Nonprofit Law Prof Blog

SCOTUS Donor Disclosure Case: California Likely to Lose, But Big Question is How

The Supreme Court held oral argument this morning in Americans for Prosperity Foundation v. Bonta (renamed once again to reflect the newly confirmed California Attorney General). Here is my quick take on the argument.

A majority of the Supreme Court appears poised to strike down the California Attorney General's requirement that charities provide identifying information about major donors to that office on a confidential basis. What remains unclear is how broad that decision will be, including whether it will affect the constitutional standard that governs donor disclosure requirements in other contexts, including elections.

 

During today's oral argument, Justices Alito, Barrett, Gorsuch, Kavanaugh, and Thomas in their questions indicated that the requirement places a substantial burden on the First Amendment rights of donors to the petitioning nonprofits. They also appeared skeptical that California's interest in regulating charities is closely enough served by the requirement to justify this burden. At the same time, Justices Barrett, Kavanaugh, and Thomas (along with Justice Breyer) appeared interested in considering how the donor disclosure requirement imposed on charities by Congress under the federal tax laws might be distinguishable and so possibly less vulnerable to constitutional challenge.

 

The same five Justices also appeared from their questions to not be comfortable with limiting the decision to upholding an as applied challenge to the requirement that would protect the petitioning nonprofits but leave the requirement in place for other nonprofits absent their own as applied claims. In addition, Chief Justice Roberts expressed concerns about how future as applied challenges could be pursued, further indicating that if the Court rules in favor of petitioners it likely will strike down the requirement as unconstitutional on its face. So while Justices Kagan raised the as applied approach in her questions as a possible alternative, it appears unlikely her view on this point will prevail.

 

At the same time, while several of the Justices asked about the appropriate constitutional standard to apply to donor disclosure requirements, including Justice Sotomayor who clearly had concerns about the effect of any change, it was less clear whether a majority of the Justices support revisiting that standard. Indeed, Chief Justice Roberts opened the questioning of counsel for Americans for Prosperity Foundation by challenging petitioners' position that the standard should be tighter than the existing exacting scrutiny standard, which requires a government to demonstrate a substantial relation to a sufficiently important governmental interest. And given the past confidentiality breaches by the California Attorney General, the Attorney General's limited use of donor information to further its charity regulator role, and the fact that 46 states do not require the filing of such information by charities, there appears to be sufficient grounds to strike down California's requirement on its face without tightening the constitutional standard for government compelled disclosure of donor information.

 

For an insightful analysis of the oral argument focused more on the possible election-related ramifications of the decision, see this blog post by Rick Hasen.

 

Lloyd Mayer

Nonprofits React to Conviction of Derek Chauvin

Yesterday's NonProfitTimes reported that the rapid conviction by a criminal court jury in Minneapolis of former police officer Derek Chauvin in the death of George Floyd last year brought swift reactions from leaders across the nonprofit sector. According to the Times, the leaders not only backed the verdict, but many also voiced support for the George Floyd Justice in Policing Act of 2021 pending in Congress which would put federal law behind blocking tactics such as no-knock warrants and chokeholds when detaining a suspect.

Among the nonprofit leaders issuing statements in favor of the verdict were: Jody Levison-Johnson, president and CEO of The Alliance for Strong Families and Communities/Council on Accreditation; Tim Delaney, President & CEO of the National Council of Nonprofits; Daniel J. Cardinali, president and CEO, The Independent Sector; Derrick Johnson, President & CEO, The NAACP; Jason Williamson, deputy director of the ACLU’s Criminal Law Reform Project; and Matthew Melmed, Executive Director, ZERO TO THREE.

Among the many statements issued and comments made, this paragraph from the statement issued by The Alliance for Strong Families is noteworthy:

This verdict reflects the fact that our national reckoning on systemic racism in America is long overdue. Watching the Derek Chauvin trial unfold has been difficult for all Americans, and for people of color who have lost another father, mother, son, or daughter at the hands of law enforcement, this tragedy, played out daily on our television screens, has been especially hard to bear. Systemic racism and implicit bias are infused across too many of the systems that should support people, resulting too often in harm to those they are meant to protect. While we recognize the work that has taken place thus far to expand equity, diversity and inclusion, we must continue to build on it, and acknowledge that the road ahead of us is long, and that true systemic change is needed and required. We hope this verdict puts us on a path toward bringing about that needed change. …”

This hope lives deep within my heart. 

