Section of Taxation Publications
  VOL. 56
NO. 4
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
 Restricting the Flow of Funds from U.S. Charities to International Terrorist Organizations—A Proposal
Mindy Herzfeld*

*Barnard College, B.A. 1990; Yale Law School, J.D. 1995; Georgetown Univ. Law Center, LL.M. 2003. The author would like to thank Professor Michael Sanders of the Georgetown University Law Center for his support and guidance in the writing of this article.


Numerous news reports since September 11, 2001 have reviewed the shortcomings within the intelligence system that may have led to the failure to prevent the terrorist attacks on the United States. In response, oversight committees have focused on the need for revamping our intelligence operations and agencies.1 In contrast, there has been relatively little attention paid to the extent to which the U.S. government and unknowing U.S. taxpayers have actively supported the types of terrorist groups that orchestrated the terror attacks. The operation under tax-exempt status in the United States of organizations that actively fund terrorist activities abroad, has meant that the U.S. government, and all U.S. taxpayers, indirectly finance such organizations and the recipients of their funding dollars.

This paper argues that the Service should take a more active stance in denying tax exemption to organizations that finance terrorist activities abroad. The paper explores the well-established principle that organizations granted U.S. tax-exemption must act consistently with national public policy, and the application of that principle to charitable organizations that send monies overseas. To foster that policy, the Service should apply special guidelines to charitable organizations that channel contributions abroad, similar to the special guidelines in effect for tax-exempt private schools. In addition, legislative changes should be made to advance such a goal in order to provide additional legal support for necessary changes in the Service's policy.

Part I of this Article reviews some of the commonly advanced theories as to the purpose of the tax exemption provisions of the Internal Revenue Code (the Code), and the reliance on such theories by the courts and by the Service to deny tax exemption to organizations operating in furtherance of an illegal purpose and organizations acting contrary to national public policy. Part II summarizes some of the publicly available information on the links between charitable organizations raising funds in the United States and individuals and organizations the U.S. government has classified as engaged in or supporting terrorism. Part III ends with concrete suggestions for a change in policy to prevent the continued operation of such organizations in the United States under tax-exempt status, including changes to the Code, changes to the Form 990, and the issuance of published guidance by the Service.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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