President Trump has recently indicated that what he considers untoward practices at Harvard, along with those of other elite universities, could jeopardize their status as tax-exempt institutions. Several news outlets have estimated that the value of benefits to Harvard and its donors traceable to Harvard’s tax-exempt status is in the range of half-a-billion dollars a year.

In a timely article, Profs. Dale, Hemel, and Manny discuss what the true impact of Harvard losing its tax exemption and they do so on a number of fronts: its own income tax liability, its potential liability under the corporate alternative minimum tax (AMT), its liability to other federal excise taxes, the impact on its donors, its ability to issue tax-exempt bonds, and the effect on its state and local tax liability.

Regarding its own income tax liability, a loss of tax-exempt status would mean that Harvard would be liable for tax on its taxable income at the current corporate rate of 21%. Thus, the key question here would be how to compute a post-revocation Harvard’s taxable income. The authors explain that although Harvard runs a large cash-flow surplus each year, a significant percentage of its income comes in the form of donations, which are excluded from gross income under I.R.C. § 102 (the extent to which such donations meet the “detached and disinterested generosity” standard when they are not infrequently means by which donors secure places in Harvard for their children is not discussed in the article). With regard to the deduction of expenses, a possible bar could be the fact that expenses are ordinarily deductible only when the primary purpose for engaging in the activity is to produce income or profit, while Harvard’s stated purpose is not to produce income or profit but rather to promote “veritas” (the university’s Latin motto meaning “truth”). Relying on Portland Gulf, a 1990 Supreme Court decision, the authors argue that a non-profit institution can nevertheless deduct expenses if it has “an intent to generate income in excess of costs” (in that particular case, the Court ruled that the expenses were not deductible because the putative “trade or business” regularly ran at a loss).

Within this framework of authorities, the authors’ analysis is not entirely clear. On the one hand, they claim that Harvard meets the Portland Gulf standard because in 8 of the last 10 fiscal years its noninvestment income exceeded its expenses. On the other hand, they claim that if its expenses were indeed deductible then Harvard would have reported a loss for tax purposes in 7 of the last 10 fiscal years. They explain the apparent discrepancy by reminding us that donations are excluded from gross income. However, they do not address the question of whether an activity that generally produces a loss can be considered a “trade or business” if the only thing keeping it afloat is donations.

Besides for regular income tax, Harvard could face a liability under the corporate AMT, as donations are not excluded for the purpose of computing one’s “adjusted financial statement income,” which is the tax base of the AMT. One significant bar to application of the AMT is that it applies to non-profit institutions only if their change in net assets exceeds $1 billion a year, and Harvard does appear to satisfy this condition. If the corporate AMT is relevant, the authors suggest Harvard could avoid the tax by working with donors to establish conditions on their gifts that would defer recognition of the gift for AMT purposes. One question that the authors do not consider is whether a shift from unconditional gifts to conditional gifts coinciding with a loss of tax exemption would not fall afoul of the various anti-avoidance doctrines (e.g., query whether the conditions would have a business purpose).

Among other federal excise taxes, the most significant is the payroll tax. As a tax-exempt organization, Harvard is exempt from the Federal Unemployment Tax Act’s 6% excise tax on the first $7,000 of wages for each of its 38,000 employees. However, the authors argue that as Harvard in any case contributes to the state unemployment insurance program and federal law permits a deduction for state contributions that can offset up to 90% of the federal unemployment obligations, the impact is likely to be minimal.

Perhaps the most significant consequence of Harvard losing its tax-exempt status is that donors would no longer be entitled to a deduction for their donations. Nevertheless, the authors argue that donors could continue to benefit from a deduction by routing their donations through Harvard-affiliated entities, which the authors opine would retain their tax-exempt status even if Harvard itself were to lose its tax exemption. They also point out that donations of appreciated property do not trigger capital gains recognition, even if the donee is not a tax-exempt organization. A question that the authors raise but for which they do not provide a definitive answer is whether donations to a non-tax-exempt Harvard would be subject to gift tax.

One specific downside for Harvard from a loss of tax-exemption would be the loss of its ability to issue tax-exempt bonds (and the consequent need to issue taxable bonds at a higher interest rate). The authors cite an estimate that the exemption saved Harvard $22 million in fiscal 2023 and note that this is “a drop in the Charles River for a university with a $53 billion endowment.”

Finally, situated in a deep-blue state and in a city so far to the left that it is sometimes known as the People’s Republic of Cambridge, Harvard has little to fear that loss of its federal tax exemption would be matched by a loss of its exemptions under state and local law. Moreover, the episode might even assist it at the state level. Harvard’s scuffle with President Trump likely endears it to progressive Massachusetts lawmakers, who as recently as last year floated proposals to tax the university on its land and endowment.

To remove any doubt, the authors on several occasions express their opinion that the attempt to rescind Harvard’s tax exemption is not lawful. If the courts agree (assuming Trump makes good on his threat), then the article as it stands may not have any practical import. However, I think that from a broader perspective, it would nevertheless be valuable. Hidden in the current debate is the question of whether, in general, institutions such as Harvard should be entitled to the tax breaks that the law provides. By using Harvard as a case study, the authors provide valuable insight into the practical effect of such benefits.