Universities’ Exempt Status: Political Threat

University and Exempt Status

It was September 8, 1971.  

In the Oval Office, Richard M. Nixon chatted with his chief domestic-policy adviser, John Ehrlichman, about the upcoming 1972 election still fourteen months away. Mentioning potential Democratic rivals by name, the President asked: “Are we going after their tax returns? I … you know what I mean? There’s a lot of gold in them thar hills.” 

We know about this incident and Nixon’s express directive to weaponize the Internal Revenue Service because – (to paraphrase a more recent government official) – “Lordy,” there were “tapes.” These secret recordings were among the evidence used to support the 1974 Bill of Impeachment including Article II: “He has, acting personally and through his subordinates and agents, endeavoured to… cause, in violation of the constitutional rights of citizens, income tax audits or other income tax investigations to be initiated or conducted in a discriminatory manner.”

Fast forward almost fifty years. 

Now there are presidential tweets: out in the open, an undeniably direct line from the Oval Office to the Treasury Department and the Internal Revenue Service:  “Too many Universities and School Systems are about Radical Left Indoctrination, not Education. Therefore, I am telling the Treasury Department to re-examine their Tax-Exempt Status … and/or Funding, which will be taken away if this Propaganda or Act Against Public Policy continues. Our children must be Educated, not Indoctrinated!” 

Tweets come and go, of course, but this one from the morning of July 10, 2020, did not quickly evaporate into the fog of the 24/7 news cycle. There have been concerning developments.  Despite reassurances from leading experts that there are legal barriers to any real tax-exemption jeopardy from the Administration, the nation’s colleges and universities – and, indeed, the nonprofit community generally – have felt a distinct chill in the air well in advance of the official date when summer turns to autumn.  

       Universities Push Back 

The Tweet in Question surfaced against a backdrop of rising tensions between higher education and the Administration including presidential rhetoric on Independence Day at Mt. Rushmore and other recent comments complaining “about schools being driven by what he describes as a radical left-wing ideology” and “‘far left-fascism’ controlling American schools, newsrooms and other institutions.” 

On July 6, 2020, the Administration (through the U.S. Immigration & Customs Enforcement) announced an abrupt change in policy on the status of international student-visa holders. Despite assurances the government offered earlier in the COVID-19 pandemic, there was to be a new rule that these students would have to attend at least one in-person class in the upcoming semester in order to stay in the United States. (Many colleges and universities had announced plans to hold online-only courses in the fall.) 

“Trump’s tweets set off a firestorm of reactions focusing on the implicit political threat against free speech.” The higher-education community pushed back immediately including well-publicized tweets from individual professors vowing to hold at least one in-person class in the coming semester even if it meant everyone would be sitting outside in the snow. And by July 14th, a group of 20 colleges and universities in the Western U.S. filed a lawsuit over this rule change. (That same day, “… what Trump had dubbed “Propaganda” resulted in his administration changing its policy.”) 

In the July 10th Tweet, the president did not name specific institutions whose tax-exempt status he wants the Treasury Department to review. And notwithstanding that the Administration later officially withdrew the immigration-rule change, the threat remained to review tax-exemptions and also withdraw federal funds. 

Among those asking for specifics – and perhaps reassurances that this matter would not be pursued any further – was Rep. Richard Neal (D-MA), chair of the House Ways and Means Committee. On July 15th, he sent letters to the Internal Revenue Service and to the Treasury inspectors general

In their formal written responses at the end of July, these officials, in appropriate bureaucratese, hemmed and hawed about what had happened or what may happen. For instance, the Deputy General Counsel replied that “the Secretary of the Treasury expects that Treasury’s Office of Tax Policy will conduct a policy review of the generally applicable regulations and guidance implicated by the President’s comment.”  And, on July 31st, Treasury Secretary Steven Mnuchin announced there would be some kind of “review” coming, and that the issue of federal funding had been forwarded to the Department of Education for consideration. 

Representative Neal wrote back to Treasury making clear he is not pleased with this state of affairs. 

