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The U.S. Supreme Court's held yesterday in the Citizens United case that it is unconstitutional to ban independent corporate campaign spending.  This raises serious doubts about the constitutionality of Internal Revenue Code Section 162(e), which in its current form denies businesses a tax deduction for any spending in connection with political campaigns and lobbying.  For a large profitable publicly held corporation operating exclusively in Colorado (which has a flat 4.63% income tax rate), Section 162(e) is a de facto 65% surtax on political advertising, relative to advertising related to the business or in furtherance of a charitable cause. Your mileage may vary.

The activities denied a deduction by Internal Revenue Code Section 162(e) include the very poltical speech that the U.S. Supreme Court held yesterday that corporations have a constitutional right to engage in under the First Amendment.  In the wake of Citizens United, can it be constitutional to impose a 65% surtax on an expenditure for a an independently produced, funded and aired television spot urging viewers to vote for John Doe, when no tax would be imposed on an otherwise identical television spot asking people to buy widgets or give to the United Way?

Generally speaking, free speech regulations that are not content neutral are subject to strict scrutiny and may only be upheld when necessary in light of a compelling governmental interest. The court in Citizens United expressly held that equalizing the resources of political candidates was not a compelling governmental interest.  A handful of cases provide precedent for the principle that taxes that make content based distinctions on constitutionally protected speech are unconstitutional under the First Amendment.  A tax case arising out of the Citizens United case may be the next precedent in that line of cass.

Prior to Citizens United, the fact that Congress was believed to have the power to prohibit corporate political speech, at least in the context of partisan elections, made the related tax treatment based on content based distinctions about speech seem a fortiori also constitutional.  Now, each of the limitations on business expense deductions under Section 162(e) of the Internal Revenue Code need to be examined on a case by case basis to determine if they involve corporate free speech rights that are constitutionally protected.

The corruption justification used in Citizens United to refrain at that time from rendering an opinion so sweeping that it would invalidate the ban on direct contributions to candidates by corporations and unions might very well be extended to IRC 162(e)(1)(D) (direct lobbying of public officials), but it is easy to imagine that at least some of IRC 162(e) could be invalidated on the basis of Citizens United and the First Amendment tax cases.

The issue is obviously a new one, and I merely raise the possibility here.  The law is never completely clear on a constitutional issue of first impression, and there may be arguments that I have overlooked.  Feel free to suggest them.

More at Wash Park Prophet.

Originally posted to ohwilleke on Fri Jan 22, 2010 at 02:32 PM PST.


Is It Constitutional To Tax Corporate Campaign Spending

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Comment Preferences

  •  Tip Jar (2+ / 0-)
    Recommended by:
    ShempLugosi, runningdoglackey

    "Learn from yesterday, live for today, hope for tomorrow." -- Albert Einstein

    by ohwilleke on Fri Jan 22, 2010 at 02:32:53 PM PST

    •  A Supreme Court Tax (1+ / 0-)
      Recommended by:
      Leroy the Roadie

        Tax all their salaries at 100%. Regrettably this would net all 9, including the 4 who dissented, but wouldn't it be interesting for the SCOTUS to take an appeal brought by themselves to be decided by themselves? The Constitution says only that judicial salaries shall not be reduced during the term, but it does not address taxes.

      "America is ruled by the moral philosophy of the dollar."

      by runningdoglackey on Fri Jan 22, 2010 at 03:56:40 PM PST

      [ Parent ]

  •  The Power to Tax (0+ / 0-)

    is the Power to destroy.

    This is why poll taxes are illegal.  And if companies are the same as people (not that I agree, just stating the ruling ...) then you can't do it.

    FYI - not a lawyer, this opinion is just a best guess from an informed spectator.

    "I will fight for the American people with my last breath. My opponent will destroy civilization making us long for the days when we had fire." - Any politician

    by Edge PA on Fri Jan 22, 2010 at 02:58:18 PM PST

    •  Poll taxes are illegal due to the 24th Amendment (1+ / 0-)
      Recommended by:
      bay of arizona

      and not on the "power to tax is the power to destroy" principle, which was a phrase originally invoked as justification for sovereign immunity from taxation in some contexts in the very early days of the Republic.

