Nonprofit Law Prof Blog

Tax Effects of Crowdfunding Distributions – Charitable and Otherwise

The IRS recently posted guidance on its website about the tax implications of distributions from online crowdfunding. With some regularity I have conversations with students or others who have raised money online for some cause outside the context of any existing 501(c)(3) organization. Sometimes, they want to create 501(c)(3) organizations for future activities, but they have already had online funding platforms distribute funds to them individually, which they have then either transferred to the intended beneficiaries of the fundraising campaign or used for the purposes described in the fundraising campaign. They want to know what the tax implications are. I usually tell them to go back in time and not to put themselves in the middle of a charitable contribution or gift without some sound legal advice, but that’s because of state charitable solicitation law reasons as much as federal tax reasons.

As for the tax implications, the IRS helpfully explains that crowdfunding payments “may be includible in the gross income of the person receiving them depending on the facts and circumstances.” In general, if someone gets money, it is taxable income unless some exception applies. In this case, the IRS mentions two exceptions: gifts and charitable donations. But also, another important principle is at play because, as the IRS notes, money raised by crowdfunding may be “on behalf of other people or businesses.” That principle is the fact that a person who receives money as an agent of someone else, and dutifully delivers that money to the principal, does not have taxable income.

With regard to charitable contributions, the question of whether a distribution is taxable should be relatively simple: either the recipient of the distribution is a charity (no income) or the recipient dutifully delivered the distribution to a charity (no income). There could be a hiccup if the recipient received the income in one year and delivered it to a charity in the next, but that shouldn’t be an insurmountable hiccup; it just might take some explaining.

The more difficult analysis has to do with whether the distribution is a gift. Here, the question is not who got the funds, but whether they were given out of detached and disinterested generosity, and (as anyone who has ever taken a law school tax class knows), that can be hard to assess. If the recipient of the crowdfunding distribution spent the money on behalf of a charitable purpose, instead of distributing money to an intended beneficiary, the question of whether it could be a “gift” is even harder to assess.

The difficulty in assessing the tax treatment of crowdfunding distributions is at the heart of the real purpose of the IRS’s website guidance, which is to explain the reporting regime, not the tax treatment. Congress required crowdfunding websites starting in 2024 to report all taxable distributions over $600 to the IRS on a Form 1099-K, although that rule has not yet been implemented by the IRS.  The problem with the rule is that crowdfunding websites are not well situated to assess all the relevant facts and circumstances, and so good faith efforts to comply with the reporting requirements will likely produce substantial reporting of non-taxable distributions on Forms 1099-K – distributions that are really gifts or charitable contributions. So, what does the recipient of such erroneous 1099-Ks do? The IRS website guidance explains how to report these distributions on one’s tax return, and urges the taxpayer to “keep complete and accurate records of all facts and circumstances surrounding the fundraising and disposition of funds for at least three years.” Seems like good advice.

--Benjamin Leff

While I Wait for Women’s Single Sculls Repechages…. Exemption and the Olympics!

So … I never thought I’d see a concert lineup that included the metal band Gojira (complete with bloody severed heads in the background- BOLD!), Lady Gaga doing the can-can, and Celine Dion.   But here we are…. The 2024 Paris Summer Olympics opening ceremony.  And I’m down for it.  All of it.

I am an Olympics nerd. I have already watched Norway v. Sweden in Women’s Team Handball.  I’m disappointed I can’t find the Archery ranking rounds that happened yesterday streaming on Peacock.  I will wake up at 5 am to watch doubles badminton tomorrow.  I’m that person.

So, it seems only appropriate to do a little review of the tax-exempt status of the Olympics for the blog today, because there are no other competitions to watch on opening ceremony day and I’ve already watched all the available Rugby 7s replays (five stars – will watch again.)  So here’s a deep dive (pun intended) into the Olympics.

Section 501(c)(3) and Section 501(j)

If you are reading the Nonprofit Law Prof Blog, you probably already know that Section 501(c)(3) describes organizations that “foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment)…”   If, however, you are a “qualified amateur sports organization” under Section 501(j), you are exempt from the prohibition on providing athletic equipment.

Prior to 1976, the IRS would grant exempt status to athletic organizations if they could show that they were charitable or educational.   But those were pretty narrow buckets.   The amateur sports language was added to Section 501(c)(3) in 1976, but the IRS apparently took the provision of equipment provisions seriously – From a 1987 EO CPE Text: 

For example, an organization which, as part of its coaching program, made videotapes of athletes for the purpose of analyzing their performance could not be granted exemption as an amateur athletic organization under IRC 501(c)(3), since the use of videotape equipment was considered the provision of equipment.

As we all know from watching Cool Runnings, bobsleds are really expensive, so this simply could not stand. Section 501(j) wasn’t added until 1982.  While the definitions of a “qualified amateur sports organization” and the general 501c3 language are close, they aren’t completely co-terminus.  But it is clearly intended to cover Olympic-type organizations.   See e.g., GCM 39459, finding as exempt the organization for USA women’s bowling even though they supplied uniforms and equipment.

Bowling is not an Olympic sport but recognized by the US Olympic Committee and eligible for the Pan Am games, which is enough.  Apparently, bowling was a demonstration sport at the 1988 Seoul Summer Olympics and has lobbied to be added, making the short list for the 2020 Tokyo Summer Olympics but missing the cut to surfing, skateboarding, and sport climbing.  BUT I DIGRESS.