       Legal Obstacles and Defenses

In Trump tweets, tax law and alleged university ‘propaganda’ (7/19/20) Professors Ellen P. Aprill and Samuel D. Brunson, provide an important and detailed legal analysis of the issues arising from, and defenses to, this threat to meddle.

A few weeks later, on August 2, 2020, Professor Brunson posted additional thoughts, summarizing the key points made earlier; see IRS Investigation of Universities’ Tax-Exempt Status, Nonprofit Blogger. The “…Treasury and the IRS face three significant problems in investigating universities.” 

First, “…even if you assume that universities are politically biased–and even if you assume they teach that bias to students–that doesn’t mean they can’t be exempt. Tax-exempt educational institutions can endorse particular viewpoints.” 

Second, Internal Revenue Code section 7217, “… prohibits the President from requesting that the IRS audit a particular taxpayer.” (No “particular taxpayer” was mentioned in The Tweet; nevertheless, they explain how this statute generally applies; Rep. Neal also mentions this statute in his letters to the IRS and Treasury.) 

Third, “… the Consolidated Appropriations Act, 2020 … prohibits the IRS from targeting groups for regulatory scrutiny on the basis of their ideological beliefs.”

Professors Aprill and Brunson include additional arguments as well in support of their analyses. 

[Update 9/17/20]: This article has just been published, with additional detail, on SSRN under the title: The University, Ideology, and Tax Exemption.


“Congressional restrictions—in addition to other legal issues—could make Trump’s directive illegal and in violation of the First Amendment, tax and non-profit groups say.” For instance, Mark Mazur, director of the Tax Policy Center and former assistant secretary of tax policy within the Treasury Department under then-President Barack Obama, agrees: “The tax code’s clear that educational institutions generally qualify for tax-exempt status,” adding “It’s not, ‘except the ones I don’t like.’” 

In What a Direct Attack on Free Speech Looks Like (July 10, 2020), The Atlantic, David Graham emphasizes the danger that should make us all shiver. In The Tweet (which he notes had that first day accumulated over 80,000 likes and 30,000 retweets), the President “… is making a bona fide threat against First Amendment speech itself, trying to use the power of the government to punish people whose expression he finds objectionable.”

PILOT Pressures for Major Nonprofits

Tax Exempt Organizations and PILOTS

In recent years around the nation, local governments have faced critical budget shortfalls. At the same time, the need for public services and assistance has skyrocketed due, at least in part, to growing economic inequality.  

Legislators and officials have tried to squeeze every possible nickel and dime out of the taxpaying base of individuals and entities. But in many localities, the biggest players and property owners are the “eds and meds”: the major health care and higher education institutions. Not only are they exempt from income tax (federal, state, and local), they are generally relieved of property-tax obligations as well.    

For municipalities, having a significant swath of its (otherwise taxable) real estate in tax-free status creates huge financial stresses. Not only do the local governments lose the considerable property-tax revenue but these eds and meds use a large – sometimes disproportionate – percentage of government services. The burden to pay for them – including police and fire protection – falls back on the non-exempt business and individual property owners.

 Nonprofits, Property Taxes, and PILOTS 

Local governments have become remarkably creative in crafting ways to help ameliorate their revenue woes.

With so much of their real estate owned by property-tax-exempt groups, they have become laser-focused on possible solutions involving those same nonprofit entities. We’ve reported on this phenomenon for several years. For instance, in Local Governments Eager to Snag Revenue from Nonprofits (April 12, 2016), we wrote:  “Nearly every week, all across the country, different levels of government devise strategies — sometimes ingenious, occasionally pernicious — to get tax revenue from already-strapped nonprofits….” 

One example is a clever backdoor way to collect money from tax-exempt organizations. The strategy – simply put – is to change the terminology: Don’t call a revenue-raising device a “tax.” Instead, call it a “fee.” These local governments are now adding so-called fees “for … anything … they can think of.”  For instance, 501(c)(3)s in Pewaukee, Wisconsin, now pay a “fee” for a fire hydrant and a separate one for extra streetlight use. 

