Trump’s Threat to Nonprofits

The administration of President Trump is threatening nonprofits with the loss of tax-exempt status in an attempt to force them to conform their activities to policies favored by that administration. The threats are based on shaky legal grounds, and nonprofits have both constitutional and statutory bases for countering them. Nevertheless, these threats are significant, especially when combined with the administration’s efforts to cut government funding for many programs operated by nonprofits. And at the same time, the U.S. Congress is considering reducing the benefits of tax-exempt status in many ways, primarily to help pay for tax cuts benefitting individuals and corporations.

Chipping away at the benefits of tax exemption

In an apparent attempt to force nonprofits to conform to the current administration’s views relating to discrimination, antisemitism, and other topics, President Trump, his officials, and to a lesser extent the U.S. Congress are threatening to revoke or reduce the benefits of tax-exempt status for certain organizations. Besides the widely reported repeated threats by President Trump to take away Harvard’s exemption from federal income tax, President Trump and other officials in his administration have challenged the tax-exempt status of groups that include the Wikimedia Foundation, prominent medical journals, and the watchdog organization Citizens for Responsibility and Ethics in Washington. And in an Executive Order relating to public service loan forgiveness, President Trump suggested that certain activities engaged in by many nonprofits relating to immigration, gender-affirming care, and other activities were illegal, which would be grounds for revoking tax-exempt status.

The U.S. Congress is also considering several measures that threaten or reduce the benefits of tax-exempt status for certain nonprofits. The provision that appears to have raised the most alarm among nonprofits was a proposal carried forward from the 2023-2024 Congress that would have given the Department of the Treasury broad discretion to strip tax-exempt status based on alleged support of terrorism, subject to certain procedural protections. While initially included in this year’s pending tax legislation, that provision did not make it out of the House of Representatives, possibly because it may have violated certain procedural rules.

But other provisions in that legislation, now under consideration by the Senate, chip away at the benefits of tax exemption for certain nonprofits, reportedly in part to help pay for extending expiring tax cuts for individuals and corporations. These provisions include proposals to sharply increase the tax on investment income of both the largest university endowments and the largest private foundations, as well as to tax certain fringe benefits provided by some nonprofits to employees and to expand the reach of an existing tax on highly compensated nonprofit employees. The bill also would reduce the benefits of the deductions available to donors to tax-exempt charities by placing a floor on that deduction for corporations and capping the deduction for certain high-income donors. At the same time, Congress is proposing temporarily restoring a modest charitable deduction that would be available to all individual donors.

Legal grounds for revoking tax-exempt status

The Trump administration appears to be relying on two legal arguments for its challenges to tax-exempt status. One argument is that the targeted nonprofits are engaging in illegal activity, including supporting illegal racial discrimination targeted by one of the administration’s first Executive Orders or terrorism. An U.S. Internal Revenue Service (IRS) ruling from the 1970s that is still in effect establishes that promoting illegal activity is inconsistent with tax-exempt status for charities and certain other nonprofits. This ruling does not establish, however, how serious or pervasive the illegal activity has to be to justify revocation of tax-exempt status, leaving the door open for the administration to assert that even a small amount of allegedly illegal activity provides sufficient justification. At the same time, this argument is vulnerable to the counterargument that the challenged activity is not in fact illegal – a counterargument that some state attorneys general have already deployed in response to the administration implying that all diversity initiatives violate federal antidiscrimination laws.

The other argument is that the targeted nonprofits are acting contrary to public policy. For example, President Trump reportedly stated that his basis for questioning Harvard’s tax-exempt status is that it was not acting “in the PUBLIC INTEREST.” The IRS took the position starting in the 1970s that schools promoting racial discrimination were acting contrary to established or fundamental public policy and so should lose their tax-exempt status. The Supreme Court of the United States ultimately agreed with this position in the 1983 decision Bob Jones University v. United States. At the same time, the Court cautioned against the IRS interpreting what constitutes fundamental relevant public policy too broadly: “We are bound to approach these questions with full awareness that determinations of public benefit and public policy are sensitive matters with serious implications for the institutions affected; a declaration that a given institution is not ‘charitable’ should be made only where there can be no doubt that the activity involved is contrary to a fundamental public policy.”  It nevertheless held that the federal government’s policy against racial discrimination in education was fundamental because it was reflected in the consistent, long-term positions of not only the executive branch but also Congress and the federal courts. A counterargument to the reliance by the administration on this contrary to fundamental public policy doctrine is therefore that the policies asserted by the administration as having been violated by targeted nonprofits have not been embraced, or not embraced for a long enough time, by all three branches of the federal government and so are not fundamental.

