This week, Jon Endean (Brooklyn) reviews a new work by Lauren Libby (Yale, moving to Texas), Tax-Exemption and the Shadow of Law (Nov. 28, 2025).

One of the many tools that the Trump administration has used (or at least, threatened to use) is the ability of the IRS to deny or revoke an organization’s tax exemption. Nonetheless, many tax scholars and practitioners have downplayed the risk, pointing out that if the Trump administration were to attempt to rely on Bob Jones University v. United States and its holding that tax exemption under section 501(c)(3) does not extend to organizations that violate “fundamental public policies,” it would run into substantial roadblocks, given how sparingly courts have invoked that holding to deny tax exemption beyond the racial discrimination context.

Lauren Libby persuasively argues that this confidence may be misplaced, because while the public policy doctrine itself that was articulated by Bob Jones is fairly limited, courts have partly relied on Bob Jones to support a similar doctrine, the illegality doctrine. Under this doctrine, the IRS can deny tax exemption to an organization that either engages in substantial illegal activities or has a substantial illegal purpose. On its face, this might appear quite reasonable—after all, it would seem inappropriate to grant tax exemption to an organization promoting a criminal enterprise. Nonetheless, as Libby shows, the illegality doctrine is far more expansive than merely covering organizations that are formed for the purposes of engaging in criminal conduct. This, Libby argues, has placed a loaded weapon into the hands of the IRS.

There are two main contributions of this paper. First, Libby ties together three major doctrines that have been attached to tax-exempt organizations during the history of the income tax: the public policy doctrine (articulated by Bob Jones), the subversive test doctrine (used during the beginning of the Cold War to blacklist organizations deemed “subversive”), and the illegality doctrine. While each has functioned in different ways, Libby argues that they all have served as an extra-textual gloss on Congress’ grant of exemption to organizations and permitted the executive branch to infuse politics into the granting of tax exemption. This itself is an important contribution to the literature, if only because it highlights how persistent the efforts by the executive have been to construe tax exemption away from politically disfavored groups.

The second contribution is to explore the illegality doctrine itself and expose the risks that current doctrine presents. The doctrine as it stands relies on illegal conduct and requires that it be substantial, but as Libby shows, those two prongs may not be as useful as we would like them to be. For example, in Iowaska Church of Healing v. Werfel, the D.C. Circuit denied tax exemption to a religious organization whose central rite involved the use of a controlled substance. In that decision, the D.C. Circuit declined to examine whether or not Iowaska’s claim that the Religious Freedom and Restoration Act permitted the organization’s use of a controlled substance and instead denied its tax exemption entirely. In other words, it was not even clear that the organization in question was doing anything illegal—the mere fact that it was illegal for some people was sufficient to deny tax exemption.

Given this fact pattern, it is not hard to imagine a parade of horribles from an administration intent on going after the tax exemption of politically disfavored organizations under the pretense that such organizations were engaged in illegal activity. (To take one example that Libby proposes, the illegality doctrine could be invoked in a case where the IRS claims that a school’s affirmative action policy is in contravention of the Supreme Court’s holding in Students for Fair Admissions v. Harvard.) To solve this problem, Libby proposes a somewhat radical solution—get rid of the illegality doctrine altogether and allow Congress to choose what types of organizations it wishes to deny exemption to. Additionally, Libby also proposes that the Supreme Court narrow Bob Jones to its facts. While actually overturning Bob Jones, Libby argues, would be unwise because of the negative moral implications such an overturning would have, limiting it to its facts would ensure that the illegality doctrine would no longer be able to derive any basis from Bob Jones. With neither a basis in the text of the statute nor a basis in Supreme Court precedent, the illegality doctrine would be more difficult to support as a matter of statutory interpretation.

There remain several questions that could be addressed in future versions of this paper. First, while it is certainly the case that the IRS has had expansive and unilateral power to strip tax exemption (such as under the subversive doctrine in the mid-twentieth century), it is not clear that this remains the case under the current illegality doctrine. After all, as Iowaska itself demonstrates, it is Article III courts, not the executive branch, that will have the last say as to whether “illegality” and “substantiality” are met. Accordingly, it is worth considering whether courts adopting a more robust view of “substantiality” and a narrower understanding of “illegality” might solve much of the concern that Libby raises.

Additionally, in Libby’s proposal, she points out that when Congress wants to explicitly deny exemption to an organization, it knows how to do so, as it did when it enacted section 501(p). However, section 501(p) may ultimately be worse than the illegality doctrine, because while it denies tax exemption to terrorist organizations (which few would dispute is a reasonable judgment by Congress!), the means by which a “terrorist organization” is defined is by reference to an executive order of the President promulgated under the authority of several statutes, including the notoriously broad International Emergency Economic Powers Act. Moreover, section 501(p)(5) sharply limits judicial review when a determination is made under section 501(p). It is not clear, then, whether section 501(p) is the model of what we might want to replace the illegality doctrine.

