In the tax world, when someone refers to a “charitable” organization, it is likely they are using the term in its generally accepted legal sense to include not-for-profit corporations or charitable trusts that are organized and operated “exclusively”[i] for religious, charitable,[ii] scientific, literary, educational, or other specified purposes.[iii]
Provided such an organization serves a public interest,[iv] and satisfies certain other requirements,[v] it may be granted various benefits under the federal tax laws.[vi] In exchange for these tax-related benefits – this quid pro quo concept is too often overlooked[vii] – the organization must[viii] apply the economic value of such benefits to further its charitable mission and activities.
Notwithstanding their continued tax-favored status – or perhaps because of it or its perceived misuse – some may say that, so far, this has been a more difficult year for some charitable organizations than others.[ix]
Before evaluating this statement, it may help to briefly review some of the aforementioned economic benefits, as well as some of the potentially adverse consequences that may be visited upon charitable organizations that fail to satisfy the obligations that are incumbent upon them if they are to retain their tax-favored status.
Tax-Exempt Status
Organizations that claim to be described in Section 501(c)(3) of the Code may be recognized by the IRS[x] as being exempt from federal income tax.[xi]
They may also be eligible to receive contributions from private individuals and businesses for which the contributing taxpayer may be allowed a deduction for purposes of determining their income tax, gift tax, or estate tax liability, as the case may be.[xii]
Exempt Income
The income derived by a qualified charitable organization from an activity that is substantially related to its exempt purpose is not subject to federal income tax; for example, a university’s revenue from tuition is not subject to federal income tax.
By the same token, such an organization is taxed on its net income from an unrelated trade or business – one that is regularly carried on by the organization, but which is not substantially related to the exercise or performance by such organization of the charitable purpose or function constituting the basis for its exemption.[xiii]
That said, the organization is exempt from income tax with respect to most of its investment income. Thus, interest, dividends, rents, royalties, and annuities are generally excluded from the unrelated business income of a tax-exempt charitable organization,[xiv] subject to an exception if such income is derived from property with respect to which there is acquisition indebtedness (“debt-financed property”),[xv] in which case the amount of such investment income that is excluded from unrelated business income is reduced.[xvi]
Based on the foregoing, it is clear that a charitable organization’s exemption from the imposition of income tax on most of its net income is of vital importance to the organization.
Deductible Contributions
Likewise, the charitable organization’s tax status allows it to receive nontaxable donations – i.e., gifts – from members of the public in exchange for which such donors may claim a tax-favored deduction, within certain parameters, for purposes of determining their income tax liability.[xvii]
Moreover, if the recipient organization is classified as a “public charity” for tax purposes,[xviii] its donors are generally allowed to claim an enhanced tax deduction for contributions of money or property in-kind for purposes of determining their income tax liability.[xix]
For example, an individual who makes a gift of unencumbered and appreciated “long-term capital gain property”[xx] to a public charity would not be required to recognize as income the gain inherent in the transferred property and would be permitted to claim a deduction of an amount equal to the fair market value of such property, up to 30% of their contribution base for the year of the gift.[xxi]
Private Foundation Grants
Private foundations are required to spend annually a certain amount of money or property for charitable purposes, including grants to other charitable organizations.[xxii] A private foundation’s grants to exempt organizations are treated as taxable expenditures[xxiii] unless the recipients are public charities, or the foundation exercises expenditure responsibility[xxiv] with respect to the grant.
The foregoing donor-side tax benefits facilitate a public charity’s solicitation of significant gifts.[xxv]
“Abuses” of Tax-Favored Status?
Over the years, members of the public, and many of their elected representatives, have sometimes questioned whether the economic benefits that tax-exempt organizations “bestow” upon society are commensurate with the above-described publicly-subsidized[xxvi] economic benefits enjoyed by these organizations.
