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April 09, 2024 The Tax Lawyer

Administrative Law Meets Section 501(c)(3) Charitable Purpose

Vol. 77, No. 2 - Winter 2024

Ellen P. Aprill

Abstract

In the past several years taxpayers have won a number of challenges to tax guidance based on violations of administrative law. Federal courts are blithely invalidating IRS and Treasury guidance, ranging from regulations to notices, because of failure to follow various administrative law doctrines. These administrative law challenges have been substantive, procedural, or both. Courts engage substantive challenges under the Chevron doctrine by determining whether guidance is inconsistent with or an unreasonable interpretation of the statutory language. Procedural challenges involve failure to satisfy requirements of the Administrative Procedures Act (APA), in particular the need for and adequacy of notice-and-comment rulemaking. The guidance nullified in recent cases includes some finalized decades ago.

To demonstrate the potential enormous consequences of these decisions, this article examines how the regulations defining “charitable” under § 501(c)(3) and the related hodge-podge of sub-regulatory guidance, especially revenue rulings, would fare under such application of current administrative law doctrine. The statute and guidance under “charitable” are very old indeed. The exempt purposes listed in § 501(c)(3) date back almost 150 years. The currently applicable regulations were promulgated in 1959. Key revenue rulings date to the 1970’s.

This examination represents a thought experiment. No court has yet invalidated the regulations or revenue rulings defining charitable purpose under § 501(c)(3) based on violations of administrative law. Such a challenge, however, could easily arise. An organization challenging denial of exemption in a declaratory judgment action under § 7428 could raise administrative law issues like those in the recent cases discussed in this piece. Challenges based on the APA have already occurred in connection with charitable deductions, a tax provision closely related to the definition of charitable purpose.

The broad application of the regulations defining charitable purpose and related revenue rulings as well as their age makes them a particularly good vehicle for considering the implications of recent tax cases invalidating guidance based on administrative law doctrines. Moreover, most tax lawyers have at least a passing familiarity with § 501(c)(3), making this approach to recent decisions accessible.

This thought experiment serves two different purposes. First, application of administrative law doctrine to this body of tax laws exposes flaws regarding guidance not only as to charitable purpose but also to tax guidance more generally. I hope that this aspect of the article encourages the IRS to explore ways to increase public participation in the guidance process. Second, it demonstrates the enormous potential harm to the tax system from judicial invalidation of old tax guidance based on flaws in the administrative procedure. My hope in this regard is that exposing the possible consequences of this new trend will move Congress to act to limit it, perhaps by clarifying the extent to which the APA requirements apply to tax guidance. Further, I urge Congress to codify the approach of a recent district court decision, which applied a six-year statute of limitations, accruing from the date tax guidance is issued, to challenges for noncompliance with the APA. Longstanding guidance is a terrible thing to waste.

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