Sharon L. McCarthy, Victor Suthammanont, and Mike Waalkes co-wrote an article for Tax Notes titled "Examining the Authority for Suspending Tax-Exempt Status Under Section 501(p)".
In the article, Sharon, Victor, and Mike provide an in-depth examination of Section 501(p) of the Internal Revenue Code and discuss how the U.S. government may continue to target nonprofit tax-exempt status in 2026.
Historically, the tax-exempt status granted to nonprofit organizations under Section 501(c)(3) has been very difficult to revoke. An IRS revocation inquiry requires a lengthy examination, the option for the organization to appeal the decision before the IRS Independent Office of Appeals, and the ability to dispute an adverse decision in federal court. Under Section 501(p), however, there is an option for the federal government to fast-track revocation of tax-exempt status.
Sharon, Victor, and Mike explain the history of the law and explore ways tax practitioners can help their nonprofit clients challenge designations and suspensions under Section 501(p). While the law provides the federal government with an express mechanism for revoking nonprofit organizations' tax-exempt status, there are legal remedies to challenge such determinations, the trio explains.
Section 501(p) was enacted as part of the Military Family Tax Relief Act of 2003, after the George W. Bush administration declared various groups–including several U.S.-based private foundations with 501(c)(3) status–as terrorist organizations. In a post-September 11th environment, lawmakers were concerned that nonprofits were sending funds to foreign terrorist organizations, yet were able to retain their tax-exempt status. Section 501(p) was intended to provide an option for the government to fast-track revocation of tax-exempt status. Under this law, the government can retroactively suspend the exempt status of organizations that were declared terrorist groups prior to the enactment of Section 501(p) in 2003.
There are multiple federal laws and frameworks that designate a group as a terrorist organization. For Section 501(p) purposes, nonprofit organizations declared as a terrorist group are on the Terrorist Exclusion List (TEL). There are two additional designations as well, foreign terrorist organizations (FTO) and specifically designated global terrorists (SDGT). An organization may be on the TEL or declared FTO or SDGT.
Nonprofits with a TEL, FTO, or SDGT designation face immediate and severe consequences. The instant loss of tax-exempt status turns them into taxable entities that must file the appropriate tax returns, which can also include state-level income tax forms. Grants from governmental agencies and private foundations may be revoked. Donors will no longer receive tax deductions for their donations. Depending on the designation, they may even face criminal and civil liability for financially supporting a terrorist organization. Financial institutions, payment processors, and vendors may cease to do business to avoid potential liability. Additionally, the nonprofit may face investigations by the Department of Justice and state attorney general.
Section 501(p) addresses three different designation scenarios that have different consequences and remedies. While the law primarily revolves around TEL, FTO, and SDGT designations, there is an additional catch-all for "designations to be made under the authority of any federal law".
You can learn more about the procedural mechanics of Section 501(p) by reading the complete article here.
About Sharon
Sharon is a Fellow of the American College of Trial Lawyers and has extensive experience representing individuals and organizations in white-collar criminal matters, civil and criminal tax controversies, and complex commercial litigation. She has experience in a wide range of matters involving allegations of securities fraud, including unregistered offerings of cryptocurrency, insider trading, and alleged market manipulation; bank fraud; tax fraud; mail and wire fraud, including theft of honest services; accounting fraud; criminal antitrust violations; public corruption; and attorney misconduct, among others.
About Victor
Victor served for a decade as a securities enforcement attorney in the U.S. Securities and Exchange Commission, including as a Senior Trial Counsel and as the Enforcement Counsel to Chair Gary Gensler. Prior to his extensive experience in the SEC’s Division of Enforcement, Victor represented and advised clients in private practice in complex commercial disputes and litigations, as well as in internal and governmental investigations.
About Mike
Mike is an associate with Kostelanetz. He focuses his practice on civil and criminal tax controversy matters, including audits, promoter investigations, voluntary disclosures, U.S. Tax Court litigation, and criminal tax investigations. Prior to joining the firm, Mike served for two years as a judicial law clerk for Judge Joseph W. Nega of the U.S. Tax Court.