For example, some in Congress (from both sides of the aisle) – having compared (i) the value of the economic benefits enjoyed by not-for-profit hospitals and colleges by virtue of their exempt status, with (ii) the degree of community benefit provided, and of community investment made, by such institutions – have questioned whether these institutions’ continuing tax-exempt status is justified.
Over the years, Congress has taken various measures to curtail certain actual or perceived “abusive” practices in which exempt organizations have engaged.[xxvii]
Excess Benefits. In 1996, for example, legislation was enacted to deter and punish the transfer of a so-called “excess economic benefit” from a public charity to a so-called “disqualified person.” This provision targeted the direct or indirect transfer by the charity of an amount that exceeds the value of the consideration (including the performance of services) received by the charity in exchange for providing such benefit.[xxviii]
Executive Compensation. In 2017, a new 21 percent excise tax was added to the Code in response to what was seen as the excessive salary being paid to certain individuals employed by public charities.[xxix] The tax, which is payable by the charitable organization, is imposed on the amount by which the compensation paid to any of the charity’s five most highly compensated employees during the taxable year exceeded $1 million.[xxx]
Endowment Tax. That same year, a new excise tax was introduced with respect to certain private universities with at least 500 tuition-paying students. The tax was equal to 1.4% of a covered organization’s net investment income for a taxable year when the aggregate fair market value of its investment assets at the end of such year was at least $500,000 per student.[xxxi]
Separately Computed UBIT. For an exempt organization with more than one unrelated trade or business, the TCJA also added a provision that requires unrelated business taxable income (“UBIT”) to be computed separately with respect to each trade or business. Thus, a deduction from one unrelated trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same taxable year, which ensures the organization’s payment of tax with respect to its profitable business.[xxxii]
A New Administration
From 2021 through 2024, exempt organizations and their lobbyists urged the then occupant of the White House and the new Congress to reverse the TCJA’s changes, but to no avail.
As we entered 2025, many charitable organizations were probably wondering what the return of President Trump and a Republican-controlled[xxxiii] Congress would mean for them in light of the changes wrought by the TCJA (described above), not to mention other “developments.”
It didn’t take long to find out,[xxxiv] with OBBBA being enacted less than six months into the new Administration.
OBBBA[xxxv]
The Act was somewhat of a mixed bag for charitable organizations and their supporters – there was good and bad.
For better or worse, some of what was good from the perspective of these organizations was the omission of certain tax-related provisions from the final version of the legislation.
However, this was also bad because some of these omitted provisions may find their way into a second reconciliation bill for which the House has already begun planning.[xxxvi]
Still, there were a number of tax-related changes of which charitable organizations should be aware.
Charitable Contributions. Prior to the Act, a taxpayer’s charitable contribution to a qualifying charitable organization was not required to exceed a statutorily prescribed floor before it became deductible.
Effective for taxable years beginning after December 31, 2025, a charitable contribution by a corporation that would otherwise have been allowed as a deduction for purposes of determining the corporation’s income tax liability for the year of the contribution will generally be allowed only to the extent that the aggregate amount of the taxpayer-corporation’s charitable contributions for the taxable year exceeds 1% of the corporation’s taxable income for the year.[xxxvii]
If such otherwise deductible amount falls short of the 1% floor for the year of its contribution, it will be carried forward for purposes of determining whether the floor is satisfied in any of the five succeeding years.[xxxviii]
If the floor is exceeded for a taxable year, the amount of the charitable contribution deduction for the year cannot exceed 10% of the taxpayer-corporation’s taxable income for such year. As previously was the case, any excess is carried forward for 5 years.[xxxix]
Itemizers. Likewise for individuals, a taxpayer’s aggregate amount of charitable contributions for a taxable year must now exceed a floor equal to 0.50% of the individual’s adjusted gross income (their contribution base) for the year before it may be deducted.[xl]
In addition, the Act reduces the amount of the itemized deductions otherwise allowable to an individual taxpayer who itemizes for the taxable year by 2/37th of the lesser of (1) such amount of itemized deductions, or (2) so much of the taxable income of the taxpayer for the taxable year (increased by such amount of itemized deductions) as exceeds the dollar amount at which the 37 percent rate bracket begins with respect to the taxpayer.[xli] This reduces the benefit of a charitable contribution deduction for individual taxpayers who are subject to income tax at the 37% bracket. Query whether this limitation will dissuade charitable giving by any of these individuals.