Your organization needs to be organized primarily to cater to serious athletes, so hosting running events open to all levels and not at Olympic distances didn’t get exempt status – it was deemed more recreational in nature. 

US Olympic & Paralympic Committee

So the USOPC is recognized by the International Olympic Committee as the National Olympic Committee for United States.  According to its website, it’s a “federally chartered nonprofit corporation” – you might remember my Veterans’ Day post on the USO, which is the same thing.  It’s a 501c3 and a public charity under 170(b)(1)(a)(vi) - the USOPC’s most recent Form 990 is in fact available on its website. It lists itself as a corporation formed in 1950 with a legal domicile in Washington DC but an HQ in Colorado Springs, Colorado.  A really interesting supplemental note on its Schedule D – wasn’t able to find a lot on this, does anyone have any details???

INSTALLMENTS FOR THE BROADCAST MEDIA RIGHTS, FOR THE OLYMPIC AND WINTER OLYMPIC GAMES, ARE HELD BY USOPC IN TRUST. THESE PAYMENTS ARE RECORDED ON THE STATEMENT OF FINANCIAL POSITION AS ASSETS HELD ON BEHALF OF OTHERS UNTIL THE GAMES OCCUR AND CERTAIN REQUIREMENTS ARE MET, THEN THE CASH WILL BE RELEASED AND THE AMOUNT WILL BE RECORDED AS REVENUE.

As a final note on related entities, there is a US Olympic and Paralympic Foundation, which “generates philanthropic support to empower Team USA athletes to achieve sustained competitive excellence and well-being.”  It appears that the USOPC doesn’t support athletes directly; athlete support comes from the USOP Foundation.  Formed in 2013 out of Colorado, it lists itself as a 170(b)(1)(A)(vi) on its Form 990.  The Foundation reports a management agreement with the USOPC on its Part VI and Schedule R.

National Governing Bodies.

If you look on the lists of grants made by the USPOC, it includes the national governing bodies for the various sports.  The list includes, USA Artistic Swimming,  the United States Curling Association (which is so much fun – try it if you can) and the Unites States Amateur Confederation of Roller Skating (OMG can we have roller derby in the Olympics?  I mean this year, breaking is an Olympic sport, so why not?  It does make me feel bad for bowling…) They are all listed as separate Section 501c3 organizations.

Because I had to, obviously, I did check out the US Amateur Confederation of Roller Skating, which is d/b/a USA Roller Sports (way better) and headquartered in that hotbed of roller sports, Nebraska (why Nebraska?  Any roller skaters out there know?)  Its 990s are also available, although curiously they report that they are a 509(a)(2) public charity.  

Apparently, rink hockey played on skates was a demonstration sport in the Olympic Games in Barcelona in 1992.  They tried for the 2016 Rio Summer Olympics but lost out to rugby 7s (I see why though – super fun) and golf.  BUT I DIGRESS.

International Olympic Committee. 

I would be remiss if I didn’t mention them.  It is an association under Swiss law, but many international organizations get exempt status from the IRS if they are worried about US source income – so I figure I’d check on the IRS’ website.  Et Voila!!!! And here’s its Form 990.  Interestingly, the list themselves as a Section 501(c)(4) organization, formed in 1894.  I immediately wondered if there is a US Friends of the IOC, or something like that, to take US-based charitable contributions (since 170 deductions are limited to domestic gifts… and they are a 501(c)(4) anyway). 

A quick check of the IOC’s website didn’t show anything that looks like a US fundraising arm, so if anyone has an info, let me know.   I’d keep looking, but it’s getting kind of late and I need to get some sleep before doubles badminton qualifying rounds at 5 am.

Frenziedly, eww

Christian Charity Violates the Johnson Amendendment ... Or Does It?

Saturday, ProPublica published a story about Ziklag, a charity created to marshal the power of wealthy conservative Christian donors to effect dramatic political and cultural change in America. The article references “six nonpartisan lawyers and legal experts” who “[a]ll expressed concern that Ziklag was testing or violating the law” (including our own Lloyd Hitoshi Mayer, Phil Hackney, Roger Colinvaux, as well as nonprofit-law giant Marcus Owens). 

The main concern appears to be campaign intervention in violation of IRC 501(c)(3) (what is nowadays called “the Johnson Amendment”). Violations of the Johnson Amendment are notoriously fact specific, and in my view, the article doesn’t describe a clear “smoking gun” violation. Much of the focus is on Ziklag’s “Steeplechase” project, which is an effort to get out the vote in swing states with the intention of turning out Trump-leaning voters to swing the election to Trump. As probably everyone reading this blog knows, according to IRS guidance, charities are permitted to conduct voter registration, voter education, and get-out-the-vote drives, so long as they are “carried out in a nonpartisan way.” But, as everyone probably also knows, the question of what it means for such drives to be nonpartisan is also quite complex. For example, my understanding is that the leaders of an organization can have an opinion about who is the better candidate, and while the IRS does not permit express targeting of sympathetic voters, there is room for play in the joints. Ironically, Republicans have recently ramped up their criticism of get-out-the-vote drives by charities, presumably under the belief that it is Democrats who use “nonpartisan” voter education for partisan ends more often or more effectively than Republicans.

