Nonprofit Law Prof Blog

Charitable SALT Workarounds After the Demise of Chevron Deference

From Windes

When the TCJA sunsets next year, the limitation on SALT deductions will expire, eliminating the need for charitable SALT cap workarounds.  House Republicans have formed themselves into a circular firing squad trying to decide whether to join with Democrats who want to let the limitation expire.  I'm putting my money on Congress increasing the limit from $10,000 to maybe $20,000 but otherwise extending the limitation.  Raising the limit would be a compromise but would mean SALT workarounds remain viable.  As I reported earlier this year, though, the Service has put its foot down on SALT Workarounds via regs issued in 2019:

In response to the new limitation under section 164(b)(6), some taxpayers are seeking to pursue tax planning strategies with the goal of avoiding or mitigating the limitation. These strategies rely on state and local tax credit programs under which states provide tax credits in return for contributions by taxpayers to or for the use of certain entities described in section 170(c). The use of state or local tax credits to incentivize charitable giving has become increasingly common over the past 20 years. Moreover, since the enactment of the limitation under section 164(b)(6), states and local governments have created additional programs intended to work around the new limitation on the deduction of state and local taxes.

Here is the basic skinny on SALT workarounds.  Instead of paying state taxes not deductible on federal returns, a state taxpayer makes a charitable contribution equal to the taxes that would otherwise have been paid.  It's a wash for the state, especially if the "contribution" is made to a government entity.  But the donor gets to take a federal deduction for the contribution equal to the amount that would otherwise been called taxes and disallowed by IRC 164.  For example, instead of paying $30,000 in state taxes, only $10,000 of which would have been deducted at the federal level, a state taxpayer pays $10,000 in state taxes and #20,000 as a charitable contribution.  As a result, the entire $30,000 is deductible at the federal level -- $10,000 as state taxes under IRC 164, and $20,000 as a charitable contribution under IRC 170.  

Treasury enacted Regulation 1.170A-1(h)(3) to shut it all down:

Payments resulting in state or local tax benefits —(i) State or local tax credits. Except as provided in paragraph (h)(3)(vi) of this section, if a taxpayer makes a payment or transfers property to or for the use of an entity described in section 170(c), the amount of the taxpayer's charitable contribution deduction under section 170(a) is reduced by the amount of any state or local tax credit that the taxpayer receives or expects to receive in consideration for the taxpayer's payment or transfer.

New York, New Jersey and Connecticut challenged the regulation but lost at the district court. The argument is that there is no legislative authority for the proposition that receipt of a state tax credit is a "quid pro quo" in exchange for a charitable contribution but that is Treasury's underlying and dubious reasoning. There is plenty of case law, and it makes economic sense, that only the amount given in excess of that received constitutes a charitable contribution.  But there is no legislative or judicial authority for the proposition that a tax concession is a return benefit reducing the charitable contribution deduction.  It would probably take an Oppenheimer to figure out the total contribution if we treated every tax concession as a return benefit.  I'm no Oppenheimer, but I imagine the deduction would always be zero once the math is all said and done.  Except the regulation applies to the benefit received from a state or local government, not a federal tax benefit under 170.  

The district court relied on Chevron deference to uphold the regulation as a reasonable interpretation of an allegedly ambiguous state.  But we all know what happened later last summer to Chevron deference.  So the three States have a pretty good shot on appeal, now that Cheron deference is a relic of history. I expect a remand, if not a complete reversal.  Here is the introduction to their opening brief before the Second Circuit Court of Appeals:

INTRODUCTION

For more than 100 years, Congress has sought to incentivize charitable giving by offering a tax deduction for charitable contributions. In reliance on this deduction, over 30 States developed numerous programs offering tax credits to taxpayers who donated to qualifying organizations. Taxpayers, in turn, have been entitled to deduct the full value of their charitable contribution from their federal taxes, without having to subtract the value of any federal, state, or local tax benefits they had received for the contribution. Courts had upheld this practice, as did the Internal Revenue Service (“IRS”), which long agreed the federal charitable contribution deduction need not be offset by resulting tax benefits—including state tax credits. Congress repeatedly amended the Internal Revenue Code without disturbing this understanding.

But in 2019, the IRS broke from that century-long consensus. Departing from its prior understanding of the federal charitable deduction, the agency for the first time published a rule requiring taxpayers to subtract credits they receive against state and local tax (“SALT”) liability from their federal charitable contribution deduction. See Contributions in Exchange for State or Local Tax Credits, 84 Fed. Reg. 27513 (June 13, 2019) (“Final Rule”). That departure undercut the financial incentives that taxpayers had to contribute to States’ charitable tax credit programs, and its results were striking and predictable. In the wake of Congress’s decision to cap the SALT deduction, Connecticut, New Jersey, and New York enacted statutes that allowed residents to receive substantial tax credits when they make contributions to public funds. But contributions to New York’s fund ground to a halt once the Final Rule issued. Seeing the writing on the wall, localities in New Jersey and Connecticut abandoned plans to establish similar funds. The Final Rule thus deprives all three States of tax revenues they would otherwise put to public use, including supporting education and health care services. The U.S. District Court for the Southern District of New York (Gardephe, J.) agreed that at least one State had standing to challenge the Final Rule, but rejected the States’ challenges to the rule on the merits. This Court should reverse.

First, the Final Rule is contrary to Section 170 of the Internal Revenue Code, the federal provision governing charitable deductions. Section 170 requires the IRS to “allow[] as a deduction any charitable contribution,” which Congress defined as a “contribution or gift to or for the use of” qualified entities, including to “State[s]” and their “political subdivision[s].” 26 U.S.C. § 170(a), (c). Nowhere in Section 170’s text did Congress disclaim an otherwise-qualifying contribution when a donor received a tax benefit, including in the form of a tax credit. For good reason: as this Court has previously explained, “[i]f the motivation to receive a tax benefit deprived a gift of its charitable nature under Section 170, virtually no charitable gifts would be deductible,” as the federal charitable deduction itself provides such an incentive. Scheidelman v. C.I.R., 682 F.3d 189, 200 (2d Cir. 2012). The district court erred in simply deferring to the IRS’s interpretation of Section 170, and the court failed to ask whether the IRS’s construction is in fact the “best” reading, Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2266 (2024). It is not: whatever the merits of the IRS’s policy goals, the Final Rule is inconsistent with Section 170’s text.

Second, the Final Rule is arbitrary and capricious. It distinguishes state tax credits, which are not deductible, and state and federal tax deductions, which are, even though credits and deductions reflect similar benefits that incentivize charitable giving. It also exempts donors from accounting for tax credits that do not exceed 15 percent of the underlying contribution—meaning a taxpayer who makes a donation triggering a state tax credit worth 15 percent may fully deduct that contribution, and need not subtract any of the credit’s value, while the very same taxpayer who makes a contribution yielding a tax credit worth 16 percent must subtract that credit’s entire value. The Final Rule attempts to muster policy justifications for these distinctions, but never explains how to square its approach with the statutory text. Because the Final Rule is inconsistent with the best reading of Section 170, and because the IRS’s explanations for the Final Rule’s distinctions fall short, this Court should reverse.

darryll k. jones

Zelinsky on Nonprofit Hospitals

From the Lown Institute

Zelinsky has commentary this morning about two state property tax cases that point to the "taxable future of nonprofit hospitals."  His commentary follows-up on his Virginia Tax Review article last year in which he concludes that there is no justification for exempting "nonprofit" hospitals from tax.  Here is the Introduction:

I. Introduction

In Brookdale Physicians’ Dialysis, the New York Court of Appeals upheld the taxability of real property that a nonprofit corporation leased to a for-profit corporation performing dialysis services. In Backus Hospital, Connecticut’s Supreme Court similarly upheld the taxability of personal property owned by a nonprofit hospital and used to operate a freestanding rehabilitation center.

These decisions are important statements by two states’ highest courts on their respective states’ statutes governing real estate tax exemptions. But these decisions have broader significance, as well: They point to a long-term future in which most hospitals are taxed. Hospitals today, including most nonprofit hospitals, are commercialized businesses, indistinguishable in their operations from for-profit medical providers, which are taxed. Businesses should pay tax to fund the public overhead that makes their activities possible. As these two cases illustrate, the line between exempt hospital property and taxable medical services property is artificial and arbitrary. The operations of nonprofit hospitals are heavily commercial in nature. There is no convincing basis for distinguishing today’s nonprofit hospitals from their for-profit competitors or from other for-profit medical services providers for tax purposes. As the latter are taxed, so should be the former.