The Act also made permanent the 60% of adjusted gross income ceiling for cash contributions made to public charities which otherwise would have expired after 2025.
Non-Itemizers. The standard deduction for non-itemizers was increased from $30,000 to $31,500 for joint filers in 2025, and will be indexed for inflation beginning in 2026. This may remove certain individual taxpayers from the ranks of the itemizers – query the effect on their charitable giving.
The Act also increased the amount of the charitable contribution that may be deducted by an individual taxpayer who does not itemize for a taxable year from $300 ($600 in the case of a joint return) to $1,000 ($2,000 in the case of a joint return). The deduction would only be available for charitable contributions made in cash to a public charity other than a supporting organization or a donor-advised fund.[xlii] Query whether this will encourage individual taxpayers who do not itemize to make gifts to charity.
Estate/Gift Tax. OBBBA increased the basic exclusion amount[xliii] for purposes of the federal gift and estate taxes from $5 million to $15 million per U.S. individual ($30 million per married couple, with portability) for gifts made and decedents dying on or after January 1, 2026. It also made the enhanced exclusion permanent – in the sense that it is not scheduled to expire at a specified time – and adjusts it for inflation starting after 2026. Query whether this may influence individual taxpayer’s incentive to reduce their gift or estate tax liability by transferring value to charitable organizations, either outright or through split-interest arrangements.[xliv] Of course, it will depend upon the value and nature of the assets in question. For example, transfers of interests in closely held businesses, which are difficult to value, will still benefit from formula clauses.[xlv]
“Excess” Compensation. Effective for taxable years beginning after December 31, 2025, the Act expanded the reach of the 21% excise tax on a charitable organization (discussed earlier) to cover not only the organization’s five most highly compensated employees but any employee – as well as any former employee of the organization who was such an employee during any taxable year beginning after December 31, 2016 – who receives more than $1 million of compensation in any taxable year. Many charitable organizations are already complaining that every dollar paid toward this tax means fewer dollars to apply toward the organization’s mission.
Endowment Tax. The Act limited the universities to which the excise tax would be applied to those with at least 3,000 tuition-paying students.[xlvi]
In addition, the Act expanded the types of investment income to which the tax would apply to include interest from student loans and certain royalties.
It also introduced a tiered rate structure based upon the size of a university’s endowment. Specifically, tax would be imposed at 1.4% of net investment income where the aggregate fair market value of the university’s investment assets was between $500,000 and $750,000 per student; 4% where such value was between $750,000 and $2 million per student; and 8% where the value was $2 million or more per student.
The foregoing changes are effective for taxable years beginning after December 31, 2025.
The Administration vs. “Academia”
Speaking of well-endowed universities, shortly into his second term the President began threatening to withdraw federal funding from, or to revoke the tax-exempt status of, several private universities.[xlvii]
From a tax perspective, whether the President has the authority to execute these threats is beside the point. The first and most relevant question is whether there is any basis for such action; specifically, are the activities of the university in question so contrary to established public policy as to undermine any public benefit that might otherwise be conferred by the university.
Public Policy
According to the U.S. Supreme Court, the IRS must determine whether there is a public policy against a particular activity conducted by the tax exempt organization in question.
The agency must then ascertain whether that public policy is so fundamental as to require the denial or revocation of the exempt status of the organization participating in that activity.[xlviii]
For example, the Court has found that racial discrimination in education is contrary to settled public policy. The fact that an organization also fulfills a legitimate educational function cannot be isolated from its discriminatory practices.[xlix]
Based on the foregoing, when the IRS becomes aware that an exempt organization has, or may have, engaged in certain activities, it is incumbent upon the agency to review the alleged activities for the purpose of determining whether they “so violate public policy that the organization cannot be deemed to provide a public benefit worthy of ‘charitable’ status.”
