This is the second of two blog posts focusing on restrictions on 501(c)(3)s engaging in illegal activity or activity that violates fundamental public policy. Click here for last week’s post focusing on public policy.

As immigration policy has taken a sharp turn under the Trump administration, including the recent memos announcing plans for increased immigrant enforcement and deportation, many nonprofits are stepping up to consider how they can help immigrants affected by these extreme changes. Some churches are agreeing to provide sanctuary to immigrants facing deportation. This post will examine how providing sanctuary could pose a threat to a nonprofit’s exempt status for engaging in illegal activity.

Illegal Activity Generally. The restrictions against illegal activity are closely related to the public policy doctrine discussed last week. To qualify as tax-exempt under 501(c)(3), an organization may not engage in activity that is illegal or that violates fundamental public policy. However, IRS guidance indicates that there is a bit of a spectrum in terms of whether the illegal activity in question will threaten exempt status.

To begin with a clear cut case, if an organization has an illegal purpose, it will not qualify for exemption. For example, if an organization’s articles of incorporation indicated it was organized to rob banks and redistribute the money gained from that activity to the poor, it would not pass IRS muster. This is because, although it is arguably charitable to give the money to the poor, it is against the law to rob banks in order to do so. Thus, the organization would be denied an exemption for having the illegal purpose of robbing banks.

Assuming an organization’s purposes qualify for exemption, whether an organization’s exemption may be revoked will be based on an analysis of the organization’s illegal activities. In these cases, revocation will be based upon the substantiality of illegal activities actually conducted by the organization. The IRS is clear that substantiality is measured using both a quantitative and qualitative analysis. Quantitative analysis looks at the overall time and resources the organization devotes to the activity, while the qualitative analysis focuses on the seriousness of the illegality involved. IRS General Counsel Memo 34631 gives this illustrative example:

A great many violations of local pollution regulations relating to a sizable percentage of an organization’s operations would be required to disqualify it from 501(c)(3) exemption. Yet, if only .01% of its activities were directed to robbing banks, it would not be exempt. This is an example of an act having a substantial non-exempt quality, while lacking substantiality of amount. A very little planned violence or terrorism would constitute ‘substantial’ activities not in furtherance of exempt purposes.

One example of the application of this analysis is Revenue Ruling 75-384, 1975-2 C.B. 204. In this case, the IRS denied exempt status for an organization that had as its primary activity sponsoring antiwar protest demonstrations. The organization’s purposes were specifically stated in its articles to “to educate and inform the public on the principles of pacifism and nonviolent action.” However, the organization’s activities urged participants to commit violations of local ordinances and breach public order, including blocking entry to military bases and preventing the work of government, but the organization did not appear to encourage actual acts of violence. In evaluating the substantiality of the organization’s civil disobedience activities, the IRS stated that the organization could not be considered to fall into the same category as an organization that had inadvertently violated a statutory regulation. Rather the intentional nature of planning and sponsoring events to encourage criminal behavior by the organization in question rose to the level of substantial, both in terms of quantity, because protesting was the majority of the organization’s activities, and in seriousness due to the nature and impact of the civil disobedience on the government. Further, the IRS noted as a general point in its conclusion that the organization’s activities increased the burdens of government, thereby frustrating a common charitable purpose, which is to lessen the burdens of government.

Offering Sanctuary. In the context of sanctuary, many churches feel that offering sanctuary is rooted in core beliefs to care for the vulnerable, and that their ultimate authority is God and conscience. Currently, there are more than 800 churches nationwide that are willing to offer sanctuary to some degree—including one in Denver that recently grabbed national attention for offering sanctuary to the undocumented Jeanette Vizguerra, a mother with three children who are U.S. citizens.

With respect to churches like the one offering sanctuary to Jeanette Vizguerra, it is highly unlikely that any would be considered to be organized for an illegal purpose. The churches offering sanctuary for the most part have a long history of operating as established religious institutions engaging in typical religious activities and many have only recently offered sanctuary in response to the new immigration policy of the Trump administration. Thus, the IRS would have difficulty making the argument that these respected institutions are organized to harbor illegal immigrants over their long-standing religious purposes. Therefore, if there is any argument to be made for revocation of a church’s exempt status for providing sanctuary, the IRS would need to make it based upon an analysis of the substantiality of the church’s illegal activities.

When engaging in the qualitative substantiality analysis, it is important to note that where the illegality of providing sanctuary falls on the spectrum between an inadvertent regulatory violation and robbing a bank is not totally clear. Illegality would be based on 8 U.S.C. § 1324(a)(1)(A)(iii), which makes it a crime to knowingly or recklessly conceal or harbor an immigrant who is in the country in violation of law. In a few cases from the 1980s, several people even went to jail for violating this law. However, very few would make the argument that harboring a non-violent immigrant is on par with criminal activity like inciting violence or robbing banks. In any event, as a precaution, some tax practitioners have recommended that churches craft a policy for sanctuary that clarifies that violent criminals are not eligible—rather than simply offering sanctuary to anyone who requests it. Churches that are found to offer sanctuary to violent criminals, or those with ties to terrorism, would likely be more at risk of losing their exemption for having qualitatively more substantial illegal activity.

With the provision of sanctuary falling somewhere in the middle of the spectrum of illegal activity, a church’s ability to keep its tax exemption would most likely hinge on the quantitative analysis of how much of the sanctuary activity a church engages in. While most churches would likely only be able to offer sanctuary to an individual or a small group of immigrants, based on logistics, it is conceivable that a church could be passionate enough about the issue that it makes the decision to provide sanctuary on a large scale. If a church decided to undertake these activities as its primary focus, moving some significant amount of its efforts away from traditional religious activities, the risk to its exemption increases. Thus, each church providing sanctuary would have to have its activities evaluated both qualitatively with respect to the immigrants they harbor and quantitatively with respect to the scale of their harboring activities.

Given the uncertainty and variability surrounding the substantiality analysis and the fact that the churches providing sanctuary are, in the opinion of a majority of Americans, doing a moral good (even if it is a legal wrong), it remains to be seen whether the IRS would have the fortitude to challenge the exemptions of sanctuary providing churches. Several commentators feel that the IRS would avoid opening itself up to such derision. However, it is possible that if the Trump administration feels these organizations are frustrating its immigration policy, it could set this as a priority. One thing is for certain—churches that venture into these murky waters should understand that they are taking a risk. How big a risk? No one can say for sure.

Schauble Law Group will continue to monitor developments on this topic as it evolves.