The Key Words
The second part of President Trump’s education tweet has the key words that form the basis for an IRS attack on universities. “Propaganda” and “Public Policy”.
The Case Law
When it comes to “Propaganda”, there are a few cases that come to mind. I would go with Big Mama Rag, Inc because I find it colorful, but I will leave that discussion for another day.
“Public Policy” is a different story. There we have an 8 to 1 Supreme Court decision – Bob Jones University v United States. The IRS has a lot of arrows in its quiver if it were to be unleashed against an industry that depends on not-for-profit status. Bob Jones is more like a nuclear bomb. It is rarely invoked, but it strikes terror in people’s hearts.
The Bob Jones Bomb
During the Obergefell litigation (In Obergefell the Supreme Court ruled that the 14th Amendment requires states to allow people of the same sex to marry and recognize such marriages made in other states.), Judge Alito asked:
“In the Bob Jones case, the court held that a college was not entitled to tax-exempt status if it opposed interracial marriage or interracial dating. So would the same apply to a university or a college if it opposed same-sex marriage?”
Solicitor General Donald Verrilli Jr. arguing for same-sex marriage indicated that it definitely would “be an issue”.
On Tax Exemption
There are a multiplicity of ways in which an organization can claim tax exemption. Under Code Section 501(c) alone there are 29. The ones that allow you to receive tax deductible charitable contributions are fewer and further between making 501(c)(3) the gold standard and also one with a pretty broad definition of organizations that can seek qualification:
“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals ……” (Emphasis added)
The Bob Jones Decision
What the Bob Jones decision blessed is an overriding requirement that is not explicitly stated in the statute namely that 501(c)(3) organizations must be considered “charitable” under common law.
The IRS noted in Revenue Ruling 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.” (Emphasis added)
As was noted in the oral arguments the IRS position before the Supreme Court consisted of a major premise and a minor premise. The major premise was that the IRS could use its reading of public policy to deny exemption. The minor premise was that the elimination of racial discrimination was such a policy.
The Court affirmed both premises.
“An examination of the IRC’s framework and the background of congressional purposes reveals unmistakable evidence that underlying all relevant parts of the IRC is the intent that entitlement to tax exemption depends on meeting certain common-law standards of charity—namely, that an institution seeking tax-exempt status must serve a public purpose and not be contrary to established public policy.”
“An unbroken line of cases following Brown v. Board of Education establishes beyond doubt this Court’s view that racial discrimination in education violates a most fundamental national public policy, as well as rights of individuals.”
“Whatever may be the rationale for such private schools’ policies, and however sincere the rationale may be, racial discrimination in education is contrary to public policy. Racially discriminatory educational institutions cannot be viewed as conferring a public benefit within the “charitable” concept discussed earlier, or within the Congressional intent underlying § 170 and § 501(c)(3).”
But It Is Not Extended
The Bob Jones decision came down in 1983. It appears to be a very powerful precedent, but it has not been used much. In a 2017 article discussing the implications of Bob Jones in light of Obergefell. Samuel Brunson and David Herzig note.
“In light of the lack of guidance, the IRS has responded almost exactly as it would be expected to respond. By and large it has not revoked or denied exemptions on public policy grounds. The exceptions fall broadly into two main categories: racial discrimination and illegality.”
Professor Brunson by the way is not enamored of the Presidential tweet:
The Jones decision does seem to imply that if a 501(c)(3) is operating contrary to public policy, the IRS has the power to revoke its exemption. Why has the power not been used beyond racial discrimination and outright illegality?
Last year n the Wisconsin Womens Law Journal Dyllan Taxman suggested that it should be extended to sexual orientation discrimination as suggested as a possibility in Obergefell.
The author proposes that recent jurisprudence, the prevalence of state anti-discrimination laws, and executive actions prohibiting sexual orientation discrimination indicate that sexual orientation discrimination in higher education runs afoul of the Supreme Court’s standard for charitable tax exemption.
Now in the Trumpian view of the universe, public policy is what President Trump says it is. So protecting the kids from “Radical Left Indoctrination” is public policy. If any of that is going on at your university, as the Soup Nazi would put it – No exemption for you.
My first reaction to President Trump’s tweet about ordering Treasury to re-examine the exempt status of universities and school systems because of their association with “Radical Left Indoctrination” was a sort of amusement. He does not mention the part of Treasury that the job would fall to – the Internal Revenue Service.
Republicans spent years trying to uncover a direct order from President Obama or anyone in his administration to the IRS to mess with the exempt status of right leaning organizations particularly those associated with the Tea Party.
In the unlikely event that this takes off, I guess it is real clear what started it.
It will be interesting if the IRS gets a flood of Forms 211 – Application for Award for Original Information from students who believe they have been subject to “Radical Left Indoctrination”. If the IRS blows them off they can appeal to Tax Court. That could be entertaining.
I heard from Paul Streckfus, editor of the EO Tax Journal. Paul was at IRS in the seventies and was part of the group that implemented Revenue Ruling 71-447, cited above. He wrote me:
“The benchmark set by the IRS seems to be “against established public policy,” which was first articulated by the IRS in the seventies regarding private schools that were set up to avoid integration by refusing to admit black students, which was subsequently approved by the courts. Bob Jones is more recent but also based on established public policy against racial discrimination. The IRS has not gone much beyond racial discrimination, as you note.
What is “educational” for purposes of section 501(c)(3) has been difficult to define for the IRS and courts. Organizations promoting white superiority have been held not to be educational but even here there are permutations of what might be educational and what is clearly not.
By registration most university faculties are largely composed of Democrats. I’m not sure how much this rubs off on the students, especially the business majors whose goal in life is to work on Wall Street!”
Professor Adam Chodorow of Arizona State University wrote me:
“Trump’s tweet is a little smarter than it looks. Let’s assume for the sake of argument that is accurately describing what goes on at colleges and universities. Rather than blatantly argue for suppressing speech with which he disagrees, he is claiming—without any factual basis—that colleges and universities are doing things that fall within established law as inconsistent with tax exemption. He is arguing that “left wing indoctrination” either violates public policy and therefore falls under Bob Jones or that what is going on isn’t really education, so 501(c)(3) doesn’t apply to colleges or universities. Bob Jones is more or less a stand alone case. The IRS has used it very sparingly because it is such a fuzzy standard. The problem for Trump with this argument is that criticizing the government or teaching critical thinking is not against public policy. Indeed, our public policy, as expressed in the first amendment, is that people are free to criticize the government. The notion that what goes on at colleges and universities is propaganda and not education is just silly.”
In a followup Professor Chodorow continued:
“ I think most academics lean liberal but are open to good faith debate and willing to change their minds. They tend also to be pluralists, supporting multiple views, so long as those views don’t advocate against pluralism. Trump isn’t engaging in good faith debate about scope of the public policy doctrine or the borders of the definition of what constitutes education. He appears to be slapping at his perceived enemies, stirring up his base, and otherwise trying to own another news cycle. This tweet appears to be in response to Harvard and MIT having the temerity to challenge his administration’s rule baring foreign students from the US if their classes go online during the pandemic. The policy seems designed either to keep foreigners out or force schools not to go online. Regardless, the decision to instruct the Treasury to go after those who speak out against him violates both the notion that politics should not drive our tax administration and that the first amendment protects such speech. I think that is why tax academics have responded the way they have.”