Friday, May 14, 2021

Will the NRA's "Course Correction" Succeed?

ImagesThe Bankruptcy Court trial and the resulting decision dismissing the National Rifle Association's bankruptcy case revealed some interesting information about the NRA and its governance and financial situation. First, and as media coverage highlighted, the decision to file the bankruptcy case was made with little involvement of the board or senior officers beyond chief executive officer Wayne LaPierre (formal title: executive vice president) and "not . . . in good faith but instead . . . as an effort to gain an unfair litigation advantage in the NY AG Enforcement Action and as an effort to avoid a regulatory scheme." Second, testimony during the trial revealed a host of facts relating to governance and financial misconduct that even the NRA's counsel acknowledged were cringeworthy. But what may prove to be most important in the long run even though it garnered much less coverage was the court found that what the NRA has labeled a "course correction" has resolved a number of governance and financial concerns, perhaps enough to save the NRA from dissolution in the NY AG proceeding and from the financial hole it has dug for itself.

On the first point, the court stated:

What concerns the Court most though is the surreptitious manner in which Mr. LaPierre obtained and exercised authority to file bankruptcy for the NRA. Excluding so many people from the process of deciding to file for bankruptcy, including the vast majority of the board of directors, the chief financial officer, and the general counsel, is nothing less than shocking.

As for the filing motivation, after lengthy consideration of the various reasons asserted and testimony on this point, including particularly from Mr. LaPierre, the court stated:

The Court finds, based on the totality of the circumstances, that the NRA’s bankruptcy petition was not filed in good faith but instead was filed as an effort to gain an unfair litigation advantage in the NYAG Enforcement Action and as an effort to avoid a regulatory scheme. This constitutes cause for dismissal under section 1112(b)(1) of the Bankruptcy Code.

On the second point, others have documented how trial testimony revealed numerous governance and financial failures. For a detailed if not unbiased summary, see this opinion piece from the Washington Post. These failures included details of LaPierre's personal and family expenses paid for by the NRA, and attempts to conceal those payments. 

But there is another point that may ultimately turn out to be the most significant, even though it has garnered the least coverage. In rejecting the appointment of a trustee or examiner, the court said the following (citations omitted):

While there is evidence of the NRA’s past and present misconduct, the NRA has made progress since 2017 with its course correction. Whether it is yet complete or not, there has been more disclosure and self-reporting since 2017. Both Ms. Rowling and Mr. Erstling, the NRA’s Director of Budget and Financial Analysis, testified that the concerns they expressed in the 2017 Whistleblower Memo are no longer concerns. Mr. Frazer testified regarding the compliance training program that the NRA now has for employees. Mr. Spray testified credibly that the change that has occurred within the NRA over the past few years could not have occurred without the active support of Mr. LaPierre. It is also an encouraging fact that Ms. Rowling has risen in the ranks of the NRA to become the acting chief financial officer, both because of her former status as a whistleblower and because of the Court’s impression of her from her testimony as a champion of compliance.

 

In short, the testimony of Ms. Rowling and several others suggests that the NRA now
understands the importance of compliance

Of course even if the NRA manages to eventually put its legal problems behind it, it will still have to deal with a slow burn financial crisis. As Brian Mittendorf detailed in 2019, the NRA has for years spent more than it brought in, creating a potential financial crisis. And that crisis is exacerbated by a point that came out during the trial and that Mittendorf highlighted on Twitter: of the NRA's approximately 5 million members, 2 million or 40% are life members who apparently have already paid all of the dues they will ever owe to the NRA. Whether course correction will be sufficient to right both the legal and financial aspects of the NRA remains to be seen.

Lloyd Mayer

May 14, 2021 in Federal – Judicial, In the News | Permalink | Comments (0)

Trump Supporters, Nonprofits, and the Law

Facebook-tileIn 2016, the rise of Donald J. Trump turned a spotlight on his purported charitable activities and made "self-dealing" and similar legal terms headline news. With his departure from office (and the dissolution of his family foundation in the face of a New York Attorney General lawsuit), it might be expected that such topics would once again return to news obscurity. But legal issues raised by the involvement of some of his supporters with nonprofits continue to garner new headlines.

