The battle between President Trump and Harvard University has moved to a new front, with the IRS now considering whether to revoke the Ivy League school’s tax-exempt status.
A final decision has not yet been made by the IRS, CBS News’ Aaron Navarro reports. But the effort comes after Mr. Trump on Tuesday suggested that Harvard could lose its tax exemption. The tax agency’s move to consider whether to strip Harvard of its designation as a 501(c)(3) organization was earlier reported by CNN.
The IRS has awarded tax-exempt status to almost 2 million organizations, ranging from universities like Harvard to charities such as churches and foundations. The designation exempts these groups from paying federal income taxes, while donations to these groups are considered tax-deductible by the IRS.
Mr. Trump’s scrutiny of Harvard’s tax status comes after the university on Monday rejected his administration’s demands to change many of the school’s policies and leadership, including auditing the student body and faculty for “viewpoint diversity.” After Harvard announced its decision, the Trump administration this week moved to freeze $2.2 billion in grants for Harvard.
The Trump administration has also threatened to cut off federal funding at other top universities as it exerts pressure on the institutions’ policies governing student expression on campus and academic programs.
But stripping an organization of its tax-exempt status is an unusual step, especially for an institution the size and reputation of Harvard, experts said.
“It would be historically unprecedented,” Brian Galle, professor of tax policy at Georgetown University, told CBS MoneyWatch. “Certainly no major research university has ever lost its tax exemption.”
Here’s what to know about the issue.
Why is Harvard tax exempt?
Organizations that have a purpose deemed to be “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition and the prevention of cruelty to children or animals” can qualify for tax-exempt status, according to the IRS.
Most private and public universities and colleges have been granted tax-exempt status by the IRS because of their educational mission, which the federal government has recognized for their importance in fostering the productivity and civic contributions of American citizens, the Association of American Universities says.
Can Mr. Trump order the IRS to remove Harvard’s tax-exempt status?
Not legally, according to Sam Brunson, a professor at Loyola University Chicago School of Law and an expert on federal income tax and nonprofit organizations.
That’s because Congress in 1998 passed a law that forbids the president from directing the IRS to audit or investigate taxpayers, he explained. If Mr. Trump instructed the IRS to remove Harvard’s tax exemption, “that runs exactly contrary to law,” Brunson said.
In an email to CBS MoneyWatch, the White House said, “Any forthcoming actions by the IRS will be conducted independently of the President, and investigations into any institution’s violations of its tax status were initiated prior” to Mr. Trump’s social media post this week questioning Harvard’s tax-exempt status.
The IRS did not respond to a request for comment.
Could the IRS remove Harvard’s tax exemption?
The IRS has legal authority to strip organizations of their tax-exempt status, and it occasionally exercises that power. But that is usually due to groups failing to meet tax requirements, like neglecting to file an annual information return for more than three consecutive years.
One famous case involved a university losing its tax-exempt status, Galle and Brunson noted. In the 1970s, Bob Jones University in Greenville, South Carolina, a Christian institution, lost its tax-exempt status due to a policy that banned interracial relationships.
That case ended up at the Supreme Court, which ruled in 1983 that the IRS was correct in depriving Bob Jones of the status because its rules had violated a “fundamental national public policy” about racial discrimination in education.
The IRS could argue that Harvard is in violation of public policy either by failing to crack down on protestors rallying against Israel’s actions in Gaza or by refusing to comply with the Trump administration’s push against diversity, equity and inclusion policies, Brunson said. But both he and Galle expressed skepticism that such rationales would hold up in court, partly because universities have a constitutional right to freedom of speech, while also representing issues that are far different from the practices that Bob Jones engaged in.
“There isn’t a society-wide agreement that allowing protests on your campus is inconsistent with fundamental public policy,” Galle said.
He added, “Let’s be clear: There is absolutely no basis for Harvard to lose its exemption. Zero.”
What happens if the IRS strips Harvard of its tax-exempt status?
The IRS would first do an investigation and then inform Harvard of its reason for removing its tax-exempt status, Brunson said. Harvard could then file an appeal to the IRS. If that appeal failed, the university could then take the issue to the courts.
As the case proceeded, it’s likely that a court would issue an injunction or order to halt the IRS’ decision, which means that Harvard would likely continue to operate as a tax-exempt institution until the case was resolved, experts said.
“Harvard isn’t going to lose this — they have the money and the resources and the alumni to get the best people representing them,” Brunson said. He predicted that Harvard would win a court case and “set a precedent.”
How could losing tax-exempt status affect Harvard?
Harvard could take a financial hit if it were to lose the tax-exempt status. But the extent of any resulting damage would be unclear given that Harvard could use tax strategies to lower its taxable income, similar to how major corporations rely on sophisticated techniques to reduce their tax liability. For instance, Harvard could lower its taxable income by deducting business costs, including its faculty salaries.
By contrast, donors to Harvard could feel the impact because they wouldn’t be able to deduct their contributions to the university from their own taxes. That could make it less palatable for donors to make large financial contributions.
“The biggest cost would be reduced donations,” Brunson said. “And the other cost is its endowment, which would no longer be tax exempt.”
Harvard’s endowment stands at $52.3 billion, making it the biggest among all U.S. universities.
What does Harvard say about the risk to its tax-exempt status?
In a statement to CBS News, Harvard reiterated that such a decision would be illegal.
“The government has long exempted universities from taxes in order to support their educational mission,” a spokesperson wrote in an email. “The tax exemption means that more of every dollar can go toward scholarships for students, lifesaving and life-enhancing medical research, and technological advancements that drive economic growth.”
The spokesperson added, “There is no legal basis to rescind Harvard’s tax-exempt status.”