H.R. 9495: Stop Terror-Financing and Tax Penalties on American Hostages Act

Exactly seven days after the Presidential election, the Republican-controlled House of Representatives failed to acquire the two-thirds majority it needed for fast track approval of H.R. 9495, the Stop Terror-Financing and Tax Penalties on American Hostages Act. It’s now being positioned for a new vote. If it becomes law, H.R. 9495 would provide the executive branch with the ability to revoke an organization’s tax-exempt status with little due process based on its unilateral determination that the organization provides or has provided support or resources to a terrorist organization or terrorist-supporting organization. 

The name of the bill may have made it difficult for some Representatives to oppose as there is little debate about the government’s goal to stop support going to terrorists, particularly if such support originates in part from tax-deductible contributions. But the devil is in the details and how such a law, as currently constructed, could be abused by an executive branch to attack its critics.

Substantively, this was the second appearance of the bill on the House floor. The first version (H.R. 6408) passed but died in the Senate. With 52 Democrats voting in favor of the bill last week, this bill seems almost certain to pass and ultimately be signed into law. 

Current Law

Section 501(p) of the Internal Revenue Code already provides for the automatic suspension of the tax-exempt status of an organization upon designation or identification by the federal government of the organization as a terrorist organization, one that supports or engages in terrorist activity. Under Section 302 of the Antiterrorism Act (8 U.S.C. § 1189), the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General, is authorized to designate an organization as a foreign terrorist organization, with prior notification to the Congress of the Secretary’s intent to make such designation. Like all bureaucratic procedures, there is a process to this designation which includes a compilation of information that demonstrates the organization fits the criteria.

Organizations are automatically subject to the following tax consequences during the period of designation or identification as a terrorist organization:

  1. The organization’s exemption from tax under Section 501(a) (which includes 501(c)(3), 501(c)(4), and other 501(c) exempt categories) is suspended. 
  2. The organization’s eligibility to apply for recognition of exemption under Section 501(a) is suspended.
  3. No deduction for a contribution to the organization is allowed under any provision of the Internal Revenue Code.
  4. Any administrative or judicial challenge of suspension or denial of deduction is denied to the organization. Notwithstanding Section 7428 or any other provision of law, no organization or other person may challenge a suspension, a designation or identification as a terrorist organization, the period of suspension, or a denial of a deduction in any administrative or judicial proceeding relating to the federal tax liability of such organization or other person.

The Legislation

H.R. 9495 amends the Internal Revenue Code to “postpone tax deadlines and reimburse paid late fees for United States nationals who are unlawfully or wrongfully detained or held hostage abroad, to terminate the tax-exempt status of terrorist supporting organizations, and for other purposes.” While very few people have issue with the first part of the bill, the second part is concerning. 

Under the second part of the bill, there is no requirement that any evidence or explanation be provided for designating an organization as a terrorist-supporting organization and terminating its tax-exempt status. There is a 90-day “cure” period during which time the organization can defend themselves against such designation, but in the absence of any evidence or explanation, the “cure” process may be meaningless. 

Impetus for this Legislation

This legislation came to being in response to pro-Palestinian protests opposing the deadly war in Gaza in college campuses earlier this year. In May, James Comer and Virginia Foxx, Republican members of the Committee on Oversight and Accountability and the Committee on Education and the Workforce, respectively, sent a letter to the Secretary of Treasury Janet Yellen asking for information on groups they accused of funding the protests and campus encampments. They claimed that the protests were antisemitic in nature and wanted to conduct an investigation into the “malign influence on college campuses and to the national security implications of such influence on faculty and student organizations.” The letter was alarming because it named several well-known and respected organizations working for progressive causes.

In addition to this letter, Congress also held a highly contentious hearing that brought down the leaders of prominent Universities including Harvard and UPenn under the guise of their not doing enough to combat antisemitism on their campuses. Regardless of the sincerity of members of Congress leading the charge, this issue proved to be a winner for members of Congress bent on cowing the leaders of the cultural power centers of American society and this bill aims to do the same to influential nonprofit organizations. 

Implications

Nonprofit organizations played an enormous role in slowing down and stopping many of the prior Trump Administration’s harmful policies. The Muslim Ban, family separations, and abortion ban legislation were all slowed down, curtailed, and in some cases stopped in their tracks, because of the work of nonprofit organizations. The ACLU alone filed more than 400 legal actions against the previous administration.

Nonprofit organizations have also stepped up their involvement in agitating for and against policies. This legislation is being seen as a tool that the new administration can use to suppress the impact nonprofit organizations have in curtailing their efforts. The lack of due process clouds the understanding of what constitutes providing resources to terrorist organizations, which will lead to organizations being more cautious of how they operate and what activities they decide to fund. The mere threat of this designation will cause organizations to change how they operate in order to avoid getting in the administration’s cross hairs. 

Next Steps

Nonprofits opposed to the bill should speak out and encourage their networks to do the same. Collaborative efforts among organizations combined with letters to Representatives are necessary to show the government that this is a critically important bill that endangers core democratic principles, risks a shift to authoritarian rule, and chills nonprofit speech.

To mitigate risk, some nonprofits have already begun changing the language in their policies to scrub them of words and themes the Trump campaign railed against in order to reduce the potential targeting and harm from the upcoming administration. Others are considering the use of subsidiaries or collaborative organizations (including fiscal sponsors) in case they have their 501(c)(3) tax-status stripped.

We would strongly recommend conferring with knowledgable counsel when designing major costly mitigation strategies as there are common misconceptions that may unnecessarily complicate or even harm an organization. One such misconception is that the power to strip an organization of 501(c)(3) status is equivalent to the power to shut it down. While this may ultimately be the outcome, it’s not necessarily the case. Note that almost 90% of taxpayers get no deduction for making a charitable contribution and private foundations have the power to make grants to organizations without 501(c)(3) status.

Additional Resources

We Oppose H.R. 9495, Joint statement from Council on Foundations, Independent Sector, National Council of Nonprofits, and United Philanthropy Forum

House GOP Moves to Ram Through Bill That Gives Trump Unilateral Power to Kill Nonprofits (Noah Hurowitz, Intercept)

IRS Exempt Organizations Technical Guide – TG 45: Suspension of Tax-Exempt Status of Terrorist Organizations under IRC 501(p)