Just in the past month, three prominent supporters have had that spotlight shine on them and their nonprofit-related activities. As reported by the Washington Post, federal authorities have indicated Brian Kolfage, who worked with Trump-advisor Stephen K. Bannon on the "We Build the Wall" crowdfunding campaign and then 501(c)(4) nonprofit, with filing a false tax return for allegedly failing to report hundreds of thousands of dollars he received from that effort and other sources.  And as reported by the Associated Press, former Trump campaign lawyer Sidney Powell now faces accusations in the lawsuit brought against her by Dominion Voting Systems that she used Defending the Republic, which claims to be a 501(c)(4) nonprofit, to pay for her personal legal expenses, an accusation she denies. And the fallout for Jerry Falwell, Jr. continues as Liberty University has now sued him for breach of contract and breach of fiduciary duties based on his alleged cover up of a personal scandal that led to his resignation as president and chancellor of the university.

Finally, congressional democrats continue to push for more information about possible tax-exempt nonprofit organization involvement in the January 6th attack on the Capital. As reported by Tax Analysts (subscription required), at this past week's ABA Tax Section virtual meeting a senior advisor to the Senate Finance Committee noted that Chair Ron Wyden remains interested in ensuring the IRS looks into which tax-exempt organizations helped plan the riots and whether any of them incited violence, thereby undermining their tax-exempt status.

Lloyd Mayer

May 14, 2021 in Federal – Executive, Federal – Judicial, Federal – Legislative, In the News | Permalink | Comments (0)

Eighth Circuit in Mayo Clinic Decision Partially Upholds Educational Organization Regulation and Remands Case

8TH_seal_appellate_option1_1The U.S. Court of Appeals for the Eighth Circuit in Mayo Clinic v. United States partially upheld, and partially rejected, the "educational organization" regulation at the heart of the case. The result was the court found that the summary judgment record was insufficient to grant victory to either the Clinic or the government and so remanded the case for further proceedings. This result means that the government has avoided, for the most part, a major expansion of an exception not only to the unrelated business income tax debt-financed rules but also an exception to the definition of private foundation. 

The regulation at the heart of the case is 26 C.F.R. § 1.170A-9(c)(1), which provides:

An educational organization is described in section 170(b)(1)(A)(ii) if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes Federal, State, and other public-supported schools which otherwise come within the definition. It does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities. A recognized university which incidentally operates a museum or sponsors concerts is an educational organization within the meaning of section 170(b)(1)(A)(ii). However, the operation of a school by a museum does not necessarily qualify the museum as an educational organization within the meaning of this subparagraph.

The Clinic challenged the "primary function" and "merely incidental" requirements of the regulation, successfully asserting in federal District Court that these tests were inconsistent with this statutory definition of educational organization found in Internal Revenue Code § 170(b)(1)(A)(ii)):

an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on

For the Clinic this issue was critical because if, as the District Court found in granting the Clinic's motion for summary judgment, it qualified as an educational organization it was exempt from unrelated business income tax on its debt-financed income to a tune of more than $11 million over the seven years at issue. But a larger ramification of the District Court's holding was that Internal Revenue Code § 501(c)(3) educational organizations are also not private foundations under IRC § 509(a)(1). So if the District Court's view prevailed, a charity that otherwise would be classified as a private foundation likely could have escaped that classification and the restrictions that come with it by simply operating a modest educational program.

However, based on a lengthy discussion of the legislative history of sections 170 and 501(c)(3), the appellate court concluded the District Court was only partially correct. The appellate court agreed that the regulation incorrectly added the "primary function [must be] the presentation of formal instruction" test. At the same time, it found that it was appropriate to interpret the statute as requiring an educational organization both to have being educational as its primary purpose and to limit its noneducational activities to being merely incidental to that primary purpose. It then found the summary judgement record to be insufficient to grant summary judgment to either the Clinic or the government under this interpretation, remanding the case for further proceedings (which presumably means a trial unless the parties settle).

Lloyd Mayer

Coverage: Law360 (sign-up required).

May 14, 2021 in Federal – Judicial | Permalink | Comments (0)

Thursday, May 13, 2021

Failure to Prove Ownership or Exhibition of African Art Collection Results in Disqualification Under 501(c)(3)

DownloadIn Tikar, Inc. v. Commissioner, the U.S. Tax Court upheld the IRS' revocation of recognition of tax-exempt status under Internal Revenue Code section 501(c)(3). The court found that the Texas nonprofit corporation failed to demonstrate that it operated exclusively for one or more exempt purposes set forth in section 501(c)(3) for two reasons. While it is reassuring to see there is some IRS audit activity still happening, it is also disconcerting to realize it took more than 15 years for the IRS to reexamine the initial recognition of exemption. 