Vaughn E. James, Professor of Law, Texas Tech University

Seattle Pacific University Faculty Vote No Confidence in Board Over LGBTQ Exclusion

The faculty of Seattle Pacific University, a Christian school associated with the Free Methodist Church, has taken a vote of no confidence in its board of trustees after members of the board declined to change its policy prohibiting the hiring of LGBTQ people.

The no-confidence vote, approved by 72% of the faculty Monday (April 20), was the latest in a series of escalating clashes between faculty, students and the school’s governing board. Faculty and students also want the school to drop its statement on human sexuality, which declares marriage between a man and a woman as the only permitted expression of human sexuality. A total of 213 out of 236 qualified faculty voted no confidence on an online form.

The board of trustees responded to the no-confidence vote Tuesday with a statement saying it would not change its employment hiring policy, which excludes LGBTQ people from full-time positions.

The statement read in part:

The board recognizes that fellow Christians and other community members disagree in good faith on issues relating to human sexuality, and that these convictions are deeply and sincerely held,” read the statement. “We pray that as we live within the tension of this issue, we can be in dialogue with the SPU community.

The board also indicated it was taking its stand because it wanted to continue to maintain its ties to the Free Methodist Church, a small denomination of about 70,000 in the United States and 1 million around the world. The Free Methodist Church has eight affiliated educational institutions including Azusa Pacific, Spring Arbor and Greenville universities.

Kevin Neuhouser, a professor of sociology at Seattle Pacific who is also the faculty advisor for HAVEN, the student club for LGBTQ students on campus, opined that “Right now the board is the last remaining group that has not yet come to recognize that LGBTQ individuals can be faithful Christians, and as faculty and staff they would play positive roles on our campus, if we can hire them.” According to Neuhousser, the school was engaged in a larger discussion of trying to discern what it means to follow Jesus. But, he asked, “Is it being faithful to include or exclude?”

Nationwide, a group of students and former students of Christian institutions are seeking an answer to that question. Last month, 33 LGBTQ students or former students at federally funded Christian colleges and universities filed a class-action lawsuit against the U.S. Department of Education alleging widespread discrimination at 25 Christian colleges and universities.

We shall follow closely as this case winds its way through the court system. 

 

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

 

 

NRA Trial Begins

The virtual bankruptcy trial of the NRA filed in Texas kicked off yesterday with opening statements.

The NRA filed for bankruptcy in January in an apparent attempt to escape the jurisdiction of the NY Attorney General who filed to dissolve the firm in New York, where it is organized, in August 2020.

As pointed out by Danny Hakim, one of the most interesting points that came out of the trial on day one is that CFO, Craig Spray, refused to sign the organization’s most recent tax form (Form 990) and was dismissed soon afterwards. 

The WSJ describes the salient features of the first day: 

"National Rifle Association leader Wayne LaPierre put the gun-rights group into chapter 11 to try to evade accountability for spending abuses, a New York attorney general's office lawyer told a judge on Monday, an allegation the NRA denied and said won't be supported by evidence presented at a bankruptcy trial.

"Those who do not go along with the 'Wayne says' policies of the NRA face retribution," said New York Assistant Attorney General Monica Connell, who argued that Mr. LaPierre put the NRA into bankruptcy largely by himself and kept his plan from the group's board as well as its general counsel and treasurer at the time.

NRA lawyer Greg Garman told Judge Harlin Hale of the U.S. Bankruptcy Court in Dallas that Mr. LaPierre had acted honorably and appropriately in leading the NRA. Mr. LaPierre made the decision to put the group into chapter 11 to prevent New York authorities from potentially putting the NRA into receivership, Mr. Garman said.

"[Mr. LaPierre] is the greatest asset which the board demands to protect," Mr. Garman said, referring to Mr. LaPierre's fundraising skills for the organization."

Philip Hackney

Soskis: Norms and Narratives That Shape US Charitable and Philanthropic Giving

Benjamin Soskis (Urban Institute) has posted Norms and Narratives That Shape US Charitable and Philanthropic Giving. Here is the first paragraph of the abstract:

The past few decades have brought about a profound shift in the norms and narratives surrounding smaller-scale charitable giving and larger-scale philanthropic giving. In this report, I analyze some of the most significant of those norms and narratives—that is, the rules governing accepted or valued charitable and philanthropic behavior and the replicable, archetypal stories that have developed to make sense of that behavior. I also examine how those norms and narratives have been shaped by and have shaped responses in the United States to the COVID-19 pandemic and to the mass protests after the killing of George Floyd. This analysis focuses on two clusters of giving norms and narratives: one surrounding the relationship between large-scale and small-scale giving, and one surrounding time-based considerations in giving.