Another “gray area” in Johnson Amendment law is the status of an internal “confidential” communication of a charity. Pro Publica obtained a video of an internal communication of Ziklag members that seemed to be intended to be kept confidential – the leader said, “You almost hate to put it out this clearly … because if somebody else gets ahold of this, they’ll freak out.” He then went on to say that Biden was “an empty suit with an agenda that’s written and managed by someone else.” The content of that message presumably constitutes campaign intervention since it disfavors a candidate in an upcoming election. But it is not at all clear that the medium of the message constitutes intervention: it was intended to be an internal communication between a relatively small number of members of the organization. It’s hard to imagine that the Johnson Amendment should be used to police every conversation between the leaders of charities and their members or staff. IRS guidance specifies that communications by organizational leaders at “official meetings” or “publications” are to be attributed to the organization and therefore must be free of electoral content, but there is no authority to help one decipher whether a confidential video constitutes an official meeting or publication.

In the end, I trust the opinions of the six experts that ProPublica cite in their report, since the ones named are the leading scholars in the field. And I strongly support ProPublica’s efforts to educate the public about campaign intervention by charities. But it is worth pointing out how elusive clear conclusions about campaign intervention often are, and how much is still left ambiguous in the law itself. While the experts cited are probably right that Ziklag is “across the line,” it may well be that Ziklag is conducting its affairs in conformance with the law, or at least with a genuine effort to conform. An intention to observe the law is entirely consistent with an intention to use 501(c)(3) status to advance the electoral interests of one’s preferred candidate. And, in my view, a diligent intention to observe the letter of law, even combined with a strong intention to distort the law’s spirit, is far better than contempt for the law. It is the difference between liberal society and an illiberal one. But maybe that’s just the tax lawyer in me talking.

--Benjamin Leff

Federal Prosecutions of Alleged Charity Fraud: Casa Ruby, Feeding the Future, and Modest Needs

The wheels of justice may turn slowly, but they do tend to catch up with those who allegedly steal from charities, particularly when government funds are involved. Three recent examples, the first two of which have been covered in this space previously, are the founder of D.C.'s Casa Ruby, various people associated with Minnesota's Feeding Our Future, and the founder of New York's Modest Needs.

The Washington Post reports that Casa Ruby's founder is set to plead guilty on July 17th to federal wire fraud arising from an allegation that she stole $150,000 of pandemic relief funds. As detailed by the Washingtonian last year, the organization closed in 2022 after the D.C. government ended its support. The DC Superior Court also appointed a receiver to sort out the organization's finances.

The N.Y. Times has the latest on the Feeding the Future scandal, which involves allegations of tens of millions of dollars in pandemic relief being stolen. The most recent development is that federal prosecutors have charged five people with conspiring to bribe a juror in a recently completed criminal trial of several people associated with Feeding the Future; those five include three of the defendants (two of whom were convicted and one of whom was acquitted). For more comprehensive coverage, see the numerous stories in the (Minnesota) Star Tribune.

Finally, the N.Y. Times also recently reported on federal prosecutors charging the founder of Modest Needs, a charity that used crowdfunding to raise donations to help working families. According to prosecutors, he diverted $2.5 million of the charity's funds over eight years to cover personal expenses, including rent, cosmetic surgery, and expensive meals out. 

Lloyd Mayer

 

IRS Finalizes Conservation Easement Disallowance Regulations

Earlier this week the IRS issued final regulations implementing section 605 of the SECURE 2.0 Act of 2022, enacted as Division T of the Consolidated Appropriations Act, 2023, Public Law 117-328, 136 Stat. 4459, 5393 (Dec. 29, 2022). That provision amended Internal Revenue Code section 170 to limit the amount of a qualified conservation contribution by a partnership or S corporation to 2.5 times the basis in the relevant real property with certain exceptions, including if the pass-through entity had held the real property for more than three years. That provision also made certain related modifications to penalty and reporting requirements. Coverage: Journal of Accountancy; Law360 (subscription required).

Lloyd Mayer

 

 

11th Circuit Rules That IRS Conservation Easement Listing Notice Is Invalid

The U.S. Court of Appeals for the Eleventh Circuit affirmed a federal district court decision that IRS Notice 2017-10 is invalid because the IRS failed to comply with the Administrative Procedure Act's public notice and comment requirements. The Notice identified certain syndicated conservation easement transactions as tax avoidance "listed transactions" and so subject to disclosure and other requirements. The case is Green Rock LLC v. IRS (No. 23-11041, June 4, 2024). The 11th Circuit joins the 6th Circuit (Mann Construction, Inc. v. United States, 27 F.4th 1138 (2022)) and the Tax Court (Green Valley Investors, LLC v. Comm'r, 159 T.C. No. 5 (2022)) in reaching this conclusion.

Reacting to the earlier decisions, in Announcement 2022-38 Treasury and the IRS stated they had published proposed regulations to address the asserted APA deficiencies in the previous Notice. While the announcement said Treasury and the IRS intended to finalize the proposed regulations in 2023, to date they have not yet done so.

Lloyd Mayer 

 

On this Memorial Day: An Introduction to the USO

As I sat to write a blog post on this Memorial Day, I was Googling recommendations for charities that support current service members, veterans, and their families.  As the USO repeatedly appeared as the first entry on a numbers of searches, I realized that I actually know very little about it.  I think we’ve all probably seen pictures of movie stars and famous singers visiting the troops out in the field from time to time (there’s a great collection of vintage photos here), but I never really thought about the organization that made that happen.

Until now. 

“USO” stands for the United Service Organizations, which reflects its origins as a collaboration among a variety of existing charities that were serving military members and families during World War II.  The USO is not part of the Department of Defense; rather it is one of a handful of federally chartered corporations in existence (see 36 USC 2201 et. seq.) – although its statute provides “the Corporation shall maintain its status as a corporation incorporated under the laws of New York, another State, or the District of Columbia.”  The 2022 Form 990 reports its state of legal domicile as the District of Columbia.