The court's first reason for upholding the revocation was the court found the nonprofit failed to establish that it actually owned the collection of Tikar artifacts at issue. (As the court explained, "Tikar was one of the tribes in Cameroon when it was controlled by Belgium in the 19th and 20th centuries.")  This lack of ownership meant that the nonprofit's activities relating to the collection provided a private benefit to the actual owner of the collection and a foreign entity that he controlled. 

Sec0nd, the court found that even if it assumed the nonprofit had an ownership interest in the collection or other African artifacts, the nonprofit failed to establish that it actually had displayed any of the items or engaged in other activities relating to them that furthered an exempt purpose for many years. Its failure to do meant it was not operated exclusively to further an exempt purpose.

Based on the court's detailed findings regarding the failure of the nonprofit to provide evidence supporting its assertions regarding its activities, the court's conclusion is not surprising. It is also is somewhat reassuring to know the IRS is engaging in some audit activity - here specifically the audit that began in 2015 of the 2012 Form 990-PF filed by the nonprofit - which is what led to the revocation. But given that the nonprofit had received its favorable determination letter in 1999 and appears to have both failed to transfer the collection and to engage in required activities since then, it is a bit concerning that it took the IRS more than 15 years to select the nonprofit's return for audit. While there is no indication in the opinion regarding what triggered the audit, it may be that a 2007 lawsuit relating to the collection drew the IRS' attention. If that was the case, who knows if and when the IRS would have audited one of the nonprofit's returns absent that litigation.

Lloyd Mayer

May 13, 2021 in Federal – Judicial | Permalink | Comments (0)

Wednesday, May 12, 2021

NRA Bankruptcy Case Dismissal Quick Takes & Media Coverage

ImagesHere is a round up of quick takes on the dismissal of the National Rifle Association's bankruptcy case and what it means for the ongoing lawsuit by New York Attorney General Letitia James seeking dissolution of the NRA:

And here is a sampling of the extensive media coverage:

Lloyd Mayer

May 12, 2021 in Federal – Judicial, In the News | Permalink | Comments (0)

Monday, April 26, 2021

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

210423143836-supreme-court-2021-large-169The 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

April 26, 2021 in Federal – Judicial, In the News | Permalink | Comments (0)

Tuesday, April 6, 2021

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

April 6, 2021 in Current Affairs, Federal – Judicial | Permalink | Comments (0)

Thursday, April 1, 2021

Nonprofit Profs File Amicus Brief in Supreme Court Donor Disclosure Case

DownloadA 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

April 1, 2021 in Federal – Judicial, In the News | Permalink | Comments (0)

Sunday, March 7, 2021

Fairbairn v. Fidelity Charitable: Duty Remains Unclear, Written Policies Key

DownloadA federal district court has ruled in favor of Fidelity's donor advised fund sponsor organization ("Fidelity Charitable")  in a lawsuit brought by donors upset with how the organization handled a large stock donation. A few thoughts on the February 26th decision in Emily Fairbairn et al. v. Fidelity Investments Charitable Gift Fund:

  • The case shows how important the DAFs associated with commercial investment firms have become. It is disputes involving donors for these DAFs that are likely to be the primary source of litigation in this area going forward, as the attention this case garnered illustrates. The court even stated that DAFs are housed at "a 501(c)(3) nonprofit organization that has usually been created by a for-profit financial institution" (top of page 3). I am not sure the "usually" is correct, but that is clearly the court's perception, and likely the current perception of much of the public.
  • The case shows the importance of clear and well communicated written policies for DAF sponsors. The Fairbairns lost in part because some of their allegations contradicted Fidelity Charitable's written policies regarding how non-monetary donations would be handled that had been repeatedly shared with them. For example, the court found that the Fairbairns failed to prove by a preponderance of the evidence that Fidelity Charitable had promised to not sell any shares until January 2018, in large part because even if an oral promise along those lines had been made it was unreasonably to rely on it given the written materials provided (top of page 8). The court also found that even if Fidelity Charitable had a duty to the Fairbairns, Fidelity Charitable did not violate that duty in part because because the immediate sale of donated shares was consistent with Fidelity Charitable's published policies (bottom of page 15).
  • The case leaves for another day whether DAF sponsors owe a duty of care to DAF donors. The court concluded that if a duty was owed under California law it is not the same as the duty owed by an investment advisor to an investor who owns the relevant securities (page 18). But more importantly, the court decided to "not finally resolve whether Fidelity Charitable owed the Fairbairns a duty of care under California law" as doing so was not necessary for it to rule in favor of Fidelity Charitable. So it will be left to future courts, including in California, to resolve that important issue.

