Volume VIII, No. 2 May-June 2000

FSDEF Files U.S. Supreme Court Amicus Brief in ATA v. Giani

On May 15, 2000, the Free Speech Defense & Education Fund, Inc. ("FSDEF"), joined by the Free Speech Coalition ("FSC") and 47 other organizations and businesses, asked the U.S. Supreme Court to strike down unconstitutional restrictions on fundraising imposed by the State of Utah. FSDEF, FSC, 23 IRC section 501(c)(3) organizations, 12 IRC section 501(c)(4) organizations, and 12 for-profit firms filed an amicus curiae brief in support of a petition for writ of certiorari filed in the U.S. Supreme Court by American Target Advertising ("ATA").

FSDEF’s brief argued that the U.S. Court of Appeals for the 10th Circuit failed to apply proper First Amendment, Due Process, and Commerce Clause precedents in its decision in ATA v. Giani, when it sustained much of Utah’s charitable solicitation law. Since the 10th Circuit struck down Utah’s bond requirement and certain other aspects of the Utah law, the State of Utah filed a cross-petition for certiorari.

FSDEF argued that the Utah statute acts as a prior restraint on core First Amendment speech, while the appeals court upheld the statute on the basis of the standard applicable to less protected activity such as pornography. FSDEF pointed out how the statute gave unconstitutional discretion to Utah officials, allowing them to serve as censors, and to determine which organizations would be permitted to contact residents of Utah by mail. FSDEF also challenged the statute’s establishment of favored and unfavored speakers, and its discriminatory application to those unfavored.

FSDEF’s brief argued that the appeals court’s decision misapplied current law governing the financial burdening of speech and speakers. It also criticized on due process grounds the appeals court’s decision upholding the Utah statute’s regulation of purely out-of-state activities, and argued that the statute’s mandatory licensure of organizations lacking any contact with the state violated the Commerce Clause.

Bruce Eberle & Associates also filed an amicus brief in this case in support of ATA, assisted by the Southeastern Legal Foundation. (The FSDEF brief is available on the FSC website, www.freespeechcoalition.org.)

FSC Files Comments on Postal Service’s Deceptive Mail Regulations

On April 13, 2000, FSC filed comments on proposed regulations published by the U.S. Postal Service. FSC’s comments were critical of the proposed regulations, which would affect the conduct of administrative law proceedings governing the issuance of false representation and lottery orders. The proposed regulations were issued to implement provisions of the Deceptive Mail Prevention and Enforcement Act ("the Act"), enacted in December 1999.

For example, FSC was critical of the proposed regulation which gave Postal administrative law judges assigned to a hearing the power to issue subpoenas "either upon written request of either party or on his own initiative." FSC pointed out that the Act limited this power to the Judicial Officer of the Postal Service (a discrete Postal Service official whose office is established by the Postal Reorganization Act, at 39 U.S.C. Sec. 204), and made no provision for the delegation of subpoena authority to administrative law judges. Furthermore, the House Report on the Deceptive Mail Prevention and Enforcement Act (Report No. 106-431, November 1, 1999) states plainly that "[f]inal authority to issue subpoenas is vested with the Judicial Officer in these circumstances," that is, during the course of a hearing. Id. at 27.

FSC also criticized the proposed regulation which would permit Postal administrative law judges to "sign a subpoena, enter the name of the witness, and leave it to the party receiving the subpoena to complete the subpoena before service." FSC pointed out the absurdity of the Postal Service’s assertion that "the parties" (in practice, almost always the Postal Service) may obtain such carte blanche from an administrative law judge, particularly when the Act requires that the administrative subpoenas which it authorizes may not be issued before "a headquarters-level review of each subpoena [has been] conducted." (Emphasis added.)

FSC challenged the proposed regulation which authorized the Judicial Officer to seek enforcement of subpoenas by the Attorney General of the United States, arguing that the Act vested such authority with the Postmaster General, only.

Finally, FSC opposed the proposed regulation which provides that – while requests for a subpoena may be filed with a request for deposition (to depose a witness) or 15 days before a scheduled hearing (where the witness is forced to attend) – the Postal Service’s administrative law judge, "in his discretion, may honor requests for subpoenas not made within the time limitations specified...." (Emphasis added.) The comments pointed out that allowing such discretion makes the regulations standardless, and would offer no due process protections to the object of the subpoena. The Postal Service has not yet issued the regulations governing the conduct of administrative law proceedings in final form.

On May 17, however, the Postal Service did issue the final version of another set of regulations, governing the issuance of administrative subpoenas (39 U.S.C. Part 913). Such subpoenas would be issued pursuant to investigations of alleged mail fraud or lotteries. Under the final regulations, a subpoena "may require the production of any records (including computer records, books, papers, documents, and other tangible things which constitute or contain evidence)" which may be considered relevant to the investigation. These subpoenas may only be issued by the USPS General Counsel or a Deputy General Counsel, in response to a request which identifies a specific case, the target of the investigation, a specific description of the records requested, and an explanation of how the records are relevant or material to the investigation.