Another approach is a direct assault on the historically hallowed property-tax exemption itself. Since taxation and any exemption from it are matters of legislative grace, why not restrict or narrow the circumstances under which a landowner gets a free pass? After all, part of what the large eds and meds are doing on their vast real-estate holdings is no different than ordinary commercial activities. Government moves to tax the landholdings of nonprofits generally trigger fierce resistance and lawsuits. In Princeton U. Settles Property Tax Exemption Challenge (February 7, 2017), we described unsuccessful challenges in New Jersey.  

A middle-ground solution is the use of “PILOTS”; that is, “payments in lieu of taxes.”  These are voluntary agreements between nonprofit organizations and local governments to help pay for key public services including police and fire protection along with public works, all of which benefit the large nonprofits and their constituents. Generally, PILOT agreements include terms with standard payment formulas; sometimes, though, the parties negotiate the terms on a case-by-case basis.  

PILOTS are generally viewed as sensible and fair compromises for all concerned: the government, the nonprofits, and the local community. But getting from the original agreement to pay to the actual payment of the promised amounts can sometimes be a challenge. And recent news stories suggest that, in several cities, controversies over payments-in-lieu-of-taxes arrangements are boiling over. 

   Boston’s PILOT Model  

These days, there’s serious PILOT trouble in Boston.  This metropolitan area had pioneered the payments-in-lieu-of-taxes model, in large part because of its concentration of prestigious educational institutions and medical centers. The need for a creative and equitable revenue solution was urgent; “…something like half of the real estate in Boston is in the hands of either a governmental entity which is tax exempt, or a nonprofit entity which is tax exempt….”  

In 2010, a city task force developed the Boston PILOT Program. There was a phase-in period of five years. It worked in the beginning with “full nonprofit participation,” having apparently, “struck a ‘reasonable balance’ of the needs and responsibilities of the various parties.” The PILOT Program applied to nonprofits with over $15 million in real estate assets. These groups were expected to turn over 25% of the property tax rate for their landholdings. Nonprofit organizations subject to the 25% payment were eligible to reduce half of the PILOT payment if they could show “offsetting community benefits.” 

But there’s a kicker. While the PILOT Program agreement is legally binding, the payments – strictly speaking – are “voluntary.” The large Boston nonprofits including the many world-renowned eds and meds are all “expected to contribute” but, generally, only the healthcare-sector groups have made the payments. This “med”  compliance rate has been over 94 percent. 

But the universities – among the most prestigious in the world – “have been less cooperative.” For 2017, there was only about 60% compliance from this sector which happens to include some institutions with multi-billion-dollar endowments. (Harvard has the largest endowment in the world of over $39 billion and pays its seven investment managers a total of $58 million.) That year, Harvard paid just $3.2 million of its expected $6 million PILOT obligation; Boston College paid just $335,000 of its $1.4 million amount due.  

A 2018 editorial in the Boston Herald savaged these institutions for not paying up, “thus depriving Bostonians of valuable city services and opportunities.” At a July 2018 meeting of the Boston City Council, “an array of nonprofits and community groups in that city banded together as the PILOT Action Group to demand that Boston’s major charitable institutions step up and keep their promises….” 

In 2018, Harvard increased its contribution to about $9.8 million, but that payment was only 79% of the PILOT-agreement total payment obligation. And even that compliance effort was tweaked to take full advantage of the wiggle room built into the Boston PILOT model which allows an institution partial, in-kind, credit against the full amount due for certain “community benefits.” So Harvard’s PILOT “payment” that year was only four-fifths of the amount it had voluntarily agreed to contribute and of that just-under $10 million, only $3.6 million was in cash. The remaining $6.2 million was a credit for “community benefit,” a “category over which the nonprofit, not the city, has definitional control.” 

In a report by a watchdog group in summer 2019, data showed that “not even 25 percent of the eligible nonprofits” – that is, those with real estate holdings over $15 million – “paid the full amount.” 

