In a significant ruling for nonprofit advocacy organizations, the U.S. District Court for the District of Columbia has held that the standards applied by the Internal Revenue Service to determine eligibility for § 501(c)(4) tax-exempt status are unconstitutionally vague. In Freedom Path, Inc. v. Internal Revenue Service, et al., (USDC DC Case No. 20-cv-1349 (JMC)), the court granted partial summary judgment to the plaintiff, finding that both the Treasury Regulation and the IRS Revenue Ruling used to deny its application transgress the heightened vagueness standard applicable to civil regulations affecting First Amendment speech. However, the court stopped short of granting Freedom Path § 501(c)(4) status, finding that neither party had proposed a constitutionally permissible alternative standard grounded in the existing statutory and regulatory framework.

This case offers critical insights for tax professionals advising organizations operating at the intersection of social welfare and political advocacy.

Factual Background of the Case

Freedom Path, Inc., a nonprofit organization advocating for causes such as limited government spending and opposition to the Affordable Care Act, applied for § 501(c)(4) tax-exempt status in January 2011. The application process was marked by protracted delays and extensive information requests from the IRS, including requests for donor lists. This occurred during a period when the IRS’s scrutiny of certain organizations was under public review, culminating in a 2013 Treasury Inspector General for Tax Administration (TIGTA) report. The report found the IRS had used "inappropriate criteria" to flag applications from "Tea Party and other organizations" based on their names or policy positions, leading to substantial delays.

In September 2013, the IRS issued a proposed denial of Freedom Path’s application. The IRS concluded that Freedom Path was "not operated exclusively for the promotion of social welfare" because a significant portion of its activities constituted political campaign intervention. To reach this conclusion, the IRS analyzed Freedom Path’s advertisements and mailers using a facts-and-circumstances test, borrowing factors from two key pieces of guidance:

Revenue Ruling 2004-06, 2004-1 C.B. 328, which outlines 11 non-exhaustive factors for identifying political campaign activity under § 527.
Revenue Ruling 2007-41, 2007-1 C.B. 1421, which provides seven factors for distinguishing issue advocacy from prohibited campaign intervention for § 501(c)(3) purposes.

Initially, the IRS determined that approximately 60% of Freedom Path’s 2012 expenditures were for political campaign intervention. After an administrative appeal, an IRS Appeals Officer sustained the denial but revised the figure to 52% of expenditures, explicitly applying Rev. Rul. 2004-06.

The Taxpayer’s Request for Relief

Following the final adverse determination in February 2020, Freedom Path filed suit in the U.S. District Court for the District of Columbia. The organization sought a declaratory judgment under 26 U.S.C. § 7428 that it qualified for § 501(c)(4) status. The core of Freedom Path’s argument was that the IRS’s multi-factor, facts-and-circumstances test, as derived from Rev. Rul. 2004-06, is unconstitutionally vague as applied to its case. In its subsequent briefing, Freedom Path expanded its challenge to also include the IRS’s standard for determining what constitutes an organization’s "primary" activity.

The Court’s Analysis of the Law

The central legal question was the level of scrutiny to apply to Freedom Path’s vagueness challenge under the Fifth Amendment’s Due Process Clause. A law is void for vagueness if it fails to provide "a person of ordinary intelligence fair notice of what is prohibited" or is so "standardless that it authorizes or encourages seriously discriminatory enforcement" (citing United States v. Williams, 553 U.S. 285, 304 (2008)).

The IRS argued for a lenient standard, asserting that regulations governing tax exemptions are a form of economic regulation that does not restrict First Amendment rights but merely determines whether speech will be subsidized. The IRS relied heavily on Regan v. Taxation With Representation of Wash., 461 U.S. 540 (1983), which held that Congress’s choice not to subsidize lobbying for § 501(c)(3) organizations did not infringe on First Amendment rights.

Freedom Path, conversely, argued for a "more stringent vagueness test" applicable to laws that threaten to inhibit constitutionally protected rights like free speech. The plaintiff pointed to Big Mama Rag, Inc. v. United States, 631 F.2d 1030 (D.C. Cir. 1980), where the D.C. Circuit found a Treasury regulation defining "educational" for § 501(c)(3) purposes unconstitutionally vague because it afforded "latitude for subjective application by IRS officials".

