FAQ: The Public Policy and Illegality Doctrines
Background
Beginning in 2025, the public policy doctrine and illegality doctrine—both of which have been applied sparingly over the years—began to receive greater attention because of concerns they could be used to bring the tax-exempt sector more closely in-line with the second Trump Administration’s preferred policies. These two doctrines, which are related but distinct from each other, provide that organizations must be evaluated under common law principles of charitable trusts to qualify for tax exemption under 501(c)(3), both as an initial matter and on an ongoing basis.
This FAQ will address the basic history of these two doctrines to help charitable organizations better understand their potential application and impact.
- What is the public policy doctrine?
- How has the public policy doctrine been applied by courts in the past?
- What constitutes established or fundamental public policy?
- What is the illegality doctrine?
- What is “substantial” illegal activity?
- How does the IRS determine whether an organization’s activity is illegal?
- What remedies do exempt organizations have if the IRS revokes their status under the public policy or illegality doctrines?
What is the public policy doctrine?
It is a legal doctrine which provides that a charitable organization’s tax-exempt status will be evaluated in terms of common law standards of charity. Organizations exempt under 501(c)(3) therefore “must serve a public purpose and not be contrary to established public policy.” An organization whose activities are found to be in violation of established public policy may face revocation of its tax-exempt status.
The public policy and illegality doctrines may both serve as a reason for denial or revocation of exempt status, although the public policy doctrine has been the basis for revocation in very limited circumstances to date, as discussed below.
While it is not possible to accurately predict how courts might rule on hypothetical revocations based on purported activities contrary to established public policy, it’s important to note that many experts agree the public policy doctrine is narrow in scope and likely has limited application beyond its past usage.
How has the public policy doctrine been applied by courts in the past?
The U.S. Supreme Court first considered application of the public policy doctrine in 1983 in Bob Jones University v. United States. In that case, the Court upheld the IRS’s 1976 revocation of Bob Jones University’s tax-exempt status, finding that the university’s racially discriminatory practices (the university forbid interracial dating among students and denied admission to any unmarried black students in furtherance of this policy) violated established public policy and was therefore inconsistent with the common-law meaning of “charitable.” In reaching this outcome, the Court also concluded that revocation on the basis of activity contrary to public policy "should be made only where there can be no doubt that the activity involved is contrary to fundamental public policy."
Subsequent application of the public policy doctrine has primarily been limited to other cases involving racial discrimination in education, but in theory it can be applied more broadly to justify denial or revocation of tax-exempt status for furthering purposes that run counter to clearly established public policy. In a political environment where the activities of tax-exempt charities are facing greater scrutiny, the public policy doctrine may become a more attractive mechanism for challenging the legitimacy of an organization’s tax-exempt status, particularly where an organization’s activities run counter to the policies and interests favored by one or more branches of government.
However, there are constitutional limitations on this power to deny or revoke tax-exemption based on alignment with the government’s preferred policies. Because tax-exempt organizations’ activities are broadly protected by the First Amendment, denial or revocation based on a purported violation of public policies that are not well established or “fundamental” would potentially be an unconstitutional infringement on speech.
What constitutes established or fundamental public policy?
The Court in Bob Jones looked to decades worth of actions taken by all three branches of the federal government aimed at ending discrimination and segregation in education. These dated back nearly 30 years to the Court’s decision in Brown v. Board of Education (1954), as well as congressional actions such as passage of Title VI of the Civil Rights Act of 1964 and various efforts by the executive branch to enforce school desegregation in multiple states. This suggests that the finding of an established and fundamental public policy on a particular issue will require some clear agreement among all three branches of government. It’s also likely that these aligned policy positions would need to be sustained over a meaningful period of time in order to be considered established.
What is the illegality doctrine?
Closely related to the public policy doctrine, the illegality doctrine similarly provides that organizations that further illegal purposes do not qualify for tax-exemption because they do not serve a public purpose and their illegal activities impose additional costs and burdens on the government which are inconsistent with the benefits bestowed by tax-exemption. Organizations that further one or more exempt purposes but engage in substantial illegal activities in carrying out those purposes likewise do not qualify for tax-exempt status.
Notably, the Supreme Court has not directly addressed the illegality doctrine as a basis for revocation.
What is “substantial” illegal activity?
The IRS has stated that “substantiality [of illegal activity] must be considered quantitatively as well as qualitatively.” That means organizations will be assessed both on the amount of time and resources they expend on illegal activity in relation to their overall activities, as well as on the character and nature of the illegal activity itself.
Illegal activity that makes up a very small percentage of an organization’s overall activities may nevertheless be deemed substantial if that activity is severe enough (IRS guidance gives the example that if a mere .01% of an organization’s activities were directed to robbing banks, it would not qualify for exemption).
Conversely, an organization that engages in activity which constitutes minor legal infractions would likely need to engage in proportionally greater levels of that activity before it would be deemed substantial enough to constitute grounds for denial or revocation of exempt status.
How does the IRS determine whether an organization’s activity is illegal?
According to IRS guidance, any constitutionally valid state or federal law may be recognized for the purpose of applying the illegality doctrine. However, in instances where the law in question falls outside of the IRS’s jurisdiction (i.e., non-tax law violations), the general position taken by the IRS is that it will rely on a court’s determination that an organization violated the law before it revokes 501(c)(3) status on the basis of illegal activity, unless the illegal activity is “so blatant” that it requires the IRS to take action without waiting for some other government body to act first.
What remedies do exempt organizations have if the IRS revokes their status under the public policy or illegality doctrines?
The law provides due process for organizations whose tax-exempt status is revoked on the basis of activities that violate established public policy. Organizations may appeal adverse determinations to the IRS appeals office, and final adverse determinations issued by that office may be further appealed in court.
See Losing Tax-Exempt Status for a more detailed overview of the remedies available to organizations who receive notice that their tax-exempt status will be revoked.
