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Terrorism and Tax Advantages

Demonstrators at the University of South Florida in Tampa
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Missouri Rep. Jason Smith denounced universities and student organizations for statements “celebrating, excusing, or downplaying” the Oct. 7 attacks by Hamas in Israel. “Releasing such statements, or failing to condemn them,” he said last month, “is unforgivable and runs counter to our values as a nation.”

Mr. Smith’s comments have more weight than most because he is chairman of the House Ways and Means Committee, which has jurisdiction over tax policy. That includes policies governing nonprofit organizations, including colleges and universities as well as groups issuing statements and staging rallies throughout the U.S. Statements celebrating Hamas’s violence, Mr. Smith adds, “call into question the academic or charitable missions they claim to pursue”—in other words, their tax breaks.

The U.S. has traditionally given charities and their supporters great leeway in handling controversial issues. Constitutional guarantees of free speech and assembly protect their activities and require government to demonstrate a strong reason for restricting them. But Congress and the Supreme Court—as well as nearly three dozen states—have agreed that providing aid to terrorist groups like Hamas is a justifiable reason to forbid donors from supporting them.

Mr. Smith’s statement suggests the tax exemptions of organizations backing Hamas—or tolerating such activity—may be in for congressional scrutiny. Virginia’s Attorney General Jason Miyares has launched an investigation of AJP Educational Foundation, aka American Muslims for Palestine. Mr. Miyares’s office said in a press release that it is looking into whether the group “used funds raised for impermissible purposes under state law, including benefitting or providing support to terrorist organizations,” as well as whether it was properly registered to solicit contributions in the state.

But apart from the constitutional issues involved, taking action against these groups won’t be easy. One reason is that some of the most prominent groups aren’t tax-exempt and don’t take tax-deductible contributions directly. Students for Justice in Palestine, whose national chapter was established by activists involved with a now-defunct charity investigated for financing terrorism, isn’t on the Internal Revenue Service’s list of tax-exempt groups. As a result, it isn’t required to disclose—to the public or the IRS—who supports it, making it the same kind of “dark money” group that progressives have criticized conservatives for using.

Those who wish to support SJP are directed on its website to make their donations to the Wespac Foundation, a tax-exempt group in White Plains, N.Y., that calls itself a “leading force for progressive social change.” Wespac is a “fiscal sponsor,” meaning it can receive tax-deductible contributions for organizations not on the IRS list. It doesn’t have to report publicly either the sources of its money or how much of it goes to SJP or other groups. In its IRS filing for 2021, Wespac listed revenue and expenses of about $1 million each but provided few details. SJP also can receive contributions from donors who aren’t interested in a tax deduction, including supporters from other countries.

In Holder v. Humanitarian Law Project (2010), the Supreme Court upheld a law making it a crime to provide “material support or resources” to organizations on the State Department’s “foreign terrorist organization” list (which includes Hamas and Hezbollah), even if the donations were earmarked for social services or other peaceful uses. “Money is fungible,” Chief Justice John Roberts wrote for the court, expressing doubt that the groups on the State Department’s list could be relied on to keep a wall between their lawful and unlawful activities.

The Holder decision applies only to foreign organizations linked to terrorist groups. A law restricting gifts to American groups that engage in advocacy on behalf of terror groups would face tougher First Amendment scrutiny. But there is a difference between exercising free speech and receiving a tax break for doing so.

Courts and legislators have long tried to distinguish between “education,” which has traditionally been considered a charitable activity, and “propaganda”—intentionally transmitting biases and misinformation on behalf of a particular position—which hasn’t. In formulating tax policies, lawmakers have sought to encourage organizations providing education (and their supporters), while avoiding tax advantages for those involved in propaganda.

This is treacherous terrain. Not long ago, the IRS used a procedure for reviewing tax-exemption applications that singled out groups with words or phrases such as “tea party” in their names. It led to a scandal, congressional hearings, and ultimately a court ruling that outlawed the practice. Now, in determining if an organization’s activities are educational, the IRS is supposed to look not at the group’s views, but at its conduct, which should involve a fair and noninflammatory presentation of facts.

Rep. Smith and many others clearly think that groups calling Hamas members “martyrs” and seeking to “free Palestine from the river to the sea” (meaning, as some have now acknowledged, eliminating Jews from Israel) don’t meet this standard. Many of these groups and their supporters are on the IRS’s list of tax-exempt charitable organizations and responsible for living up to the requirements of tax policy. So too are the colleges and universities that have been tolerating their conduct.

“Charities that encourage violence and cheer on extremism are not contributing to society with any of the purposes the IRS allows,” Elizabeth Schmidt, a nonprofit-law expert at the University of Massachusetts Amherst, wrote last spring. She was looking at right-wing extremism, particularly whether the Oath Keepers Foundation—the fundraising arm of the main group involved in the attack on Congress in 2021—deserved the tax exemption it had at the time. Her conclusion seems to apply with even greater force to the organizations now defending Hamas, minimizing terrorism and calling for the destruction of Israel.

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Source: Terrorism and Tax Advantages – WSJ