In a post published on November 19, 2024, we described H.R. 9495, the Stop Terror-Financing and Tax Penalties on American Hostages Act that passed the U.S. House of Representatives mostly along party lines on November 21. HR 9495, labeled by some as the ‘Nonprofit Killer Bill’ because it would have provided the Treasury Secretary with the unilateral right to designate a nonprofit as a terrorist supporting organization and revoke its tax-exempt status, stalled in the Senate of the 118th Congress. But that’s not likely to be the end of HR 9495.
An identical bill could be reintroduced and refiled for consideration by the House and the Senate of the 119th Congress, each now represented by a Republican majority. This seems likely based on the deluge of executive orders and administrative memos and actions, particularly those opposing diversity, inclusion, and equity, that have inflicted serious harm to the nonprofit and charitable sectors and communities dependent on the work of nonprofits and nongovernmental organizations.
Should a successor bill to HR 9495 (which I’ll continue to refer to as HR 9495 in this post) be introduced, it will no doubt reignite great fear of executive branch abuse. Such abuse is possible and dare I say likely, but it’s important to understand that the executive branch already has access to inflict more severe penalties on a nonprofit if it ‘believes’ that such nonprofit is supporting a terrorist organization, a terrorist supporting organization, or a policy that is contrary to established, fundamental public policy.
HR 9495 would still be a terrible bill and perhaps the tool of choice by an executive branch that wants to instill fear in those who might oppose its policies. But the sector must also look at the bigger threat that an array of laws and directives poses to a huge segment of the nonprofit sector and the communities that they serve. Further, if people and organizations decide to expend significant resources on HR 9495, they must make sure that they have a strong and accurate understanding of the bill. Spreading even well-intentioned misinformation seriously weakens legitimate criticisms of the bill. For some additional context, see H.R. 9495 – Some Definitions.
What existing powers does the executive branch possess to revoke tax-exempt status of organizations that support terrorist organizations?
The executive branch has existing powers to designate an organization as one that provides material support or resources (1) for the commission of certain designated offenses that might be committed by terrorists or (2) to certain designated terrorist organizations. See Terrorist Material Support: An Overview of 18 U.S.C. § 2339A and § 2339B (Congressional Research Service, Updated August 15, 2023). A defendant, charged with providing material support to a foreign terrorist organization may not challenge the designation. The courts have consistently held that a defendant’s inability to challenge the designation does not offend due process; nor does it constitute an unconstitutional delegation of legislative authority. In contrast, HR 9495 has been negotiated to include greater due process and an appeals process.
Internal Revenue Code Section 501(p), which HR 9495 seeks to build upon, already allows the IRS to suspend the tax-exempt status of organizations that support terrorist organizations, but the determination of “terrorist organizations” (including by virtue of supporting a terrorist organization) is made pursuant to other laws and not at the sole discretion of the Treasury Secretary. Notably, such determination may be made by Executive Order. For more information on 501(p) and HR 9495, see Comparison of Procedures in Current Section 501(p) and H.R. 6408 (Ellen P. Aprill, SSRN). Note that HR 6408 (further discussed below) is essentially the same bill as HR 9495.
Precedent also exists for the revocation of 501(c)(3) tax-exempt status based on violations of established fundamental public policy. See, e.g., Rev. Rul. 71-447 (“all charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy”); Rev. Rul. 75-384 (organization didn’t qualify as exempt under IRC Section 501(c)(3) where its primary activity was to sponsor antiwar protest demonstration in which demonstrators urged to violate local ordinances and commit acts of civil disobedience); Bob Jones University vs. United States, 461 U.S. 574 (1983) (racially discriminatory policies of schools cannot be charitable – Two part test: (1) Is there a public policy against a particular activity? (2) Is the public policy so fundamental as to require the denial or revocation of exempt status for organizations participating in that activity?). While revocations based on violations of public policy are exceedingly rare, House Republicans raised the issue last year in a letter to the IRS Commissioner regarding their “growing concern surrounding the influence of America’s foreign adversaries, including the Chinese Communist Party (“CCP”), on U.S.-based tax-exempt organizations.” One of the questions asked of the IRS Commissioner in the letter: “If in practice a tax-exempt organization operates to promote conduct that is counter to public policy, is that grounds for revocation of tax-exempt status?”
Myriad other laws also could be used against a nonprofit for supporting terrorist activities or organizations. For example, the Patriot Act, which broadened material support to include training and expert advice or assistance and prohibited financial transactions with terrorists; the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) Laws; Executive Orders from past Presidents (2001 and earlier – e.g., 13224 and 12947) that allow for freezing of assets and criminalize the support to designated terrorists; the Immigration and Nationality Act, which calls for designation of an organization as a terrorist organization (without prior notice to the org) by the Secretary of State, but only in consultation with or upon the request of the Attorney General or the Secretary of Homeland Security or in consultation with the Treasury Secretary and the Attorney General.
If there are already other antiterrorism laws, why would some members of Congress want to pass HR 9495?
Many believe the rationale behind HR 9495 is not to inhibit the support of terrorism. There are other laws that accomplish that goal, and the Treasury Secretary is not likely to be qualified to make the sole determination that an organization is supporting terrorism. The more likely goal of HR 9495 is to inhibit free speech where tax-exempt nonprofits are supporting Palestinians or other groups of people who may be ruled by terrorist organizations or governments engaged in terrorist activities. By coupling it to popular and noncontroversial antiterrorism provisions, the bill almost slipped through Congress last year without critical review and with some fear of elected officials to oppose any antiterrorism bill.