Per its organizing statute, the USO was designed, in party, to   

accept the cooperation of, and provide an organization and means through which, the National Board of Young Men's Christian Associations, the National Board of Young Women's Christian Associations, the National Catholic Community Service, the Salvation Army, the National Jewish Welfare Board, the Travelers Aid-International Social Service of America, and other civilian agencies experienced in specialized types of related work, which may be needed adequately to meet the particular needs of the members of the Armed Forces, may carry on their historic work of serving the religious, spiritual, social, welfare, educational, and entertainment needs of men and women in the Armed Forces and be afforded an appropriate means of participation and financial assistance,

According to its 2022 Form 990, the USO is a private organization that is tax-exempt under Code Section 501(c)(3) and a public charity under Code Section 170(b)(1)(a)(vi).

By statute, the USO is a membership organization overseen by a Board of Governors.  The Board consists of six members appointed by the President, the Secretary of Defense (or designed), and representatives of the organizations listed above (or the public at large) that have the power to appoint the board of directors.  It is a membership organization, but the voting members are the six appointees of the President. According to its 2022 Form 990, it has a 38-person board, of which 37 are reported as independent (the one person who is not independent is the current President & CEO – he is also the only compensated member of the Board of Directors).

It’s hard to summarize all that the USO does for our military service members and their families. In addition to the well-known entertainment tours, the organization provides care packages for service members, transition services for soldiers re-entering private life, and various support services for military spouses, among other things.  It operates in a number of foreign countries as well in order to provide services to our military service members stationed overseas.   I strongly recommend visiting its website or, for the tax nerds among us, reading the details of its program services on Form 990 Schedule O.

There is a separate USO Foundation, which the USO lists on its Form 990 as a directly controlled entity within the meaning of Code Section 512(b)(13).  It was formed in 2007 as a fundraising arm.  The USO Foundation’s Form 990 indicates that it is a Type I supporting organization of the USO and covered under the USO’s group exemption letter.

If you wish to read more: uso.org

To review the USO’s Forms 990 and financial statements, see here:  https://www.uso.org/about/financial-statements

If you wish to donate, link is here.

Thankfully and in remembrance,

eww

IRS EO Statistics & Compliance Priorities Update

Recent months have seen the usual steady flow of IRS data releases and compliance updates that reflect both the continuation of past trends (e.g., very limited enforcement, continued growth of giving to DAFs) and new developments (e.g., scrutiny of tax-exempt NIL collectives). Here are some highlights:

• The 2023 IRS Data Book (for the fiscal year ended 9/30/23) reports:
  • Of 109,482 applications for tax-exempt status under section 501 closed, the IRS approved 103,069 (86.3%), disapproved 88 (0.07%), and otherwise disposed of 16,325 (13.7%). As usual, the bulk of these applications were under section 501(c)(3) (114,073 closed, 98,417 approved, 62 disapproved, 15,594 otherwise disposed), with only 501(c)(4), (c)(6), and (c)(7) have more than 1,000 applications each (and less than 2,000 each). (Table 12)
  • There were 3,025 notices of intent to operate under section 501(c)(4) received and 587 rejected. The Data Book notes "[e]xamples of notices that would be rejected include notices from organizations not required to file Form 8976 (e.g., organizations that filed [a Form 990 series return] or Form 1024 on or before July 8, 2016, or organizations already exempt under other Internal Revenue Code subsections) or where the IRS cannot confirm an organization’s Employer Identification Number." (Table 13)
  • There were 1,999,457 tax-exempt organizations, nonexempt charitable trusts, and split-interest trusts, of which 1,847,501 were tax-exempt under section 501(c) and 1,514,558 under section 501(c)(3). (Table 14)
  • The IRS examined 1,029 Forms 990, 990-EZ, and 990-N (Table 21). Since these are past year returns there is not a directly comparable number of such forms filed provided in the Data Book, but it likely fair to say this figure reflects a continuing examination rate of less than 0.2% and probably closer to 0.1%.
  • Chief Counsel reported receiving 1,000 new tax law enforcement and litigation cases in TEGE Division Counsel, as well as closing 1,128 cases and having 845 cases pending as of 9/30/23. (Table 30)

• The EO Tax Journal reported (subscription required) that as 1/26/24 the average processing time for closed Form 1023s was 105 days, for closed Form 1023-EZs 22 days, and for closed Form 1024s 178 days. For Fiscal Year 2024 as of the same date, the 637 closed exams had a 74.4% change rate.

• The IRS Statistics of Income Division posted noncash charitable contributions data for 2021. The OneSheet summary notes that donor-advised funds were the largest beneficiaries, receiving 3.7.0 billion or 31.7% of the total amount donated, with foundations receiving $35.5 billion.

• The current TEGE Compliance Strategies now include tax-exempt NIL collectives with this explanation: "The focus of this strategy is to ensure that exempt organizations identified as supporting athletes through the use of their name, image, or likeness, for compensation, disclosed their activities in their application for exempt status and that those activities are in full compliance with the existing legal requirements under Internal Revenue Code Section 501(a). The treatment stream for this strategy is examinations."

• Last but not least, the current IRS Dirty Dozen list now includes art donation deductions, CRATs, and fake charities.

