Wall Street Journal, Tax Rule In Political Donations Tightened:

A federal appeals court narrowed the tax rule that has let conservative and liberal groups pour billions of dollars into political campaigns without disclosing their donors, and the case could restrict the flow of so-called dark money into politics [Memorial Hermann Accountable Care Organization v. Commissioner, No. 23-60608 (3d Cir. Oct. 28, 2024)].

The unanimous opinion from a three-judge panel of the 5th U.S. Circuit Court of Appeals came this week in a healthcare case that didn’t directly address politically active organizations. But the decision—from a conservative court—sets a tighter legal standard for tax-exempt status that the advocates for political donor transparency have long sought. from a three-judge panel of the 5th U.S. Circuit Court of Appeals came this week in a healthcare case that didn’t directly address politically active organizations. But the decision—from a conservative court—sets a tighter legal standard for tax-exempt status that the advocates for political donor transparency have long sought.

The court said groups can’t qualify for tax exemption under Section 501(c)(4) of the tax code if they have a substantial nonexempt purpose. That is a much stricter standard than the one in Internal Revenue Service regulations, which say groups only need a primary purpose that qualifies for the exemption. That has been interpreted to allow tax exemptions for groups that spend 51% of their money on lobbying or other clearly allowed activities—and 49% on politics.

“The people who are making the case that they can do up to 49%, do they have a leg to stand on? Their leg got a lot weaker,” said Phil Hackney, a University of Pittsburgh tax law professor.

The path ahead is murky. This case could still get appealed, and other cases could get decided that expand nonprofits’ ability to engage in politics. The IRS, which declined to comment, must decide how to enforce the law as groups get audited or seek tax-exempt status. For now, the opinion applies only in Louisiana, Mississippi and Texas.

Section 501(c)(4) applies to “social welfare” groups and has long been the province of organizations like Rotary clubs. It occupies an odd middle ground in the tax code between charities and political organizations.

Donors don’t get tax deductions like they do for giving to charities, though they can avoid capital-gains taxes when giving appreciated stock. But unlike donors to political-action committees, donors to 501(c)(4) groups aren’t disclosed publicly.

Those features make 501(c)(4) groups attractive to corporations and well-heeled donors, and they became central to Republicans’ and Democrats’ election strategies. They now spend vast sums each election cycle with little disclosure about funding sources.

During the 2020 elections, dark money groups and shell corporations spent more than $1 billion, according to the nonpartisan election group OpenSecrets.

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