This article first discusses the New York court’s opinion in Brookdale Physicians’ Dialysis. It then reviews the Connecticut court’s decision in Backus Hospital. The final section highlights the deeper significance of these decisions. In the long run, the tax-exempt status of nonprofit hospitals is not justifiable. The businesslike activities of contemporary nonprofit hospitals are indistinguishable from the commercial operations of for-profit hospitals and other for-profit medical providers. In today’s world, all these commercialized medical services providers should pay tax like other businesses do. Brookdale Physicians’ Dialysis and Backus Hospital signal a future in which most hospitals, for-profit and nonprofit alike, are recognized as the commercial businesses they are and thus are taxed.

darryll k. jones

 

What is the Difference Between a Church and a Religious Organization? Amici line up in Support of Catholic Charities

From the Foundation Group

Friends of the Court are lining up in support of Catholic Charities Bureau's Petition for Certiorari.  Here is a brief recap:

Wisconsin denied a religious exemption from employment taxes to the Wisconsin Catholic Charities Bureau and its charitable sub-agents (independent organizations operating under the CCB umbrella) because they were not operated "primarily for religious purposes." CCB sought exemption from Wisconsin's unemployment tax but the Wisconsin Supreme Court ruled that Catholic Charities Bureau is not churchy enough.  This, even though the Wisconsin Diocese controls and operates the CCB, and all separate organizations under CCB's general supervision are required to comply with CCB guidelines.  Those guidelines don't require adherence to or preaching of Catholic doctrine but merely that sub-agents practice good altruism, such as serving all comers without discrimination.  None of the guidelines require the separate CCB-approved and loosely controlled agents to proselytize.

The lower courts ruled that neither the CCB nor the subagents were operated for "primarily for religious purposes" within the statute's intended meaning because they didn't preach, teach or otherwise proselytize.  The Wisconsin Supreme Court, affirmed explaining that operating "primarily for religious purposes" means organizations federal law considers churches.  Plain old "religious organizations" don't get "church" status for purposes of Wisconsin's unemployment tax exemption.  At best, CCB and the organizations might just be considered "religious organizations" under federal law.  Religious organizations don't get extra special dispensation under federal tax law that churches get.  

So far there are 8 amicus briefs supporting the cert petition from a wide variety of groups, including The Catholic Conferences of Illinois, Iowa, Michigan and Minnesota, the Wisconsin State legislature, a group of Religious Liberty Scholars, the Wisconsin Catholic Conference, the Jewish Coalition for Religious Liberty, the Lutheran Church Missouri Synod,  the National Association of Evangelicals, Hands for Kids After School Ministry, The Ethics and Religious Liberty Commission, the Minnesota-Wisconsin Baptist Convention, The Islam and Religious Freedom Action Team, the International Society for Krishna Consciousness, and the Sikh Coalition.  There are more friends than briefs because some of the amici submitted joint briefs.  There are too many to read carefully so I picked one -- the Krishnas' joint brief with the Sikh Coalition -- and only skimmed the argument summaries of the others.  The common theme is that by defining "religious organizations" narrowly to exclude organizations that do not teach, preach or proselytize, the Wisconsin Supreme Court impermissibly intrudes on religious practices and discriminates against certain religions:

The Wisconsin Supreme Court’s decision authorizes a sweeping government intrusion into the religious sphere—empowering government tribunals to scrutinize the religious nature of an institution’s activities and disadvantaging minority religions in the process.  The lower court’s decision thus cannot be reconciled with the First Amendment’s fundamental protections against government interference in religious activities and beliefs. To make matters worse, the Wisconsin Supreme Court required courts to pass judgment on the religious character of an organization’s activities even in circumstances where, as here, a court has already determined that the organization has a sincere religious motivation for undertaking those activities. This Court should grant review to prevent this erosion of fundamental First Amendment protections.  

The problem, it seems to me, is that when a legislature grants special dispensation to organized worshippers -- whether it calls them "religious organizations" or "churches" -- it must necessarily define the universe of eligible organized worshippers.  Otherwise, the dispensation must be provided to all who assert a spiritual motivation.  So long as the legislature defines organized worshippers by reference to  objective content neutral criteria ("we don't care what you teach, preach or proselytize, but you must at least do that much"), it should not be unconstitutional to limit the dispensation to organizations that fit the definition.  What am I missing here?

Two other points:  The first is a pragmatic one.  The Wisconsin Legislature filed an amici brief when it can resolve the issue by simply overruling the Wisconsin Supreme Court's narrow statutory interpretation of "primarily for religious purposes."  Wisconsin can change the statutory definition so that it includes all spiritually motivated or religiously controlled organizations even if they don't preach, teach, or proselytize.  I don't know whether "the Wisconsin State Legislature" means all the legislators or a simple majority but it seems to me the better and quicker option would be to just amend the law. 

Second, if a legislature cannot define that which is a "church," as does the federal law (quite loosely, of course, and only be silent acquiescence at best), the only option would be to grant special dispensation to all organizations claiming spiritual motivations, or to none at all.  If the Court were to rule that a legislature can grant tax exemption to organized worshippers, but may not define organized worshippers in any sort of exclusive manner that does not pass judgement on the religion, the legislature is in a quandary.  

Here are the Amicus briefs:

1. Catholic Conferences of Illinois Iowa Michigan and Minnesota
2. Wisconsin State Legislature
3. Religious Liberty Scholars
4. Wisconsin Catholic Conference
5. Jewish Coalition for Religious Liberty
6. Hand Club for Kids After School Ministry
7. The Lutheran Church Missouri Synod, The National Association of Evangelicals, The Ethics and Religious Liberty Commission, the Minnesota=Wisconsin Baptist Convention, the Islam and Religious Freedom Action Team
8. International Society for Krishna Consciousness and the Sikh Coalitions

Amici are all more knowledgeable than I am about religious liberty, about that I am sure.  But I am not so sure they have sufficiently thought through the ramifications of the notion that government cannot define, by content neutral criteria, the universe of "organized worshippers" to whom it grants tax benefits.

darryll k. jones

   

 

Anti-NGO Laws and Other Tools of Democratic Repression

 

Yesterday, the Senate Foreign Relations Committee heard from three witnesses regarding "Anti-NGO Laws and Other Tools of Democratic Repression."  The three witnesses were Douglas Rutzen, Yaqiu Wang, and Eka Gigauri.   You can watch the one hour and forty five minute hearing above.  You can also read Rutzen's prepared statement here, Wang's prepared statement here, and Gigauri's statement here.  Here is an excerpt from media coverage: 

According to Freedom House, global freedom has declined for 18 consecutive years. Seventy-one percent of the world’s population – 5.7 billion people – live in autocracies. Some say the world is witnessing a “democratic recession,” but many countries have already entered a new phase: the Great Repression, Douglas Rutzen, President and CEO, of the International Center for Not-for-Profit Law declared during the Committee Hearing of Anti-NGO Laws and Other Tools of Democratic Repression.  A representative of Georgia’s civic society said U.S.  sanctions should target individuals undermining democracy and serving Russian interests, not the people of Georgia, whom America supports. “Autocrats fear the loss of control, and this ensures opposing ideas are neither seen nor heard. The United States must do more to combat this trend”, U.S. Senator Jim Risch said.As a tool of repression, governments are enacting legislation to restrict civil society, including human rights groups, development organizations, religious organizations, and chambers of commerce. In doing so, governments undermine freedom, peace, and prosperity, Douglas Rutzen, President and CEO, of the International Center for Not-for-Profit Law said.  According to ICNL data, 72 countries have introduced more than 270 legal initiatives restricting civil society over the past five years. Governments are converting the rule of law into the rule by law. They are using legislation to consolidate power, control civil society, and constrain civic freedom.

darryll k. jones

Pennsylvania Supreme Court Oral Argument re: Nonprofit Incentive Compensation and Revenue Sharing

Click here to listen to the oral argument starting around 3:12:00

On Tuesday, the Pennsylvania Supreme Court heard fascinating, instructive and probing oral arguments in Pottstown Sch. Dist. v. Montgomery Cnty. Bd. of Assessment Appeals.  That case considers whether Tower Health, a nonprofit hospital, forfeited property tax exemption because it set executive compensation in part by reference to the hospital's financial performance.  Forty percent of the hospital's executive salaries was determined by reference to the hospital's net revenues.  The Commonwealth Court, finding that some of those hospital executive salaries were "eye-popping,"  affirmed the denial of property tax exemption. 

The Pennsylvania Supreme Court had to determine whether the hospital's incentive compensation plan rendered the hospital ineligible for charitable property tax exemption.  Both sides made compelling arguments and at least one justice focused on whether reasonable compensation may be defined by reference to salaries paid by similar market participants, for profit and nonprofits alike. That approach is consistent with federal tax exemption law.  Another justice focused on whether incentive compensation resulted in private inurement, per se (the court didn't use federal tax exemption lingo). The taxing authority argued that compensation based on revenues automatically precludes charitable tax exemption, even if the amount paid would be reasonable if it were a fixed salary.  That argument harkens back to federal law prior to the adoption of IRC 4958, which allows for the possibility that revenue sharing could be consistent with federal income tax exemption under regulations issued by the Treasury.  But Treasury has never issued regulations that address whether revenue sharing is permissible for federal tax exemption.  