Lloyd Mayer

Potential Self-Dealing in the Conservative Partnership Institute

Last week my co-blogger posted about a recent New York Times article by David Farenthold about the Conservative Partnership Institute (“CPI”), a 501(c)(3) charity. In my view, Farenthold does a remarkable job of reporting on the nonprofit sector, but the article illustrates the limits of public knowledge on nonprofit spending. He reports on numerous insider transactions at CPI, involving millions of dollars flowing to for-profit entities formed by CPI leaders. Farenthold correctly notes that, “[w]hile hiring insiders is permitted when certain safeguards are in place, the payments moved money out of daylight and into opaque entities that the nonprofit’s leaders helped control.”

The obvious question, of course, is whether those “safeguards” were in place in CPI's case; safeguards that would presumably be described in a robust conflict-of-interest policy. Farenthold was at the mercy of CPI, which declined to provide details about its processes. There are many legitimate charities that legitimately pay for services from companies that their founders or directors own or control. There is no law against that; nor should there be in my opinion. But, of course, such payments produce risk. Farenthold quotes non-profit law scholar Linda Sugin, who correctly notes that CPI “could have reduced its risk by soliciting bids from competing firms to gauge whether insiders were charging market rates [and it] could have asked its leaders to recuse themselves from the decision to hire their own companies[.]” But because CPI refused to comment, we just don’t know whether they did. I’m guessing that they had good enough lawyers that they probably did have those procedural safeguards in place and make use of them. That doesn’t mean that they didn’t manage to overpay the companies that are connected to insiders anyway; it also doesn’t mean that they did pay too much. That’s a question that we the public are extremely unlikely to be able to judge accurately.

So, who should police whether payments from charities to insiders are excessive? That burden falls on the IRS and state charity regulators. It’s important for two different reasons. First, donors receive a tax deduction for charitable contributions, and that tax deduction is not warranted when the money is diverted from its charitable use. But even more important is that charitable donors generally rely on the regulation of nonprofits to enable them to trust that their donations will be used for their intended purpose. The one donor who would talk to Farenthold explained that he didn’t need that legal protection because of his personal relationship with the leaders of CPI, saying, “I’ve known them a long time …. They’re good people.” But most charitable donors don’t have that luxury, and the charitable sector would be much smaller (and able to do much less good) if every donor had to personally know the directors of every charity they want to support. And, obviously, the donor who talked to Farenthold could be wrong in his trust of CPI.

--Benjamin Leff

Illegality Doctrine and Cannabis Advocacy Organizations

Last week, my co-blogger posted about PLR 202417022, which revoked tax-exempt status from an organization that apparently hosts street festivals that promote cannabis businesses and educate participants about cannabis use. The IRS held that this organization does not qualify for tax-exempt status for numerous reasons, one of which is that it “advocate[s] and engage[s] in activities that contravene federal law[.]” In holding that this activity is inconsistent with tax-exempt status, the IRS relied on a 1975 Revenue Ruling that held that an organization could not qualify for tax-exempt status if its primary activity was encouraging its members to engage in civil disobedience acts contrary to local law. As my co-blogger points out, this position – that an organization that advocates for or engages in civil disobedience cannot qualify for tax-exempt status – has the potential to be applied in nefarious ways.

In 2014, I wrote an article criticizing the use of the illegality doctrine in the cannabis context, especially for 501(c)(4) organizations. In 2016, I expanded the analysis to state and local government entities, arguing that the illegality doctrine does not apply to them. The history of the IRS’s use of the illegality doctrine makes it clear how dangerous the doctrine can be when an organization has the purpose of educating the public that something that is currently illegal is nonetheless good. The organization NORML fought for years with the IRS about the line between advocating illegal cannabis use (which the IRS argued would cause their tax-exempt status to be revoked) and advocating use of cannabis if and when it is made legal (which would not). When an organization is educating the public that an illegal substance is actually good for you, the line can be blurry.

The IRS’s attempts to apply the rule to organizations “serving homosexuals” makes it even more clear how problematic this line-drawing is. For example, a 1971 General Counsel Memorandum addressed an organization that sought to educate the public about homosexuality with the goal of attaining “complete public acceptance of homosexuals as one type of normal human[] being[].” The IRS denied tax-exempt status because of state laws criminalizing sodomy. In 1973, the IRS granted tax-exempt status to an organization that provided social services to the gay community, but noted that the organization qualified for tax exempt status at least partially because, “[t]he organization expressly disavows … seeking to alter the community’s attitudes toward homosexuals” and noting that “[t]he maladaptive and at least potentially offensive nature of homosexual activities is also borne out by the continuing prohibition of substantially all forms of sodomy by the criminal laws of the District of Columbia and all but three of the several states.” Even as late as 1977, in a GCM that reversed the IRS’s position denying tax-exempt status to organizations that seek to change the public’s perception of homosexuality, the IRS cautioned that “[i]f an organization directly fostered or promoted homosexual practices, it would not be entitled to exemption [at least in part because] in many jurisdictions homosexual practices are illegal.” I bring this all up not only to remind us all how long ago the nineteen-seventies were, and how bad they were in some respects, but to illustrate how hard it is to draw the line between advocating for something that is illegal (like same-sex love, cannabis, or civil rights) and having a purpose that is illegal.

The 2024 PLR about the organization hosting a cannabis street festival simply does not provide enough facts to know where that line is drawn or whether it is appropriate in that case. It should have relied instead on other reasons the organization did not qualify for tax-exempt status, like the fact that it failed to provide financial records or file an informational return.  

