​​Potential Implications of Funding Protest Activities​

Developed for the Council on Foundations by Christopher J. Armstrong, Partner at Holland & Knight 

The Current Environment 

Foundations are under increasing political scrutiny regarding their relationships with organizations that have engaged in protests, especially in situations where protestors are alleged to have engaged in violence or other illegal activities. This sharpened focus on the funding sources of protests may lead to increasing oversight of foundations or the tax-exempt sector generally and organizations perceived as left-leaning entities specifically.  

Comments made by political leaders suggest a growing interest in undertaking investigations and other actions against not only certain parts of the tax-exempt sector, but also directly on entities such as foundations that provide funding. There is significant risk that members of the Council on Foundations may be subject to this scrutiny in the weeks and months ahead and should consider how funders may be implicated by the actions – real or perceived – of those they have funded. 

Potential Actions Ahead 

Because of the attention being paid to entities providing funding to certain tax-exempt groups, it is important for foundations to consider the variety of ways (none mutually exclusive) that this scrutiny might arise. Due to the political nature of this rising attention, as well as the power congressional committees have to launch investigations, there is not a predicable standard by which an organization is safe from being the subject of an investigation on these issues. Therefore, foundations who have supported groups that are themselves disfavored or might be associated with (correctly or incorrectly) violent protests will carry risk of themselves being subject to action. 

Potential actions include: 

• Congressional Investigations
  • Congressional investigations are perhaps the hardest to predict and prepare for, given the wide leeway congressional committees enjoy to launch investigations when and against whom the chair deems appropriate. Most congressional committees have many tools with which to conduct investigations, including voluntary information requests, the power to issue subpoenas for records and testimony, conduct depositions or transcribed interviews, hold public hearings, hold parties in civil or criminal contempt, and refer matters to the executive branch for additional action. Yet the most often used – and effective – tool is the ability to sway the court of public opinion through press releases, the use of traditional and social media, and the microphones of committee members. 
• Department of Justice Action
  • The Department of Justice can launch an investigation in several ways and across several types of investigations, including general criminal investigations related to violations of federal law, civil investigations (regarding civil rights and fraud against the government), or civil or criminal litigation by the Tax Division concerning tax law. How DOJ will scrutinize foundations remains to be seen but based on the Administration’s public statements and recent actions, the most likely avenues are claims of funding illegal DEI practices, aiding the violation of immigration laws, or support for organizations involved in protests (especially if violent behavior occurred at the protest, whether the organization is involved or not).  
• Internal Revenue Service Action
  • The Internal Revenue Service (IRS) could review an organization’s tax-exempt status, though such reviews typically begin with an audit, which legally and historically are not conducted publicly. Confidentiality aside, there are several ways the government attack tax-exempt status after an audit, such as: 
    1. While 26 U.S.C. 7217 prohibits Executive Branch influence over taxpayer audits and investigations, there is an exemption for the Secretary of the Treasury to provide a written request to the IRS to take action “as a consequence of the implementation of a change in tax policy.”1 
    2. Accusations of funding terrorist groups that are on a U.S. sanctions list or funding illegal activities or activities that promote or incite violence. 
    3. Accusations of not serving a public purpose and having purposes and activities that are contrary to established public policy.2 
    4. Accusations of impermissible use of funds for non-charitable purposes, or to fund “illegal” activity. The standard is generally that violation of constitutionally valid laws is inconsistent with exemption under section 501(c)(3). The IRS seems to weigh whether the illegal activities are substantial both in quantity and quality. 

Relevant claims that the activities of charitable organizations are “illegal” may involve DEI, immigration, lobbying activity, and that participation in planned demonstrations that violate laws and ordinances may not be considered tax exempt, particularly if the charity encourages its participants to ignore or violate such laws and ordinances.

Considerationsp

Foundations providing general operating support or specific project support for organizations should review the Council’s guidance on expenditure responsibility3 and speak with their counsel to understand any specific risks. Given the current political environment, it is important to keep in mind that perception – not strict adherence to laws and regulations – will likely guide which organizations are targeted for scrutiny in this environment. Should a foundation be aware (or become aware) that its funding went to an organization that was involved in overt partisan political activity, protests that may have included violent actions, aid to undocumented individuals in crossing the border or evading law enforcement, or other activities bearing political or legal risk, it will be important to work with counsel to review documentation of relevant pre-grant inquiries, the written grant agreement, and documentation of its ongoing monitoring and reporting to determine what further actions may be necessary.