It's a really good back and forth between the justices and the advocates.

darryll k. jones 

 

Ways and Means Completes Mark-Up of Terrorist Tax Exemption Revocation Bill

Yesterday, Ways and Means completed its mark-up of the Stop Terror-Financing and Tax Penalties on American Hostages Act (H.R. 9495), Section 4 of which expands Treasury's authority to revoke tax exemption for organizations that provide material support to terrorist organizations.  The bill passed Ways and Means by a vote of 38-0, an indication that  the bill has bipartisan support.  The Council on American-Islamic Relations immediately issued a statement urging the full House to reject the bill:

The Council on American-Islamic Relations (CAIR) is calling on the U.S. House of Representatives to reject the advancement of a bill that would allow any future administration’s Secretary of the Treasury to revoke the nonprofit tax status of religious and advocacy organizations without justification, charges or due process.

TAKE ACTION: URGE CONGRESS TO OPPOSE ANTI-NONPROFIT TAX BILL H.R. 9495

Today, the House Ways and Means Committee during a mark-up hearing voted to advance H.R. 9495, misleadingly titled the “Stop Terror-Financing and Tax Penalties on American Hostages Act.” This bill grants the Secretary of the Treasury excessive discretionary power to strip the tax-exempt status of nonprofits based on subjective determinations that they are “terrorist-supporting organizations.” 

While CAIR acknowledges that Representatives Lloyd Doggett (D-TX) and Don Beyer (D-VA) expressed concerns about the act’s harmful impact on due process during the committee’s markup of H.R. 9495, it was disappointing to see both ultimately join their Democratic colleagues in voting to support the bill. Yesterday, CAIR sent a private letter to members of the committee recommending they “oppose H.R. 9495 in its current form” and “at a minimum” “the harmful language of H.R. 6408 be removed from the larger bill.”

CAIR supports the primary goal of H.R. 9495—to postpone tax deadlines and reimburse late fees for U.S. nationals wrongfully detained or held hostage abroad. However, the legislation is tainted by a provision allowing for the termination of nonprofit tax status, which draws from the text of H.R. 6408 and S. 4136. These companion bills, introduced earlier this year, represent a deliberate attempt to stifle criticism of Israel and advocacy for Palestinian human rights.

In May, CAIR joined 135 civil liberties, human rights, community, faith, and privacy organizations in a letter to the U.S. Senate Committee on Finance opposing S. 4136. The letter raised several concerns, including:

• • Broad Discretionary Powers and Potential for Abuse: The bill would grant the Secretary of the Treasury broad powers to revoke the tax-exempt status of nonprofits based on subjective determinations of being “terrorist-supporting organizations.” Without sufficient accountability, this power could be misused by any administration to arbitrarily target organizations, especially in an increasingly polarized political environment.
  • Threat to Free Speech and Legitimate Advocacy: The proposed legislation poses a serious threat to free speech, as it could be used to target organizations advocating for politically sensitive issues. Recent attempts by state governors and universities to suppress Jewish and Palestinian advocacy groups underscore the dangers of such unchecked powers. The inclusion of provisions aimed at silencing criticism of Israel and advocacy for Palestinian rights, especially in light of ongoing humanitarian crises in Gaza and the West Bank, is particularly concerning. Codifying this bias would institutionalize prejudice and undermine America’s commitment to human rights and equality.
  • Due Process and Legal Concerns: The bill would allow the use of “classified information” to designate organizations as “terrorist-supporting,” without permitting them to review or challenge this evidence in court. This lack of transparency is a violation of due process and mirrors the problematic federal terrorism watchlists, which have been criticized for their arbitrary and opaque nature.
  • Existing Legal Framework: Laws already exist to address the financing of terrorism, including the Antiterrorism and Effective Death Penalty Act of 1996 and the International Emergency Economic Powers Act (IEEPA), both of which prohibit designated entities from claiming tax-exempt status. Additional legislation is unnecessary and increases the risk of abuse and legal challenges.

CAIR remains committed to challenging this legislation in all its iterations and forms, and will continue to advocate for the protection of nonprofit organizations’ rights to free speech, due process, and equal treatment under the law.

darryll k. jones

Study: Some Nonprofit Workers Live in Poverty, Struggle Financially

Writing in TheNonProfitTimes, Paul Clolery reports on a 2022 study conducted by United For Alice and Independent Sector. United For Alice is a U.S. research organization, led by United Way of Northern New Jersey, that drives innovation, research and action to improve life across the country for ALICE(R) (Asset Limited, Income Constrained, Employed) and for all. Independent Sector is a coalition of nonprofit organizations, foundations and corporate giving programs in the United States. Founded in 1980, it is the first organization to combine the grant seekers and grantees. The study, titled “ALICE in the Nonprofit Workforce: A Study of Financial Hardship,” reveals that more than one in five nonprofit employees (22%) live in poverty and struggle financially. 

According to the study's findings:

Among nonprofit workers in 2022, 5% were below the official U.S. poverty level, and another 17% qualified in the category of ALICE®. ALICE nonprofit employees live in households that earn more than the federal poverty level, but less than what it costs to survive in the counties where they live. They cannot afford the basics: housing, childcare, food, transportation, healthcare, technology and taxes.

ALICE households include those employed by nonprofits and otherwise. Those in poverty represented 42% of all households across the United States in 2022. For example, the federal definition for poverty is $18,310. The ALICE Household Survival Budget gives three distinct examples of costs for a two-person household (a single adult and a school-age child) in three counties. These examples illustrate the cost of basics below the national average (El Paso County, Texas, $40,032), near the average (Franklin County, Ohio, which includes Columbus, $46,932), and above the average (Alexandria City, Virginia ($71,436).

To determine a nonprofit worker’s financial status, the Household Survival Budget for that worker’s county is compared to the worker’s total household income as reported in the U.S. Census Bureau’s American Community Survey’s Public Use Microdata Sample.  

Commenting on the study's findings, Independent Sector President and CEO Akilah Watkins, Ph.D., stated: “The nonprofit sector is fundamental to American society, delivering vital services and resources to those who need them most. Yet it is deeply troubling that so many of our own nonprofit workers – those who dedicate their lives to supporting others – are themselves facing financial hardship." Dr. Watkins continued: "This groundbreaking study gives us both a starting point and a call to action. We must find data-informed solutions, whether through policy or practice, to meet the needs of nonprofit workers who are struggling financially. Investing in the health of our workforce is essential, because it takes a thriving and well-equipped workforce to drive meaningful and sustained change in our communities and our nation.”

According to the study:

Among the 13.9 million nonprofit workers, there were substantial differences in financial hardship by industry sector. The largest industry sector in 2022 was healthcare, with 4.9 million nonprofit employees. Most industry sectors had fewer than 400,000 nonprofit employees. Among the nine largest industry sectors, rates of financial hardship for nonprofit employees varied from 16% in both the healthcare and the finance and insurance industry sectors to 42% in retail trade.

“Nonprofit workers in the social services sector take care of our most vulnerable citizens, including seniors and children. Yet, one-third (32%) of social service workers cannot make ends meet and take care of their families. That stress and uncertainty impacts the health and well-being of our communities and economy overall,” said Kiran Handa Gaudioso, CEO of the United Way of Northern New Jersey and president of United For ALICE.

The study reveals that in 2022, almost half (45%) of the nonprofit workforce was aged 25 to 44, followed by 38% aged 45 to 64. These two groups, in their prime working years, had the lowest rates of hardship: 23% of workers aged 25 to 44 lived in households with income below the ALICE threshold, as did 17% of workers aged 45 to 64. The youngest nonprofit workers, younger than age 25, had the highest rate of financial hardship at 37%. Nonprofit workers aged 65 and older made up 9% of the workforce with 22% below the ALICE threshold.

Of those 65 and older, 2% were considered in poverty based on salary and benefits; 19% were within the ALICE threshold. Stephanie Hoopes, Ph.D., national director, United For ALICE and chief research and impact officer of United Way of Northern New Jersey, stated: “The ALICE analysis is only of current workers; volunteers are not included. The lower percent of 65+ workers (5% for the overall population) below the ALICE threshold is likely because they are receiving social security benefits. But interestingly, even with their nonprofit salary it was not enough to get 19% above the ALICE threshold."

Surely, this is a chilling revelation of the plight of nonprofit workers, people who take care of our most vulnerable citizens, including seniors and children.  

Prof. Vaughn E. James, Texas Tech University School of Law

  

Fearless Fund Settles

From a press release issued by American Alliance for Equal Rights today:

American Alliance for Equal Rights Concludes Lawsuit Against the Fearless Fund's Black-Only "Strivers Grant Contest."

AUSTIN, Texas, Sept. 11, 2024 /PRNewswire/ — The American Alliance for Equal Rights (AAER) entered into a settlement agreement with the Fearless Fund over the Fund’s black-only Strivers Grant Contest which AAER challenged in federal court on August 2, 2023.  The U.S. Court of Appeals for the Eleventh Circuit ruled on June 3, 2024, that the Grant Contest likely violated 42 U.S.C. §1981 which guarantees all Americans the same right to contract, thus protecting the equal rights of all persons to make and enforce contracts without respect to race.