Media Coverage: Bloomberg (subscription req3uired); Law360 (sign up required); Wall Street Journal (subscription required).

Lloyd Mayer

March 7, 2021 in Federal – Judicial, In the News | Permalink | Comments (0)

Thursday, February 25, 2021

Americans for Prosperity v. Becerra - What's at Stake?

Exciting times in the world of nonprofit law, as the Supreme Court will soon decide a case with potentially significant implications for regulation of nonprofits. Nonprofits challenge the constitutionality of a California law that requires the organizations to provide their unredacted Form 990 – including Schedule B’s list of major donors – to the State as a condition of soliciting donations in the state. image from www.thomasmoresociety.org

The petitioners/plaintiffs – conservative organizations Thomas More Law Society and Americans for Prosperity Foundation -- cite the risk of the information being publicly disclosed by the state and the fear their donors possess of being harassed if their support for these organizations is made public. The plaintiffs rely heavily on the NAACP v. Alabama case from the 1950s, where the Supreme Court struck down an Alabama ruling that required the NAACP to publicly disclose its members, finding that such a disclosure would pose significant challenges to the ability to associate to advocate against oppression. Petitioners do argue that their donors may be less willing to donate and may face reprisal if their identities are known, but they do not and cannot argue that they face the same levels of risk that members of the NAACP faced in the 1950s South. The analogy is further strained by the fact that California has promised not to publicly disclose the identity of major donors, which further reduces the risk to associational rights.

The government, in contrast, cites to Citizens United and Doe v. Reed, which blessed laws requiring disclosure of donors in election-related contexts as a way of supplying the electorate information on which to judge the messages we’re hearing. Yet California’s law isn’t triggered by election-related speech as in Doe and Citizens United. Instead, it is triggered by charitable solicitation for any cause, and applies broadly to organizations across the nonprofit spectrum.

Relying on precedent, the 9th Circuit rejected out of hand the plaintiffs’ facial challenge to California’s law. And finding that the plaintiffs failed to prove their case (rejecting the district court’s factual findings to the contrary), the 9th Circuit also rejected the plaintiffs’ as-applied challenge to the disclosure requirement. The Second Circuit had reached a similar conclusion in a challenge to an analogous provision in New York’s law, and there wasn’t a split on this narrow point. Yet the Supreme Court agreed to take the case, which will be argued towards the end of this term. There are a lot of vulnerabilities in the case for California (such as unfavorable factual findings by the district court, a sloppy regulatory canvas (for example, not enshrining the rule against public disclosure in statute)), but a loss for California could have ramifications well beyond California and well beyond the specific mandate challenged here.

While the entire case is complex, here are some of the questions that the Court might find it necessary to address:

  • What is the standard of review: Is it strict scrutiny, intermediate scrutiny, “exacting” scrutiny, or something else entirely?
  • Is the case best decided as a facial or as-applied challenge? Does it matter?
  • Is a constitutional analysis only required upon a threshold associational showing of a risk of threats/violence/harassment/something else, or does it apply even in the absence of this predicate showing?
  • Assuming that the mode of analysis is, or is similar in structure to, strict/exacting/intermediate scrutiny, what are valid government interests that would justify the compelled disclosure, and what level of proof is needed? Conversely, what are the relevant associational interests at stake, and what level of proof is needed?
  • Does the rule change depending on the content area of the association’s speech (political v. ballot initiative v. lobbying v. other)? The parties seem keen to use content of speech (election-related versus something else) as a dividing line.
  • What effect, if any, does the fact that these organizations already provide this information to the IRS have on their challenge? (For example, does the constitutional analysis change depending on whether the compelled disclosure is in the context of granting tax exemption (the IRS requirement) versus engaging in charitable solicitation (California rule)?

Joseph W Mead

February 25, 2021 in Federal – Judicial | Permalink | Comments (2)

Saturday, January 9, 2021

Big Pharma, Charities, and Kickbacks

Download (1)While not necessarily covered much in the nonprofit press, there has been a steady stream of news about federal officials charging pharmaceutical companies with using charities to funnel illegal kickbacks under Medicare. Just last month, Biogen agreed to pay a $22 million fine to resolve claims it used two 501(c)(3) foundations as conduits to cover the copay obligations of Medicare patients in order to induce those patients to purchase its drugs. In its press release, a Department of Justice official noted that is but the latest of a number of settlements relating to similar misconduct.