 

--Benjamin Leff

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.   I'm going to shamelessly block quote Benjamin's description here:

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

With the Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

• Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
• Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
• Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
• While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
• Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww

  

 

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.    I'm going to shamelessly block quote Benjamin's description here:

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

With th Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

• Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
• Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
• Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
• While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
• Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww

  

 

Finally, a Johnson Amendment Case in Tax Court!

Well, my fellow bogger reported it on Friday, but I’ve got to say I’m pretty excited that this has finally happened: A 501(c)(3) organization has gotten into court to argue that the Johnson Amendment is unconstitutional. Why am I so excited?

Back in 2016, I wrote a blog post called “If Churches Really Want to Vindicate Their Right to Endorse a Candidate, It’s Easy to Get Their Case into Court,” in which I proposed forming a new 501(c)(3) organization and checking the “wrong” box on Form 1023 that asks whether the organization will “support or oppose candidates in political campaigns in any way?” That wrong box should get the IRS to deny the application, and when it does, or if it does nothing for 270 days, the organization can seek declaratory judgment in the tax court that it qualifies for tax-exempt status under section 501(c)(3). After years of writing that the IRS’s interpretation of the Johnson Amendment is unconstitutional (see here and here), I was planning with Sam Brunson (see here) to create our own organization to test the theory in this election cycle.

But, it turns out that more than 270 days ago, Ilya Shapiro (with Alex Reid’s help) beat us to it, filing a Form 1023 for an organization called SAFE SPACE that plans to endorse candidates on its website. The IRS never acted on their application, and so Presto, they’re in court! (I have been told over the years that some organizations have tried this tactic, but had their exemption applications approved, so the IRS’s inaction in this case is notable.) SAFE SPACE’s constitutional argument is obviously not very fleshed out in the Petition, but the key to it appears to be their claim that, “[t]he unconstitutionality of section 501(c)(3)’s political speech and lobbying restrictions is even more apparent with respect to SAFE SPACE because the low- to no-cost of SAFE SPACE’s political speech and lobbying activities means the government, simply by recognizing SAFE SPACE’s tax exemption, could never be viewed as subsidizing those activities.” This focus on the government subsidy embedded in the deduction for charitable contributions is directly related to the Supreme Court’s leading case on the constitutionality of lobbying restrictions for charities, Taxation with Representation of Washington v. Regan, and the DC Circuit’s leading case on the constitutionality of the Johnson Amendment, Branch Ministries v. Rossotti, both of which relied on the existence of a government subsidy as an essential component of their holdings.

Sam and I were planning a similar approach, but with a slightly more conservative approach to avoiding any cost in our charity’s endorsement. We were going to use an affiliated 501(c)(4) organization to assume all the costs of operating a website that was going to post the 501(c)(3) organization’s endorsement. SAFE SPACE claims that its endorsement costs are “zero” even though it admits that it will pay a flat fee for its website (which will have lots of other content). It then argues that the solution we planned to use, creating an affiliated 501(c)(4) organization, would impose significant administrative burdens,” and that “these administrative burdens are insurmountable.” This may seem like a difference without a distinction, but it is probably quite significant for reasons that are beyond the scope of this post. Whatever the next step in this case, we may be witnessing some interesting times for the Johnson Amendment in the runup to the 2024 presidential election.

-Benjamin Leff

Feeding Our Future Continuing Fallout: A Guilty Plea, More Indictments, and New Counterclaims

The U.S. Attorney's Office for the District of Minnesota announced last month that the executive director of House of Refuge Twin Cities pleaded guilty to one count of wire fraud in the $250 million fraud scheme centering on the nonprofit Feeding Our Future. The charge related to her redirection of millions of dollars in federal funds to pay personal expenses and family members. According to the press release, she is the seventeenth defendant to plead guilty to charges arising from this fraud scheme. Coverage: CBS News; Sahan Journal; Star Tribune.

And she is unlikely to be the last, as this week the same U.S. Attorney office announced federal criminal charges against 10 additional defendants arising from the same fraud (on top of approximately 60 already charged). Those defendants included six members from the same family who allegedly used a variety of legal entities to receive and launder the stolen federal funds, as well as four others who allegedly falsely claimed to have provided meals to children. Coverage: MPR News.

Not all the action is on the government's side, however. According to an MPR News article, the founder of Feeding Our Future and alleged leader of the fraud conspiracy is pushing back. She is asserting that Minnesota Department of Education officials who oversaw the hunger relief funds intentionally mislabeled document and used burner phones to improperly thwart a 2020 lawsuit brought by the nonprofit challenging the Department's treatment of Feeding Our Future. Her attorney stated that she plans to raise these allegations as part of her defense against federal wire fraud and bribery charges.

Lloyd Mayer

 

NCAA Update: NLRB Employee Ruling and NIL Rules & Disputes

The Associated Press reports a National Labor Relations Board (NLRB) Regional Director has ruled that Dartmouth basketball players are employees, which would allow them to create a labor union. The decision is particularly significant because the players, in common with other Ivy League athletes, do not receive athletic scholarships  As the story notes, this holding is consistent with the NLRB General Counsel's 2021 memo concluding that certain college athletes should be considered employees. The decision is subject to review by the NLRB. Additional coverage: Inside Higher Ed; N.Y. Times; Slate; Washington Post.

Separately, in the rapidly developing name, image,  and likeness (NIL) area the Division I Council of the NCAA approved new rules relating to disclosure and transparency. The press release highlights "four elements of student-athlete protections": voluntary registration for NIL service providers; required disclosure by student-athletes to their schools of more than nominal NIL agreements; development of a template contract and recommended contract terms; and development of an education plan for student-athletes and other stakeholders. The Council also introduced new proposals for consideration relating to school involvement and recruiting in NIL activities, including ones that would remove certain restrictions on school support for such activities.

