Libby, Tax-Exemption and the Shadow of Law

President Trump’s recent statements calling for Harvard University’s tax-exempt status to be revoked have sparked considerable debate over whether the IRS can lawfully undertake such an action. Many have assumed that if the government decides to act, it will rely on the “public policy doctrine” from Bob Jones University v. United States. On that basis, most have concluded that the case for revoking Harvard’s exemption is weak. This paper challenges the prevailing narrative by arguing that the IRS has long possessed an alternative legal basis for revoking Harvard’s exempt status. Known as the illegality doctrine, this extra-textual reading of § 501(c)(3) has deep historical roots and operates as a broader and much more powerful tool for enforcing federal tax law. Drawing upon previously overlooked judicial and administrative records, this paper traces the history of the illegality doctrine and reveals how it emerged from decades of administrative improvisation, institutional politics, and ideological policing during the Cold War.

Despite scholarly assumptions that institutional caution substantially limits the potential for abuse, this history demonstrates that the illegality doctrine has remained consistently broad, discretionary, and vulnerable to political manipulation. Tracing its evolution from early judicial skepticism, through Supreme Court validation in Bob Jones, to recent expansions by lower courts, this paper argues that the illegality doctrine is the tax law equivalent of Justice Robert Jackson’s “loaded weapon.” Though it presents a neutral posture and appears grounded in the rule of law, the doctrine is dangerously malleable and insufficiently constrained by statutory clarity or judicial oversight. Ultimately, this paper contends that courts should not overrule Bob Jones but instead cabin it to its narrow core: racial discrimination in education, where bipartisan consensus and explicit statutory mandates converge. Courts should repudiate the broader illegality doctrine as an unauthorized gloss on § 501(c)(3). By limiting Bob Jones to its facts and rejecting illegality outright, courts can preserve the moral clarity of the former while restoring statutory fidelity, democratic accountability, and institutional stability to the law of charitable exemption.