By: Tatum Perez, Esq.
In part one of this article, The History and Risk of Losing Tax-Exempt Status in the U.S. , we discussed the legal framework and policy rationale behind tax-exempt status in the U.S. Recently, Harvard University is embroiled in a very public dispute with the Trump administration over the administration’s decision to freeze $2.2 billion in federal grants and contracts to the university. This freeze occurred after Harvard declined to implement changes, including ending diversity, equity, and inclusion (DEI) programs and modifying admissions and hiring practices. The administration is also attempting to revoke Harvard’s tax-exempt status. The effort raises profound questions about the intersection of tax law, civil rights enforcement, and political influence.
The Trump administration’s attempt to revoke Harvard University’s tax-exempt status is grounded in allegations that Harvard has violated federal civil rights laws and fundamental public policy, particularly concerning antisemitism and discriminatory practices. The administration contends that such violations disqualify Harvard from maintaining its 501(c)(3) nonprofit status. Revoking a university’s tax-exempt status would require clear evidence of violations, such as engaging in discriminatory practices or deviating from its educational mission.
More specifically the administration alleges the following:
Failure to Address Antisemitism: The administration accuses Harvard of inadequately responding to antisemitic incidents on campus, thereby failing to protect Jewish students and violating Title VI of the Civil Rights Act of 1964, which prohibits discrimination based on race, color, or national origin in programs receiving federal assistance.Engagement in Discriminatory Practices: Harvard’s diversity, equity, and inclusion (DEI) programs are alleged to involve race-based and gender-based preferences, which the administration argues constitute discriminatory practices contrary to federal law and public policy.Political and Ideological Bias: The administration asserts that Harvard operates more as a political entity than an educational institution, promoting ideological agendas that conflict with its obligations as a tax-exempt organization.
While these allegations are serious, the legal vehicle proposed is both highly unusual and extremely difficult to achieve under current law. The administration’s legal rationale is based on the “illegality doctrine,” established in the Supreme Court case Bob Jones University v. United States (1983). In that case, the Court upheld the IRS’s revocation of Bob Jones University’s tax-exempt status due to its racially discriminatory policies, stating that tax-exempt status is not available to organizations that violate “fundamental public policy.”
While Bob Jones is precedent, it applies in rare and extreme cases. Courts and the IRS are generally reluctant to expand the “fundamental public policy” doctrine beyond the facts of that case, especially absent clear Congressional guidance or a final adjudication of civil rights violations.
Federal law also prohibits the President and other executive branch officials from directing the IRS to investigate or audit specific taxpayers, including nonprofit organizations. Such actions must originate within the IRS and follow established procedures.
Additionally, while the alleged Title VI violations may be serious, they are enforced by the Department of Education’s Office for Civil Rights, not the IRS. For IRS revocation to proceed on this basis, a strong causal link between civil rights violations and exempt purpose failure must be proven.
While issues of this magnitude are not commonly experienced within a small foundation or even a very large public charity, the principles of maintaining good stewardship and compliance within these organizations are nevertheless paramount. The consequences might not be as dire as it would be for Harvard, but the loss of tax-exempt status and subsequent public trust could be difficult to overcome.
For any non-profit it is advisable to ensure it is maintaining alignment with its mission; it is avoiding partisan or discriminatory practices, and complying with all federal laws, not just tax laws. For nonprofits of all sizes, good governance and documented compliance are the best defense.
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