At the same time, disputes between the NCAA and schools relating to NIL arrangements are heating up. Last month the NCAA announced an agreement relating to a violation of NCAA rules by a Florida State assistant football coach, including various recruiting-related restrictions. Coverage: ESPN; Washington Post. And earlier this month USA Today reported a federal judge refused to issue a temporary restraining order relating to the NCAA's NIL rules in an antitrust lawsuit brought by Tennessee and Virginia. A preliminary injunction hearing in that case is set for next week.  Additional coverage: Law360 (subscription required). 

Lloyd Mayer

 

 

 

IRS TE/GE Releases FY2023 Accomplishments Letter Including EO Exam & Application Statistics

The Tax Exempt and Government Entities division recently released its Fiscal Year 2023 Accomplishments Letter. Topics of particular relevance to tax-exempt organizations include:

• Several new tools to increase exam efficiency (and can we hope volume?), including an Exempt Organizations Graph Exploration Tool ("an interactive graph tool designed to help EO examiners and classifiers conduct risk analysis and identify potential insider abuse among tax exempt organizations") and a soon-to-be-published TE/GE Consolidated Examination Internal Revenue Manual.

• The launch of the Tax Exempt Organization Search Modernization project, which will include "a dataset guide, data dictionary, indices, annotated tax forms, schemas, FAQs and regular updates."

While the Letter also highlighted the hiring of 197 employees, it later reveals that because of attrition and other adjustments TE/GE only had a net increase of seven permanent staff for the fiscal year.

As of the end of the year, there were 541 employees assigned to the Exempt Organizations function. Those employees started 2,529 examinations and closed 2,464 examinations. One of the results of the examinations were proposed revocations of 141 tax-exempt entities. This compares with the closure of 119,491 determination applications, including 103,073 approvals (98,417 under 501(c)(3)).

Lloyd Mayer

 

More Thoughts on NIL Collectives

Sometimes I like to share my own perspective on issues previously covered well by my colleague bloggers. In this case, I’m following up two posts (this one and this one) by my colleague Darryll Jones on IRS guidance issued last May about the possibility of tax-exempt status for so-called NIL collectives.  I also like to take the opportunity to recommend podcasts when they are informative, and in this case there are excellent episodes of The Daily and Taxes for the Masses (discussion of tax-exemption begins at minute 12:50).

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

In my view, the weakest part of the Memorandum is that it doesn’t really explain why NIL payments to student athletes do not potentially serve the charitable purpose of advancing education or amateur sports competitions, even though athletic scholarships presumably would. Instead of distinguishing between merit-based athletic scholarships (that presumably do not create an impermissible private benefit) and NIL payments (that do), it discusses need-based scholarships, which would clearly be permissible because mitigating poverty is a well-established charitable purpose. The comparison between need-based scholarships and NIL payments is kind of a red herring, since it’s so obvious how those two kinds of payments are different from each other. But I know of no authority to support the idea that scholarships based on athletic ability rather than need fail to advance a charitable purpose because they are not need-based. Obviously, NIL payments and athletic scholarships are different from each other, and so this weakness of the Memorandum does not mean that it is wrong. It just fails to explain what is materially different between NIL payments and athletic scholarships when evaluating private benefit to student athletes.

But the fact that NIL payments do not themselves constitute a charitable purpose does not mean that NIL Collectives that pay them necessarily fail to qualify for tax-exempt status. Once a noncharitable purpose (NIL payments) is identified, the collective must determine if its noncharitable activities constitute a private benefit to the student athletes that is too substantial, either quantitatively or qualitatively. Professor Jones’s January 10 post cites a Chronicle of Philanthropy article that describes a new charitable NIL collective (“Hail! Impact”) that purports to qualify for tax-exempt status even though it makes NIL payments to student athletes. The organization’s theory is that so long as 70% of its funds are used for a proper charitable purpose, the 30% of its funds that are used for NIL fees do not create a substantial private benefit, either quantitatively or qualitatively. The article also states that the organization, “worked with the IRS and believes it is the first NIL collective to be designated a charity since the agency issued its guidance about donations.” In other words, the IRS appears to have blessed this 70/30 split as the proper way to structure an NIL collective. Given that donating money in general support of athletic programs at a tax-exempt college or university has always been treated as a tax-exempt purpose, NIL Collectives could be formed to transfer 70% of all contributions to the university in support of its athletic programs (and presumably could be spent on merit-based athletic scholarships) and the remaining 30% could be spent on NIL payments to student athletes. It remains to be seen how many NIL collectives will choose this path and how many will simply organize as profit-making ventures for their investors, taking as much profit as they can from exploiting the NIL rights of student athletes.

The podcasts I recommended take the position that charitable NIL collectives are an abuse of the Tax Code. But the fact is that under current law, there is nothing impermissible about an NIL Collective making NIL payments to athletes, as long as that activity is insubstantial in relation to its charitable activities. That’s why charities can engage in lobbying activities, for example, or enter into a joint venture with for-profit partners, or pay relatively high (but reasonable!) fees to fundraising firms, or engage in any number of other activities. As many of the Nonprofit Law Professor Blog posts point out, there are areas in which the law of private benefit probably fails to sufficiently protect the nonprofit sector. I definitely agree that a more coherent framework would be preferable to the one we have. But I’m not sure I am persuaded that I should be outraged by tax-exempt NIL collectives. If donors want to give to universities’ athletic programs and “on the side” provide NIL payments to student athletes, I’m OK with that. I think these NIL payments are less likely to undermine the educational objectives of the schools than those made by ordinary for-profit investors, and I even (perhaps naively) think they might be less exploitative of the athletes. If fans want to donate to make payments to student athletes, don’t we imagine, at least as a starting point, that they are might care more about those student athletes than investors who are simply trying to make a buck off a teenagers’ NIL value? Or do I need to go back and re-read my Milton Freidman?