Lloyd Mayer

Zolt: Cross-Border Philanthropy: A U.S. Perspective

Eric M. Zolt (UCLA) has posted Cross-Border Philanthropy: A U.S. Perspective. Here is the abstract:

Americans lead the world in supporting charitable activities (both in the U.S. and abroad). For foreign charitable activities, two key questions arise:

1. Should tax benefits support charitable activities outside the U.S.?
2. Should the U.S. tax system treat contributions to foreign charities differently from contributions to domestic charities?

U.S. tax law imposes remarkably low barriers to cross-border philanthropy. Contributions to U.S. charities are deductible even if all charitable activity takes place outside the U.S. Nominally, direct contributions to foreign charities are generally not deductible for income tax purposes. Practically, donors can easily work around this restriction (at relatively low costs and complexity) by transmuting non-deductible contributions to foreign charities into deductible contributions to domestic charities.

The hard question is normative: what should the law be? This chapter provides a framework for examining the desirability of the current regime and the different factors policy-makers may find useful in considering options to either reduce or increase barriers to cross-border philanthropy.

Lloyd Mayer

April 8th: Charitable Crowdfunding: Who Give, to What, and Why? (Lilly Family School of Philanthropy)

I am very much looking forward to participating in a presentation with Amy Sample Ward and Una Osili on new research from the Lilly Family School of Philanthropy about charitable crowdfunding. Free registration is available. Here are the details:

Charitable Crowdfunding: Who Gives, to What, and Why?

Thursday, April 8, 2021
2:00-3:15 p.m. ET
Cost: Free

Featuring:

• Amy Sample Ward, CEO, NTEN
• Lloyd Hitoshi Mayer, J.D., Associate Professor of Law, Notre Dame
• Una Osili, Ph.D., Associate Dean for Research and International Programs, IU Lilly Family School of Philanthropy

During these unprecedented times, crowdfunding has taken on a significant role in philanthropic giving and fundraising. 

New research from the Indiana University Lilly Family School of Philanthropy reveals perceptions of crowdfunding, how awareness of crowdfunding compares with giving via crowdfunding projects, what motivates donors who give this way, what they support, how they differ from other donors, and where crowdfunding fits in the philanthropic landscape.

Join the Lilly Family School of Philanthropy and NTEN for a webinar that blends research and practitioner perspectives on this timely topic. We will present research highlights, discuss trends and implications for crowdfunding for nonprofits, and field questions from participants. This opportunity was made possible with funding from Facebook.

Lloyd Mayer

FATF Announces New Project to Mitigate Unintended Consequences of Its Standards, Especially on Nonprofits

The Financial Action Task Force (FATF) has announced that in February of this year it launched "a new project to study and mitigate the unintended consequences resulting from the incorrect implementation of the FATF Standards." Those standards guide countries in implementing legal rules and processes to combat money laundering, terrorist financing, and other illegal, international financial activity. Nonprofits have long complained that countries have used the standards as cover for improperly cracking down on cross-border philanthropy, particularly philanthropy supporting disfavored nonprofits.

Here is the full announcement:

In February 2021, the Financial Action Task Force (FATF) launched a new project to study and mitigate the unintended consequences resulting from the incorrect implementation of the FATF Standards.

The project will focus on four main areas:

• De-risking, or the loss or limitation of access to financial services. This practice has affected non-profit organisations (NPOs), money value transfer service providers, and correspondent banking relationships, in particular;
• Financial exclusion, a phenomenon whereby individuals are excluded from the formal financial system and denied access to basic financial services;
• Suppression of NPOs or the NPO sector as a whole through non-implementation of the FATF’s risk-based approach;
• Threats to fundamental human rights stemming from the misuse of the FATF Standards or AML/CFT assessment processes to enact, justify, or implement laws, which may violate rights such as due process or the right to a fair trial.

The FATF will conduct the project in two phases:

Phase One: research and engagement. The project team will analyse these unintended consequences resulting from the misuse of the FATF’s Standards on preventing and combating money laundering and the financing of terrorism. This work will draw on the knowledge and experiences of members of the FATF’s Global Network of 205 jurisdictions, its observers, and outside stakeholders.

Phase Two: solutions. The second phase will develop options the FATF could consider to prevent and mitigate these unintended consequences.

