Highlights from the ABA Exempt Organizations Committee Meeting 2/20/25

Published on: by Gene Takagi Category:EVENTS, IRS & FEDERAL TAX ISSUES
L.A. Live district at night

Here are some of the highlights from the American Bar Association Exempt Organizations Committee meeting held on February 20 as part of the ABA Midyear Tax Meeting. As with all of our posts capturing highlights of events, my interpretations and opinions may be sprinkled with those of the presenters.

Executive Orders

The opening session of the meeting was intended to be News from the IRS and Treasury. However, the invited government attorneys were unable to attend. Alexander Reid and Kimberly Eney, Chair and a Vice Chair of the Tax Exempt Organizations Committee, respectively, assembled and led an ad hoc panel to speak on the recent Executive Orders.

Enemies of the State?

In the wake of the October 7, 2023 attacks on Israel and nearly 25 years after the September 11, 2001 attacks on the World Trade Center, Congress is considering The Stop Terror-Financing and Tax Penalties on American Hostages Act (H.R. 9495), which, if enacted, would empower the Treasury Secretary to designate a nonprofit as a “terrorist supporting organization” if it provided material support or resources to a terror group within the past three years of the designation and to revoke such the organization’s tax-exempt status. This panel will discuss what lessons we may have learned from the War on Terror and efforts to curtail nonprofit involvement. Is it different this time? To what extent must nonprofits adhere to or support US foreign policy? Could HR 9495 be used to create an enemies list to stifle free speech? Presenters: Ellen Aprill, Shirin Sinnar, Gene Takagi

  • HR 9495 passed in the House (November 2024) but was not acted upon by the Senate; it’s likely to be reintroduced
  • Current laws exist to prohibit the support of terrorism, including Section 501(p) of the Internal Revenue Code, which provides that an organization’s exempt status is automatically suspended for the period it is designated under various federal authorities as a terrorist organization (this has been applied to just nine organizations)
  • HR 9495 creates a new category of terrorist-supporting organization (“TSO”) which can be a designation made by the Treasury Secretary if they determine that an organization has provided material support or resources (including training, advice, or assistance) to a terrorist organization or to a TSO
    • 90 days’ notice must be given to the organization
    • The designation may be appealed (IRS Office of Appeals) and taken to a U.S. District Court
  • There has been strong opposition to HR 9495 from many organizations in the nonprofit sector – see, e.g., We Oppose H.R. 9495: Joint statement from Council on Foundations, Independent Sector, National Council of Nonprofits, and United Philanthropy Forum; Letter to House Speaker Johnson and Leader Jeffries from the ACLU together with a coalition of 354 civil liberties, religious, reproductive health, immigrant rights, human rights, racial justice, LGBTQ+, environmental, and educational organizations
  • See also Comparison of Procedures in Current Section 501(p) and H.R. 6408 (Ellen Aprill, SSRN); HR 6408 stalled in the Senate earlier in 2024 before being reintroduced as part of HR 9495
  • Some lessons to be learned from the War on Terror (Takagi’s personal opinions):
    • Terrorism is not limited to foreign threats but we have policies dictated by xenophobia, racism, and fear, all of which serve to chill dissent and collectively leads to bad foreign policy driven more by moneyed interests than national interests
    • Terrorism is constantly evolving (e.g., cyberterrorism, use of technology in misinformation/disinformation, targeting elections) and effective counter-terrorism must be adaptive
    • Antiterrorism strategies must not be limited to stopping attacks but must address root causes, including government failures and instability, economic hardship, lack of opportunity and hope, oppression in all forms particularly where a privileged class benefits from such oppression, perceived injustices and cultural imperialism, historical grievances, and ideological radicalization – this requires substantial investment and diplomacy
    • But HR 9495, especially together with the defunding and dismantling of USAID and foreign grantmaking, the Executive Orders targeting DEI, and the added risks and burdens imposed upon nonprofits engaging in foreign humanitarian work, exacerbates the root causes of terrorism
    • The rationale for passing HR 9495 may be less about preventing the support of terrorism and more about chilling dissent from nonprofit, tax-exempt organizations – see, e.g., H.R. 9495: What’s Next?
    • Tips for nonprofits:
      • There is great importance in resisting bad policies that threaten your mission, values, and beneficiaries, even if you fail on a specific fight – see, e.g., How Nonprofits Can Fight Back Against Trump’s Harmful Executive Orders (Alliance for Justice)
      • Ensure you are compliant with basics like qualifications to operate in applicable states and jurisdictions, charity registrations, bylaws provisions regarding elections and terms of office – these may be easier ways for a regulator to shut down your operations – see, e.g., Nonprofit Legal Compliance in an Unfriendly Political Environment (NPQ)
      • HR 9495 could be used to revoke 501(c)(3) status, but it doesn’t in and of itself give the authority to the federal government to shut down your operations or freeze your assets – make sure you are well informed before making strategies for preventative steps (like forming an LLC) because they may not be as protective as desired and they may unnecessarily make operations more complicated
  • Despite the existing laws that could be used to label and shut down a nonprofit and impose criminal liabilities upon its leaders, HR 9495 could make it worse
  • Other antiterrorism laws include definitions of Foreign Terrorist Organization (Immigration and Nationality Act) and Specially Designated Global Terrorist (International Emergency Economic Powers Act and EO 13224)
  • The Crimes and Criminal Procedures Title of the U.S. Code includes Sections 2339A and 2339B together generally deal with knowingly attempting to, conspiring to, or actually, providing material support knowing or intending that it be used to support an act of terrorism, a designated foreign terrorist organization, or an organization engaged in terrorist activity – see Terrorist Material Support: An Overview of 18 U.S.C. § 2339A and § 2339B (Congressional Research Service)
  • HR 9495 is missing the intent or knowledge (mens rea) standard for designating a terror-supporting organization and provides that “a ‘terrorist supporting organization’ means any organization which is designated by the Secretary as having provided, during the 3-year period ending on the date of such designation, material support or resources (within the meaning of section 2339B of title 18, United States Code) to an organization described in paragraph (2) (determined after the application of this paragraph to such organization) in excess of a de minimis amount.”
  • This uncertainty would chill support provided by a tax-exempt organization to another organization for humanitarian aid even if such recipient organization had no identified connection to a known terrorist organization or act of terrorism at the time of such support and even if the organization providing the support had absolutely no intent of supporting terrorism or a terror-supporting organization
  • New antiterrorism laws can be used in ways not anticipated by the public or possibly by the legislature to promote attacks against lawful dissent