And also last month, a federal district court denied the motion of pharmaceutical company Regeneron Pharmaceuticals to dismiss similar charges brought against it. The 501(c)(3) foundation involved in that case is the Chronic Disease Fund, now operating as Good Days, which allegedly received tens of millions of dollars from Regeneron.

Lloyd Mayer

January 9, 2021 in Federal – Judicial, In the News | Permalink | Comments (0)

Supreme Court Grants Cert in California Donor Disclosure Cases

DownloadThe Supreme Court of the United States agreed yesterday to hear two cases challenging a California law that requires charities to share the donor information reported to the IRS with state authorities, subject to those authorities keeping the information confidential. The cases are Americans for Prosperity v. Becerra and Thomas More Law Center v. Becerra. The Court consolidated the cases, with one hour of oral argument total.

The question presented by the petition a write of certiorari in the first case is:

Whether the exacting scrutiny this Court has long required of laws that abridge the freedoms of speech and association outside the election context—as called for by NAACP v. Alabama ex rel. Patterson, 357 U.S.
449 (1958), and its progeny—can be satisfied absent any showing that a blanket governmental demand for the individual identities and addresses of major donors to private nonprofit organizations is narrowly tailored to an asserted law-enforcement interest.

The questions presented by the petition a write of certiorari in the second case are:

1. Whether exacting scrutiny or strict scrutiny applies to disclosure requirements that burden nonelectoral, expressive association rights.
2. Whether California’s disclosure requirement violates charities’ and their donors’ freedom of association and speech facially or as applied to the Law Center.

The Court did not announce a decision with respect to a third case involving the same law (Institute for Free Speech v. Becerra). If the Court decided not to hear that case, it is expected to issue an order to that effect on Monday.

For more details, follow the links provided above to the SCOTUSblog pages for the cases. 

Lloyd Mayer

January 9, 2021 in Federal – Judicial | Permalink | Comments (0)

Friday, January 8, 2021

Negative Scrutiny of Nonprofit Hospitals Continues, Along With Consolidations

Download (2)Nonprofit hospitals are, along with all hospitals, struggling with the COVID-19 pandemic. But that role has not caused a let up in negative scrutiny of their activities by journalists, Senator Chuck Grassley, or state legislators. It also has not halted the continuing consolidation of health care entities.

For example, ProPublica reports that "Nonprofit Hospital Almost Never Gave Discounts to Poor Patients During Collections, Documents Show," describing the practices of Methodist Le Bonheur Healthcare, Memphis' largest health care system. And the N.Y. Times reports that "The largest hospital system in New York sued 2,500 patients for unpaid medical bills after the pandemic hit," describing the activities of state-run Northwell Health system, which consists primarily of 501(c)(3) tax-exempt nonprofits. 

Responding to these and other concerns, Senate Finance Committee Chairman Chuck Grassley wrote a public letter to every member of the Senate Finance and Judiciary Committees about the need for new attention to the tax laws governing nonprofit hospitals. Senator Grassley is rotating off of the Finance Committee, having hit his term limit for that committee under Senate GOP rules, and of course his influence would have been reduced by the Democrats taking control of the Senate under any conditions. But he likely will still have influence over such matters in the new Congress, giving his longstanding interest in the rules for tax-exempt organizations.

In the states, the Philadelphia Inquirer reports that "New Jersey may be the first state to impose per-bed fees on nonprofit hospitals for municipal services." The $3 per day per licensed bed fee is paired with preservation of nonprofit hospital property tax exemption, which has been under increasing attack in New Jersey, with approximately two-thirds of the state's nonprofit hospitals having been taken to tax court. However, Governor Phil Murphy has not yet said if he will sign the bill.

Finally, consolidation of nonprofit health care providers also continues. For example, the Federal Trade Commission recently lost an appeal of a federal district court's denial of a motion for a preliminary injunction to block the merger of Thomas Jefferson University and Albert Einstein Healthcare Network in the Philadelphia area. And 501(c)(4) nonprofit health insurers Tufts Health Plan and Harvard Pilgrim Health Care have now completed their merger after having received federal and state approvals (after some divestment).

