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Supreme Court Ruling Curtails Agency Power, Setting Stage for IRS Crackdown on Dark Money

Supreme Court Ruling Curtails Agency Power, Setting Stage for IRS Crackdown on Dark Money
Supreme Court Ruling Curtails Agency Power, Setting Stage for IRS Crackdown on Dark Money

The recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo abolished the “Chevron deference” doctrine, which had previously required courts to defer to federal agencies’ interpretations of laws. This decision shifts power from agencies to the judiciary, enabling courts to question agency decisions more freely.

This change has long been sought by conservatives who aim to limit federal agency authority. However, an unexpected consequence of this decision has already surfaced: a recent Fifth Circuit Court of Appeals case applying this new approach could impact tax exemptions commonly used by “dark money” political groups.

The case that the Fifth Circuit ruled on involved Memorial Hermann Accountable Care Organization, or MHACO, a nonprofit in Texas created to help reduce healthcare costs under the Affordable Care Act. MHACO had applied for 501(c)(4) tax-exempt status, which is designated for groups primarily promoting “social welfare.”

The IRS rejected MHACO’s application, arguing that its activities primarily benefited commercial insurers rather than the public at large. Although MHACO argued that its work benefited society indirectly, the U.S. Tax Court and Fifth Circuit sided with the IRS, concluding that MHACO’s commercial focus was grounds for disqualifying it from the tax exemption.

Supreme Court Ruling Curtails Agency Power, Setting Stage for IRS Crackdown on Dark Money

Supreme Court Ruling Curtails Agency Power, Setting Stage for IRS Crackdown on Dark Money

Organizations with 501(c)(4) status are generally tax-exempt and intended to work toward public welfare, but they may also engage in political activities as long as these activities do not become their main purpose.

This provision has made 501(c)(4) groups popular with wealthy individuals looking to influence politics anonymously since contributions to these groups are not subject to the same disclosure requirements as direct campaign donations.

Well-known examples include donations by individuals like Bill Gates and Barre Seid, who have used 501(c)(4) organizations to fund politically aligned initiatives without publicizing their identities.

Historically, the IRS has struggled to regulate political spending by 501(c)(4) organizations, facing backlash in cases like one from the Obama administration when its scrutiny of these groups was met with political controversy. Congress subsequently restricted the IRS from enacting new regulations around 501(c)(4) status.

The Fifth Circuit’s recent ruling in MHACO’s case bypassed Chevron’s deference and instead applied a stricter standard, considering any “substantial non-exempt purpose” as grounds for denying tax-exempt status. This test, originating in a 1945 Supreme Court case related to 501(c)(3) organizations, led the court to rule that substantial commercial activity disqualified MHACO from the exemption.

The implications of this ruling could be significant, as it may open the door for the IRS and courts to more closely scrutinize 501(c)(4) organizations, particularly those funded by anonymous donations with political motives.

If this reasoning is applied more broadly, groups that dedicate a substantial portion of their resources to non-exempt activities, like political advocacy, could risk losing their tax-exempt status. This shift may reduce the influence of wealthy donors on politics, forcing greater transparency and potentially curbing the flow of “dark money” into political campaigns.

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