Last week, my co-blogger posted about PLR 202417022, which revoked tax-exempt status from an organization that apparently hosts street festivals that promote cannabis businesses and educate participants about cannabis use. The IRS held that this organization does not qualify for tax-exempt status for numerous reasons, one of which is that it “advocate[s] and engage[s] in activities that contravene federal law[.]” In holding that this activity is inconsistent with tax-exempt status, the IRS relied on a 1975 Revenue Ruling that held that an organization could not qualify for tax-exempt status if its primary activity was encouraging its members to engage in civil disobedience acts contrary to local law. As my co-blogger points out, this position – that an organization that advocates for or engages in civil disobedience cannot qualify for tax-exempt status – has the potential to be applied in nefarious ways.
In 2014, I wrote an article criticizing the use of the illegality doctrine in the cannabis context, especially for 501(c)(4) organizations. In 2016, I expanded the analysis to state and local government entities, arguing that the illegality doctrine does not apply to them. The history of the IRS’s use of the illegality doctrine makes it clear how dangerous the doctrine can be when an organization has the purpose of educating the public that something that is currently illegal is nonetheless good. The organization NORML fought for years with the IRS about the line between advocating illegal cannabis use (which the IRS argued would cause their tax-exempt status to be revoked) and advocating use of cannabis if and when it is made legal (which would not). When an organization is educating the public that an illegal substance is actually good for you, the line can be blurry.
The IRS’s attempts to apply the rule to organizations “serving homosexuals” makes it even more clear how problematic this line-drawing is. For example, a 1971 General Counsel Memorandum addressed an organization that sought to educate the public about homosexuality with the goal of attaining “complete public acceptance of homosexuals as one type of normal human[] being[].” The IRS denied tax-exempt status because of state laws criminalizing sodomy. In 1973, the IRS granted tax-exempt status to an organization that provided social services to the gay community, but noted that the organization qualified for tax exempt status at least partially because, “[t]he organization expressly disavows … seeking to alter the community’s attitudes toward homosexuals” and noting that “[t]he maladaptive and at least potentially offensive nature of homosexual activities is also borne out by the continuing prohibition of substantially all forms of sodomy by the criminal laws of the District of Columbia and all but three of the several states.” Even as late as 1977, in a GCM that reversed the IRS’s position denying tax-exempt status to organizations that seek to change the public’s perception of homosexuality, the IRS cautioned that “[i]f an organization directly fostered or promoted homosexual practices, it would not be entitled to exemption [at least in part because] in many jurisdictions homosexual practices are illegal.” I bring this all up not only to remind us all how long ago the nineteen-seventies were, and how bad they were in some respects, but to illustrate how hard it is to draw the line between advocating for something that is illegal (like same-sex love, cannabis, or civil rights) and having a purpose that is illegal.
The 2024 PLR about the organization hosting a cannabis street festival simply does not provide enough facts to know where that line is drawn or whether it is appropriate in that case. It should have relied instead on other reasons the organization did not qualify for tax-exempt status, like the fact that it failed to provide financial records or file an informational return.
–Benjamin Leff