Now, in early 2020, the city and its taxpaying inhabitants (individuals and businesses alike) are fed up and have had enough. The Model PILOT Program is “slated for serious reform.” Boston’s Mayor Marty Walsh “has made it known that he wants 100-percent participation, three of the [… city council members … ] have filed a reform ordinance, and the new city council president Kim Janey promised during her inaugural address that she will convene a committee to evaluate the program.”

  Other PILOT Trouble Spots 

Boston is not the only metropolitan area rethinking the PILOT model, this so-called “solution” to extracting a contribution from services-gobbling but tax-exempt “eds and meds.”  

In Baltimore, the powers-that-be are reconsidering the PILOT deal made several years ago. See Activists rally for Hopkins, other nonprofits to ‘pay their fair share’ as Baltimore council reviews tax deal (December 19, 2019). The problem in Baltimore is a serious change of circumstances; newly enacted state mandates now impose drastically larger amounts to be spent on public education. While the PILOT agreement was fair and reasonable in light of earlier fiscal realities, that’s no longer the case.

And in Providence, Rhode Island – where tax-exempt organizations own 40 percent of the real estate – there is trouble for the city’s treasury and for the future of the city’s PILOT agreement. Specifically, a firm called Lifespan – the state’s largest hospital group which also happens to be its largest employer – ran a $55-million deficit in the 2018-2019 fiscal year. The group will not be able to decide until late spring whether it can pay its scheduled $400,000 annual PILOT payment. Of course, the city budget of Providence has already included it as “expected revenue.” Officials are now saying they may want to “… go back to the table and make sure” for the future that PILOT payments “… aren’t voluntary….”


The PILOT model seemed a fair compromise when first launched but now it’s clear there are drawbacks to the voluntary nature of these agreements. For cash-strapped municipalities with heavy concentrations of tax-exempt institutions with vast landholdings, this solution of payments-in-lieu-of-taxes may or may not be the answer. 

Shutdown: Fallout for Nonprofits

The recent federal government closure was the longest in U.S. history, causing incalculable pain, financial and otherwise, most directly to the workers and contractors who went without paychecks. There were serious ripple effects, too, through the economy as a whole. And the important work of government stopped for almost a month, creating backlogs for the foreseeable future which may never be fully remedied

The news media have documented much of this entirely unnecessary (and unproductive) fallout. From the standpoint of the 501(c)(3) world, though, there has been devastating damage that experts are only beginning to assess.

Huge Toll of Shutdown on Organizations

The new Congress acted to authorize back pay for the affected federal employees, but they will never be fully compensated for their additional losses including – for example –  negative credit-rating effects, evictions, and delays of urgent medical treatment.

The employees of federal contractors have been left in an even more unfair and precarious situation; Congress has not yet voted to reimburse them for their lost wages or compensate them for any of the consequential damages from their furloughs.

And a fact often overlooked in media reports about “federal contractors” is that many nonprofits are included in that category – including organizations that stepped up to the plate during the shutdown to provide emergency assistance to community members. These groups have been left without assurances that missed grant or contract payments will ever be paid. These sudden, severe losses are on top of funding cutbacks and other actions by the current Administration in the past two years that had already created spikes in demand for their services.

Certain communities were affected more acutely than the nation as a whole. “The biggest impact [was] likely felt in the Washington, D.C. area.” But in other parts of the United States with “a large per-capita federal workforce or military,” like Alaska, charitable organizations had to scramble to provide widespread assistance, according to NCN’s Thompson. In large parts of the western U.S., especially where there are many Native American tribes, the loss of services by and through the Department of the Interior has negatively impacted areas that “most politicians in D.C. don’t pay attention to.

One of the few “good news” aspects of the shutdown crisis was the highly visible and immediate response by nonprofits all around the nation to help their neighbors and friends with financial and other assistance. “Charities large and small have diverted their attention to address needs of furloughed employees and others affected by the shutdown.”  Here in San Diego, for instance, alongside the many groups expanding food-assistance services to the human victims, the San Diego Humane Society sprang into action providing emergency food relief for their pets.

