Trump tweets, tax law and alleged university ‘propaganda’

On the morning of July 10, 2020, President Donald Trump tweeted, “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!” He tweeted in reaction to the broad opposition by the university community to the administration’s announcement that foreign students would have to take at least one in-person class or be denied permission to stay in the United States.

Trump’s tweets set off a firestorm of reactions focusing on the implicit political threat against free speech. Within a few days, what Trump had dubbed “Propaganda” resulted in his administration changing its policy. Nonetheless, identifying errors in his tweets remains important.

Trump’s misunderstanding of the applicable tax law also helps us better understand both the rules for tax-exempt colleges and universities and the important role they play in our society.

Under section 501(c)(3) of the Internal Revenue Code, corporations “organized and operated exclusively for . . . educational purposes” may qualify as charities exempt from income taxation. Exempt educational entities must meet several general rules that apply to all organizations seeking such tax exemption.

A key general rule limits lobbying. Under section 501(c)(3), “no substantial part” of an exempt organization’s activities can be “carrying on propaganda, or otherwise attempting, to influence legislation.” Insubstantial lobbying is allowed. No bright line separates insubstantial activities from substantial activities, and courts tend to address substantiality on an ad hoc basis. Still, section 501(c)(3) clearly permits exempt organizations to participate to some extent in the political process by lobbying for legislation.

The test for impermissible lobbying is quantitative, not content-based. Too much lobbying, whatever its subject, can lead to loss of exemption. The activities of universities opposing the foreign student visa rules — whether in the form of letters, statements, suits, or amicus briefs — would not amount to substantial activity under the lobbying rules, even if they did constitute lobbying.

But the universities’ opposition to the new policy does not constitute lobbying. President Trump’s tweet objects to university “propaganda,” reflecting the language of section 501(c)(3). In the Code, however, the word “propaganda” refers to attempts to influence legislation, not opposing executive actions. Thus, the lobbying limitation does not even come into play in this dispute.

More specific rules apply to tax-exempt educational organizations. For purposes of tax exemption, an educational organization is one that instructs or trains individuals for the purpose of improving or developing those individuals’ capabilities or that instructs the public on subjects useful to the public. Universities and schools are quintessential exempt educational organizations.

“Educational” does not mean viewpoint-neutral, however. Under the tax law, an educational organization can endorse a particular position or viewpoint as long as it provides a sufficiently “full and fair exposition of the pertinent facts” to allow individuals to come to their own conclusion. An organization that principally presents unsupported opinion, by contrast, does not qualify as educational.

The IRS has adopted a test for applying the requirement of full and fair exposition that focuses on the method of delivering information, not the information presented. Importantly, the IRS’s test does not require an educational organization advocating a particular view to present and rebut opposing views. Universities’ opposition to the new administration policy undoubtedly  meets the IRS’s test for an exempt educational organization.

Two other legal considerations further undermine the president’s position in his tweet. First is the public policy doctrine. In its Bob Jones decision, the Supreme Court held that a racially discriminatory school could not be tax-exempt under section 501(c)(3) because racial discrimination in education “violates a most fundamental public policy.” In support of that conclusion, the Court cited case law, legislation and consistent support by the Executive Branch. Nowhere, however, did the Court explain exactly what governmental actions are required to constitute “a most fundamental public policy” in other contexts.

Whatever the trigger for fundamental public policy may be, at the very least it must require more than a new position taken by one administration and subject to change by another. Opposition to a new and controversial policy such as the administration’s announcement that foreign students must take at least one in-person class does not prevent tax-exemption under the public policy doctrine.

Second is a pair of Congressional directives regarding IRS enforcement. More than 20 years ago, Congress prohibited the president from telling the IRS to investigate any taxpayer. President Trump’s tweets may have violated this statute — Rep. Richard Neal (D-Mass.) has instructed two IRS oversight organizations to look into the question.

In addition, after the controversy around IRS treatment of Tea Party groups in 2013, Congress included a provision in the Consolidated Appropriations Act of 2018 prohibiting the IRS from using appropriated funds “to target groups for regulatory scrutiny based on their ideological beliefs.” The Appropriations Act for 2020 includes the same language.

While in theory this prohibition on targeting for ideological beliefs could come up against the public policy doctrine — an entity might espouse an ideological belief contrary to fundamental public policy — that possibility does not arise here. The position of the Trump administration regarding visas for foreign student does not amount to fundamental public policy and, thus, opposition to it, does not violate the public policy doctrine.

The president’s tweet, however, has asked the Treasury Department to target universities based on their ideological beliefs. It is the president, not the university community, that seeks to violate applicable law by asking federal tax administrators to examine colleges and universities on the basis of the schools’ principles and beliefs.

Samuel D. Brunson is the Georgia Reithal Professor of Law at Loyola University Chicago School of Law. His teaching and research focus on federal taxation and tax-exempt organizations. Follow him on Twitter @smbrnsn

Ellen P. Aprill is the John E. Anderson Chair in Tax Law at LMU Loyola Law School in Los Angeles, where she founded the Western Conference on Tax Exempt Organizations.