The controversial provisions in HR 9495 regarding termination of tax-exemption are the same as those in a bill, HR 6408, which passed overwhelmingly in the House by a 382 to 11 vote in April 2024. Many representatives who voted for HR 6408 must not have recognized or heard the strong concerns of nonprofits. Such concerns did, however, reach the Senate, where the bill stalled before being reintroduced as HR 9495, which also got stalled in the Senate very late in the political season. Now that the Republicans have gained control of the House and Senate, some believe that the reintroduction and passage of HR 9495 are inevitable absent a huge public outcry or a Democrat filibuster.
While HR 9495, if it should become law, may not be the harshest law threatening nonprofits, it may be a less controversial and therefore more useful tool for the executive branch to target, threaten, and revoke the 501(c)(3) status of, nonprofits whose support might be considered supportive of a designated terrorist organization. This might include support or resources that are directed at humanitarian aid to groups of people who live within an area under the control of a group designated as a terrorist organization.
Chilling free speech
By targeting just a few high-profile organizations, the executive branch could chill lawful nonprofit speech across the sector. The recent Executive Orders aimed at DEI are a good example of how the President can spend very little resources to chill speech, adversely impact resource allocation, and change the behavior of nonprofit leaders who had previously committed to advancing DEI, which the vast majority had been doing in a completely lawful manner (that remains lawful despite the rhetoric of these Executive Orders which target “illegal” DEI activities in the private sector and do not create new anti-discrimination laws applicable to nonprofits).
Note the language used in Executive Order 14173 “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (January 21, 2025) (emphasis added):
Sec. 4. Encouraging the Private Sector to End Illegal DEI Discrimination and Preferences. (a) The heads of all agencies, with the assistance of the Attorney General, shall take all appropriate action with respect to the operations of their agencies to advance in the private sector the policy of individual initiative, excellence, and hard work identified in section 2 of this order.
(b) To further inform and advise me so that my Administration may formulate appropriate and effective civil-rights policy, the Attorney General, within 120 days of this order, in consultation with the heads of relevant agencies and in coordination with the Director of OMB, shall submit a report to the Assistant to the President for Domestic Policy containing recommendations for enforcing Federal civil-rights laws and taking other appropriate measures to encourage the private sector to end illegal discrimination and preferences, including DEI. The report shall contain a proposed strategic enforcement plan identifying:
(i) Key sectors of concern within each agency’s jurisdiction;
(ii) The most egregious and discriminatory DEI practitioners in each sector of concern;
(iii) A plan of specific steps or measures to deter DEI programs or principles (whether specifically denominated “DEI” or otherwise) that constitute illegal discrimination or preferences. As a part of this plan, each agency shall identify up to nine potential civil compliance investigations of publicly traded corporations, large non-profit corporations or associations, foundations with assets of 500 million dollars or more, State and local bar and medical associations, and institutions of higher education with endowments over 1 billion dollars;
(iv) Other strategies to encourage the private sector to end illegal DEI discrimination and preferences and comply with all Federal civil-rights laws;
(v) Litigation that would be potentially appropriate for Federal lawsuits, intervention, or statements of interest; and
(vi) Potential regulatory action and sub-regulatory guidance.
While Executive Order 14173 may not create a new form of illegal discrimination, together with new policies ending federal support of organizations with DEI initiatives and other communications coming from the White House, it has created panic thoughout the nonprofit sector and resulting in a large number of nonprofits (whether reliant on federal funding or not) scrubbing their communications of references to DEI, environmental justice, climate change, and other perceived red-flag terms. This fear arises from an administration that is looking for a variety of tools to ensure widespread support of their policies and little organized opposition, regardless of whether the policies are lawful or beneficial to the American public.
What should we do to make sure our organization isn’t on the executive branch’s hit list?
The nonprofit sector encompasses a very broad array of organizations with different missions, visions, values, assets, and risk tolerances. Some organizations focused on equity may be well positioned to take a stand and not do anything different despite the threat of HR 9495 and laws that might be used to chill dissent from the incoming administration’s policies and priorities. Others, particularly those whose activities are critically needed and whose missions may not overtly appear to be potential targets, may choose to be more conservative.
It seems reasonable to think that the IRS may be directed to review exemption applications more critically if there are signals that an applicant will have DEI-related programs and activities. But it’s important to understand that advancing diversity, equity, and inclusion is not an unlawful goal and may be completely consistent with a charitable purpose. See, e.g., Charitable: Eliminating Prejudice and Discrimination; Charitable: Lessening Neighborhood Tensions; Charitable: Defending Human and Civil Rights; and Charitable: Combating Community Deterioration.
Similarly, the IRS may be reviewing Forms 990 using algorithms that may consider words or terms like “DEI” as indicators of higher compliance risks. While advancing diversity, equity, and inclusion can be done in a completely lawful manner, it can also be done unlawfully if, for example, hiring preferences are given to persons who identify with a specific race group or if contracts are made or enforced unequally based on race. See, e.g., Anti-Discrimination Laws – Section 1981.
We strongly encourage all nonprofits to ensure their compliance on basic employment laws, qualifications to do business, charitable registration (if applicable), licensing, and other fundamental matters in order to mitigate their risks. There are easier ways to shut down a nonprofit for noncompliance than to attack them for their compliant DEI or environmental justice practices and values. See, e.g., Nonprofit Legal Compliance in an Unfriendly Political Environment (Nonprofit Quarterly).