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Can Schools and Other Educational Institutions Lose Their Tax-Exempt Status?

Sandra Pfau Englund

Aug 04, 2020

On July 10th, 2020, President Donald Trump tweeted that he wanted the Treasury Department to consider revoking the tax-exempt status of colleges and universities. The argument, apparently, is that some schools are “about Radical Left Indoctrination, not Education” according to Trump. It is unclear how serious Trump is, but we thought it was a good time to look at the rules relating to IRS 501(c)(3) tax-exemption for higher education.

What does it mean for a school to be tax-exempt?

To qualify as a tax-exempt 501(c)(3) charitable, educational or scientific organization, organizations must:

Be “organized” as a 501(c)(3) – this means than an organization’s “governing document”, usually the articles of incorporation, must include the IRS required 501(c)(3) language restricting lobbying activities and requiring assets to be given to another nonprofit 501(c)(3) upon dissolution; and,
Be “operated as 501(c)(3) – this generally means that the organization must have independent board, be funded with broad public support, and engage in activities that benefit the public broadly rather than private interests.

The IRS describes the qualifications to be classified as an “educational” 501(c)(3) in its regulations as follows:

"The instruction or training of the individual for the purpose of improving or developing his capabilities; or,"
"Instruction of the public on subjects useful to the individual and beneficial to the community. An organization may be educational even though it advocates a particular position or viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent facts as to permit an individual or the public to form an independent opinion or conclusion. On the other hand, an organization is not educational if its principal function is the mere presentation of unsupported opinion."

American Campaign Academy found not tax-exempt.

One of the most relevant cases on this topic was the 1989 case American Campaign Acad. v. Comm'r of Internal Revenue, 92 T.C. 1053, (U.S.T.C. 1989). In this case, the U.S. Tax Court revoked the tax-exempt status of the American Campaign Academy (ACA) because it was found to be operated primarily to benefit the Republican party. Essentially the ACA trained individuals to be political campaign professionals for Republican candidates. The IRS called the activities of the ACA and their qualifications for tax-exempt status into question brought the lawsuit against the ACA stating that the ACA was operating primarily for private benefit to support Republican political campaigns.

Are colleges and universities operating appropriately?

Most colleges and universities with 501(c)(3) status that we are aware of accept a wide variety of students both international and domestic. The schools offer a wide array of courses and appear to examine the subjects from a variety of angles. Unlike the ACA, 501(c)(3) tax-exempt universities do not appear to be training individuals to work for a specific political party.

President Trump may be sensitive to this subject. The tax-exempt status of both the Trump and Clinton Foundations have been scrutinized by the IRS. In addition, the President’s tweet came on the heels of several universities including Harvard, MIT, and Johns Hopkins University filing lawsuits against the Trump administration to block new restrictions being placed on international students.

Without researching the specific activities at certain schools, we cannot say if there are colleges and universities that are violating 501(c)(3) rules.

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