As anyone who has seen a building collapse or a bridge buckle can attest, it can be harrowing to witness the failure of a major structure, particularly one that is historic and relied upon heavily. Sometimes, however, falling walls can be a welcome change. The Berlin Wall, for example, unfairly separated the people of Berlin, and its demise was celebrated worldwide by lovers of freedom. Perhaps one day we too will celebrate the liberation of nonprofit organizations from the walls erected by the regulatory state to protect the powerful from the people. That day may come sooner than expected, as the Supreme Court recently recognized the freedom of association as a constitutionally protected right (Americans for Prosperity Foundation v. Bonta) and rejected the deference historically granted to the executive branch to write regulations without adequate legislative authority (West Virginia v. Environmental Protection Agency).
Like the Berlin Wall, the regulatory structures impeding philanthropic freedom were constructed at the height of the Cold War, when governmental power was strongest and so too was paranoia about the influence of non-governmental organizations. Midcentury fear of out-groups—from Asians to Zionists and every race, religion, and ideology in between—was expansive. The notion to limit nonprofit legislative speech germinated in the anti-Catholic mulch of the 2nd Circuit decision, Slee v. Commissioner (holding gifts to the American Birth Control League not deductible because the organization engaged in “dissemination of controversial propaganda”). This spore grew into a full shiitake during the build up to the New Deal, when the National Economy League won the battle over pension legislation, but lost the war when Congress limited its right to “substantial” legislative speech (Revenue Act of 1934). Soon the right to political speech was lost as well when then-Senator Lyndon Johnson of Texas reacted poorly to being called a “dupe” and a “godless Commie” by his opponents, including the nonprofit, Committee for Constitutional Government. Senator Johnson expressed his feelings of hurt and vengeance by introducing legislation to prevent charities from ever again speaking about politics. They remain silent to this day.
Attacks on civil society continued throughout the century. In 1967, the Ford Foundation had the temerity to make a grant to the Congress of Racial Equality and the Southern Christian Leadership Conference to support Black voter registration drives in Cleveland during the aftermath of the violent Hough Street riots to protest poverty and racism. This grant so enraged Wilbur Mills, the Arkansas Representative who was at the time the “most powerful man in Washington” as chair of the House Committee on Ways and Means, and the other segregationists of the southern bloc, that they cleaved the nonprofit sector into the regulatory morass we contend with today: private foundations subject to one regulatory regime, public charities subject to another, and a vast array of intermediate entities subject to a regulatory patchwork of the two, including supporting organizations and donor advised funds (the Tax Reform Act of 1969). Private foundations, many of which are nonpartisan experts on policy issues, are prohibited from opining on legislation. They must distribute 5% of their assets every year, regardless of how the organization’s own leaders would choose to spend the organization’s own funds. They must pay an income tax and may not make certain investments or engage in certain transactions, regardless of whether they are favorable to the organization.
Efforts to shrink civil society have continued unabated. The Nixon Administration waged a war on public interest law firm litigation, particularly environmental litigation, in the 1970s. The War on Terror of the early 2000s resulted in legislation that has impaired the ability of nonprofits to engage in humanitarian and peacebuilding work in conflict zones. As a result of an ill-considered provision of the Pension Protection Act, more than 760,000 nonprofits lost their tax-exempt status between 2010 and 2017 merely for the sin of failing to file information returns with the IRS. In 2013, the IRS admitted to targeting nonprofits affiliated with the Tea Party movement and others for intensive scrutiny based on their names or political themes. Today, we have attacks on “elite” institutions of higher education, now subject to an income tax for the first time in history. Contemporary misguided policy efforts such as the Accelerating Charitable Giving Act would limit the lifespan of foundations and donor advised funds, force them to support certain causes and disfavor others, control their boards of directors, and tax their sources of support. In short, the hostility of the legislative and executive branches toward the nonprofit sector shows no sign of abating.
Viewed in this historical context, the Supreme Court’s recent turnabout with regard to the degree of statutory authority necessary to implement regulation may present an opportunity to reverse a century of constricting regulation on the nonprofit sector.
To understand what is happening, consider the following analogy. If statutes are like stones in the walls that prop up the regulatory state, then regulations are the mortar holding those stones in place. Congress roughly hews the stones, the executive branch sets them with regulatory mortar, and the judiciary tests the walls’ structural integrity. In good masonry, mortar seeps into the cracks and crevices between the stones and prevents them from dislodging. In poor masonry, mortar extrudes beyond the natural line the stones establish, unmoored and exposed to the elements. Over time, all walls decay and fall apart. Some are rebuilt by more highly skilled and better equipped masons; others become abandoned ruins.
As the judiciary tests the constitutional strength of the regulatory state, regulation without statutory authority has become less stable. Whereas once the Court deferred to the judgment of the executive branch to regulate virtually at will under the doctrine known as “Chevron deference,” today, the Court demands a greater ratio of statutory stone to regulatory mortar.
In other words, Chevron deference appears to be on the way out. The doctrine generally provides that courts will defer to agencies’ interpretations where statutory language is ambiguous. The Supreme Court has not applied Chevron deference in six years, simply ignoring it in many high-profile statutory cases. And in West Virginia v. Environmental Protection Agency (2022), the Court recognized a major carve-out from Chevron: where executive agencies claim a “major power,” that claim must find clear authorization in the statutory text, leaving no room for deference. Lower courts have gotten the message, with many less eager than in the past to defer to agency interpretations and more willing to engage in muscular statutory interpretation themselves, narrowing or eliminating any zones of ambiguity that might enable agencies to step in with their preferred policies.
