Aprill, Once and Future Revocation of Tax Exemption for Pursuit of DEI and Other Alleged Violations of Section 501(c)(3)

This piece first describes the process for revoking exempt status. It then considers each of four possible bases – violation of fundamental public policy, substantial illegal purpose, supporting terrorism, and redefining charitable purpose – that organization could encounter in any attempt by tax authorities to deny them section 501(c)(3) status. Discussion of each of these issues seeks to assist organizations, including grantmaking entities, and their advisors who are worried about challenges to their exemption in understanding the substance – the  strengths, weaknesses, and uncertainties –  of each of the possible bases. 

This version updates and expands the draft of the paper posted on July 21, 2025. It goes into further detail about what revocation entails and considers the settlement in Z Street v. Koskinen. It expands discussion of fundamental public policy by considering inclusion on Treasurys’ 202-2026 priority guidance plan regarding the application of the doctrine to private schools.  The section on substantial illegal purpose now includes examination of the Department of Education’s reliance on the doctrine in promulgating regulations for the Public Service Loan Forgiveness program as well as new scholarship about it. The section on supporting terrorism adds developments as to domestic terrorism. The section on redefining charitable purpose is new. It describes the administrative law doctrines that could form the basis for challenging any attempt to define section 501(c)(3) purpose to exclude, as has been reported, any pursuit of  DEI activities or efforts to curb climate change.

The article concludes with the assurance that exempt organizations have available a variety of statutory and constitutional arguments to counter attempts to deny, revoke, or suspend their exempt status.