The Chronicle of Philanthropy recently reported that more than 60 controversial nonprofits—deemed “hate groups” by the Southern Poverty Law Center (SPLC) —currently enjoy federal tax-exempt status. Further, most of these nonprofits are exempt under Section 501(c)(3), which comes with the additional benefit of eligibility for tax-deductible contributions. This post will explore the basis under which these organizations ostensibly qualify for tax-exempt 501(c)(3) status, and potential hurdles in eliminating their tax exemption.
Qualifying as a 501(c)(3) Organization
As a starting point, to be exempt under 501(c)(3), an organization must be organized and operated exclusively for 501(c)(3)-appropriate purposes. The statute lays out the following categories of eligible purposes:
- Testing for public safety;
- Literary; and
An organization’s formational documents (e.g., its articles or certificate of incorporation) will need to contain certain language that indicates it is organized for 501(c)(3) purposes (known in tax-speak as the “organizational test”). In addition, its activities need to demonstrate that it is actually operated for 501(c)(3) purposes (the “operational test”)—a requirement that is more of a moving target. Most often groups that SPLC has categorized as hate groups fall within the educational purposes category of 501(c)(3) and tend to focus on a specific social issue or issues for which they advocate.
What is “Educational”?
Section 501(c)(3) doesn’t define the term “educational.” However, the regulations define it to encompass both (1) individual instruction “for the purpose of improving or developing his capabilities,” and (2) “[t]he instruction of the public on subjects useful to the individual and beneficial to the community.” Further, the regulations flesh this out a bit by clarifying that:
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.
In an attempt to provide more guidance on the “full and fair exposition” standard, the IRS developed the “methodology test” to help determine whether a method used by an organization to communicate a viewpoint or position is educational within the meaning of Section 501(c)(3). Under the methodology test, a method is not educational if it fails to provide a factual foundation for the position, or fails to provide a development from relevant facts that would materially aid a listener or reader in the learning process. The methodology test lays out four factors that lead to the conclusion the method is not educational:
- a significant portion of the group’s communications consists of the presentation
of viewpoints or positions that are unsupported by facts;
- facts that purport to support the viewpoints or positions are distorted;
- the group’s presentations make substantial use of inflammatory and disparaging
terms and express conclusions based more on strong emotional feelings rather
than objective evaluation; and
- the presentation’s approach is not aimed at developing the audience’s
understanding of the subject matter because it does not consider their background
In general, the presence of any one of these factors indicates the organization’s method of communicating its views does not meet the criteria to be educational under 501(c)(3).
The IRS is clear that when applying the methodology test, it takes a viewpoint-neutral perspective. This means that when the IRS analyzes an organization’s methods of educating, it is not evaluating the viewpoint the group is putting forth. In other words, if the IRS agrees that a method is educational, it isn’t necessarily passing judgment on the content. Fundamentally, the IRS recognizes that “the advocacy of particular viewpoints or positions may serve an educational purpose even if the viewpoints or positions being advocated are unpopular or are not generally accepted.” With respect to hate groups, this objectivity can be especially difficult to apply. In fact, in many cases the inflammatory rhetoric and defamation of certain groups is the content or viewpoint itself. Thus it is difficult to know how much content neutrality the IRS is capable of when applying the methodology test to these organizations.
For example, in Nationalist Movement v. Commissioner, 102 T.C. 558 (April 11, 1994), the IRS challenged the tax-exempt status of an organization called the Nationalist Movement, which purported to advance “American freedom, American democracy and American nationalism.” The Tax Court applied the methodology test focusing on the fact that the group regularly sent out newsletters that contained unsupported conclusions and used derogatory and defamatory terms for gays and African Americans. The Court held that the organization failed the methodology test by primarily presenting viewpoints that were not supported by facts and by using inflammatory and disparaging terms, and therefore was not being operated for 501(c)(3) educational purposes.
Challenging the Exemptions of Hate Groups Going Forward
The Nationalist Movement case shows that the methodology test does provide a means to challenge the tax exemption of a hate group, if the group regularly uses inflammatory or disparaging terms, among other things. However, in practice the IRS undertaking challenges to these groups on a large scale is a remote likelihood for several reasons. First, the vast majority of groups on the SPLC’s hate group list have conservative leanings, and given the backlash the IRS received over its 2013 scandal for targeting “Tea Party” conservative nonprofits for additional scrutiny, it has shown its reluctance to go after conservative groups again. Second, the IRS has had its budget slashed by Congress over the last decade and given its limited resources for enforcement, the fight over exemptions granted to hate groups is most likely not considered a top enforcement priority when criminal tax evaders are going unpunished. Thus, as much as the IRS might want to undertake a large-scale challenge to hate groups’ exemptions based on the argument that they are not truly educational, the IRS may not be in a position where it is realistically possible given these pressures.
Unfortunately, some organizations listed on the SPLC’s hate group list have reported an uptick in support and donations as a result of being listed. Brigitte Gabriel, the founder and CEO of ACT for America, a grass roots anti-Muslim group, said that since they were listed, they have seen a donation boost. She explained, “People who know what we do and educate about national security stepped up to support us because they were upset by the SPLC labeling.” Chris Gacek, senior fellow for regulatory affairs at the Family Research Council, stated in response to his group’s listing by the SPLC, that “we’re probably doing better than we ever have.” Therefore, one thing appears certain in this polarized climate—whether or not the IRS sees fit to challenge the exemptions these groups enjoy, they aren’t going anywhere anytime soon.