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Trump Review of Colleges’ Tax-Exempt Status Faces Legal Hurdles

July 13, 2020, 8:45 AM

President Donald Trump’s call to investigate the nonprofit status of universities could run into legal problems, including guardrails Congress placed on the IRS after a scandal over the agency’s scrutiny of nonprofit status of conservative political groups.

“Too many Universities and School Systems are about Radical Left Indoctrination, not Education,” Trump said on Twitter July 10. “I am telling the Treasury Department to re-examine their Tax-Exempt Status.” Trump hascalled for schools at all levels to reopen for in-person classes this fall.

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.

“The tax code’s clear that educational institutions generally qualify for tax-exempt status,” said Mark Mazur, director of the Tax Policy Center and former assistant secretary of tax policy within the Treasury Department under then-President Barack Obama. “It’s not, ‘except the ones I don’t like.’”

The groups point to the 2013 targeting scandal, which led to a legal settlement and apology from the Internal Revenue Service in 2017 as a warning. An inspector general report found that the IRS disproportionately slowed or scrutinized nonprofit applications from political groups, mainly conservatives, by looking for specific phrases in applications like tea party. The scandal forced Lois Lerner, the head of the IRS’s tax-exempt division, to resign and led to major political fallout for the Obama administration.

“With Lois Lerner, they had the objective standard of the name tea party or the name progressive,” said David Thompson, vice president of public policy at the National Council of Nonprofits. “Here it’s someone’s determination of who is too liberal for federal funds.”

Appropriation bills funding the IRS since the scandal have included prohibitions from Congress on targeting individuals or organizations based on their political or religious beliefs, to prevent the politicization of the tax collection agency. That language has enjoyed bipartisan support in the past, and House Democrats included it in the fiscal year 2021 bill before the House Appropriations Committee.

“It does sound clearly to me like the plain reading of the language would prevent you from doing it,” Mazur said, though he left open the possibility that the administration might be able to craft a workaround known as a policy rider.

The Treasury Department didn’t immediately respond to a request for comment on Trump’s directive.

Spokespeople for House Ways and Means Committee Chairman Richard Neal (D-Mass.) and the committee’s top Republican, Rep. Kevin Brady (R-Texas), didn’t respond to requests for comment. That committee was the venue for several hearings on the IRS targeting scandal in 2013 and 2014.

An order from Trump could face other legal hurdles, including violating parts of the tax code and the First Amendment rights of universities, if he took action, non-profit groups said.

“You can’t discriminate randomly against subsets of the charitable and nonprofit community,” Thompson said.

If Trump follows through with his Tweet, it would seemingly contradict the president’s own 2019 executive order on free speech, said Terry Hartle, senior vice president of government and public affairs at the American Council on Education.

“How do you square this with his strongly stated belief in the importance of free speech?” Hartle said. “It’s a head-scratcher.”

—With assistance from Allyson Versprille.

To contact the reporters on this story: Colin Wilhelm in Washington at cwilhelm@bloombergtax.com; Sam McQuillan in Washington at smcquillan@bloomberglaw.com; Andrew Kreighbaum in Washington at akreighbaum@bgov.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Yuri Nagano at ynagano@bloombergtax.com

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