Lloyd Mayer

January 8, 2021 in Federal – Judicial, Federal – Legislative, In the News, State – Legislative | Permalink | Comments (0)

Tuesday, December 29, 2020

Summary judgment briefs filed in Girl Scouts v. Boy Scouts trademark litigation

The Washington Post has a story, "Girl Scouts rebuke Boy Scouts in escalating recruitment war," that begins:BSA Unveils Name of Program for Older Boys and Girls, Launches “Scout Me  In” Campaign – New Birth of Freedom Council, BSA

The Girl Scouts are in a “highly damaging” recruitment war with the Boy Scouts after the latter opened its core services to girls, leading to marketplace confusion and some girls unwittingly joining the Boy Scouts, lawyers for the century-old Girl Scouts organization claim in court papers.

The Girl Scouts' summary judgment brief is available here and begins:

This is a trademark dispute brought by Girl Scouts to halt ongoing marketplace confusion caused by Boy Scouts throughout the United States, and to prevent further harm to the famous GIRL SCOUTS brand. The level of confusion resulting from Boy Scouts’ use of terms like GIRL SCOUTS, SCOUT, SCOUTS, SCOUTING, SCOUTS BSA and SCOUT ME IN to market its core programs to girls is both extraordinary and highly damaging to Girl Scouts.

On its motion, Boy Scouts asks the Court to ignore all of this and hold, as a matter of law, that confusion and dilution are unlikely, even though the GIRL SCOUTS trademark is concededly famous, the parties’ marks are obviously similar, and the services they offer are, since 2017, directly competitive. This proposition is untenable, and based on a wholly misleading factual presentation that sidesteps or ignores the mountain of evidence of confusion and dilution that is central to this case. Most fundamentally, Boy Scouts repeatedly downplays the momentous change in its business that was announced in 2017, when it decided to abandon its historic identity as an organization that only served boys by expanding to girls its two core programs: CUB SCOUTS and the program now known as SCOUTS BSA, formerly known as BOY SCOUTS. That major change brought the parties squarely into the same market

The Boy Scouts' summary judgment brief, available here, begins:

GSUSA's trademark lawsuit against the Boy Scouts of America (the “BSA”) arising from the BSA's 2018 “Scout Me In” marketing campaign is utterly meritless, and should never have been filed. The BSA is the senior user of SCOUT-formative branding, having been founded before GSUSA. When GSUSA chose to change its name from Girl Guides to Girl Scouts, it assumed the risk that Americans might assume the parties are related. Not surprisingly, GSUSA's own research confirms that half of Americans indeed held that belief as of 2017—before any of the events in question in this lawsuit. GSUSA also has voluntarily associated itself with the BSA for decades, including by participating in joint events and sharing facilities. And, GSUSA deliberately abandoned the use of SCOUT alone at least 30 years ago, in favor of always using GIRL before SCOUT.

GSUSA's present claim that the BSA's 2018 “Scout Me In” marketing slogan suddenly has caused marketplace confusion is bereft of any evidence supporting a causal connection to confusion. The Court should grant summary judgment in the BSA's favor on all claims.

-Joseph Mead

December 29, 2020 in Federal – Judicial | Permalink | Comments (0)

Friday, December 11, 2020

CA Counters US Call for SCOTUS to Grant Cert in CA Sched B Disclosure Case

In Americans For Prosperity Foundation v. Becerra, California recently filed a Supplemental Brief countering the US brief in the case, which argued that while the US Schedule B requiring donor disclosure of charitable organizations was constitutional, the California version was unconstitutional:

"1. The United States principally contends that the court of appeals applied the wrong standard of scrutiny. U.S. Br. 8-19. But it is difficult to see any material difference between the standard embraced by the United States and the one applied below. According to the United States, “compelled disclosures that carry a reasonable probability of harassment, reprisals, and similar harms are subject to exacting scrutiny.” Id. at7. Exacting scrutiny, in turn, calls for “a form of narrow tailoring” (id.) that requires “‘the strength of the governmental interest [to] reflect the seriousness of the actual burden on First Amendment rights’” (id. at 9); that dem ands a means-ends fit that is “‘reasonable’” but not “‘perfect’” (id. at 16); and that ensures that the compelled disclosure does “not sweep significantly more broadly than necessary to achieve [a] substantial governmental interest” (id. at 12). See also id. at 9 (compelled disclosure requirements are valid where “the public interest in disclosure outweighs the harm”) (internal quotation marks and ellipses omitted). The United States also asserts that “narrow tailoring is to  some degree implicit in the requirement that the governmental interest in the compelled disclosure be ‘legitimate and substantial’” because “it is difficult to demonstrate a ‘substantial’ interest in a broad disclosure scheme when narrower disclosures would be sufficient.” Id. at 10-11.