As of today, the Fearless Fund has permanently closed the grant contest and will never reopen it.  Edward Blum, president of AAER said, “The American Alliance for Equal Rights encouraged the Fearless Fund to open its grant contest to Hispanic, Asian, Native American and white women but Fearless has decided instead to end it entirely.”

Blum added, “Race-exclusive programs like the one the Fearless Fund promoted are divisive and illegal. Opening grant programs to all applicants, regardless of their race, is enshrined in our nation’s civil rights laws and supported by significant majorities of all Americans.”

AAER will not be disclosing any information about legal fees.

Read the Stipulation of Dismissal here. For press coverage, see Wapo and the Associated Press. For our prior blog coverage see here and here.

darryll k. jones

Schmalbeck on IRC 7428 Declaratory Judgements

Schmalbeck is out with an excellent report about tax exemption in Tax Notes this week.  He explores the boundaries of tax exemption by use of a comprehensive catalog of all IRC 7428 decisions to date.  Appendix A, nearly 20 pages, collects the cases from 1977 (the year 7428 became effective) to the present, including Memorial Hermann about which we blogged just a few days ago. There are 195 cases and Schmalbeck offers interesting demographics along the way.  For example, only about 20% of the cases overturned an adverse IRS ruling, but litigants enjoyed a higher success rate (45%) in the Court of Claims than in the Tax Court or the federal district court.  Appendix B is 35 pages long, arranges the cases by alphabetical order, and summarizes the controversy and the court's holding in each controversy. 

Private inurement, private benefit and church status compose most of the issues.  The Report doesn't just curate, it offers observations  to indicate trends of one sort or another.  For example, Schmalbeck tells us why Americans United for Separation of Church and State, about which we blogged today coincidentally, was the real "poster child" proving the necessity of IRC 7428.  It wasn't Bob Jones, which was able to get judicial review through an employment tax refund claim.  IRS denied (c)(3) status to Americans United but granted (c)(4) status.  That Americans United would never owe taxes complicated its ability to obtain judicial review.  Here is part of the Introduction:

The boundary of greatest interest in the field of federal nonprofit law is the one that defines a charitable organization for purposes of section 501(c)(3). It has several dimensions: Is the organization’s purpose within the statutory definition of charitable? Are its operations consistent with public policy? Are the operations of the organization free (enough) of private inurement or benefit, lobbying, campaign participation, and commerciality?

Unfortunately, as anyone who has taught or practiced the law in this area knows, charity is not a crisp legal concept. Each of its dimensions is more like a doughnut than a bicycle tire, offering robust opportunities for dispute. Indeed, were it not the case that the majority of fledgling, would-be charitable organizations have only limited resources to see their disputes through to their conclusions, one imagines that the courts would be flooded with cases that seek to elaborate on the precise location of the boundaries along each dimension of “charitable.” Even so, there are many litigated disputes. This report is constructed primarily around the disputes about exempt status that have been decided under section 7428, which offers organizations an opportunity to seek a declaratory judgment to the effect that, despite IRS views to the contrary, they merit section 501(c)(3) status. Because cases brought under section 7428 are easily searchable, a reasonably comprehensive collection of these cases is available for systematic study. Other cases, as well as rulings, examples in the Treasury regulations, and other materials are also available and are referred to below when useful.

Following a brief summary of the history and operation of section 7428, this report looks at what the cases decided under that section reveal about the locations of the several boundaries surrounding the concepts that collectively define the nature of charity for federal tax purposes. It also offers some observations about the administrative process implications of cases that do not produce litigated disputes.

Nice work.  I would especially recommend downloading the appendices.  

darryll k. jones

"Neither Church nor State Would Benefit:" Americans United Argues Against Invalidating the Johnson Amendment

Americans United for Separation of Church and State argues that churches are free to talk all they want about political issues, just not candidates who take stands on those political issues.  They are saying that the Broadcasters and Three Churches don't have anything to complain about.  I'm not so sure.  The Broadcasters and Three Churches argue that (1) they don't want to explicitly endorse or oppose anybody, (2) they just want to talk about political issues from a Biblical standpoint without fear of losing tax exemption.  Yeah, let's not be stupid.  They want to endorse without naming, that's what they are worried about.  And even without calling no names, it will all be pretty obvious.  It's attractive at first, but Americans United's argument can't resolve the issue as long as you might be a violator without calling names.  Because you don't have to call no names to be violating.  Context and timing can make you a violator.  Nevertheless, if I am a judge just trying to mind my own business, I would dismiss this case on mootness and standing.    

Here is Americans United's thoughtful press release:

Two Texas churches and the National Religious Broadcasters (NRB) have filed a lawsuit seeking to overturn a federal law that bans tax-exempt, 501(c)(3) organizations, which includes houses of worship, from intervening in partisan politics by endorsing or opposing candidates.

This lawsuit, filed in a federal court based in Texas, is an audacious gambit that should be swiftly rejected.

The law in question, known as the Johnson Amendment, protects the integrity of our elections by ensuring that tax-exempt organizations stay focused on their missions, which is usually charitable, spiritual or public policy work, not partisan politics. If the churches in Texas and the NRB, which has espoused Christian Nationalist views, want to engage in partisan politics, there are appropriate vehicles for that. Allowing tax-exempt entities to jump into partisan electioneering, and even funnel money to candidates, would create a huge loophole in our nation’s campaign finance laws.

Americans reject pulpit politicking

In addition, the American people don’t want this. Polls are crystal clear: Americans oppose pulpit politicking. A poll released in November of 2022 by the Pew Research Center found that 77% of respondents said they oppose partisan politicking in America’s houses of worship.

In a statement supporting the lawsuit, Troy A. Miller, the NRB’s chief executive officer, misconstrued the parameters of the Johnson Amendment.

“We believe,” Miller asserted, “that all nonprofits should have the constitutional right to freely express their point of view on candidates, elections and issues on the ballot. Our challenge to the Johnson Amendment is about securing the future of free expression for all Americans, particularly those standing in the pulpit.”

Issue advocacy is protected

But nonprofit groups, including houses of worship, already have the right to express their views on political issues. The Johnson Amendment applies only to races between candidates. Thousands of secular nonprofits follow this rule with no problems. There’s no reason why churches can’t do the same.

The Internal Revenue Service (IRS) is charged with the task of enforcing the Johnson Amendment. It’s true that the agency isn’t particularly aggressive in making sure the law is followed. And while the majority of American religious leaders abide by the Johnson Amendment, every election season, we do see a few violations. (Here’s an example from May 2022.)

The answer here is for the IRS to enforce the law, not to abandon it. If the lawsuit were to succeed, it would have profound and overwhelmingly negative effects on our political system.

Neither church nor state would benefit.

darryll k. jones

AmeriCorps Opens Federal Grants Competition

AmeriCorps, the federal agency for service and volunteerism, has announced that the 2025 State and National Grants Competition is now open for applications from organizations who wish to host AmeriCorps members beginning in the summer of 2025.

In announcing the competitive grants, AmeriCorps stated that

For this funding opportunity, AmeriCorps will prioritize consideration from organizations that:

Serve Communities

• Serve communities with concentrated poverty, rural communities, tribal communities, and historically underrepresented and underserved individuals. These may include people of color, immigrants, refugees, people with disabilities, LGBTQIA+ individuals, people with arrest or conviction records, religious minorities, etc.;
• Implement programs for or expand access to high-quality youth mental health and substance use recovery services and prepare AmeriCorps members to enter behavioral health careers. These may include individuals with lived experience with substance use and mental health challenges to support youth mental health efforts and continued AmeriCorps work on the opioid epidemic;
• Focus on improving the quality of life for veterans, active-duty members of the Armed Forces, and their families by recruiting veterans, military spouses, and their older children into national service; 
• Promote environmental stewardship to help communities (especially underserved households and communities) to be more resilient by reducing greenhouse gas emissions, conserving land and water, increasing renewable energy use and improving at-risk ecosystems; and
• Support civic bridgebuilding programs and projects to reduce polarization and community divisions; and providing training in civic bridgebuilding skills and techniques to AmeriCorps members.

Benefit AmeriCorps Members

• Provide benefits to AmeriCorps members aimed at enhancing member experience and bolstering member recruitment and retention such as paying more than the minimum living allowance, transportation, housing, food, etc.;
• Create workforce pathways for AmeriCorps members, including deliberate training, certifications, and hiring preferences or support;
• Enhance and expand services to second chance youth and/or engage those youth as AmeriCorps members; and
• Develop and train the next generation of diverse public health leaders through service while addressing pressing community health challenges. Review Public Health AmeriCorps Priority in the Mandatory Supplemental Information for eligibility information.

Use Evidence

• Utilize reports from the AmeriCorps Evidence Exchange on programs assessed as having Moderate or Strong evidence to scale, replicate, or adapt the intervention.

Faith-Based

• Organizations that are faith-based.

American Climate Corps 

Applicants may propose projects to be affiliated with the American Climate Corps (ACC), which is a federal government national service and workforce development initiative focused on training young people for the clean energy and climate resilience workforce.