The prevention of genocide is settled public policy in the U.S.[l] Thus, when an otherwise exempt charitable organization appears to have endorsed, even implicitly, activities that plainly seek to exhort or mobilize others to pursue an end that is contrary to this public policy, it is the IRS’s responsibility to investigate the activities in question.
In fulfilling this mission, the IRS should focus on the requirement that charitable organizations must serve a public purpose and must not act contrary to established public policy. An organization’s tax exemption is intended to be beneficial to society as a whole. Indeed, the exemption is based on the theory that society is “compensated” for the loss of tax revenues by the public benefits resulting from the organization’s promotion of the general welfare – the quid pro quo[li] referenced earlier. Similarly, the tax-favored treatment of contributions made to such a charitable organization is founded on the principle that the public is both an indirect donor and a beneficiary of such contributions.
Enough said.[lii]
The Bully Pulpit?[liii]
Over 70 years ago, Congress approved an amendment by then Sen. Lyndon Johnson to prohibit Section 501(c)(3) organizations, including churches, from engaging in any political campaign activity. In 1987, the ban against political activity was strengthened when Congress amended the language to clarify that the prohibition also applies to statements opposing candidates.[liv]
Fast forward to last month, when the IRS filed a joint motion requesting a federal district court to enter an order enjoining the federal government from enforcing the Johnson Amendment against the plaintiff churches.[lv]
The joint motion explained that the IRS “generally has not enforced the Johnson Amendment against houses of worship for speech concerning electoral politics in the context of worship services.” It then stated that the Johnson Amendment should not be interpreted to
“reach communications from a house of worship to its congregation in connection with religious services through its usual channels of communication on matters of faith. . . . For these reasons, the Johnson Amendment does not reach speech by a house of worship to its congregation, in connection with religious services through its customary channels of communication on matters of faith, concerning electoral politics viewed through the lens of religious faith.”
To-date, the district court has not entered the consent judgement. Assuming it is entered, it will only be binding on the churches that were parties to the action.
That said, it is possible – likely? – that other religious organizations[lvi] may seek to take advantage of the “relaxed” prohibition on political activities. Will this activity be limited to messages delivered “in good faith” from the pulpit or will churches start holding political rallies? Will the Administration become “selective” in its enforcement of the Johnson Amendment? It remains to be seen.
It should be noted that the IRS’s enforcement efforts may change in just a few years, with a new Administration and a new Congress.[lvii]
Mayo End On a Happy Note
You may recall – at least if you read the endnotes[lviii] – if you read the endnotes,[lix] that passive income from debt-financed real property may still be excluded from an exempt organization’s unrelated business income if the organization is a “qualified organization.”[lx]
According to the Code, a qualified organization is “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.”[lxi]
However, the IRS has by regulation[lxii] included two additional requirements for qualified organization status: first, the organization’s “primary function” must be the presentation of formal instruction; and second, the organization must normally maintain a regular faculty and curriculum and have a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on. The regulation also states that the organization in question must not “be engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities.”
A few years back, the IRS questioned the status of the Mayo Clinic (“Mayo”) as an educational organization, asserting that the organization failed the regulations’ “primary-function” and “merely-incidental” tests. A federal District Court rejected the IRS’s argument,[lxiii] and the IRS appealed the decision to the Eighth Circuit,[lxiv] which agreed with the lower court that the regulation in question added “unreasonable conditions to the statutory requirement that a qualified educational organization is one ‘which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.’”