Finally, while declining to overrule Bob Jones is certainly normatively appealing, the implication of Libby’s argument appears to be that Bob Jones was wrongly decided. This is not an argument for overturning it per se—stare decisis and Libby’s own justification for narrowing, but not overruling, Bob Jones both hold merit—but Libby’s logical argument against the illegality doctrine would appear to support the Supreme Court ruling in favor of Bob Jones University if it were viewing the case today as a matter of first impression. Libby argues that the illegality doctrine is “an interprative tool that was deliberately constructed and repeatedly deployed to suppress politically disfavored groups,” and it is difficult to see how that framing would not equally apply to the public policy doctrine, which was first articulated in the context of challenging the tax exemption of Bob Jones University and other racially discriminatory institutions.

Thus, it may be a useful exercise to examine whether this analysis is ultimately the right result. And indeed, it may be. After all, in the context of supporting a broad-based tax exemption used to support a wide range of institutions within civil society—which Libby appears to endorse—there will be many organizations that get tax exemption that range from distasteful to unpopular to morally reprehensible. Some of those groups might be so distasteful or reprehensible that we place them outside the ambit of section 501(c)(3). But ultimately, Libby’s paper is about who decides, and in the context of tax exemption, placing the primary decision-making in the hands of a single individual, the President, has proven to be both unwise and dangerous.

Here is the rest of this week’s SSRN Tax Roundup:

Naisha Arora, Taxation on Gifts and Windfall Gains: Where Should the Line of Income Be Drawn? (Oct. 30, 2025)

Solomon Ater (University of Abuja), Tax Treatment of Non-Governmental Organisations Under the Tax Reforms Acts, 2025 (Nov. 2, 2025)

Reuven S. Avi-Yonah (Michigan), The Perils of Pseudo-Textualism, 120 Tax Notes Int’l 779 (Nov. 3, 2025)

William H Byrnes (Texas A&M) & Pramod Kumar Siva (Texas A&M), Comments on Framework Convention Template (A/AC.298/CRP.21) (Nov. 30, 2025)

William H Byrnes (Texas A&M) & Pramod Kumar Siva (Texas A&M), Comments on Workstream III Concept Note on Dispute Prevention and Resolution (A/AC.298/CRP.22) (Nov. 30, 2025)

Kristin E. Hickman (Minnesota) & Bridget C.E. Dooling (Ohio State), Delay, Politics, and Expertise in OIRA Tax Review, __ Va. Tax Rev. __  (forthcoming 2025)

Jim Y. Huang (OISE, Toronto), Writing Pressure: Fiscal Form, Emotional Grammar, and the Aesthetics of Institutional Tension (Nov. 2, 2025)

Jim Y. Huang (OISE, Toronto), Dynamic Z-ITI / ZIDI Model: Measuring How Tension Moves Through Canada’s International Student English-Testing Pathway (Dec. 7, 2025)

Jim Y. Huang (OISE, Toronto), Credential Downgrading as Fiscal Boundary Work: An X–Y Analysis of the 2025 U.S. “Professional Degree” Reclassification (Nov. 27, 2025)

Jim Y. Huang (OISE, Toronto), Institutions Live Because They Strain: The Ontology of Dualism in Fiscal Architecture (Nov. 3, 2025)

Grace Goun Kim (Yonsei University) & Won-Wook Choi (Yonsei University), Dividend vs RPTs Indirect Controlling Owner’s Tax Strategy (Dec. 5, 2025)

Lyla Latif (University of Nairobi), Fiscal Extraction Through Arbitration: Assessing the Impact of Investor-State Dispute Settlement on Public Finance and Labour in Africa and MENA (Dec. 4, 2025)

Doron Narotzki (Akron), From Deficits to Equity: Designing A Fair Federal Consumption Tax, 189 Tax Notes Fed. 31 (Oct. 6, 2025)

Comrade Kalu Nnanna Nwonyuku, The Jurisdictional Conundrum of Withholding Tax on Corporate Director Fees in Nigeria: A Statutory and Agency Theory Analysis (Nov. 6, 2025)

Comrade Kalu Nnanna Nwonyuku, Protecting Earmarked Revenue: An Analysis of Tax Base Disparity Caused by the Literal Interpretation of the Tertiary Education Tax Act in Nigeria (Nov. 3, 2025)

Tracey M. Roberts (Samford), W(h)ither Regulation? Hither to the Tax System, 43 Pace Env’t L. Rev. 182 (2025)

John R. Robinson (Texas A&M), Zackery D. Fox (BYU) & Stephen A. Stewart (Trinity), From Clicks to Bricks: The Effect of Economic Nexus Laws on Consumer Spending (Oct. 1, 2025)

Adam H. Rosenzweig (Wash U), Stateless Public Goods, 74 Kan. L. Rev. 235 (2025)

Jack Salmon (George Mason), Who Really Pays? Reevaluating the Corporate Tax Burden (Sept. 23, 2025)

Darien Shanske (UC Davis) & Kenneth C. Wilbur (UCSD), Better Arguments Still Favor Maryland’s Digital Ad Tax, 118 Tax Notes St. 205 (Oct. 27, 2025)

Pramod Kumar Siva (Texas A&M) & William H. Byrnes (Texas A&M), Pillar Two Side-by-Side Challenges of EU Law, Global Tax Governance, Sovereignty. Comments for a Rational Win-Win Path Forward (Dec. 5, 2025)

Walter Hellerstein (Georgia) & Andrew D. Appleby (Tennessee), A State Tax Perspective on Proposed Federal Cryptoasset Guidance, 118 Tax Notes St. 539 (Nov. 24, 2025)