The court sided with Freedom Path, concluding that Big Mama Rag remains good law and that its heightened First Amendment vagueness review applies to tax exemption regulations. The court reasoned that while the government is not required to subsidize speech, it cannot use vague criteria that create the risk of viewpoint discrimination in awarding those subsidies. The court distinguished Regan, noting it did not involve a vagueness claim and explicitly reaffirmed the prohibition on viewpoint discrimination in government subsidies. The court found that the potential for selective enforcement based on viewpoint, which vague regulations permit, is sufficient to trigger heightened scrutiny, even without proof of actual discrimination.

Application of the Law to the Facts

Applying this heightened standard, the court found the IRS’s framework for § 501(c)(4) eligibility to be unconstitutionally vague in two key respects.

The "Primary Activity" Inquiry The court first analyzed the threshold for how much political activity is permissible for a § 501(c)(4) organization. IRS guidance, stemming from Rev. Rul. 81-95, 1981-1 C.B. 332, states an organization qualifies so long as it is "primarily engaged" in social welfare activities. However, the court noted several problems:

The IRS lacks a clear, consistent definition of "primarily". In some instances, IRS officials suggested a 49% or 51% threshold. Yet, in this litigation, the IRS argued it means "more than insubstantial"—a significantly lower and undefined bar.
The IRS itself acknowledged in a 2013 Notice of Proposed Rulemaking that the ambiguity surrounding the "primary activity" measure has "created considerable confusion for both the public and the IRS".
The 2013 TIGTA report directly linked this confusion to the delays and inconsistent treatment of applicant organizations.

The "Political Campaign Activity" Inquiry The court then scrutinized the facts-and-circumstances test from Rev. Rul. 2004-06, used to determine if a specific communication constitutes political campaign intervention. This test failed constitutional muster for several reasons:

It is an "open-ended rough-and-tumble of factors" with no guidance on how to weigh the 11 non-exhaustive factors against one another. This gives IRS officials wide discretion to emphasize certain factors over others.
The hypothetical examples in the Revenue Ruling lack any "explicit analysis" of how the factors are balanced, merely stating a conclusion based on the facts presented.
This type of multi-factor test has been condemned by the Supreme Court in the campaign finance context (e.g., Citizens United v. FEC, 558 U.S. 310 (2010)) as an impermissibly ambiguous standard for regulating speech.

The court concluded that the "compounding uncertainty" of a vague definition of political activity combined with a vague threshold for how much of that activity is allowed renders the entire scheme unconstitutionally vague. This vagueness was further evidenced by the findings in the 2013 TIGTA report of selective enforcement against organizations based on their political leanings.

The Court’s Conclusions and Path Forward

Despite finding the IRS’s standards unconstitutional, the court denied both parties’ motions for summary judgment on the ultimate question of Freedom Path’s exempt status.

The court rejected Freedom Path’s proposed alternative standard—that "political campaign intervention" be limited to "express advocacy" or its "functional equivalent" as defined in cases like Buckley v. Valeo, 424 U.S. 1 (1976). The court found this standard was derived from statutes governing campaign finance prohibitions, not tax subsidies, and that Congress explicitly cautioned against importing definitions from the Federal Election Campaign Act into the tax code.

Ordinarily, a court might remand the case to the agency to apply a constitutional standard. However, a longstanding congressional appropriations rider prohibits the IRS from issuing or revising any guidance related to the § 501(c)(4) social welfare standard. This rider effectively freezes the unconstitutional standard in place, preventing the IRS from developing a remedy.

Faced with this impasse, the court determined it must decide Freedom Path’s eligibility itself but could not do so based on the briefing provided. It has ordered the parties to submit new motions proposing alternative standards that are both constitutionally sound and properly grounded in the existing tax law. The outcome of this next phase will be closely watched by tax professionals and the nonprofit sector alike.

Prepared with assistance from NotebookLM.