New Orleans The US 5th Circuit Court of Appeals, based in New Orleans, is often where good laws, progressive regulations, labor rights, and often common sense usually go to die. The Trump-dominated appointees and the general cast of the court are the most conservative in the country, and the court of choice for conservative forces. In a twist on the old saw that even a clock is right twice a day, the court may have just tightened a huge loophole that has allowed dark money to flood our political system.
There are various classifications under the Internal Revenue System that create certain benefits for nonprofit organizations. The most common is a 501(c)(3), referring to a section in the regulations. This is the most advantageous for nonprofits because it allows donations to receive a tax-exemption for the donor. As a public charity, direct political activity is barred and would lead to withdrawal of the exemption. There are other 501(c) classifications for nonprofits, like trade associations or labor unions, which don’t provide exemptions for union dues or contributions, but also exempt the qualifying organizations from paying taxes on their activities which are within the scope of their primary purpose. In recent years, a classification, 501(c)(4) has become very popular, especially in the political area, not because it provided a tax exemption for donations, but because it allowed the donors to remain anonymous, hence the term “dark money.” The organization, Open Secrets, estimated that $1 billion coursed through this channel in the 2020 election. I’m not an expert of any kind on c4s, because ACORN has never used them, and it all seemed tricky to me.
If you’re still with me, here’s what the 5th Circuit has done. In a unanimous decision of a three-judge panel, as the Wall Street Journal reported:
The court said groups can’t qualify for tax exemption under 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 billionaires and others playing politics in this sandbox just lost an important playground.
The decision is only in force for Louisiana, Mississippi, and Texas, the states covered by the 5th District, but, face it, the IRS is not going to have one set of standards for three states and another for the rest. Without a reversal or a legislative remedy, this decision could go national.
Now, you and I both may wonder about why any donations to a 501(c)(4) organization would have ever been shielded so completely. A 501(c)(3) for example, has to disclose all a lot of information about donations above a fairly low threshold. Contributions are not disclosed in order to prevent their harassment. Who knows the rationale, but whatever it was, it’s in trouble now.
This is a right and left slush fund. Recently, indirect communications indicated that both Bill Gates and Michael Bloomberg had given $50 million donations to nonprofits aligned with VP Harris, and those nonprofits were surely 501(c)(4) organizations. Same for many of the billionaires backing Trump.
For political fundraisers, this decision cuts both ways. For the rest of us, this is great news if it reduces dark money streams, forces donors to come out in the open, and, if miracles never cease, reduces the cost of politics, all of which would improve our currently money-swollen political system.