Aprill, Memorial Hermann: Rejecting Pro-Taxpayer Regulations under Loper Bright

In Memorial Hermann Accountable Care Organization v. Commissioner (“Memorial Hermann”), the Fifth Circuit relied on Loper Bright v. Raimondo (Loper Bright)  to reject the appellant taxpayer’s claim that longstanding section 501(c)(4) regulations entitled it to exemption as a section 501(c)(4) social welfare organization. It instead relied on a test from Better Business Bureau v. United States (“BBB”), a 1945 Supreme Court case involving the Social Security Act rather than the Internal Revenue Code. In this essay, I argue that both the validity of the section 501(c)(4) regulations under Loper Bright and the authority of BBB as the test for qualification under section 501(c)(4) are more complicated and uncertain than Memorial Hermann acknowledges. Issues that the case raises include the implications of Loper Bright as to delegated administrative authority, the role of “purpose” and “activity” in both BBB and the section 501(c) regulations, and the impact of the case on campaign intervention by section 501(c)(4) organizations. After giving some background to the case, this essay discusses each of these issues. It concludes with a discussion of the impact of the case on current law. Memorial Hermann raises issues not only as to the meaning of section 501(c)(4), but also more generally for both tax law and administrative law. This examination underscores the need for further guidance from the Supreme Court, Congress, the Department of Treasury, and the IRS, however unlikely it may be that such guidance will soon appear.