Another instance is The National Parks Foundation helping to clean up public recreational areas when federal services stopped. It’s a good move in some respects, according to David Thompson of the National Council on Nonprofits, but it “could be detrimental in the long run.” When nonprofits “step in to do what they do — solve problems,” governments “get used to these volunteers doing the work.” Nonprofits that “divert from their mission for government not doing its job” have been burned in the past; often they are never reimbursed.

Shutdown Set Back IRS Oversight Capabilities  

For several years, the Internal Revenue Service has endured cutbacks, with losses of “about $715 million in funding and 22,000 full-time employees.” The agency has also had an attrition problem; many long-time workers are reaching retirement, and it’s been difficult to replace them.

The Tax Exempt/Government Entity Division (TE/GE) has been particularly hard-hit for a variety of insupportable reasons pushed by certain legislators. This has caused ongoing problems and backlogs including the notoriously long time it used to take for approval of a tax exemption application. In 2014, the IRS tried to reverse this lag time by launching the ill-designed Form 1023-EZ. In the short term, this move cleared the backlog, but there are new headaches now as large numbers of ineligible groups have slipped through and achieved tax-exempt status.

Will the IRS ever catch up from almost four weeks of an absent workforce? It’s anybody’s guess. The shutdown has magnified the preexisting staffing shortfall and has likely created a new backlog that will be difficult to remedy.

There may also be a long-term effect on this agency’s workforce. In Shutdown Pain May Make Working at IRS a Tough Sell, the authors wonder whether the stoppage has set up “a serious question for IRS employees: is working there even worth it?”  And will prospective employees consider it at all? They may be able to get a better salary in the private sector without any risk of work stoppages because of political stalemates.

The important role of the Internal Revenue Service in the proper oversight of the charitable community has been hurt severely over a period of years. This rash, pointless government action has made matters much worse. “Given all the budget cuts we’ve had over the years, and the grievous harm that’s been inflicted upon employees during this shutdown, it could take a generation to repair the harm that’s been done,” according to University of Pittsburgh law professor Philip Hackney, a nonprofit expert who previously worked in the IRS Office of the Chief Counsel.


Perhaps the only silver lining to this miserable episode is the spike in the reputation of the federal worker, long-maligned (unfairly) as lazy or superfluous. Looking good, too, is the philanthropic community; already held in fairly high regard, our sector has emerged as more vital than ever for the nation in times of crisis and hardship.

California Administrative Dissolutions

In early January of last year, the California Franchise Tax Board and the California Secretary of State launched something brand new designed to clear a lot of nonprofit organizations that are no longer operating off their rolls.
California nonprofit public benefit, mutual benefit, religious, and registered foreign nonprofit corporations are now subject to administrative dissolution (California nonprofit corporations) or administrative surrender (registered foreign nonprofit corporations) if the entity’s corporate powers have been suspended or forfeited by the California Franchise Tax Board for at least 48 continuous months.
Once initiated by the California Franchise Tax Board, the nonprofit corporation has 60 calendar days to act before the corporation administratively is dissolved/surrendered permanently.
Now, a rather large list of proposed dissolutions/surrenders has been released – and boy, there are A LOT of nonprofits on the list posted on July 26th, 2017!  In fact, there are almost 10,000 organizations that are set to be dissolved by the state of California within the next 60 days if they do not (1) “Pay and Return to Active Status”; or (2) “Submit an Objection and Get a 90 Day Extension.”
So, what does that mean for the organizations who turned up on this list?
Well, if you’re no longer operating, and just want the state to let your organization die quietly – it’s really great news. Upon administrative dissolution or administrative surrender, the dissolution action abates the nonprofit corporation’s outstanding liabilities for qualified taxes, interest, and penalties.
But… what if you’re still operating and just not paying all that much attention to filing pesky Statements of Information with the Secretary of State or informational returns with the Franchise Tax Board and you get administratively dissolved? Well… that’s a different kettle of fish.
But it’s a kettle we’re familiar with. If you find yourself in this situation, give us a call.