--Benjamin Leff

Donor Disclosure Cognitive Dissonance

The whole dark money issue creates cognitive dissonance in all of us, I think.  "Hooray NAACP  v. Alabama ex rel. Patterson, way to go Supremes!"  But then "Boo Americans for Prosperity Foundation v. Bonta, you suck, Supremes!"  The Daily Beast reports on the latest example.  The headline screams Republicans Are Making ‘Dark Money’ Even Darker for 2024. Yep, those evil Republicans are at it again.  But, well, the story is about Protect Our Winters,  a "left-leaning" nonprofit thumbing its nose at the FEC on the strength of the position asserted by the Republican Commissioners in the minority on the FEC.  I love a story that allows me to take both sides, don't you?

For years, dark money groups have enjoyed certain advantages that offer donors anonymity—putting the proverbial “dark” in “dark money.”  But late last month, one small outside group quietly told election law regulators to shove off when watchdogs demanded to see the group’s donors, a move that legal experts say could signal a profound shift in campaign finance disclosure laws, making dark money even darker just in time for the 2024 election.

The group, a left-leaning climate change advocacy organization called “Protect Our Winters Action Fund,” was standing its ground after a notice from the Federal Election Commission flagged the group’s failure to disclose contributors, as the law requires.  In response, POWAF—a 501(c)(4) nonprofit—simply declined to disclose its donors. And as a justification, the group cited a policy statement from the FEC’s three Republican commissioners released in June 2022, signaling they would not enforce “dark money” disclosure rules as courts had previously decided.

That policy statement does not carry the force of law. And legal experts told The Daily Beast that the commissioners’ memo—written in response to two federal court rulings that had interpreted the law the opposite way—undercuts judicial decisions favoring transparency.  Instead, these experts said, GOP commissioners are apparently signaling they will unilaterally refuse to enforce the law as courts have defined it. With all FEC enforcement decisions requiring support from four of the six commissioners, this three-commissioner Republican contingent could block any action.

While the mechanisms involved may seem highly technical and obscure, the potential consequences are broad and easy to understand.  In short, transparency advocates say, if outside groups like POWAF take advantage of the GOP commissioners’ posture, those groups could continue to keep their donors secret—even though the courts have ruled otherwise—without risking penalties. The upshot, experts worry, could be a murky operational environment for some of the most powerful and well-funded outside spending groups in the country, during an election cycle that is, once again, shaping up to be the most critical in recent history.

Brendan Fischer, a campaign finance lawyer and deputy executive director of the watchdog group Documented, said that half of the commissioners are undercutting the rulings of two federal courts, allowing dark money groups to “continue hiding their donors.”  “A D.C. District Court and the D.C. Circuit have both held that nonprofits which spend money on independent expenditures must disclose their political contributors,” Fischer told The Daily Beast. “But just half of the FEC’s commissioners are aiming to protect dark money and render those decisions meaningless.”

What’s more, the crux of the GOP’s interpretation—that the federal courts hadn’t stipulated a replacement for the regulation they vacated, and that the agency they run has still failed to, in their view, provide “definitive guidance” for reporting and enforcement—raises the question of whether dark money groups are required to disclose any donations at all.

darryll k. jones

NASCO Reiterates Criticism of IRS Form 1023-EZ

In response to a general request from the Internal Revenue Service for comments on its forms for tax-exempt organizations, the National Association of State Charity Officials (NASCO) sent a letter repeating its longstanding concerns regarding Form 1023-EZ.  Here is NASCO's summary of that letter:

In the letter, we underscore NASCO’s longstanding position that the 1023-EZ should be revisited and reiterate the need for timely availability of Forms 990. We highlight how the use of the Form 1023-EZ combined with the IRS’s retroactive reinstatement procedures under section 4 of Rev. Proc. 2014-11 can harm the public interest and enable scam charities to fly under the radar with serious consequences for donors, public funds, and confidence in the charitable sector.

Lloyd Mayer

Federal Grand Jury Indicts Former Sacramento Goodwill CEO for Allegedly Diverting $1.4 Million

The Sacramento Bee reports that a federal grand jury indictment unsealed last week charges the former chief executive officer of Goodwill Industries of Sacramento Valley & Northern Nevada for wire fraud and identity theft charges arising from his alleged diversion of $1.4 million in funds from the charity for his own benefit. More specifically, the indictment contains "nine counts of wire fraud, aggravated identity theft and three counts of monetary transactions with proceeds of specified unlawful activity." The article reports that the charity, which is not named in the indictment, fired the CEO in July 2021 after a routine audit discovered a series of questionable transactions, which triggered an internal investigation by the Board of Directors. The DOJ also issued a press release, with a link to the indictment.

While we do not have all the details, it is refreshing to see that a charity's internal controls caught up to the alleged wrongdoing despite the CEO's reported extensive attempts to hide them. And it is reassuring to see a charity's board act promptly and thoroughly to address the discovered irregularities.

Additional coverage: CBS News Sacramento; KCRA.

Lloyd Mayer