The Illegality Doctrine and 501(c)(3) Organizations (CRS Report for Congress)
| Release Date |
Aug. 14, 2024 |
| Report Number |
IF12739 |
| Report Type |
In Focus |
| Authors |
Milan N. Ball |
| Source Agency |
Congressional Research Service |
Summary:
Courts and the Internal Revenue Service (IRS) have long
recognized an implied requirement that organizations
exempt from taxation under Internal Revenue Code (IRC)
Section 501(c)(3) must not have an illegal purpose. As
explained by the Supreme Court in Bob Jones University v.
United States, 461 U.S. 574 (1983), the origins of this
illegality doctrine emanate from the law of charitable trusts.
Loss of government revenues from tax exemption is often
justified on the grounds that tax-exempt organizations serve
desirable public purposes and lessen the government’s costs
and burdens. As a corollary to this public benefit principle,
tax exemption is not justified when an organization has an
illegal purpose because the organization does not serve a
public purpose and the organization increases the
government’s costs and burdens. The illegality doctrine
helps ensure that the government is not subsidizing activity
that it aims to prevent. When an organization provides some
public benefit but engages in substantial illegal activity, the
IRS principally relies on the statutory text of IRC Section
501(c)(3)—requiring organizations to be organized and
operated exclusively for one or more enumerated exempt
purposes—to deny 501(c)(3) status.
This In Focus examines how and when courts and the IRS
have used the illegality doctrine to deny organizations
501(c)(3) status.