Many observers believe that Chevron’s future will track the recent history of so-called “Auer deference,” under which courts defer to agencies’ interpretations of ambiguities in regulations. In the past, the Supreme Court and lower courts had applied a strong form of Auer deference, allowing agencies broad leeway to essentially rewrite regulatory requirements through interpretation and guidance. But the Supreme Court put an end to that in Kisor v. Wilkie (2019). The decision did not jettison Auer deference, but substantially narrowed it. Before even considering deference, courts must fully exhaust all the traditional tools of interpretation; only if an ambiguity remains is deference even potentially on the table. And even then, an agency won’t receive deference unless its interpretation was made in an authoritative fashion, as opposed to in a brief or informal statement; relies on the agency’s substantive expertise; reflects the agency’s considered judgment; and is not unfair to regulated parties, such as a surprise reversal. In short, what had been a freewheeling deference doctrine is now reduced to a minor gap-filler that is inapplicable in many cases and provides only limited discretion to agencies when it does apply.
To date, the Supreme Court has not bitten on numerous requests to abandon Chevron deference. That may reflect a recognition that agencies inevitably make expert policy decisions in interpreting the details, often technical details, of the statutory schemes they administer. A Kisor-style reformation of Chevron deference may leave agencies with that power, while putting weightier questions of interpretation with the courts.
That would have major implications for all manner of tax-law challenges. Treasury has relied aggressively on Chevron deference to implement its preferred policies in the face of statutory language that often doesn’t quite get there. Historically, Treasury embraced a position of “tax exceptionalism,” believing that its actions were not subject to the ordinary requirements of administrative procedure and ordinary processes of statutory interpretation. In effect, it claimed something like “super-deference” for its interpretations of tax law. Tax exceptionalism lost out. The agency has lost a spate of cases challenging its procedures in promulgating tax regulations. And the Supreme Court, in Mayo Foundation v. United States, held that Treasury’s interpretations are subject to the ordinary rules of statutory interpretation, including Chevron deference. Treasury actually celebrated that result, believing that the courts, especially lower ones, would proceed to afford it broad discretion in interpreting and administering tax law. And it certainly acted with that expectation in mind, undertaking heavy-handed interpretations to achieve results that many thought required authorization by Congress. But as Chevron has waned, so has Treasury’s power of policymaking-through-interpretation. If Chevron falls, in whole or in part, Treasury will face serious consequences.
Consider just one tax law, the Tax Cuts and Jobs Act of 2017. In the wake of its enactment, Treasury issued over 1,000 pages of regulations and sub-regulatory guidance. Ten or 15 years ago, one could have confidently predicted that the courts would defer to all or most of the agency’s pronouncements. Now, however, one can predict only uncertainty: with greater skepticism of deference among the courts, more avenues for challenge are open now than ever before. And if Chevron does suffer Auer’s fate, then all kinds of tax-law questions will be up for grabs.
Even if it’s not quite yet open-season on Treasury regulations and other statutory interpretations, there are more opportunities than ever before to make gains, change policy, and achieve better outcomes by challenging the agency’s handiwork. In the past, practitioners often took Treasury’s interpretations or guidance as law, but that sort of assumption is now misplaced. When parties find themselves in a dispute with the IRS, they should consider the agency’s statutory authority. And opponents of Treasury policies will have a greater ability to challenge them through litigation. While the tax area has had little ideological litigation in the past, due in large part to the Anti-Injunction Act and the likelihood of losing on deference grounds, the deck is no longer stacked against policy-motivated challenges to tax regulations. To be sure, bringing suit is complicated by the need, in most cases, to do so through a refund action or, where authorized, a challenge to liability determination. But groups interested in tax policy can, as groups in other areas have done for decades, recruit plaintiffs and put together litigation that is more like the offensive challenges seen in other fields.
Meanwhile, the Supreme Court has strengthened the First Amendment freedom of association, which protects the right to collectively express, promote, pursue, or defend common interests as a group. Although the freedom of association is one of the core tenets of American civil society, it has until recently been weakly enforced pursuant to a “reasonableness” standard whereby courts weighed the value of a particular expressive act against the relative worthiness of the association seeking constitutional protection. The recent Supreme Court decision, Americans for Prosperity v. Bonta, however, has elevated the enforcement of the freedom of association to “exacting scrutiny” which requires a “substantial relation” between (1) the regulatory burden on association, such as a public disclosure requirement, and (2) “a sufficiently important government interest.” Exacting scrutiny also requires the regulatory burden on association to be “narrowly tailored,” meaning that it must be closely drawn to target only the problem or interest at issue and not so broadly that it chills associational activity. The burden on freedom of association addressed in Americans for Prosperity v. Bonta was the requirement by several states, including New York and California, that all nonprofits doing business in the state must disclose their donors to state regulators on Form 990 Schedule B, a requirement that the Supreme Court held to be unconstitutional. It is not a difficult leap from this decision to conclude that many of the other regulatory restraints on nonprofit associational activity may well fail to pass exacting scrutiny, either due to insufficient governmental interest or lack of narrow tailoring.
In short, a new era of tax litigation by or on behalf of nonprofit organizations is dawning, one marked less by the travails of individual taxpayers and more by the interests in conforming Treasury tax policy with the law and thereby achieving better policy outcomes. And, as agency deference continues its long decline, that trend will only accelerate, and tax law will begin to look like the other fields of public law marked by vibrant public-interest litigation. In that way, too, tax law will no longer be the exception.
Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at email@example.com.