Does One Bad Apple Spoil the Barrel?

Fiscal Sponsors support a wide variety of projects in furtherance of their mission. They are an efficient means of conserving scarce charitable resources and maximizing impact. While federal law has long recognized and even encouraged fiscal sponsorship arrangements, the practice has recently been challenged by the House Committee on Ways and Means, alleging that fiscal sponsorships can enable foreign influence and conceal uncharitable, if not illegal activity. How do fiscal sponsors identify and limit abuse? Is more regulation warranted? Presenters: Erin Bradrick, Jill Horwitz, Suneela Jain

  • Models of Fiscal Sponsorship (with reference to Fiscal Sponsorship: 6 Ways To Do It Right, 3rd Edition by Greg Colvin & Stephanie Petit)
    • Comprehensive/Direct (Model A)
    • Independent Contractor (Model B)
    • Preapproved Grant Relationship (Model C)
    • Group Exemption (Model D)
    • Technical Assistance (Model F)
    • Single Member LLC (Model L
  • History
    • National Foundation, Inc, v. United States (1987): Court found that NFI operated exclusively for exempt purposes. “NFI’s goal is to create an effective national network to respond to many worthy charitable needs at the local level which in many cases might go unmet. By drawing upon this grass roots network of resources, creativity, and knowledge of local needs, NFI initiates, funds, and administers many small local charitable projects which would otherwise not be supported. NFI’s activities promote public policy and represent the very essence of charitable benevolence as envisioned by Congress in enacting § 501(c)(3).”
    • Rev. 68-489: “An organization exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954 distributed part of its funds to organizations not themselves exempt under that provision. The exempt organization ensured use of the funds for section 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes. It retains control and discretion as to the use of the funds and maintains records establishing that the funds were used for section 501(c)(3) purposes. Held, the distributions did not jeopardize the organization’s exemption under section 501(c)(3) of the Code.”
    • IRS CPE Text on Community Foundations (1994): Acknowledges that there is “nothing inherently wrong with fiscal sponsorship” and provides examples of “legitimate fiscal sponsorships.”
  • Model A fiscal sponsorship basics – Parties (including regulators and legislators) should recognize that a Model A fiscal sponsorship arrangement is generally the same as an internal program’s relationship to the nonprofit entity in which the program exists (i.e., the fiscally sponsored project has no separate legal existence; there is no separate entity “sharing” the fiscal sponsor’s 501(c)(3) status)
  • Model C fiscal sponsorship basics – Parties (including regulators and legislators) should recognize a Model C fiscal sponsorship arrangement is generally the same as a grantor-grantee relationship (i.e., the grantee in the fiscal sponsorship arrangement cannot direct the fiscal sponsor to make grants to the pre-approved grantee; the fiscal sponsor has discretion to use the grant itself or grant it to another party within the restricted purpose of the funds)
  • Where fiscal sponsorship is properly set up, there may be greater oversight over the charitable assets involved than if the leaders of the fiscally sponsored project started a new charity to run the project’s operations; where fiscal sponsorship is not properly set up, there may be appropriate criticisms of a lack of IRS oversight and transparency
  • Greater education of fiscal sponsorship is key to help assure fiscal sponsors are properly setting up their fiscal sponsorship relationships
  • Because “fiscal sponsorship” is not a defined term, consideration should be given to better differentiating the models, possibly by referring to “fiscal sponsorship” only for Model A relationships
  • Fiscal sponsors should be particularly concerned about the possibility of ascending liability from Model C grantees and the separate risk of having unlawful activities of agents of a fiscal sponsor (including employees and volunteers fundraising on behalf of the fiscal sponsor) being attributed to the fiscal sponsor; clear policies should be adopted and agreed upon to mitigate such risks