However, the Circuit Court also added that the terms “primary function” and “merely incidental” had a “valid role in interpreting the statute” and, in particular, the term “educational organization.” According to the Court, such an organization must be “organized and operated exclusively for … educational purposes,” meaning its “primary purpose” must be “educational” and that its noneducational activities be merely “incidental to that primary purpose.” The Court stated that whether Mayo was an educational organization was a “mixed question of law and fact.” With that, it remanded the case to the district court to determine whether the organization’s overall purpose and operations established that it was “organized and operated exclusively” for educational rather than other purposes.[lxv]
On remand, the District Court,[lxvi] after reviewing its system-wide activities, again entered judgment for Mayo, concluding that the term “primary” should be interpreted as meaning a “substantial purpose” of the organization – not the “most important purpose” – and finding that Mayo was organized and operated exclusively for educational purposes, and had no noneducational purpose that was substantial because its educational functions were “inextricably intertwined” with its clinical and research functions.
Again, the government appealed, stressing that Mayo does much more than provide medical education, and late last month the Eighth Circuit again held for Mayo. The Circuit agreed with the lower court’s interpretation of “primary” and observed that the word “exclusively” should not be interpreted literally (as urged by the government) “if the purposes underlying income tax exemptions and charitable deductions were to be achieved.” Next, it rejected the government’s assertion that patient care was “a substantial and noneducational purpose” at Mayo, concluding instead that “patient care is not noneducational” at Mayo.[lxvii]
What’s Next?
As stated earlier, thus far it has been a difficult year for many charitable organizations. We still have one-third of the year to go, and many issues remain unresolved, including the President’s face off with several universities. Then there is the possibility that a second reconciliation bill may reintroduce provisions that were withdrawn from an earlier version of OBBBA but that will certainly be of interest to charitable organizations.[lxviii]
Stay tuned.
4935-4368-6748, v. 1
[i] Reg. Sec. 1.501(c)(3)-1(b)(1)(i) [it may be authorized to engage in other than exempt activities only “as an insubstantial part of its activities”] and 1.501(c)(3)-1(c)(1) [it must be operated “primarily” for its exempt purpose].
More on this later.
[ii] Eleemosynary is more accurate, but what marketer would ever use the word? It’s rooted in the Hellenic “eleos,” meaning mercy, as in “Kyrie Eleison” (Lord have mercy).
[iii] Reg. Sec. 501(c)(3)-1(d)(2).
[iv] Reg. Sec. 501(c)(3)-1(d)(1)(ii).
[v] Established by the Code, by the regulations promulgated under the Code, or by the Courts.
Among these is a judicially created test requiring that the purpose and activities of the organization not be so contrary to an established public policy as to undermine any public benefit that might otherwise be conferred.
According to the U.S. Supreme Court, the IRS must determine whether there is a public policy against a particular activity conducted by the organization in question. Next, the agency has to ascertain whether that public policy is so fundamental as to require the denial or revocation of the exempt status of an organization participating in that activity. Bob Jones University v. United States, 461 US 574 (1983).
For example, the Court has found that racial discrimination in education is contrary to settled public policy. The fact that an organization fulfills a legitimate educational function cannot be isolated from its discriminatory practices.
Thus, in the case of a university that has already been granted exempt status, the IRS has the responsibility to review the organization’s later activities for the purpose of determining whether a given set of activities “so violate public policy that the organization cannot be deemed to provide a public benefit worthy of ‘charitable’ status.”
More on this later.
[vi] In most cases (religious institutions are excepted), an organization must apply to the IRS to establish its qualifications for recognition as an organization described in IRC Sec. 501(c)(3). This tax-favored status is not automatic. Thus, it must not be taken for granted.
[vii] As is much of the social contract theory in which the Founders were steeped and which influenced their legacy.
[viii] Not merely “expected” or “encouraged” to do so.