Applicants who are interested must demonstrate that their project funds ACC eligible positions meeting the following criteria:

• The position has verifiable climate or environmental impact.
• The position is temporary (term-limited), and the term length is at least 300 hours.
• The position includes skills-based training as part of the program and provides a pathway to employment.
• The position must receive a living allowance and, in some cases, may receive additional member benefits.

To receive priority consideration, applicants must show the priority area is a significant part of the program focus and intended outcomes. Priority consideration does not guarantee funding.

The application deadline is 5 p.m., Thursday, January 23, 2025. Successful applicants will likely be notified by mid-April 2025. Funding will be released in July.

Prof. Vaughn E. James, Texas Tech University School of Law

 

National Catholic Reporter Names Wall Street Journal's James Grimaldi as Executive Editor

Today's edition of Religion News Service (RNS) is reporting that after being without a top editor for more than a year, the National Catholic Reporter, the 60-year-old, left-leaning Catholic media outlet, announced that James V. Grimaldi, a senior writer at The Wall Street Journal, has been named executive editor. 

According to RNS:

Grimaldi, 62, is set to begin work Sept. 16, filling a position that has been vacant since August of 2023, when Heidi Schlumpf stepped down after four years in the role, becoming a senior correspondent. Grimaldi will report directly to Joe Ferullo, the newspaper’s CEO and publisher.

In an arrangement in step with the technology-aided dislocations of modern journalism, Grimaldi will oversee the editorial operation of NCR, which is headquartered in Kansas City, from Washington, where the newspaper has offices in the historic Methodist Building on Capitol Hill. Ferullo, a retired television executive, works from Los Angeles. 

RNS reports that in a statement about Grimaldi's appointment, Ferullo stated:

James is dedicated to NCR’s mission; he will elevate and expand NCR’s excellent journalism at a pivotal moment in the history of the Catholic Church. All of us at NCR — including our readers — look forward to his extraordinary editorial leadership in this exciting and decisive time.

What do we know about Grimaldi? RNS has this to share:

In a long career that began at the San Diego Tribune, Grimaldi has become known for his accountability and investigative reporting. In more than two decades covering politics and governmental affairs at the Washington Post and the Journal, he reported on corruption by federal judges and government officials.

Grimaldi has received three Pulitzer Prizes for his investigative work. In 1996, he contributed to a Pulitzer win for the Orange County Register, reporting on unethical fertility practices by a research university. In 2006, he received a Pulitzer with two colleagues for an investigation of the Jack Abramoff lobbying scandal. In 2023, while at the Journal, he won another for exposing conflicts of interest among several federal employees.

RNS also shares the following information about NCR:

With a staff of 40, NCR draws a million readers to its website monthly and publishes 26 print issues each year. Catholics’ options for reading about their faith and its institutions have shrunk in recent years. Diocesan newspapers, once considered essential guides to the thinking of local bishops and the national church, have in many places disappeared. In late 2022, the U.S. Conference of Catholic Bishops shuttered domestic operations of its Catholic News Service, which now maintains only its Vatican bureau. 

NCR has been a supporter of Pope Francis, and under Schlumpf was known to criticize U.S. Catholic bishops for what the paper’s editors regarded as politically motivated decisions on topics such as denying Communion to pro-choice Democratic politicians.

From the 1980s onward, the paper was pivotal in leading the Catholic Church to confront the sexual abuse scandal, first reporting not only on abusive priests but on the U.S. bishops’ cover-up in June 1985. The news outlet has also covered mismanagement of diocesan funds and the impact of conservative donors on the U.S. church.

With the 2024 Presidential Election a few weeks away, we wonder what impact Grimaldi's appointment to the position of executive editor will have on NCR and on Roman Catholic voters. Time will tell. 

Prof. Vaughn E. James, Texas Tech University School of Law

 

Tax Deductible Dark Money?

Tax law will grant charitable contribution deductions for dark money if two of three things happen.  Or just one thing happens.  The one thing that could create tax deductible dark money is a Court declaring the Johnson Amendment unconstitutional as applied to churches. Churches don't file 990s so political dollar donations to churches will necessarily be dark.  But the complaint in Religious Broadcasters and Three Churches seeking that declaration is problematic and should not survive a standing challenge.  We could still have tax deductible dark money if a Court rules that the (c)(3) donor disclosure requirements are unconstitutional, and another Court declares the Johnson Amendment unconstitutional on its face.  The Buckeye Institute and SAFESPACE complaints, both well written, are more likely to bring about deductible dark money donations. 

There are self-help ways, I suppose, of getting charitable contribution deductions for dark money donated to influence elections.  Donating to a DAF that then makes grants to a (c)(4) engaged charitable activity, but also campaign intervention might work.  Funding a (c)(4) 's activities consistent with the (c)(3) donor's charitable purposes "frees up" a (c)(4)'s un-deducted contributions for campaign intervention.

A reporter asked me last week whether I thought a court's declaration that the Johnson Amendment is unconstitutional would open the flood gates for tax-deductible dark money.  Here is the hook to her resulting article:

A new lawsuit pushed by conservative operatives with ties to Donald Trump, right-wing power broker Leonard Leo, and a hate group could make donations to dark-money groups tax deductible. Such an outcome could further incentivize the massive surge of dark money flowing into politics, where there are already no limits on how much the rich and powerful can spend to influence elections. 

Currently, most dark-money donations flow through 501(c)(4) groups, or “social welfare” organizations, since these nonprofits are allowed to engage in political activities. While these donations are considered “dark” because their origins can remain secret, they are not tax-deductible. On the other hand, donations to charitable, religious, educational, and scientific groups that qualify as 501(c)(3) nonprofits are tax deductible — but these organizations are generally not allowed to dabble in politics.

Overturning the Johnson Amendment would indeed render political donations to churches dark and deductible because churches are not required to file information returns.  Political donations to non-church religious organizations and secular charities could also be dark and deductible, but only after a ruling overturning the (c)(3) donor disclosure requirement.  And that ruling seems only a matter of time.  The Buckeye Institute is winning right now  because a lower court determined that the "exacting scrutiny" standard applies to determine whether the Service can require disclosure of (c)(3) donors.  The ruling is pending interlocutory appeal, but there isn't much to support the notion that a standard more deferential to that applied in Americans for Prosperity Foundation v. Bonta should apply. And when SAFESPACE refiles, it won't have the standing problem that the Broadcasters and Three Churches have.  

darryll k. jones

    

Did LBJ Solicit Johnson Amendment Violation Two Weeks After Passage?

 

We have been critical of the extraneous discrimination allegations in the National Religious Broadcasters and Three Churches complaint filed last week seeking to invalidate the Johnson Amendment.  It's really religious broadcasters, two churches and some other Bible thumpers but that would be an awkward case title.  Anyway, all that stuff about TE/GE enforcing the campaign intervention prohibition against conservative churches whilst turning a blind eye to progressive churches is just plain stupid. If anything, and if they know what's good for them, TE/GE whistles past both graveyards alike.  By the way, I said last week that the Broadcasters and Three Churches might just win if they can prove standing but only after the Court waded through all the grievance politics unnecessarily included in the complaint.  I have thought about it more.  I don't think even a forum-shopped Texas judge is dumb enough to find standing.  But then again, standing seems so much easier to prove to judges itching to get in on social debates these days.

Mike Farris, National Religious Broadcaster's General Counsel, was on TV last week and repeated those same ridiculous assertions about discrimination in favor of Democratic nonprofits and churches.  He never got to whether Taxation with Representation provides a viable alternative for religious organizations. I'm starting to wonder whether they really understand their own best argument.

Farris included an interesting but unlikely anecdote about LBJ's push through and then immediate violation of the campaign intervention prohibition.  You can listen to his seven minute interview on YouTube above.  Farris asserts that Johnson passed the act to shut down a Texas nonprofit advocating against LBJ's senatorial campaign. Most of us have heard that story.  But Farris also says that within two weeks after the amendment passed, LBJ strong harmed a Protestant pastor into leading his own and other Protestant churches to publicly urge people to vote against the Catholic candidate in the Democratic primary. LBJ eventually lost to  JFK, Jr. anyway. 

I never put too much stock in conspiracy theories, to tell you the truth.  And this tall tale is likely false.  The amendment passed in 1954; LBJ and JFK, Jr. opposed each other in the Democratic Primaries in 1960, not two weeks later.  LBJ is my second favorite president. He was a walking "man vs. man" conflict.   And that story sounds like some underhanded backroom stuff LBJ would do. 

Or it might just be that LBJ never thought the prohibition would or could restrict religious speech anyway.

 

darryll k. jones

One foot on a banana peel? You're better off at a nonprofit hospital.

                                              Are Non-Profit or For-Profit Hospitals Better?