The court of appeals held that California’s Schedule B filing requirement is subject to “‘exacting scrutiny,’” and it understood exacting scrutiny in the same way as the United States. Pet. App. 15a.1 It recognized that the “strength of the governmental interest must reflect the seriousness of the actual burden on First Amendment rights.” Id. (internal quotation marks omitted). It examined whether the State’s chosen approach swept too broadly. See id. at 19a-23a, 29a. And it determined that concerns about overly broad regulation are part and parcel of the substantial-relationship test. See id. at 15a-16a (requirement “that the State employ means ‘narrowly drawn’ to  avoid needlessly stifling expressive association” is not “distinguishable from the ordinary ‘substantial relation’ standard”).

The United States ignores the overlap between the court of appeals’ approach and its own and asserts that the lower court erred in declining to require an adequate means-ends fit. U.S. Br. 16. But what the court of appeals declined to adopt was “the kind of ‘narrow tailoring’ traditionally required in the context of strict scrutiny,” including the requirement that “the state . . . choose the least restrictive means of accomplishing its purposes.” Pet. App. 16a; see also Opp. 6, 14-15. And the United States itself agrees that strict scrutiny and its “particularly stringent form of narrow tailoring” do not apply to information-reporting requirements like the one at issue here. See U.S. Br. 16."

Philip Hackney

December 11, 2020 in Current Affairs, Federal – Judicial, State – Executive | Permalink | Comments (0)

Friday, November 20, 2020

Conservation Easement Battles Continue in Congress, DOJ, IRS, and the Courts

ImageThere is some much continuing activity relating to to conservation easements that it is difficult to keep track of everything. Fortunately, fellow blogger Nancy McLaughlin (Utah) has recently updated her comprehensive summary of court decisions, Trying Times: Conservation Easements and Federal Tax law (Sept. 2020). It undoubtedly will need to be updated for many years, as just last month taxpayers filed at least 27 Tax Court petitions relating to claimed conservation easement deductions according to Tax Notes (subscription required).

The Department of Justice has also provided more information in its lawsuit against promoters of syndicated conservation easements, including identifying 42 additional such deals, again according to Tax Notes. The Internal Revenue Service this week issued a memo emphasizing the use of summons and summons enforcement in syndicated conservation easement cases, among others, and  Chief Counsel recently issued a Notice providing further guidance about the settlement of such cases. Finally, Senators Grassley, Daines, and Roberts recently reintroduced the Charitable Conservation Easement Program Integrity Act targeting abusive conservation easement arrangements.

Additional Coverage: Washington Post ("Wealth investors seem to be exploiting land-conservation breaks, and the Senate is taking notice").

Lloyd Mayer

November 20, 2020 in Federal – Executive, Federal – Judicial, Federal – Legislative, In the News | Permalink | Comments (0)

Tuesday, November 17, 2020

Election 2020: Post-Election Challenges and What the Election May Mean for Nonprofits

DownloadWith the fading but still heated allegations about the 2020 election came at least two legal issues for Internal Revenue Code section 501(c)(3) charities seeking to be involved in the post-election litigation. One issue is to what extent charities can be involved in that litigation and related public debate without engaging in political campaign intervention. The Bolder Advocacy Program at the Aliiance for Justice provides helpful guidance on this point. But the other, perhaps more surprising issue, was whether 501(c)(3) Project Veritas may have put its tax-exempt status at risk during its attempts to find evidence of voter fraud. Fellow blogger Sam Brunson unpacks this issue over at The Surly Subgroup, concluding that if Project Veritas broke the law by helping and encouraging perjury by a Pennsylvania postal worker it may indeed have placed its tax-exempt status at risk.

But the bigger issue for most nonprofits is how the election may directly affect them or the positions they support. Before the election, the Chronicle of Philanthropy noted that the announced Biden tax plan "would steer aid to the poor but could deter some wealthy donors from giving." And in the wake of the election, the Chronicle of Philanthropy has collected a roundup of stories about how it is likely to affect philanthropy more generally. The consensus appears to be that incremental change is likely, with charities supporting more progressive policies cautiously optimistic but expecting a lot of hard work ahead.