In the case of not-for-profit hospitals, Congress felt compelled to codify the so-called “community benefit standard” as IRC Sec. 501(r). In addition to the general requirements for tax exemption, a hospital organization must meet the following requirements on a facility-by-facility basis: the hospital organization must conduct a community health needs assessment (CHNA) every three years and must adopt an implementation strategy to meet the community health needs identified through the CHNA; the hospital organization must establish a written financial assistance policy (FAP) and emergency medical care policies for any hospital facility it operates, and which includes, among other things, the method for applying for financial assistance; limits the amount charged for any emergency or other medically necessary care it provides to a FAP-eligible individual; and requires a hospital organization to make reasonable efforts to determine whether an individual is eligible for assistance under the hospital organization’s FAP before engaging in “extraordinary collection actions” against that individual.
[ix] This post will focus on public charities, as opposed to private foundations. The latter dodged a bullet, unfortunately. Congress would have been justified in requiring a greater than 5% annual minimum distribution (IRC Sec. 4942), and even a required termination date by which a private foundation must have expended all of its assets and accumulated income for charitable purposes. Perhaps the next tax reconciliation bill, for which the House is already planning, will take up one of these proposals.
[x] IRC Sec. 508. They must file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3).
[xi] Under IRC Sec. 501(a).
[xii] IRC Sections 170, 2522, and 2055, respectively. Note: an organization that is eligible to receive a gift that is deductible by the donor for purposes of one of these taxes, may not be eligible to receive a gift that is deductible for purposes of another tax.
It should also be mentioned that a qualified organization may have access to tax-exempt financing through State and local governments that may issue tax-exempt bonds to finance the activities of charitable organizations described in IRC Sec. 501(c)(3). Because interest income on tax-exempt bonds is excluded from gross income, investors generally are willing to accept a lower pre-tax rate of return on such bonds than they might otherwise accept on a taxable investment. This, in turn, lowers the cost of capital for the tax-exempt users of such financing.
[xiii] IRC Sec. 511; Sec. 513; Reg. Sec. 1.513-1. The contortions by which certain revenues are found to be “related” are quite impressive. Just look at the monies flowing from contracts for broadcasting rights for college football.
[xiv] IRC Sec. 512(b).
[xv] For example, debt incurred to purchase rental real property. In other words, the property in question was not acquired with contributed funds, tax-exempt income, or after-tax dollars.
[xvi] IRC Sec. 514.
Even if the passive income comes from debt-financed real property, the income may be still excluded from unrelated business income if the organization is a “qualified organization” – i.e., “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” IRC Sec. 514(c)(9)(A); IRC Sec. 514(c)(9)(C); IRC Sec. 170(b)(1)(A)(ii).
However, the IRS has issued regulations that include two additional requirements for “qualified organization” status that do not appear in the Code. Specifically, the organization’s “primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. . . . It does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities.” Reg. Sec. 1.170A-9(c).
[xvii] IRC Sec. 170.
[xviii] An organization qualifying for tax-exempt status under Section 501(c)(3) of the Code is classified as either a public charity or a private foundation. An organization may qualify as a public charity in one of several ways. The Code does not expressly define the term ‘‘public charity,’’ but rather provides exceptions to those entities that are treated as private foundations. IRC Sec. 509.
Certain organizations are treated as public charities per se. These include an “educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on”; i.e., colleges and universities. Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through (iv) for a description of these organizations); see in particular IRC Sec. 170(b)(1)(A)(ii).
[xix] “Enhanced” in the sense that a donor to a private foundation is entitled to a lesser benefit by comparison.
[xx] For example, Section 1231(b) property, such as real estate, or capital assets (IRC Sec. 1221), such as marketable securities.
[xxi] IRC Sec. 170(b)(1)(C).
[xxii] IRC Sec. 4942. The amount that must be distributed annually is ascertained by computing the foundation’s distributable amount. The distributable amount is equal to the foundation’s minimum investment return with certain adjustments.
[xxiii] IRC Sec. 4945.
[xxiv] IRC Sec. 4945(d)(4) and Sec. 4945(h).
[xxv] People are motivated to support charities for different reasons. In general, the tax benefit merely makes it economically less expensive to do so.