Legal defenses for nonprofits threatened with loss of tax-exempt status

Besides the potential counterarguments already noted, nonprofits facing threats to their tax-exempt status from the Trump administration have several constitutional and statutory grounds with which they can defend themselves. The most obvious constitutional ground is the First Amendment’s protection for freedom of speech. President Trump and other officials in his administration have repeatedly stated that they are questioning the tax-exempt status of certain nonprofits because those nonprofits have engaged in speech the administration disagrees with or is critical of the President.

It is a clear violation of the First Amendment for the government to target individuals or groups for prosecution or investigation based on their protected speech, as the Supreme Court recently confirmed in its 2024 National Rifle Association of America v. Vullo decision. In that case, the American Civil Liberties Union (ACLU) represented the pro-gun rights National Rifle Association (NRA) in a lawsuit against a former New York state official who allegedly violated the NRA’s First Amendment rights by pressuring regulated entities not to do business with the NRA because of its pro-gun rights advocacy. In a unanimous decision, the Supreme Court reversed a lower court’s dismissal of the lawsuit, holding that the NRA should have the opportunity to try to prove the truth of its allegations, as if they were true they established a violation of the First Amendment.

Another possible constitutional defense is if the administration acts to revoke tax-exempt status without granting the targeted nonprofits sufficient procedural protections. The Fifth Amendment guarantees due process, and stripping a nonprofit of tax benefits without providing adequate notice and opportunity to contest the government’s actions violates that guarantee. This is part of why the IRS provides detailed procedures relating to revocation of tax-exempt status.

There are also several statutory protections for nonprofits facing possible loss of tax-exempt status. The one that President Trump appears to most clearly be ignoring is 26 U.S. Code Section 7217, which prohibits any White House employee from directing the IRS to target a specific nonprofit’s tax-exempt status and any IRS employee from complying with such an order or request. While President Trump is likely immune from prosecution under this criminal statute given a recent Supreme Court decision on presidential immunity, and other government employees likely face little risk of prosecution while President Trump is in office, a future (Democratic) administration could pursue prosecutions of those employees if they violate this statute.

Nonprofits have access to the courts to challenge revocation of tax-exempt status

Any nonprofit facing an IRS threat to revoke tax-exempt status also has the right to challenge that proposed revocation before it takes effect. The primary way to do so, enacted by Congress in the wake of Bob Jones University running into procedural difficulty challenging the revocation of its tax-exempt status that led to the Supreme Court case mentioned earlier, is provided by 26 U.S. Code 7428. This statute gives a nonprofit the right to go to federal court to seek a declaratory judgment that the revocation is improper and so should not be allowed to go into effect, although the nonprofit has to wait until the IRS has finalized its decision to revoke (or deny initially) tax-exempt status and the nonprofit has exhausted its administrative options for challenging that decision. Nonprofits can therefore force the IRS to defend its revocation decision in court.

A federal appellate court endorsed another way in Z Street v. Koskinen, which involved a pro-Israel charity that alleged the Obama administration had a policy targeting applications by pro-Israel nonprofits for tax exemption. That court ruled that a nonprofit may challenge the failure to approve such an application even before the IRS makes a decision if the challenge is based on First Amendment free speech grounds. Since most if not all of the threatened challenges to tax-exempt status appear vulnerable to exactly this type of constitutional challenge, that precedent likely would permit nonprofits to go to court immediately, without having to wait for a final IRS decision or having to exhaust their administrative remedies, if they can plausibly allege the IRS is investigating their tax-exempt status because of their protected speech.

The bottom line

The bottom line is that nonprofits facing a threat to their tax-exempt status from the Trump administration have a variety of legal defenses at their disposal. However, they will of course face the disruption and cost of having to deploy those defenses, which may lead many of them to instead quietly adjust their activities to avoid the areas the administration has targeted even if the threat would ultimately fail legally. The speed and breadth of the Trump administration’s attacks not only on tax-exempt status but also government funding for nonprofits has reportedly left many nonprofit leaders reeling, unsure whether and how to combat those attacks given the limited resources available to their nonprofits.

And the proposals under consideration by Congress do not have these legal vulnerabilities. If Congress wants to reduce the scope of tax exemption or other tax benefits enjoyed by nonprofits, it can do so as long as it has a reasonable basis for its actions that does not target disfavored speech or otherwise violate the Constitution. And for a Congress interested in extending tax cuts projected to cost trillions of dollars over the next ten years, paying in part for those cuts provides such a basis.