Freedom Path, Inc. v. Lerner, Civil Action No. 3:14-CV-1537-D
| Decision Date | 24 February 2015 |
| Docket Number | Civil Action No. 3:14-CV-1537-D |
| Parties | FREEDOM PATH, INC., Plaintiff, v. LOIS G. LERNER, in her personal capacity as former Director, Exempt Organizations Division, Internal Revenue Service, et al., Defendants. |
| Court | U.S. District Court — Northern District of Texas |
This is an action by an organization that maintains that it was targeted by the United States of America, the Internal Revenue Service ("IRS"), and a former IRS official for unconstitutional and unlawful treatment based on its conservative political views when it applied for tax-exempt status. Defendants' motions to dismiss under Fed. R. Civ. P. 12(b)(1), 12(b)(2), and 12(b)(6) largely present preliminary questions—such as personal jurisdiction, standing, and the availability of injunctive and declaratory relief where IRS tax policies and procedures are challenged—although the court must venture to some extent into the merits. For the reasons that follow, the court dismisses the claims against the former IRS official without prejudice for lack of personal jurisdiction, grants in part and denies in part the other defendants' motion to dismiss, and grants plaintiff leave to replead.
Plaintiff Freedom Path, Inc. ("Freedom Path") sues defendants Lois G. Lerner ("Lerner"), in her personal capacity as former Director of the Exempt Organizations Division of the IRS; unknown named officials of the IRS, in their official and personal capacities as employees of the IRS; the IRS; and the United States of America, alleging that defendants illegally targeted its application for tax-exempt status under 26 U.S.C. § 501(c)(4) based solely on its conservative policy positions; illegally inspected and disclosed its application, in violation of 26 U.S.C. §§ 6103 and 7431; and relied on an unconstitutional "facts and circumstances" test to evaluate its alleged political activities. According to Freedom Path's complaint, its claims arise from an IRS policy of targeting organizations with conservative sounding names or policy positions for heightened scrutiny when considering their applications for tax-exempt status.
Based on a report of the Treasury Inspector General for Tax Administration ("TIGTA"), Freedom Path alleges that, at least as early as February 2010, the IRS began identifying for additional scrutiny applications from organizations whose names included the terms "Tea Party," "Patriots," and "9/12 Project," along with other conservative sounding names.1 According to Freedom Path's complaint, the IRS later expanded its criteria forheightened scrutiny to include organizations whose policy positions and purposes focused on government spending, government debt or taxes, and educating on the Constitution and Bill of Rights. At least as early as April 2010, the Acting Manager of the IRS Exempt Organizations Technical Unit was aware of the practice of selective targeting of, and discrimination against, conservative groups seeking tax-exempt status. This information was soon shared with the Director of the IRS Rulings and Agreement Office, and with defendant Lerner, who was the Director of the Exempt Organizations Division. To enable IRS team members to more efficiently screen these applications, the IRS identified a series of criteria, internally referred to as a "Be On the Lookout" ("BOLO") list, that included "various local organizations in the Tea Party movement" and "political action type organizations involved in limiting/expanding Government, educating on the Constitution[] and Bill of Rights, social economic reform/movement." Compl. ¶ 32. The Exempt Organizations Technical Unit developed written guidelines for use by IRS officials and employees when processing conservative nonprofits' applications. Based on these guidelines, IRS officials andemployees requested additional information from conservative nonprofit applicants. These information requests were often delayed almost one full year—sometimes longer—after the organizations initially filed their applications for tax-exempt status, significantly delaying the approval process. In approximately March 2012, IRS officials and employees created a list of questions to be included in requests for additional information from conservative nonprofits, including inappropriate and unconstitutional requests for donor information. Freedom Path alleges that these inappropriate and changing criteria may have led to inconsistent treatment of organizations applying for tax-exempt status and processing delays, potentially causing the organizations' donors and grantors to be reluctant to provide donations or grants, and preventing organizations from receiving certain benefits of tax-exempt status.