That said, many decedents, as matter of principle, have directed their estates to qualifying charities rather than to the federal government. Then are those folks in New York whose estates may be subject to the so-called “fiscal cliff” – they will direct testamentary transfers to charities to reduce the economic impact of the cliff.
[xxvi] I.e., lost tax revenues.
[xxvii] See, for example, https://www.taxslaw.com/2025/04/observations-on-charities-taxes-and-cash-flow/ .
[xxviii] IRC Sec. 4958. Pub. L. 104-168. For example, the payment of unreasonable compensation to certain “disqualified” persons, or the sale or lease of property to such persons at a below-market price.
[xxix] This echoes the policy underlying the denial, under IRC Sec. 162(m), of a deduction for certain compensation paid by publicly traded corporations to its “covered” employees. It goes to the question of what is “reasonable” or “excessive” compensation in the context of a tax-exempt employer. Because such compensation is generally not deductible by the charitable organization, the Code instead treats the organization as a taxable C corporation for this purpose by imposing the 21% corporate tax rate on the “excess” compensation (the equivalent of disallowing the deduction).
[xxx] IRC Sec. 4960. Pub. L. 115-97 (the “TCJA”). In general, the compensation in question includes not only the amount paid by the charitable organization for the taxable year but also “excess parachute payments” (per se unreasonable). It also includes compensation paid by a related person (for example, a for profit subsidiary). The latter echoes Reg. 53.4958-4(a)(2), which provides that a transaction that would be an excess benefit transaction if the applicable tax-exempt organization engaged in it directly with a disqualified person is likewise an excess benefit transaction when it is accomplished indirectly through a for profit controlled entity.
[xxxi] IRC Sec. 4968. Pub. L. 115-97. Net investment income is determined using rules similar to the rules of IRC Sec. 4940(c) (relating to the net investment income of a private foundation). The provision is aimed at educational organizations that are perceived as holding “excessive” assets that are not used directly in carrying out the institution’s exempt purpose (i.e., investment assets) and the income therefrom.
[xxxii] IRC Sec. 512(a)(6). A net operating loss deduction is allowed with respect to the trade or business from which the loss arose.
[xxxiii] By the slightest of margins.
[xxxiv] https://www.taxslaw.com/2025/07/closely-held-businesses-and-their-owners-ask-whats-big-and-beautiful-in-the-recent-tax-law/
[xxxv] One Big Beautiful Bill Act, P.L. 119-21. (The “Act” or “OBBBA”.)
[xxxvi] When asked how a second bill would compare to OBBBA, Speaker Johnson replied, “It will not be as big. I hope it is as beautiful.”
Among these omitted items: (a) a proposed increase in the excise tax rate applicable to the net investment income of a private foundation (it remains 1.39%, but would have been scaled upward depending upon the size of the foundation); (b) treating as unrelated business income the income or gain from the licensing or sale of a name or logo (for example, of a college or university’s sports teams); and (c) authorization of the Treasury Secretary to revoke the tax-exempt status of an organization as a terrorist-supporting entity.
[xxxvii] IRC Sec. 170(b)(2)(A). In other words, the amount of the contribution is reduced by an amount equal to 1% of the corporation’s taxable income. Effective for taxable years beginning after 12/31/2025.
[xxxviii] IRC Sec. 170(d)(2).
[xxxix] IRC Sec. 170(d)(2).
[xl] IRC Sec. 170(b)(1)(I). In other words, an otherwise deductible contribution will have to be reduced by the amount of this floor. Effective for taxable years beginning after December 31, 2025.
[xli] IRC 68(a). This limitation is applied after any other limitation on the allowance of any itemized deduction.
[xlii] IRC Sec. 170(p).
[xliii] IRC Sec. 2010 and Sec. 2505.