Republican Fundraising Letter Examined Under Deceptive Mail Act

It did not take long for the Deceptive Mail Prevention and Enforcement Act to become a political football in an election year. In April, Rep. Carolyn Maloney (D-NY) directed the Postal Service to investigate a Republican National Committee fundraising letter sent to party members. The envelope included the words "REPUBLICAN CENSUS DOCUMENT ENCLOSED." In her letter to Postmaster General Henderson, Rep. Maloney acknowledged that the letter "does not resemble an official census questionnaire," but observed that it also failed to clarify that it "has no connection whatsoever to the 2000 Census."

Unsurprisingly, the Postal Service used its discretion to refuse to levy any fine or place a stop mail order on the Republican National Committee, an organization with the ear of Congress. (Penalties of up to $1 million in fines are reserved for nonprofits who are less politically powerful.) A spokesman for the Postal Inspection Service intoned that the fundraising letter "does not fall under the category of what we would consider to be a deceptive mailing or a government look-alike mailing." News reports noted that an individual in Montgomery County, Maryland enclosed the RNC return envelope with a contribution, together with the official census response; in the past, Postal Service administrative law judges have been known to apply a standard that, if any person could be confused by the solicitation, the solicitation was deceptive. Hopefully, this decision by the Postal Service is indicative of a more tolerant attitude toward First Amendment activity by all mailers.

United Cancer Council Case Settled

The litigation between the United Cancer Council ("UCC") and the IRS has been settled. FSDEF had funded UCC’s successful appeal to the 7th Circuit in an effort to defend both UCC and all nonprofits from the application of a new, expansive regulatory attack by the IRS after the IRS had forced UCC into bankruptcy.

The IRS had used the UCC litigation to pursue an aggressive new legal theory. In the past, rules against private inurement only applied to those directors, officers and employees who ran a nonprofit organization. In the UCC case, the IRS sought to apply those rules to independent contractors (specifically, professional fundraising counsel) and to use that alleged violation as the sole basis for revocation of the nonprofit’s tax-exempt status.

In the UCC case, the IRS conceeded that the contract between UCC and its fundraisers had been negotiated at arm’s length, but decided the contract’s terms had been too generous to the contractor, and therefore retroactively revoked UCC’s tax exempt status. A Tax Court decision approved the IRS action.

However, last year the U.S. Court of Appeals for the 7th Circuit, in a blistering opinion, reversed the Tax Court’s decision. The Court of Appeals attacked the IRS’ legal theory in this case as making "the tax status of charitable organizations and their donors a matter of the whim of the IRS." (Emphasis added.) It added that the inurement provisions in federal tax law are "designed to prevent the siphoning of charitable receipts to insiders of the charity, not to empower the IRS to monitor the terms of arm’s length contracts made by charitable organizations with the firms that supply them with essential inputs, whether premises, paper, computers, legal advice, or fundraising services." (Emphasis added.)

The 7th Circuit’s decision did not dispose of the entire case, and was remanded to the Tax Court for further proceedings. Under the terms of the reported settlement with the IRS, UCC regained its tax exempt status. However, UCC was required to concede that it will no longer raise funds from the general public. UCC may only receive unsolicited donations, such as bequests, and must transmit such proceeds to local cancer councils (IRC 501(c)(3)s) solely for the provision of direct care to cancer patients. Any assets remaining after its bankruptcy estate will also be transferred to such local cancer councils.

The IRS’ $174,290 assessed deficiency (for 1986 and 1987) was reduced to $70,000, and no further deficiencies will be assessed. UCC’s tax-exempt status for 1986-89 remained revoked, but the IRS agreed not to disallow the deductibility of charitable contributions made to UCC during this time period.

The IRS required the closing agreement to be provided to tax news services (including Tax Analysts and the Bureau of National Affairs). The agreement was required to be part of UCC’s application for exemption, and thus would become part of the public record in any case.

Congress Considers New Non-profit Reporting and Disclosures

On March 15th, FSC submitted comments to the House Ways and Means Committee on behalf of 26 of our members in response to the Joint Committee On Taxation staff recommendations that new reporting burdens be placed on non-profits. These staff recommendations had been made in January.

FSC pointed out that in trying to ensure the provision of more complete information regarding tax-exempt organizations to the general public, enactment of the study’s findings would instead inhibit the orderly resolution of audits, guarantee the diversion of charitable assets from tax-exempt purposes to legal defense purposes, and facilitate greater opportunity for IRS abuse of its oversight authority through the publication – and transmission to state authorities – of interim (read unbalanced and incomplete) findings and analyses in the determination and audit process.

The recommendations call for vast new non-profit disclosures, even though there is no public clamor for such information. Once again, there is an effort to unleash the voracious regulatory dogs to take another bite out of free speech and the charitable efforts of this nation, this time by the staff which reports to lame duck Chairman Bill Archer.

The Free Speech Coalition, Inc. is a nonpartisan, nonprofit 501(c)(4) organization which educates, lobbies, and litigates to defend the rights of advocacy organizations and their members. FSC needs your support to continue its fight to protect the rights of citizens to associate together and exercise their First Amendment right to petition their government for redress of their grievances. Contributions to the Free Speech Coalition, Inc. are not tax-deductible. However, contributions to the Free Speech Defense & Education Fund, Inc., a 501(c)(3) public charity, are tax-deductible.