Thoughts, Words, and Deeds

The First Amendment protects expressive activities. For example, the Supreme Court held that wedding cake bakers (Masterpiece Cakeshop) and website designers (303 Creative) can discriminate against same-sex couples because their activities are expressive and therefore within the scope of the First Amendment. Does this line of jurisprudence also protect the mission related activities of nonprofit organizations? To what extent does the First Amendment protect race-based grantmaking programs? Presenter: Eugene Volokh

  • An exempt organization doesn’t have full 1st Amendment rights (e.g., electioneering and lobbying)
  • Speiser v. Randall (1958): discriminatory denial of a tax exemption for engaging in speech is a limitation on free speech
  • Exemption Can’t Turn on Viewpoint but May Turn on Conduct (e.g., Bob Jones University v. United States (1983); Christian Legal Society v. Martinez (2010); Runyan v. McCrary (1976))
  • Discriminatory Conduct Protected – religion clauses (e.g., selecting clergy/teachers of religion); intimate association (e.g., selecting roommates); expressive association (e.g., selecting people who can speak for your organization – Boy Scouts); free speech clause (e.g., selecting floats for parade), selecting actors, pageant participants; creating speech (303 Creative LLC v. Elenis (2023)); donating money for expression (Coral Ridge Ministries v. Amazon (2011))
  • Discriminatory Conduct Unprotected – selecting union members, private school students, social club members, law firm partners, companies to do business with
  • Civil Rights Act of 1866, Section 1981
  • Banning private “DEI programs” is unconstitutionally vague and viewpoint discrimination, but stopping federal funds from funding DEI activities may be constitutional

Tax-Exempt Bonds for 501(c)(3) Attorneys

Tax-exempt bonds are a valuable financing tool for 501(c)(3) exempt organizations. Panelists during this session will discuss, among other points, the context for giving and receiving opinions on exempt status and unrelated business issues in connection with qualified 501(c)(3) bonds., the sources counsel may rely on in determining whether an entity is operating in furtherance of its exempt purpose, and the restrictions that apply while tax-exempt debt is outstanding. Presenters: Andrew Rubin and Eorl Carlson

  • Under IRC Sections 103 and 145, a governmental issuer may issue tax-exempt bonds for the benefit of a 501(c)(3) organization that would be considered the borrower
  • Interest paid on the bond is tax-exempt to the lender/bondholder, which allows for the 501(c)(3) borrower to pay lower rates of interest for the loan and the lender to still to make the same amount as on a commercial rate loan for which the lender/bondholder would be subject to tax on the interest
  • Bond purchasers will expect bond counsel to provide an approving opinion that interest on the bonds is excludable from gross income for federal income tax purposes, which will depend in part on whether the borrower qualifies as exempt under 501(c)(3) and that private business use of the bond proceeds (e.g., unrelated business) is not expected to exceed 5% of the proceeds of the issuance; bond counsel will typically rely upon an opinion of borrower’s counsel
  • Borrower can use equity funds for private uses; may want to reserve some funds as a buffer to guard against a charge of misuse of bond funds
  • See Rev. Proc. 2017-13 safe harbor provisions