The FATF welcomes input to inform this project, including, for example: scholarly research; industry and civil society perspectives; and documented instances of unintended consequences. Information may be sent to pscf@fatf-gafi.org. While contributions are welcome for the duration of the project, they would be most relevant for Phase One if submitted on or before 20 April 2021.

This is not an investigative endeavour, but an opportunity to study trends and propose solutions. Any information provided to the FATF Secretariat will be shared with the project team and the source will be identified. Depending on the volume of input, we may not be able to follow up on each suggestion for engagement, nor are we able to provide feedback about how, or if, information received is used. 

Lloyd Mayer

Articles on Conservation Easements, As DOJ and IRS Enforcement Efforts Continue

A number of commentators have recently posted articles addressing conservation easement deductions. Several of these articles were originally published in 2020 in a Tax Notes publication, but for readers who may not have access to Tax Notes publications they are now available on SSRN and so I am including them in this list:

• Jessica Jay, Down the Rabbit Hole with the IRS' Challenge to Perpetual Conservation Easements, Part Two, in the Environmental Law Reporter.

• Nancy Ortmeyer Kuhn, The Eleventh Circuit Court of Appeals: The Current Focus for Conservation Easements, in Bloomberg Tax.

• Douglas L. Longhofer and Katherine Jordan, Eroding Conservation, Preserving Abuse — A Flawed IRS Strategy, originally published in Tax Notes Federal.

• Nancy A. McLaughlin, Amendment Clauses in Easements: Ensuring Protection in Perpetuity, originally published in Tax Notes.

• Nancy A. McLaughlin and Ann Taylor Schwing, Conservation Easements and Development Rights: Law and Policy, originally published in Tax Notes.

In addition, the only exempt organizations issue that appears to have been raised by the National Taxpayer Advocate in her latest report to Congress focused on conservation easements. The report identified syndicated conservation easements as being at the center of the "most significant cases" involving a charitable contribution deduction issue, which was in turn identified as the ninth most litigated issue. The report notes that perpetuity, as opposed to valuation, has become the focus of recent conservation easement cases. See pages 216-219 of the report for more details.

Finally, Tax Notes reports that the DOJ has reached a settlement with a consultant who was one of the targets of the DOJ's investigation of syndicated conservation easements. Without admitting any wrongdoing, the consultant agreed to be permanently enjoined from promoting or arranging a qualified conservation easement contribution in the future (and to pay an amount that was not specific in the court filing).

UPDATE: Tax Notes reports that taxpayers involved in syndicated conservation easement deals have now filed a class action lawsuit against promoters of those deals.

Lloyd Mayer

DAF Debate Heats Up, New Data Emerges

Recent weeks have seen a flurry of pieces relating to changing the legal rules for donor advised funds or DAFs. Notable contributions include:

• Craig Kennedy and William Schambra published Conservatives Should Applaud — Not Fight — Efforts to Change Philanthropic Giving Rules in The Chronicle of Philanthropy, criticizing opposition to the Initiative to Accelerate Charitable Giving's proposed reforms.

• Dan Petegorsky published DAF Numbers Obscure Who’s Giving and How Much in InsidePhilanthropy, also criticizing opposition to the proposed reforms.

• Edward Zelinsky (Cardozo) published A Response to the Initiative to Accelerate Charitable Giving in Tax Notes, "agreeing with much (but not all) of its perspective and arguing that the rules applied to private foundations should also govern donor-advised funds."

At the same time, data about DAF contributions and donations continues to emerge (some from sources with a stake in the reform debate), including:

• AEI and The Philanthropy Roundtable released a new paper titled Appreciation in Donor-Advised Funds: An Analysis of Major Sponsors, describing how DAFs "have become the fastest-growing vehicle for charitable giving in recent years."

• The Community Foundation Public Awareness Initiative reported that For Every Dollar Contributed to Community Foundation DAFs in 2019, Donors Granted $1.08 in 2020, with the $6.7 billion donated by community foundation DAFs to nonprofits in 2020 representing an increase of 41 percent over 2019 donations.

• The National Philanthropic Trust published its 14th annual Donor-Advised Fund Report, reporting continued rapid growth of contributions to DAFs and donations from DAFs to charities through 2019.

• The Nonprofit Quarterly published COVID-19 and Donor-Advised Funds in 2020: What Do the Numbers Tell Us?, reporting data regarding disbursements by DAFs in 2019 and 2020.

