HR 9495: The Good, the Bad?, and the (Potential) Ugly

Previously in this space fellow blogger Darryll Jones has covered contentious bill H.R. 9495, which has now passed the House of Representatives. Setting aside the provisions not relating specifically to tax-exempt organizations, H.R. 9495 (section 4) would amend Internal Revenue Code section 501(p). Currently section 501(p) suspends the tax-exempt status and eligibility to receive tax deductible contributions for an organization described in paragraph two of that section, which are organizations designated or individually identified under several federal laws or an Executive Order as a terrorist organization, an organization subject to sanctions relating to terrorism, or otherwise supporting or engaging in terrorism or terrorist activity. The section also currently denies an affected organization the right to bring any any administrative or judicial challenge to the suspension. The legislation would add a new paragraph extending section 501(p) to "terrorist supporting organizations," subject to certain procedural requirements and the ability to challenge designation as a terrorist supporting organization in federal district court.

The Good. As Darryll pointed out in his post, the new paragraph has procedural protections for affected organizations that are sorely lacking from existing section 501(p). Those protections include a notice requirement prior to the designation, a 90-day period from the mailing of the notice for the organization to challenge the proposed designation either as incorrect or as corrected with a commitment not to provide further support or resources to organizations described in paragraph two of section 501(p), administrative review of any designation by the IRS Independent Office of Appeals, and the ability to seek review in federal district court. While these procedural rules do not extend to the rest of section 501(p), they are a welcome protection for organizations subject to designation under the proposed new paragraph.

The Bad? As good as the procedural provisions are, there may be serious issues raised by the substantive rule that brings an organization within the reach of the new paragraph. The paragraph defines as terrorist supporting organization as "any organization which is designated by the Secretary as having provided, during the 3-year period ending on the date of such designation, material support or resources (within the meaning of section 2339B of title 18, United States Code) to an organization described in paragraph (2) (determined after the application of this paragraph to such organization) in excess of a de minimis amount." Three aspects of this rule raise concerns:

• The three-year look-back, especially since it appears to include support provided to a group that at the time of the provision of the support was not described in paragraph two but subsequently came to be so described.

• The incorporation of 18 U.S.C. 2339B, which in turn incorporates the definition of "material support or resources" from 18 U.S.C. 2339A.  That latter provision defines this term broadly to include "any property, tangible or intangible, or service, including currency or monetary instruments or financial securities, financial services, lodging, training, expert advice or assistance, safehouses, false documentation or identification, communications equipment, facilities, weapons, lethal substances, explosives, personnel (1 or more individuals who may be or include oneself), and transportation, except medicine or religious materials." 

• Unlike the two above criminal statutes, there is no requirement in the proposed new paragraph of section 501(p) that the material support or resources be provided "knowingly" (section 2339A(a)) or "knowing or intending" (section 2339B(a)) it would be used to violate certain federal criminal laws.

My understanding is that critics have also raised concerns that if Organization A provides support - say a grant - to Organization B that in turn independently provides support (without using any of the support provided by Organization A to do so) to Organization C and it then turns out that Organization C is described in paragraph two, Organization A will fall afoul of the new paragraph, and that this chaining effect could extend to an indefinite number of organizations. I have not, however, been able to confirm that this is the case or how the above criminal statutes interpret material support or resources in this respect. (For more about those statutes, see this recent Congressional Research Service report.)

The (Potential) Ugly. My understanding is that perhaps the greatest concern critics have raised is that the designation under this new paragraph is no longer with other agencies that specialize in terrorism investigations (or the President via Executive Order) but instead with the Secretary of the Treasury. While I am not familiar enough with the designation processes listed in current section 501(p)(2) and so how politicized they are or could be, the concern with this new designation power appears to be that the Secretary is a politically appointee who could - either directly or through reliance on a politically motivated underling - target the new designation against politically disfavored tax-exempt organizations. And while the procedural provisions described above are available to try to prevent or challenge any incorrect designation, invoking them of course can be costly and time consuming process, which many tax-exempt organizations may not realistically be able to afford. 

The bottom line is that the legislation raises many questions that do not appear to have been addressed much if at all in the run-up to the House's passage. Hopefully therefore the Senate will not take up the bill but instead leave it to the next Congress, perhaps with more deliberation, to consider.

Lloyd Mayer