If you are really sick and almost dead, new research indicates you are better off at a nonprofit hospital than a for-profit hospital. Especially if its gonna cost a lot to save your worthless ass.  By worthless, I mean unable to contribute to a hospital's bottom line. I have not read the whole 65 page article, but check out this rather morbid abstract for a paper posted a few days ago:

We compare the effects of external financing shocks on patient mortality at nonprofit and for-profit hospitals. Using confidential patient-level data, we find that patient mortality increases to a lesser extent at nonprofit hospitals than at for-profit ones facing exogenous, negative shocks to debt capacity. Such an effect is not driven by patient characteristics or their choices of hospitals. It is concentrated among patients without private insurance and patients with higher-risk diagnoses. Potential economic mechanisms include nonprofit hospitals' having deeper cash reserves and greater ability to maintain spending on medical staff and equipment, even at the expense of lower profitability. Overall, our evidence suggests that nonprofit organizations can better serve social interests during financially challenging times. 

The authors are Janet Gao, Tim Liu, Sara Malik, and Merih Sevilir.  Here is a little more from the Introduction:

Nonprofit institutions are an indispensable part of the U.S. economy, accounting for over 20% of U.S. firms (Adelino et al., 2015). Unlike for-profit firms that seek to maximize profit for shareholders, nonprofit entities are owned by various organizations such as charities, academic institutions, religious groups, and governments, and are set up to serve a certain mission. Aside from the differences in corporate structure and objective, nonprofits also face a different set of regulations governing how they allocate financial resources compared to for-profit firms. Namely, nonprofits are tax-exempt and cannot distribute excess earnings. These regulations may affect the way nonprofit organizations manage liquidity and respond to fluctuations in external financial markets

Look, if I get really sick, take me to University Hospital, or Sisters of Mercy.  Don't take me to that fancy place.  

 

darryll k. jones

Private Benefit Precludes Social Welfare Status for Accountable Care Organization, Government Argues

The Government argued before the 5th Circuit yesterday that the private benefit doctrine precludes exemption under IRC 501(c)(4) for an accountable care organization.  You can listen to the interesting oral argument here:  Memorial Hermann v. Commissioner

It sure sounds like the judges agreed with the Government and were not persuaded by Memorial Hermann's belated argument that the private benefit is qualitatively and quantitatively incidental. They didn't use the words and didn't seem aware that there is a whole body of murky law on the issue.  That argument seemed offered only as an afterthought and only because Memorial Hermann was forced into doing so by a really skillful argument delivered by DOJ Tax attorney Julie Ciamporcero Avetta. By night, Avetta doubles as an opera singer and even sings the national anthem at Major League baseball games. An oral argument is obviously nothing to her.   

Memorial Hermann's private benefit argument should have been offered in the case in chief instead of as what appeared to be a desperate attempt to salvage a sinking boat.  What the case boils down is whether a health care organization that serves only its members qualifies for tax exemption. Membership, by the way, is a primary method for cost containment in any sort of risk pool.  It is "incidental." Hermann Memorial's attorneys didn't recognize the issue, Avetta did and she made them confront it. She declined to make their argument for them when the judges asked her to do so. She knows something, trust me. She knows that the issue boils down to whether private benefit associated with a membership requirement is intolerable.  I always thought the answer was yes for (c)(3) status, no for (c)(4).  But the Government foisted the private benefit doctrine onto (c)(4) -- that seems a first to me -- and said the private benefit precludes (c)(4) too.  Hermann Memorial didn't understand the issue and so it could hardly offer the argument I would have.  That the private benefit is qualitatively and quantitatively incidental. That is the short version of this post.  

Here is the long version.  To be a social welfare organization, an organization must promote the “common good and general welfare of the people of the community.”  Memorial Herman Accountable Care Organization is essentially a managed care organization comprising all health care participants, not just an insurance company.  It works to incentivize costs savings in health care.  The hope is that increased efficiencies in health care will lead to increased supply and lower costs.  The accountable care organization is essentially a consortium:

Accountable Care Organizations (ACOs) are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high-quality care to the Medicare patients they serve. Coordinated care helps ensure that patients, especially the chronically ill, get the right care at the right time, with the goal of avoiding unnecessary duplication of services and preventing medical errors. When an ACO succeeds in both delivering high-quality care and spending health care dollars more wisely, it will share in the savings it achieves for the Medicare program.

If the ACOs meets efficiency benchmarks set by the social security administration, “they can receive a portion of the savings,” as determined by SSA.  "ACOs are rewarded when they lower growth in Medicare Parts A and Be expenditures (relative to their benchmark) while meeting quality performance standards:"

The term ACO was originally coined by researchers and policy experts to describe entities that consist of responsibly integrated healthcare providers who all are working toward achieving a common clinical goal and outcome: efficient, high-quality patient care while utilizing a common clinical pathway that incorporates principles of treatment and therapeutic modalities in a multifaceted provider setting. There are three core Accountable Care Organizations principles:

1. Provider-led organizations with a strong base of primary care that is accountable for the quality and per capita costs

2. Payments linked to improvement in quality and reduced costs

3. Reliable and increasingly sophisticated measurement of performance to support improvement and provide confidence care is improved, and cost savings occur.

As with traditional managed care organizations, ACOs have membership requirements that preclude their gaining (c)(3) status.  That’s why most non-staff model managed care organizations are (c)(4) organizations.  The membership requirement apparently implies impermissible private benefit even when an organization subsidizes membership fees for people who can’t pay the fee.  The cases that denied (c)(3) status in favor of (c)(4) status have never required a subsidized fee program as a condition of (c)(4) status.  But that, apparently, is what the Government is arguing as its basis for denying (c)(4) status to Memorial Hermann.  By limiting its direct impact to members – never mind that the aggregate effect of ACOs is a reduction in overall health care costs to the community – the ACO is operating for private benefit. 

It has never been the case that the private benefit doctrine has been explicitly applied to deny a health care organization (c)(4) status.  During oral argument yesterday, Avetta argued just that, and it sure sounds like the 5^th Circuit panel agreed.  The petitioners didn’t really catch on and respond to the argument until its five-minute rebuttal.  When it did, it nearly got to the gist of it but it never focused on the magic words, "qualitatively and quantitatively incidental."  To achieve a public good, private actors must benefit.  Some private benefit is indispensable to achieving public good, and it is that amount of private benefit that ought to be considered permissible. We call that qualitatively and quantitatively incidental private benefit.

Memorial Hermann, not understanding private benefit at all, got distracted over arguments about whether “primary purpose” has a different meaning than “exclusively organized and operated." Semantics only lawyers would assert. I thought that was a waste of time and Avetta all but said so.  The judges appeared to agree.  So Memorial Hermann  never got to its best argument that the private benefit inherent in ACOs is qualitatively and quantitatively indispensable to promoting the common good and general welfare of the community. 

darryll k. jones

Monitoring the Efficacy of Carbon Credit Cookstove Projects

A fascinating article on carbon credits from cookstove projects ran in the print edition of the Washington Post today. Generally, cooking over open wood or charcoal fires is dangerous and environmentally harmful, and so facilitating upgrades to domestic cookstoves has been viewed as beneficial. Because of the environmental harm, selling carbon credits based on these upgrades has been viewed as a source of funding for cookstove projects designed to accomplish this goal. The majority of the article describes the failures of a specific cookstove project in Mozambique, apparently because of the faulty design of the stove itself, which was designed to be cheap and easy to repair, but was just too cheap to be functional in the area investigated.

The article is full of interesting information, not just for people interested in carbon credits, but for anyone interested in attempts to improve the world. While I don’t know much about the carbon credit market, the article caught my eye partially because I wrote an article back in 2015 about joint ventures between for-profit and nonprofit firms, and the example I chose to illustrate the risks and potential benefits was a (fictional) cookstove project in Mozambique. The article in the Post almost seems like a parable designed to illustrate the core idea behind the economic justification for the non-profit form: that when the quality of services is hard for a funder to monitor, the for-profit business form may be inefficient. Here, the funder is the purchaser of a carbon credit, and the “service” is the replacement of an inefficient cookstove with a more efficient one. Unless there is robust monitoring of the effectiveness of the replacement, the business is incentivized to cut corners. That’s not some evil greedy perversion of human relations, it’s how competition works. The article quotes the CEO of a “cookstove sensor company” as saying, “The most cynical way to think about it is, as long as I shove a stove into a lady’s house, I’m going to get the carbon credit.” If the funder just wants the credit, its going to want the least expensive credit.

One solution to that is for carbon credit purchasers to require better monitoring, for example through cookstove sensors, recognizing that a credit based on false information has no actual value. Another solution, of course, is for government(s) to regulate the carbon credit market to require a greater level of monitoring. Another solution is monitoring by charitable nonprofits, which is discussed in the article. Significant information in the article comes from Verra, a 501(c)(3) organization devoted to verifying carbon credit programs. But, of course, as in any certification program, the question of the quality of the certification, and the monitoring on which it depends, is key to understanding how much trust can be placed in its efforts. Someone has to believe that high-enough quality monitoring is worth its price to someone. And, as always, detailed reporting by trustworthy media, like the Post, can have an important role to play as well, but someone’s got to pay for that too.