      (Poll taxes have been a common form of local government finance in the U.K., in recent history and perhaps still are, by the way).

      But, the poll tax point aside, the reasoning may be right anyway.  Certainly, this is the kind of tax provision that would at least get scrutiny.

      Content based distinctions for speech aren't per se illegal, but they are entitled to much higher scrutiny.  I could see the case going either way.

      "Learn from yesterday, live for today, hope for tomorrow." -- Albert Einstein

      by ohwilleke on Fri Jan 22, 2010 at 03:10:17 PM PST

      [ Parent ]

  •  The Supremes have ruled in the past that (0+ / 0-)

    ALL deductions are a matter of legislative grace.

    "Fascism should more properly be called corporatism because it is the merger of state and corporate power." -- Benito Mussolini

    by enhydra lutris on Fri Jan 22, 2010 at 03:29:46 PM PST

    •  The existence of a deduction at all is a matter (0+ / 0-)

      of legislative grace.  

      The notion that deductions can be permitted or denied within the legislative scheme solely on the basis of an unconstitutional distinction, however, is not nearly so clear.

      For example, a provision that denied all business expense deductions to U.S. citizen sole proprietors of Japanese origins, but allowed them for all other businesses, would surely be unconstitutional.

      "Learn from yesterday, live for today, hope for tomorrow." -- Albert Einstein

      by ohwilleke on Fri Jan 22, 2010 at 07:01:36 PM PST

      [ Parent ]

      •  I don't think that the example is remotely (0+ / 0-)

        parallel, however, and I don't think that the "distinction" is unconstitutional.  Recall that the overturned provision applied only to a varying 30 or 60 day window, while 162(e) would apply to all such expenditures, but was nonetheless non-problematic.  Congress has a lot of leeway to be arbitrary and capricious as long as they are not discriminating against a class of persons.  Hence, they cannot restrict the charitable deductions of, let us say Austrian Americans, or to Presbyterian churches, but they can eliminate all of 501, should they see fit, and crtainly 501(c)(3).

        "Fascism should more properly be called corporatism because it is the merger of state and corporate power." -- Benito Mussolini

        by enhydra lutris on Fri Jan 22, 2010 at 08:59:28 PM PST

        [ Parent ]

  •  Wrong question.... (1+ / 0-)
    Recommended by:

    denying a tax deduction is not taxing an expenditure...expenditures must be for your business purpose, so my POV is that unless you are a registered lobbying firm then making political speech/money contributions is not a bonafide business purpose so therefore it is not tax deductible.../no snark

    Also it puts corporations on the same playing field as individuals and NFP's that do not get a tax deduction for political contributions.../no snark

    Although I think only donations to Democrats should be deductible because it is in the public interest.../snark

    Obama - Change I still believe in

    by dvogel001 on Fri Jan 22, 2010 at 04:33:27 PM PST

    •  The description of it as a tax on the expenditure (0+ / 0-)

      is intentionally rhetorical to explain the effect of the income tax provision.

      This said, the issue is whether the cover action is a bona fide business expense, and it isn't obvious that 162(e), particularly given its timing, was intended to be a legislatively conclusive finding of fact that these aren't business expenses.  If it was simply considered further enforcement of now held unconstitutional campaign finance law concepts, then the constitutional argument still lives.

      The fact that individuals, for whom it is not a business expense, can't take it, isn't very persausive.  There are lots of other expenses that individuals can't take (e.g. employee compensation expense) that business can take.

      "Learn from yesterday, live for today, hope for tomorrow." -- Albert Einstein

      by ohwilleke on Fri Jan 22, 2010 at 06:58:58 PM PST

      [ Parent ]

      •  And the theory... (0+ / 0-)

        on all of the disallowed expenses that would under normal circumstances be deductible is that at some level of compensation it is not a necessary expense to run the business...

        Obama - Change I still believe in

        by dvogel001 on Sat Jan 23, 2010 at 12:05:14 AM PST

        [ Parent ]

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