In Defense of GLAAD

Well! It looks like I got my facts all mixed up in this post as it originally appeared.  I said that GLAAD President and CEO Sarah Kate Ellis (pictured above), was no longer with the organization.  Rich Ferraro, GLAAD's communication guy sent me a kind email explaining that reports of Ms. Ellis' proverbial death are greatly exaggerated.  And to make matters worse, Ms. Ellis never signed an NDA.  Somebody else did.  My bad, Ms. Ellis.  But I am happy to report that my defense of GLAAD has been upgraded from lukewarm to boiling.  For those of you who have already read the post, here is a revised version.

The NY Times ran with the provocative title "A Pattern of Lavish Spending at a Leading L.G.B.T.Q. Nonprofit" last week.  It followed-up with another article entitled 4 Key Takeaways From the Times Report on Spending at GLAAD.  The articles leave readers with the impression that Sarah Kate Ellis, GLAAD's President and CEO, violated "Internal Revenue Service rules."  The article cites several experts, including our own Phil Hackney.  I disagree with the commentary and the implications, even as I acknowledge that the popular media can never capture the nuance with which experts offer opinions about current events.  Despite the headline, I don't see anything to support the implication that GLAAD or Ms. Ellis violated tax laws or regulations. To the contrary, the article leaves me with the impression that GLAAD's board operates with the degree of diligence we might expect and which is sufficient for purposes of 501(c)(3).  In the one instance that we might have concluded otherwise -- payment for a ski trip -- Ms. Ellis and GLAAD mad a "correction" as that term is used in IRC 4958(b) and Treas. Reg. 53.4958-7.  It must have been a slow news day for the Times because I don't see a smoking gun.  

The article starts thusly:

A light rain fell at the Zurich airport one Sunday morning in January 2023 as Sarah Kate Ellis made her way from a seat in Delta’s most exclusive cabin to a waiting Mercedes. It was there to chauffeur her to the Swiss Alps, where she and her colleagues would stay at the Tivoli Lodge, a seven-bedroom chalet that cost nearly half a million dollars to rent for the week. Ms. Ellis, who was en route to the World Economic Forum in Davos, doesn’t run a Wall Street bank or a high-flying tech start-up. She is the chief executive of the nonprofit organization GLAAD, one of the country’s leading L.G.B.T.Q. advocacy groups.

The group, which has an annual budget of roughly $30 million, paid for Ms. Ellis’s trip, as well as a day of skiing, according to internal documents reviewed by The New York Times and interviews with current and former employees and others with knowledge of GLAAD’s operations. The trip was part of a pattern of lavish spending at GLAAD, much of it by Ms. Ellis, that may have violated the organization’s own policies as well as Internal Revenue Service rules.

When Ms. Ellis traveled for work, there were first-class flights, stays at the Waldorf Astoria and other luxury hotels and expensive car services. Not to mention a Cape Cod summer rental and nearly $20,000 to remodel her home office, which was outfitted with a chandelier, among other accouterments.

All of that is on top of Ms. Ellis’s annual pay package, which has the potential to stretch into the high six or low seven figures — a sum that would far exceed what her peers at many similarly sized organizations have earned.  Such perks, luxurious business travel and large pay packages might be commonplace at a for-profit company. But legal experts said they were inappropriate for a nonprofit organization with about 60 employees that, in exchange for being exempt from federal and state taxes, must ensure that executive pay is reasonable and aligned with the charity’s mission and the intent of donors.

It continues in like fashion to describe GLAAD paying $15,000 for what sure looks like an annual boondoggle to some swanky resort popular amongst LGBTQ folks.  I should admit here that we in the academy enjoy off-site events related to our tax exempt universities all the time.  Last year, for example, me and my wife enjoyed nearly a week in Puerto Rico along with hundreds of other faculty from around the country.  All on our university's tab (except for my wife's expenses).  There were  plenty of academic sessions and presentations the whole time.  We didn't do any skiing, but we saw a whole lot of the island whilst shopping and eating mofongo. In fact academic boondoggles are the norm in all sorts of swanky venues.  Here is what Mr. Ferraro told me about Ms. Ellis' trip:

Tivoli Lodge is used as a venue for multiple GLAAD-hosted roundtables, receptions, and meetings during The World Economic Forum’s Annual Meeting in Davos. The CEO stays in the lodge with other staff members, as well as staff from other organizations that join GLAAD in Davos. Tivoli Lodge was underwritten by a grant from the Ariadne Getty Foundation.