--Benjamin Leff

The Upper 7s: Nonprofit Law Defends Nonprofit News

 

The Montana Attorney General is trying to censor a nonprofit news story but the Upper Sevens, a nonprofit law firm, ain't having it.  

We've talked quite a bit about attorneys general lately.  It's pretty clear that a lot of AGs determine which cases to pursue based on their politics.  And on how big a headline the case will command.  The lazy-eyed Republican Cowboy is the best example.  But Democratic AGs sometimes do the same thing.  We've also blogged about nonprofit news lately because nonprofit news wants to be taken seriously.  It wants to be news in every way, including political endorsements. And when not making endorsements (when it figures out how to do so consistent with tax law), nonprofit news just wants to report the news. But we haven't seen a story about AGs and nonprofit news all at the same time.  And I am not sure we've ever talked about nonprofit law firms all that much either. Here's a story that combines all three.

Up in Big Sky Country, AG Austin Knudson is being ignorant and something less than strategic in the fights he's picking.  He must know so because his webpage announces his support of Tik Tok bans and his fights against the Biden administration but doesn't say a word about a bald-faced attempt to act as editor in chief of The Daily Montanan, an exempt newspaper.  Here is some of the press release that explains what's going on:

On August 24, 2024, the Daily Montanan responded to a frivolous cease-and-desist letter from the Attorney General’s office, which demanded that the news outlet delete a recently published article.  The article included a copy of a survey that the Montana Highway Patrol conducted to assess its “organizational climate” and highlighted employees’ concerns over claims of favoritism, distrust, mismanagement, and cronyism among leadership. The Daily Montanan received a copy of the anonymized survey from a confidential source and made no changes to it before publication.  Both the Montana Constitution’s right to know and the First Amendment of the U.S. Constitution protect the Daily Montanan from any attempt by the Attorney General’s office to prevent disclosure of the survey—an obviously public document.   On August 29, 2024, Upper Seven Law responded to the Attorney General on the Daily Montanan’s behalf, in turn demanding that his office rescind its cease-and-desist and refusing to remove the article. 

The attorneys at Upper Seven Law wrote the press release, I'm sure.  I can tell by looking at them that they are all vegans. My daughter has that same "let's be happy and not eat bacon or hamburgers" look.  Here is what one of their private foundation funders said about them:

Upper Seven Law is a Montana-based nonprofit law firm dedicated to holding the powerful accountable.  Based on the belief that creativity and innovation in law are essential to advancing social justice and public interest objectives, they take smart risks and invest the time necessary to build foundations for long-term accountability work.  Since June 2021, they have invalidated four unconstitutional state laws, preliminarily enjoined two more, caused the redistricting of Montana’s Public Service Commission districts, prevented the Governor from hiding documents from Montanans, and vindicated diverse human and civil rights.

The AG must have thought vegans are pushovers or don't pay attention.  He thought wrong because Upper Seven -- what a great name -- is having none of that.  First, though, here is what the AG  actually had the gumption to say:  

On behalf of the Montana Department of Justice (DOJ), this serves as a formal cease and desist demand to immediately remove the confidential document titled “Montana Highway Patrol Organizational Climate Assessment” from your website located at https://dailymontanan.com/wp-content/uploads/2024/08/MHP-full-report-small.pdf, as well as all quotes in the article from the individual comments portion of that document.

The version of the Climate Assessment you published contains sensitive and private information in the form of confidential individual Montana Highway Patrol employee comments and employee identities that was illegitimately obtained without consent. As is stated in the Daily Montanan’s article, “participants . . . were granted anonymity in the survey.” Publication of this document and quotes from individual comments contained in it constitutes a blatant violation of employee privacy rights and confidentiality expectations. The privacy concerns with respect to the individual comments clearly outweigh the merits of public disclosure. See Mont. Const. art. II, §§ 9-10; Missoula Cnty. Pub. Sch. v. Bitterroot Star, 2015 MT 95, 378 Mont. 451, 345 P.3d 1035; Billings Gazette v. City of Billings, 2013 MT 334, 372 Mont. 409, 313 P.3d 129; Admin. R. Mont. 2.21.6615.

The Upper Sevens don't look too far removed from Con Law I class so they must have had a good laugh about this.  I did too but its serious when an AG threatens legal action against nonprofits for reporting the news, sheltering migrants out of religious convictions, or for advocating ideas the AG doesn't much like. Hell, even if the Montana  AG slept through Con Law he would know you can't stop publication of the The Pentagon Papers if he had seen Tom Hanks and Meryl Streep in The Post. The vegans went to class and saw the movie, trust me.  Here is part of what they said in response:

This letter responds to the cease-and-desist demand the Department of Justice sent to the Daily Montanan on August 21, 2024. The demand refers to an article published August 16, 2024, regarding a Montana Highway Patrol (“MHP”) report detailing anonymous employee responses to a climate assessment survey (“the Survey”), and commands the Daily Montanan to immediately take down the Survey. The demand appears to attempt to silence and intimidate reporters. The Survey is a government document, generated using tax dollars, possessed by a government agency, and necessarily subject to the right to know. The article is prototypical investigative journalism protected by the First Amendment. The Attorney General’s apparent desire to suppress unflattering commentary regarding his management of MHP does not justify legal threats that jeopardize the free press in Montana.

I'm not sure the Daily Montanan's Editor is a vegan.  He may have had a few burgers in his day.  And he spells his first name wrong.  Here is what he said just this morning as he announced that the Montanan would not be unpublishing the report the AG doesn't like:

When we obtained a copy of the survey, we published it. If you don’t believe anything I am saying [about bad morale in the MHP office], go ahead, read it for yourself. But Knudsen doesn’t want you to read it. He’s threatening to sue the Daily Montanan for not removing it from our website (it remains there still). If he didn’t want to bring attention to the nearly 400-page document, threatening to sue for its removal seems like a guarantee that people will want to read it. You know, that ol’ thing about the forbidden fruit.

It says a lot about Knudsen’s administration that he would work so hard to stop the publication of an unflattering, even damning report, rather than just do the hard work of restoring confidence from the people the rest of us rely on for public safety. Moreover, Knudsen doesn’t appear very familiar with how his department is spending money because the survey’s entire purpose was to make it so that it could be shared anonymously — and shared widely. The survey was conducted with public funds, about a public agency, and involves public employees. All of those things would certainly seem to trigger certain provisions in the Montana Constitution, the same document that he has sworn to uphold and defend.

And privacy interests, which he cited in his letter to us? Hard to do it when there are no names attached to comments. 

The Montana Attorney General’s Office routinely offers silence when it comes to questions from the press, the Daily Montanan included. The staff there seem to be too busy, too self-important to answer the press or the public, but not so busy that they can’t threaten to sue journalists. What may be even more hard to figure is why Austin Knudsen believes that threatening us will stop us. And given how many times Knudsen has lost and his seeming lack of understanding of the Montana Constitution, I like our chances.

Whether they are vegans or not, I would advise the AG to leave these nonprofit lawyers and reporters alone.   

darryll k. jones

How Can Open AI Escape Its Tax Exempt Status?

I mentioned last summer that OpenAI (c)(3) is looking to shed its tax-exempt cocoon or skin, as the case may be.  Because whether it emerges as a beautiful butterfly or a slithering snake remains to be seen.  I could be wrong but not because OpenAI (c)(3) thinks it still deserves tax exemption. It probably doesn’t.  But any attempt to escape from its tax-exempt status, even by conversion to a public benefit corporation, will not be easy.  If not done carefully, there could be a pretty big tax exit fee. 

Word has it that Sam Altman and his band of effective altruists are kicking around the idea of reincarnating OpenAI (c)(3) as a public benefit corporation. They must know by now that pretending to be a charity is no longer viable, even if they have a bunch of influential heavy hitters on their board to stave off IRS inquiries. The IRS gods warned them in Rev. Rul. 98-15 not to eat of the forbidden profit fruit but I don't think they listened.  Elon Musk certainly doesn't think so.  There is just way too much profit fruit in the joint venture known as OpenAI Operating LLC and altruists seem to be eating plenty of it.  “Capped profit,” my ass.  When the cap extends into outer space, there really ain't no cap.         

Here is a brief recap:  Microsoft enticed OpenAI (c)(3) into a mixed marriage with practically unlimited working capital with which to do good works.  And while you are at, said Microsoft, here’s some profit for you.  We call these "stock option" apples.  Go ahead, have some.  Altman took a bite, and it was good. The Board saw and kicked him out of the Garden.  Microsoft engineered a quick coup d’état reinstalling Altman and at the same time ridding itself of the Board’s effective altruists.  And since that time, the joint venture that all but defines OpenAI (c)(3) has reached a market value of $100 billion.  The capitalists are in line to reap nearly 50%, capped at 100x.  The Times and the Wall Street Journal report that Apple and Nvidia are about to invest in OpenAI too. 

