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The Legal Rights of Charities to Defend Charitable Status

The Internal Revenue Code clearly sets forth the legal rights for all types of nonprofit tax-exempt organizations regarding the procedures to follow if “a determination by the Secretary” is made regarding the initial qualification or continuing qualification of the nonprofit organization’s status. The term “Secretary” is defined as the Secretary of the Treasury “or his delegate”.  The Secretary’s determination may be appealed to one of three courts in a declaratory judgment action.  The revocation or denial of exempt status may be appealed to the United States Tax Court, the United States District Court for the District of Columbia, or the United States Court of Federal Claims.  Judges at the Tax Court and Court of Federal Claims are appointed for a term of office, so could conceivably be removed by the Executive Branch.  Judges at the District Court for D.C. are lifetime appointments.

Standard Procedures

In practice, a nonprofit typically receives a notice of examination from the Internal Revenue Service as a starting point.  That notice signifies that an Exempt Organizations Revenue Agent will examine the organizational and operational details of the nonprofit and will eventually conclude whether the organization’s exempt status should be revoked. If the agent concludes that the organization’s status should be revoked, there is an opportunity to appeal the initial notice to IRS Appeals for their independent review.  If a final notice of revocation is ultimately issued, the organization has 90 days to file a declaratory judgment action in court. IRC §7428.  If the organization files in court prior to receipt of the final notice of revocation, that petition is likely to be dismissed for lack of jurisdiction due to failure to exhaust administrative remedies.  Assuming administrative remedies have been exhausted, after a Petition or Complaint is filed in Federal court, the trial proceeds under the chosen court’s rules.  The decisions of any of these courts may be appealed to a Federal Court of Appeals, with ultimate appeal lying with the United States Supreme Court.

Prohibition Against Actions by the White House

It is prohibited for the Secretary of Treasury to delegate authority to the White House regarding the determination of exempt status of any nonprofit organization (or any other tax audit).  It is unlawful for the President, Vice-President and their staff to request, directly or indirectly, any employee at the IRS to conduct or terminate an audit.  IRC §7217.  Moreover, if the White House merely states that exempt status has been revoked, without providing a final IRS notice, the alleged “revocation” is meaningless and does not impact the organization’s legal rights as a tax exempt organization under the Internal Revenue Code.  That organization retains its administrative and judicial rights to challenge any actions taken by the President or Vice-President or their staff.

Suspension of Exemption Due to Terrorist Designation

Internal Revenue Code Section 501(p) is a partial exception to the general rules set forth in §7428 and §7217.  If an organization is designated as a “terrorist organization” by name through a Presidential Executive Order or through the Immigration and Nationality Act, that organization’s exempt status is suspended (but not revoked) from the date of first publication of its designation as a terrorist organization until the date that all designations are rescinded pursuant to the law or an Executive Order.  Charitable donations to the organization are not deductible during the period of suspension and the organization is taxed on its net income.  However, if at a future time exemption is restored, the organization may file within 12 months for a refund, with interest, of all taxes paid as a result of the suspension without regard to any other statutes of limitation.

Revocation Based Upon Public Policy

The IRS and courts have rarely revoked a charity’s exemption based upon public policy.  An exception is set forth in a 1971 Revenue Ruling which states that a private school that does not have a racially nondiscriminatory policy as to students does not qualify for exemption.  Similarly, Bob Jones University’s tax-exempt status was revoked for a period of time due to its racially discriminatory policies. The Supreme Court held that institutions seeking tax-exempt status must serve a public purpose and not be contrary to established public policy. “Established public policy” is defined as public policy that all three branches of the Federal government have declared to be the policy of the United States.

For more information or assistance with any of your tax issues, please contact Nancy Ortmeyer Kuhn or your Shulman Rogers attorney.

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