UPDATE: The Chronicle of Philanthropy also just published an article with this headline: "Biden Transition Team Signals Big Role for Nonprofits Throughout Government." While that article is behind a paywall, the NonProfit Times has a list of over 40 nonprofit leaders that are among the 257 members of Biden's Agency Review Teams.

Lloyd Mayer

November 17, 2020 in Federal – Judicial, In the News, State – Judicial | Permalink | Comments (0)

Monday, November 2, 2020

Nonprofit Standing to Challenge Electoral Policies

Surprising no one, there is a flurry of litigation in federal and state courts right now seeking various remedies regarding the right to vote. While some of these challenges are brought by political parties or candidates or individual voters, many of these challenges are brought by nonpartisan nonprofits asserting standing on their own behalf and/or their members to challenge state laws that impede ballot access. Drawn from the SCOTUSBlog Election Litigation Tracker, meet some of the nonprofit litigants shaping election litigation in the courts, and the interests that they represent (below the break).

Continue reading

November 2, 2020 in Current Affairs, Federal – Judicial | Permalink | Comments (0)

Thursday, October 29, 2020

NRA executive personally under investigation by the IRS

Further troubles continue to rain down upon the heads of the top authorities at the National Rifle Association. Earlier this month it was announced that the Internal Revenue Service is investigating the possibility of bringing criminal charges against Wayne LaPierre, the executive vice president of the organization since 1991. Given the extent of the civil charges brought against the organization and its leaders by New York Attorney General Letitia James, which have been discussed in this blog in several prior posts, it is perhaps unsurprising that criminal prosecution might follow.

The Wall Street Journal, which reported this development at the beginning of October, states that the IRS is investigating LaPierre in particular (as opposed to the NRA at large) for potential tax fraud. Possibly the agency is investigating LaPierre’s taxes for activities entirely outside his decades-long role as an executive for the powerful nonprofit: however, given the proximity of this news in relation to Attorney General James’ attempt to entirely dissolve the NRA for its alleged shady business dealings, the possibility seems remote. LaPierre was unquestionably a central piece in the high-level decision making of the large 501(c)(3) organization, and the New York Attorney General called LaPierre out by name when she brought suit. It would seem that the civil suit seeking its dissolution is only the beginning for the NRA, and whether leaders within its network besides LaPierre will draw the Internal Revenue Service’s ire remains to be seen.

For a discussion of the Wall Street Journal piece and the underlying facts, see this article by Nonprofit Quarterly.

David Brennen, Professor at the University of Kentucky College of Law

 

 

October 29, 2020 in Current Affairs, Federal – Judicial | Permalink | Comments (0)

Monday, October 19, 2020

Fairbairn v. Fidelity implications for DAFs

Figured readers would be interested in this look by Brian Mittendorf at the implications for Donor Advised Funds of Fairbairn v. Fidelity that appears in HistPhil.org.

"One way the concern that commercial DAFs are donor-centric arises is in the competition between sponsoring organizations. The lawsuit alleges that Fidelity Charitable differentiated itself from other charitable options by its “superior ability to handle complex assets,” even stating in correspondence about the possibility of receiving a gift of one particular type of asset that “Vanguard can’t do this but we do it frequently.” The general public may think of competition among charities as focusing on who can best put gifts to charitable use. It turns out this is an antiquated notion: the intense competition centering on seamlessly receiving and converting complex assets for donors presents a stark contrast.

A related issue is that DAFs increasingly are vehicles that provide disposal options to donors for illiquid assets. In the Fairbairn case, the assets donated were technically liquid (they were publicly traded) but the size of the donation would threaten share price if it were a sale instead of a donation, an eventuality that formed the basis for the lawsuit. However, donating such assets permits a tax deduction for the value, even though an outright sale at that value would be problematic. "

And, "A final issue that surfaces in the Fairbairn case is that some DAF sponsors may implicitly or even explicitly be beholden to their commercial affiliates. Legally speaking, Fidelity Charitable is a distinct entity from Fidelity Investments; as is the case for Vanguard Charitable and Vanguard; and so on. Yet, the shared names and logos underscore a nontrivial affiliation. Critics have argued that the commercial DAFs invest funds heavily in their affiliated investment companies and, as such, generate substantial fees for them. This, in turn, could create incentives to retain funds in investments rather than distribute them to charitable endeavors. The allegations in the Fairbairn case are consistent with this fear."

Philip Hackney

 

October 19, 2020 in Current Affairs, Federal – Judicial, Federal – Legislative, In the News | Permalink | Comments (0)