Trump’s Threat to Harvard’s Tax Status Reaches All Nonprofits

The Trump administration has made clear it intends to use executive agencies to enforce its priorities, including promotion of religious liberty, freedom of speech, and viewpoint diversity. After threatening Big Law firms with loss of access to the administration—and making deals with some firms while others filed suit—President Donald Trump has leveled similar accusations against multiple colleges and universities.

When Harvard rejected an “agreement in principle” to settle disagreements over its policies and leadership, Trump has publicly vowed to revoke its tax-exempt status. The IRS is reportedly prepared to follow through, and Secretary of Education Linda McMahon speculated that the IRS may review the tax-exempt status of other colleges and universities.

While a battle between the IRS and a university sitting on a $53 billion endowment may seem like a fight between two titans, the implications of the fight may trickle down. The US is home to over 1.8 million entities exempt from federal income tax, including schools; hospitals; and charitable organizations such as churches, food banks, homeless shelters, and local arts organizations.

The administration’s investigation of Harvard, which is exempt from federal income taxes as an educational organization under Section 501(c)(3) of the tax code, will serve as a blueprint for how the government can attempt to silence critics in the nonprofit sector—regardless of the university’s fate.

Harvard has a large enough endowment to fight any attempt to revoke its tax-exempt status. But Columbia University has an endowment of approximately $15 billion, one of the largest among US universities, and it capitulated to similar administration demands to avoid the loss of approximately $400 million in government funds. Other colleges and universities are now facing a similar choice—give in to the administration’s demands or fight them.

But these Ivy League institutions are all wealthy and heavily endowed compared with local and regionally focused tax-exempt organizations. What happens if the administration moves to revoke the tax-exempt status of even smaller organizations that support policies it dislikes? How would a homeless shelter or a church with a lesser annual budget and no endowment be able to fight—especially if the law firms they might call on are unwilling to take on the administration?

This problem isn’t limited to Trump’s term in office. The executive branch doesn’t tend to give up power obtained by a prior administration. Whether the next president is a Democrat or a Republican, supports Trump’s policies or opposes them, the precedent set by this administration will affect the future.

What can tax-exempt organizations do if their operations are, or appear to be, policy based and potentially subject to a future IRS audit at a president’s whim? The most important thing to do is make sure they follow the law.

For example, to qualify for 501(c)(3) tax-exempt status, the organization must be organized and operated exclusively for an “exempt purpose.” This includes religious, charitable, scientific, testing for public safety, literary, or educational purposes; fostering national or international amateur sports competitions; or preventing cruelty to children or animals.

Further, none of its earnings may inure to any private shareholder or individual, no substantial part of its activities may attempt to influence legislation, and it may not participate in any political campaign for or against a candidate for public office.

In practice, tax-exempt organizations should conduct a governance review of their organization and its operations. At a minimum they must:

• Review articles of organization, bylaws, and all policies and procedures to ensure they are organized for an exempt purpose.
• Review past, present, and future operations to ensure they are also supporting an exempt purpose.
• Review books and records to determine whether they have engaged in private benefit transactions or private inurement, given out grants and scholarships properly, and satisfied the applicable financial tests that the IRS mandates they use.
• Ensure no substantial part of their operations include lobbying at the federal, state, or local level.
• Ensure they don’t support, or oppose, any political campaigns. (This is always a hot-button issue, and while the Trump administration is lightening enforcement of churches on this issue, a different administration may reverse course.)
• Ensure employees, board members, officers, and constituents understand the above limitations and agree to abide by them.

Not all nonprofits, if any, have Harvard University’s financial resources. Although it’s uncertain whether the IRS will revoke Harvard’s tax-exempt status—or any other organization the Trump administration wants to target—tax-exempt organizations should act now. They must be prepared to defend their status in a cost-effective and efficient manner if the need arises.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brian C. Bernhardt and Adam R. Young are partners at Fox Rothschild, focused on federal tax controversies and tax litigation, as well as providing governance and tax advice to nonprofit and tax-exempt organizations.

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