Freedom Path was formed in January 2011, and in March 2011 it submitted to the IRS its Application for Exemption as a § 501(c)(4) organization. Freedom Path alleges that the application contained all of the documentation and information necessary for the IRS to make a determination regarding its tax-exempt status; that instead of the prompt review given other organizations seeking tax-exempt status, the IRS made voluminous and probing requests for additional information almost one year after Freedom Path submitted the application; that the IRS requested that Freedom Path disclose the names of its donors and asked a number of other questions that the TIGTA Report later determined were unnecessary to determine tax-exempt status; and that, despite the intrusive nature of the requests, Freedom Path complied and provided comprehensive responses to the IRS's questions.
Freedom Path also avers that, in November 2012, ProPublica, an investigative news organization, requested that the IRS disclose any public records related to Freedom Path. Later that month, the IRS provided ProPublica a copy of Freedom Path's pending Application for Exemption, which eventually became the subject of an article published by ProPublica entitled, "Controversial Dark Money Group Among Five That Told IRS They Would Stay Out of Politics, Then Didn't." Compl. ¶ 72.
According to Freedom Path's complaint, in February 2013 it received additional requests from the IRS for information concerning Freedom Path's communications and activities. Freedom Path provided some requested information, but it hesitated to comply fully in light of the IRS's unlawful disclosure of Freedom Path's confidential tax return information to ProPublica. Freedom Path's counsel and attorneys for other tax-exempt organizations wrote the IRS expressing concern about unlawful disclosures of pending applications for tax-exempt status and unredacted tax returns of certain tax-exempt organizations, and requesting that the IRS take immediate steps to determine how these disclosures had occurred and how to prevent similar disclosures.
Freedom Path alleges that, in April 2013, it received a follow-up request from the IRS for the information it had sought in the February 2013 letter. The IRS letter stated that, if Freedom Path did not provide the information, its case could be closed, and it could lose the right to seek a declaratory judgment from a court declaring its exempt status. In June 2013 the IRS notified Freedom Path that it was instituting a new optional expedited process for certain organizations applying for recognition of exemption under § 501(c)(4). Under thisprocess, Freedom Path could obtain approval of its pending application if it made certain representations regarding the organization's past, current, and future spending on political activities. Freedom Path alleges that it declined to participate in this optional expedited process because it viewed the required representations as unconstitutionally broad and as an IRS attempt to force Freedom Path to relinquish some of its First Amendment rights.
Freedom Path asserts that, in September 2013, it received a letter from the IRS analyzing Freedom Path's advertising activities and other communications under the IRS "facts and circumstances" test. This test is a method of analysis found in Revenue Ruling 2004-6, and is used to determine whether an organization's communications constitute "issue advocacy" or an expenditure for political campaign intervention under 26 U.S.C. § 527(e)(2). Although the IRS concluded that two of Freedom Path's advertisements constituted campaign activity, it has not yet reached a final determination regarding Freedom Path's exempt-status under § 501(c)(4), nor has it assessed any tax against Freedom Path based on these conclusions or issued any decision regarding whether Freedom Path owes a tax deficiency.
Freedom Path brings this action alleging violations of its First and Fifth Amendment rights, the Administrative Procedure Act ("APA"), and the Internal Revenue Code. Lerner moves to dismiss under Rules 12(b)(2) and 12(b)(6), contending that the court lacks personal jurisdiction over her and that Freedom Path has failed to state a claim on which relief can be granted. The IRS and the United States (collectively, the "federal defendants") move todismiss counts IV, VI, and VII, in their entirety, and count V, in part, under Rules 12(b)(1) and 12(b)(6) for lack of subject matter jurisdiction and failure to state a claim on which relief can be granted. They maintain that Freedom Path lacks constitutional standing and that the claims in question are not ripe; that the Anti-Injunction Act, 26 U.S.C. § 7421, and the federal Declaratory Judgment Act ("DJA"), 28 U.S.C. §§ 2201, 2202, bar Freedom Path's claims for injunctive and declaratory relief; that Freedom Path's claims for judicial review under the APA fail to state claims on which relief can be granted; and that Freedom Path's claims that they violated the Internal Revenue Code by disclosing Freedom Path's tax return information are barred by sovereign immunity and fail to state a claim on which relief can be granted. Freedom Path opposes the motions.
The court turns first to Lerner's challenge...
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