House Resolution 9495

Who DOESN'T want to stop terror financing?!

HR 9495, also known as: “The Stop Terror-Financing and Tax Penalties on American Hostages Act”, passed in the House by a vote of 219-184 largely along party lines, with 15 Democrats supporting the bill and one Republican voting in opposition. It’s now headed to the Senate where Democrats hold a slim majority, however, it’s sure to come back around in 2025, so let’s try and understand what people in the nonprofit world are so upset about.

On it’s face, the bill seeks to do two things:

H.R. 9495 proposes an amendment to the Internal Revenue Code to postpone tax deadlines and reimburse late fees for Americans who are wrongfully detained or held hostage abroad. This makes good sense, and the Senate unanimously approved a similar measure earlier this year. This piece is not expected to face any opposition as a standalone bill.

The second part doesn’t seem problematic on its face. It purportedly strips tax-exempt status from terrorist supporting organizations. Well that makes sense too doesn’t it? It does, until you ask yourself who decides whether an organization supports terrorists. The answer is the treasury secretary, a political appointee of the president.

What is a “Terrorist Supporting Organization?”

There are a lot of concerns that this legislation will be used to target enemies of the administration or disproportionately target political viewpoints that are not in line with that of those in power (viewpoints that are usually expressed through protest perhaps). Here’s the definition directly from the text of the Act:

“For purposes of this paragraph, the term ‘terrorist supporting organization’ means 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.”

What is an Organization Described in Paragraph 2 and Who Decides?

Let’s jump ahead here, because this is what we really need to know. You won’t find the answer in the Act itself, rather you’ll find it in the Internal Revenue Code, Section 501(p). You certainly can and should scroll down through the linked code section and read it yourself, but the spoiler alert is this:

An organization can be designated a terror organization by the Secretary of State (also a political appointee) under certain sections of the Immigration and Nationality Act as either a terrorist organization or a foreign terrorist organization OR it can be done pursuant to an Executive Order under the authority of the International Emergency Economic Powers Act or section 5 of the United Nations Participation Act of 1945. The designation is made for the explicit purpose of imposing on such organization an economic or other sanction.

If the tax exemption of an organization is suspended under this subsection, the Internal Revenue Service is required to update the listings of tax-exempt organizations and publish “appropriate notice” to taxpayers of such suspension and of the fact that contributions to such organization are not deductible during the period of such suspension.

Now remember, this is the definition of a terrorist organization and IRC 501(p) is already in place. HR 9495 seeks to expand this to include not just those organizations deemed to be terrorist organizations, but also organizations that the Secretary of Treasury determines to be “terrorist supporting organizations.”

So if an organization not on the terror list supports an individual that is deemed tied to an organization on the list, this legislation would also strip the donor organization of tax exempt status. Additionally, the legislation as written, puts the onus on the tax exempt organization to prove that they did not materially support a terrorist organization.

Material Support and Resources

The United States Patriot Act of 2001 prohibits material support for terrorists. 18 USC Section 2339B defines material support to foreign terrorist organizations (FTO’s). The statute gives examples of material support to include “property, tangible or intangible, or service, including currency or monetary instruments or financial securities, financial services, lodging, training, expert advice or assistance, safe houses, 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.”

Makes sense, however, “material support” statutes can prove to be a slippery slope for nonprofits providing humanitarian aid through funds, food, mental health services, medical services etc. in war zones where identification may no longer exist and affiliations are vague.

Lest you think this is a new issue, I’ll refer you back to Holder v. Humanitarian L. Project¹ (yes, as in Eric Holder). Here the Plaintiff’s argued that the “material support” provision was unconstitutionally vague and that money sent to aid the “nonviolent purposes” of two listed groups infringed on their Constitutional rights to freedom of speech and association.

The Supreme Court disagreed and held that the statute was not unconstitutionally vague based on a finding that the specified organizations “are so tainted by their criminal conduct that any contribution to such an organization facilitates that conduct.” While this also makes sense on its face, how do you identify individual members of terrorist organizations and how far down the chain is treasury looking to strip tax exempt status? Is it direct support? Or can it be donating to an organization that then serves a population that may include members of a terrorist organization?

What’s Changed

We can argue it’s the political climate, the polarization around Gaza and Israel, the 24 hour news cycle and access to social media where American donors can see nuance for themselves, or the fears around an authoritarian regime that will use the broad powers in this legislation to punish enemies.

Perhaps there’s also a fear that donors are next. Anecdotally there has already been a chilling effect on giving to causes abroad. My advice to donors has been, do your research, give to trusted charities, and ultimately you are not responsible for what the charity does once you donate. I’m not sure if that changes down the road.

Additionally, if we move to political appointees having wide discretion to strip nonprofits of tax-exempt status, what happens to the granting of nonprofit status? The IRS has always had broad authority to determine who qualifies for tax exempt status and who does not. There is of course, an appeals process if you receive an adverse determination and there will continue to be one under the proposed law. That process will be exhausting, complicated, and at your expense.

Anti-terrorism bills focused on “material support” whether well intended or meant to stifle dissent, are rife with unintended consequences. This one is no different.

For now, we wait and watch.

1. https://supreme.justia.com/cases/federal/us/561/1/