• The Nonprofit Times reported that the largest DAF sponsor organizations reported significant increases in distributions from DAFs to charities in 2020, including a 24% increase at Fidelity Charitable, a 171% increase at the National Philanthropic Trust, and a 35% increase at Schwab Charitable.

Despite this debate and new information, it is unclear at this point whether there is any interest in Congress for changing the rules for DAFs. And the IRS is still considering comments it received in response to Notice 2017-73 relating to various issues involving DAFs.

Lloyd Mayer

Solicitation Update: States & FTC Crack Down on Fraud; Crowdfunding Grows; Donors Test Their Influence

There has been a steady drumbeat of news stories reporting that state authorities and, on occasion, the FTC continue to scrutinize and prosecute individuals who allegedly engage in fraudulent charitable solicitation. Some of the cases involve tried-and-true techniques, such as purporting to raise funds to help veterans, while others reflect more recent events, such as attempting to capitalize on support for the Black Lives Matters movement. Here are recent examples from just last month:

• The FTC, 38 States, and the District of Columbia shut down a fraudulent charity telefunding operation that raised more than $110 million, almost all of which went to pay fundraising costs and very little of which went to actual charitable services.

• The Florida AG shut down a "sham" wounded veterans charity named Healing Heroes Network that used very little of the contributions it received to actually help veterans.

• The Minnesota AG is suing a company that allegedly posed as a charity for service members, using the name Contributing 2 Combatants and Coast 2 Coast Marketing, but instead allegedly used the donations to enrich the company's owner.

• In Ohio, the U.S. Attorney's Office reported an indictment against a man for allegedly using a fake nonprofit Facebook page with the Black Lives Matter name to rob donors of more than $450,000.

• In Oregon the Douglas County Sheriff's Office arrested a man accused of using fake nonprofits to obtain donations, including the Impossible Roads Foundation that purpotedly built tiny homes for disabled veterans.

• In Utah, the Davis County attorney general is investigating whether Operation Underground Railroad made misleading statements in its fundraising appeals, even as Vice reports broader concerns about the anti-child sex trafficking charity's operations.

It is not surprising that there is fraud in this area, as it has been increasingly easy to raise funds quickly for a variety of legitimate causes. Again just in the past month. Facebook and Instagram announced that users had donated more than $5 billion over five years to nonprofits through campaigns on those platform, and the AP reports that millions of dollars have poured in through crowdfunding campaigns to aid the families of the Atlanta shooting victims. Crowdfunding can also be used for more controversial causes, as illustrated by The Guardian's report that far-right extremists have raised millions of dollars via social media, among other channels.

Finally, some prominent donors are trying to use their influence to affect the charities they support. The Washington Post reports that James Huntsman has filed a federal lawsuit against the LDS Church, alleging it misused millions of dollars of his family's donations by using them for commercial purposes. And some wealthy supporters of the University of Texas have waded into the controversy over the school's fight song (Eyes of Texas), vowing to pull their donations unless the school retains it.

UPDATE: In another case of a disgruntled donor, a Sinclair anchor is demanding $20 million from the WE charity that has been at the center of a charity scandal in Canada. The amount is in addition to a demand for return of donations the anchor made, and is for "destruction of [the donor's] character and marketability as a journalist, public speaker, filmmaker, and author."

Lloyd Mayer

Nonprofit Profs File Amicus Brief in Supreme Court Donor Disclosure Case

A dozen well-known and experienced nonprofit law professors yesterday filed an amicus brief supporting the California Attorney General in Americans for Prosperity Foundation v. Rodriquez (previously named Americans for Prosperity Foundation v. Becerra). As detailed in a previous post by Joseph Mead in this space, this pending Supreme Court case raises significant issues relating to the ability of governments to require charities to provide information identifying their major donors. Here is the first paragraph from the Summary of Argument:

California has a compelling interest in sustaining its charitable sector, the nation’s largest. Petitioners challenge the State’s requirement that tax-exempt charities provide to the California Attorney General, on a confidential basis, a copy of the IRS Form 990 Schedule B form that charities file annually with the Internal Revenue Service. Their challenge, if upheld, would undercut crucial and irreplaceable elements of California’s efforts to regulate its charitable sector and ensure public confidence in charities operating in the
State. More than that, Petitioners’ same arguments could apply equally to central aspects of the federal regulation of charities and other major components of state supervision. Thus, whatever the applicable level of constitutional scrutiny, California’s collection of information about major charitable donors should survive review.

More details and documents relating to the case can be found on the Supreme Court's docket and on SCOTUSblog.

Lloyd Mayer