The culture of fear triggered by the current administration’s attacks on diversity, equity, and inclusion (DEI), while understandable, is not healthy for the nonprofit sector. Staying informed and stepping up general compliance are generally appropriate responses. Making changes to communications may be part of a sound risk management strategy. Giving up on an organization’s lawful core values is wrong.

Further, for the vast majority of nonprofits, moving money offshore or to nonexempt entities may at this point raise more problems and be more administratively burdensome than is worth the expense and risks.

With that context, learning more about how a charity’s 501(c)(3) tax-exempt status may be revoked and what options a charity would have under such circumstance is important. We’ve discussed certain elements of these subjects in earlier posts, but for those looking for a deeper dive in the form of a law journal article from one of our most esteemed experts in nonprofit law, Professor Ellen Aprill just released Revoking Tax-Exemption For Pursuit of DEI on SSRN (publication in The Tax Lawyer forthcoming).

Forecasting how the attacks on DEI will look is not necessarily an area of expertise for academics and legal professionals. Accordingly, I would encourage readers to review the article not as a doomsday scenario but as part of the running saga of areas in which nonprofit advocacy can continue to make a big difference.

Abstract

These have been hard times for section 501(c)(3) organizations that believe in DEI. President Trump, unhappy with Harvard’s University’s refusal to agree to a long and detailed list of demands has threatened to remove its tax exemption. The American Alliance for Equal Rights filed a complaint with the IRS asserting that the Gates Foundation did not qualify for section 501(c)(3) exempt status because it awarded its scholarships only to students from minority groups. 

After explaining the process for revoking exempt status, this piece describes the two most likely bases for the IRS to revoke the exemption of a section 501(c)(3) that advances DEI – loss of exemption for violation of  fundamental public policy, and loss of exemption because of substantial illegal purposes. It then considers legislation that would permit the Secretary of the Treasury to suspend the exemption of organizations designated as supporting terrorism. It separately evaluates any IRS move to revoke Harvard’s tax exemption, including statutory prohibitions on executive branch interference, and the consequences of revocation. 

The paper advises that tax-exempt organizations have solid bases on which to answer attempted revocation. They have a number of ways to respond to any attempts at  revocation. They can make changes, large and small, to current operations. They can go to court.  But they, along with their advisers, need to consider now the choices they will make and the actions they will take. The article concludes with Justice Powell’s observation in his Bob Jones concurrence: “the provision of tax exemptions to nonprofit groups is one indispensable means of limiting the influence of governmental orthodoxy on important areas of community life.” This statement stands as an important reminder for both charities and the current administration.