[xliv] The increased exclusion plus portability between spouses may enable individuals to retain ownership of valuable, low-basis assets until their demise, at which point the assets’ bases will be adjusted to fair market value. IRC Sec. 1014. But see https://www.taxslaw.com/2025/07/the-enactment-of-obbba-its-time-to-plan-not-relax-winter-is-coming/ .
[xlv] A la Wandry v. Comm’r, T.C. Memo. 2012-88.
[xlvi] As described earlier, the TCJA required at least 500 tuition-paying students.
[xlvii] The purse is a powerful weapon. Indeed, many of the same universities are lining up to pay large sums to the federal government so as to fend off the loss of larger grants and, perhaps, tax-exempt status.
[xlviii] Bob Jones University v. United States, 461 US 574 (1983).
[xlix] Bob Jones University v. United States, 461 US 574 (1983).
[l] In 1948, the U.S. signed the Convention on the Prevention and Punishment of the Crime of Genocide. Congress subsequently passed, and the President signed, The Elie Wiesel Genocide and Atrocities Prevention Act of 2018 (P.L. 115-441), which states that atrocity prevention is in the U.S. national interest and calls for the U.S. to pursue a “government-wide strategy to identify, prevent, and respond to the risk of atrocities.”
In 2022, the then-President stated, “I recommit to the simple truth that preventing future genocides remains both our moral duty and a matter of national and global importance…. When hatred goes unchecked, and when the checks and balances in government and society that protect fundamental freedoms are lost, violence and mass atrocities can result.” https://www.state.gov/2022-united-states-strategy-to-anticipate-prevent-and-respond-to-atrocities/ .
[li] Or “squid pro row” as Austin Powers may say.
[lii] Historically, the IRS has been reluctant to revoke the exempt status of organizations that faithfully fulfill their mission but occasionally stumble into territory beyond their normal purview. This was the reasoning behind the enactment of the excess benefit rules – the IRS was stuck between choosing to do nothing or revoking an organization’s tax exemption.
Do we need a similar approach in the case of an organization that acts contrary to a fundamental public policy? I don’t think so. Some activity – or inactivity – is so offensive that the offending organization should not be allowed to pay a lesser penalty.
[liii] The phrase coined by President Teddy Roosevelt.
[liv] The Code prohibits political campaign activity by charities by defining a Sec. 501(c)(3) organization as one “which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”
[lv] National Religious Broadcasters v. Long, E.D. Tex., No. 6:24-cv-00311, joint motion filed 7/7/25.
[lvi] Both “liberal” and “conservative,” whatever that means in matters of faith.
[lvii] See https://www.taxslaw.com/2025/07/the-enactment-of-obbba-its-time-to-plan-not-relax-winter-is-coming/ for a discussion regarding taxes generally and a shift in the political winds. (Nope, not gonna say it – no cheesy jokes about politicians and the wind. Not happening. This is killing me.)
[lviii] I do hope you read the endnotes.
[lix] I do hope you read the endnotes.
[lx] IRC Sec. 514(c)(9)(A).
[lxi] IRC Sec. 514(c)(9)(C); IRC Sec. 170(b)(1)(A)(ii).
[lxii] Reg. Sec. 1.170A-9(c).
[lxiii] 412 F. Supp.3d 1038 (D. Minn. 2019).
[lxiv] 997 F. 3d 789 (8th Cir. 2021).
[lxv] The IRS announced that it disagreed with the Court’s decision. AOD-2021-04, Nov. 22, 2021. The IRS disagreed with the Court’s invalidation of the regulatory requirement that the primary function of an educational organization must be formal instruction. While it recognized that the Court’s decision was precedential for cases appealable to the Eighth Circuit, the IRS added that it would continue to litigate the “formal instruction” requirement in other circuits.
[lxvi] 2022-2 USTC P 50,266 (D. Minn. 2022).
[lxvii] I liked the double negative.
[lxviii] Of course, there is also the ongoing redistricting of Congressional districts and what it may mean for the mid-term elections and the legislative agenda for the next Congress.