In fact, when the financial world talks about "OpenAI," it doesn’t even pretend to talk about OpenAI (c)(3) anymore.  It means the thoroughly profitable OpenAI LLC Operating LLC, 49% of which is owned by Microsoft and a few other capitalists.  All of them are exploiting tax subsidized wealth for their own profit.  I am not mad at them, but its only just now that they are admitting that its time to move on. 

So I am just thoroughly dissuaded of the notion that altruism and capitalism can co-exist with capitalist taking orders from altruists.  I’ve been accused of being pollyannish before.  Even the Times throws is throwing shade on the notion:

OpenAI is also in talks with investors such as Microsoft, Apple, Nvidia and the investment firm Thrive for a deal that would value it at $100 billion. And the company is considering changes to its corporate structure that would make it easier to attract investors.  The San Francisco start-up, after years of public conflict between management and some of its top researchers, is trying to look more like a no-nonsense company ready to lead the tech industry’s march into artificial intelligence. OpenAI is also trying to push last year’s high-profile fight over the management of Sam Altman, its chief executive, into the background.

If being a PBC represents “no-nonsense,” what does the current joint venture governed by altruists represent?  The Street calls it nonsense.  I am not here to grind that axe anymore.  I’m tapping out.  Our national religion is capitalism not altruism, I get it.  I am just wondering how in the world OpenAI (c)(3) can execute an escape from (c)(3) status. 

I bet the reason we haven’t seen a conversion yet is because a bunch of well-paid associates still haven’t presented to the  partners a legal and economically feasible way to do it. Because legally, OpenAI (c)(3) can only transfer its assets for fair market value.  OpenAI Operating LLC, in which OpenAI (c)(3) has 51% vote is worth $100 billion.  Does that mean OpenAI (c)(3) must sell its share for $51 billion? Or should we conclude that OpenAI (c)(3)’s interest is worth more than an amount proportionate to its voting power? It seems to me that LLC's entire body of know-how came from tax subsidized wealth. Once those assets are contributed to an LLC they become community property, hardly divisible at all according to capital accounts. Whatever the case, OpenAI (c)(3) must sell, it cannot just give, its assets to a non-charitable successor.  And then Open AI (c)(3) must distribute the proceeds to a governmental entity or another exempt organization. There might be some wiggle room in the regulations on that point. How might they do that? We might expect that the distribution will be to an AI think-tank or some such, controlled by the original fiduciaries who will thereafter operate New OpenAI (c)(3) in tandem with Newco, the newly formed public benefit corporation.  We can expect, too, that the fiduciaries in New OpenAI (c)(3), will be employed by NewCo, if not Microsoft.  With stock options, of course.  It's all kinda smelly but it still might work.   

How will the purchase be structured, assuming that Altman and probably some of OpenAI (c)(3)’s insiders will want to be amongst the buyers?  Where will they get the money? A sale from OpenAI (c)(3) to OpenAI (c)(3)’s former fiduciaries will require a mechanism to ensure the price is right, and that the fiduciaries don’t simultaneously serve as sellers and buyers.   Or maybe the fiduciaries won’t be buyers but instead given ownership in whoever the buyers are.  Maybe Microsoft, Apple, and Nividia will purchase OpenAI (c)(3) and through some other mechanism give the fiduciaries ownership in one of those companies.  Still seems to me to require some excess benefit engineering. 

It was groundbreaking legal engineering when OpenAI (c)(3) got into the joint venture in the first place. It will require  equally groundbreaking legal engineering to get out.    

Darryll k. jones

Ninth Circuit Explains Constitutionality of Religious Tax Exemption After Kennedy v . Bremerton School District

In Hunter vs. Department of Education, released last Friday, the Ninth Circuit Court of Appeals explained why religious tax exemption is constitutional. The opinion applies Kennedy v. Bremerton School District and marks an expansion of the rationale applied in Walz v. Tax Commissioner.  Walz relied on the Lemon test, one aspect of which requires the Government to prove that a neutral law incidentally impacting religion does not foster government’s “excessive entanglement” in religion.  Walz held that exempting religious organizations results in less entanglement than taxation, the only logical alternative.  Under Kennedy, as interpreted by the Ninth Circuit in Hunter, a Court need not find the Lemon factors if there is historical precedent for tax exemption existing on or around the date the Constitution was adopted.  If the same or similar law was ok with the Founders when they adopted the Constitution, it's contemporary analog is presumed constitutional regardless of whether it is neutral, promotes or inhibits religion, or fosters excessive entanglement.

Hunter involved a challenge to a Title IX regulation permitting religious universities to discriminate based on gender if they are following their religious tenets.  The plaintiffs were LGBTQ+ students alleging that Title IX’s religious exemption amounted to government establishment of religion.  The lower court dismissed, finding that the Title IX religious exemption met the discarded Lemon test. That test states that a law affecting religious practice is constitutional if it  (1) has a secular purpose, (2) a primary impact that neither promotes nor inhibits religion, and (3) does not foster excessive government entanglement with religion.  Although the Supreme Court decided Walz v. Tax Commission of City of New York a year before setting out the Lemon test, it applied Lemon’s essence to find that NYC’s religious property tax exemption did not violate the Constitution. 

Walz found minimal entanglement via tax exemption especially by comparison to the only alternative.  Taxing, instead of exempting, would require much more government entanglement. But the Supreme Court discarded the Lemon test two years ago in Kennedy v. Bremerton School District (involving a high school football coach fired for silently praying at the 50 yard line after the game). 

Kennedy explained instead that the constitutionality of a law respecting religion should be determined by reference to historical practices and understanding existing around the time the Founders adopted the First Amendment. This “originalist” approach seeks to determine whether the Founding Fathers would have thought a law impacting religion intolerable.  If so or if things have changed since the Founders implicitly approved, the law violates the First Amendment.  The analysis implies it is no longer necessary to disprove excessive entanglement to justify religious tax exemption.  If exempting churches is something the Founders would have tolerated,  and things haven't changed much, exemption is constitutional, regardless of the Lemon factors.  Which brings us to the Ninth Circuit’s upholding of Title IX’s religious exemption permitting gender discrimination. The Court did so after finding that the Founders thought religious tax exemption tolerable and thus constitutional.

Remember, the plaintiffs assert that the Title IX exemption “establishes” religion.  The Ninth Circuit noted that there were no historical antecedents to prove that the Founders would have approved the Title IX exemption for religious organizations.  So the Court said that the historical record of exempting churches from taxation is the next best evidence.  It concluded that tax exemption has historical precedent contemporaneous with the First Amendment; therefore the Founders would have approved of religious tax exemption under Title IX.  In the process, the Ninth Circuit restated the constitutional justification for exempting churches and religious organizations from income taxation. Tax exemption is constitutional, the Court stated, not because it involves a neutral law with minimal entanglement, but simply because the Founders approved and not much has changed since that original[ist] approval:

To determine whether government action violates the Establishment Clause, the panel must “focus[] on original meaning and history.”  Any practice that was “accepted by the Framers and has withstood the critical scrutiny of time and political change” does not violate the Establishment Clause.    

We begin with the historical practices that help to inform the original meaning of the Establishment Clause in its application to religious exemptions.  “As history must play such a vital part in understanding what the Bill of Rights requires, it is . . . appropriate to note that at the time this charter of freedom was written, no massive programs of federal aid to the public existed.”  Because no identical exemption existed at the Founding, we must use the historical analogues that are available. The Department contends that such historical analogues may be found in the “substantial evidence of a lengthy tradition of . . . exemptions for religion” at or near the time of the Founding.  Specifically, it refers us to tax exemptions for religious organizations as far back as 1802.  

Given the dearth of historical equivalents, tax exemptions are the most analogous case to Title IX’s statutory exemption.  As we described them in Kong, tax exemptions for religious institutions are really “[s]ubsid[ies] of buildings of worship,” which is “a universal practice of state and federal government.”  341 F.3d at 1139 (citing Walz v. Tax Comm’n, 397 U.S. 664 (1970)).  

Religious institutions are constitutionally exempted from paying property taxes.  Both the statutory exemption to Title IX and property tax exemptions operate as a financial benefit to non-secular entities that similarly situated secular entities do not receive.  And they were deemed constitutional without a requirement that the exemption only apply if the tax conflicted with a specific tenet of the religion.  Even if Title IX’s exemption is a “benefit” instead of a “burden,” “[a] variety of benefits have been bestowed by government on religious practices and either have been unchallenged or passed constitutional muster without fatal compromise of principle.”  Id. at 1139.  Absent additional historical evidence—and Plaintiffs point us to none here—the history of tax exemptions near the time of the Founding suggests that the statutory exemptions that operate as a subsidy to religious institutions do not violate the Establishment Clause according to its original meaning.

Though most of these cases were decided under the Lemon test, they evince a continuous, century-long practice of governmental accommodations for religion that the Supreme Court and our court have repeatedly accepted as consistent with the Establishment Clause.  The examples provided by the Department demonstrate that religious exemptions have “withstood the critical scrutiny of time and political change.”  

Darryll k. jones