The Times did not disclose the relationship and funding from the Ariadne Getty Foundation until sixteen paragraphs after the article first mentions Davos. Ms. Getty provided a quote for the New York Times that they unfortunately did not use. Here it is: “The Ariadne Getty Foundation submitted a quote to The New York Times prior to publication which it did not print: “We're proud to continue investing in the vital work of GLAAD at Davos, where their presence has made an enormous impact. Putting LGBTQ issues on the global agenda and being visible on a world stage is the type of work that pushes our movement forward and it's exactly what GLAAD should be doing.”

I have never been to Davos, Switzerland but I bet there aren't too many Budget Inns around.  The report indicates that Ms. Ellis thought it useful to mingle with other attendees because it stimulated interest and donations to GLAAD. That makes sense to me and even if it didn't nonprofits are no different than for-profits.  They are granted the same sort of business judgement rule protections allowed to for-profits in determining the amounts spent for ordinary and necessary inputs.  In any event there are 100s of nonprofits that attend the event every year.  So this is all pretty unremarkable and yet the Times makes it seem as though it has uncovered large scale graft, corruption, private inurement and excess benefit. 

Ms. Ellis concealed none of these expenses from her board, though when an accountant raised questions the Board hired a law firm to evaluate the matter and make recommendations.  The firm eventually recommended relatively minor accounting and policy changes.  Ms. Ellis paid back the cost of skiing said to have been erroneously charged to GLAAD.  Yawn.

As regards the improvements to Ms. Ellis' home office -- something that occurred during the height of COVID when people worked at home a lot -- Hackney opines that the expensive chandelier and other permanent improvements might constitute income to Ms. Ellis.  I'm not sure about that and after researching flluegeladjutants and "convenience of the employer," I would give Ms. Ellis an opinion letter concluding that the permanent improvements do not constitute income even if they are lavish and never removed from Ellis' home.  At any rate, whether it is income is not the controlling factor with regards to private inurement if the Board approved and the total remuneration was reasonable.  So nothing so far suggests slam dunk private inurement or excess benefit.   

The article asserts that Ms. Ellis made a whole lot more than other similarly situated entities; but it admits that GLAAD is not just any old organization.  It is the "leading" such organization which means its salaries are probably higher than average.  Similarly situated entities constitute a valid comparator but GLAAD is in NY, not Iowa.  The Times estimated a $1.3 million salary but that appears to be based on the erroneous and unsupported conclusion that all those "lavish" expenses were disguised payments for Ms. Ellis' personal consumption. The actual reported salary, about $600,000, probably compares well to profit as well as nonprofit businesses headquartered in Manhattan.  The tax regs tell us that nonprofits must compete for talent with for profits so taking into consider both nonprofits and for profits is appropriate.  Indeed, I would expect Ms. Ellis' reported salary to be on the low end, and nothing requires a nonprofit to be headquartered in Des Moines rather than Manhattan. 

Most importantly, the article concedes that the "lavish" spending would be "commonplace for a for-profit business." That just about settles the matter for me and brings me to the real point of this post.  Whether a business expense is lavish, ordinary or necessary is the same whether the entity is nonprofit or for-profit.  If the expenses would be deductible by a for-profit under IRC 162 then they are appropriate as a legal matter for a nonprofit organization. Ordinary and necessary is not defined differently for nonprofits because they have to pay market rates just like everybody else. 

Indeed, the Code makes no serious attempt to regulate the amount businesses spend on items that are otherwise ordinary and necessary. IRC 162 is exceedingly neutral in that regard, except for salaries, and even that is more to protect the corporate tax base against disguised dividends than to regulate salaries.  The Code relies instead mostly on the market to discipline business owners.  So you can deduct the cost of a private limousine or first class airfare to get to work even though public transportation or Spirit Airlines would do just as well.  But if you do that too often when lesser payments might do, the market will punish you.  Not the Tax Code.   

As it turns out, that Ms. Ellis's business travel might have been accomplished at much lower cost has nothing to do with private inurement or excess benefit once we agree that the travel was "ordinary and necessary."  Perhaps the only exception is that Ms. Ellis always took her kids with her to the swanky resort and they lived in the $15,000 a month residence GLAAD paid for. But I can defend that by analogy to IRC 119.  The stakeholders -- donors, in particular -- might legitimately disagree with the spending but in that regard they are like shareholders who can enforce belt-tightening measures by leaving the firm or by some other means regulating spending.  GLAAD's spending seems entirely transparent and yet stakeholders continue t0o support its mission. That probably means that everything is kosher.  The market, after all, is the ultimate judge and jury on whether a tax exempt organization is spending money wisely.  

darryll k. jones