Nonprofit Law Prof Blog

Politico Look at Ginni Thomas, Leonard Leo, Nonprofits and Citizens United

Politico had an extensively researched story looking at the history of Ginni Thomas and Leonard Leo and their association with nonprofits that have filed amicus briefs with the Supreme Court while directing money to Ginni Thomas.

From the story: "Two months before the Citizens United decision, but after the justices had signaled their intentions by requesting new arguments, attorney Cleta Mitchell — later to play a role in Donald Trump’s false claims about the 2020 elections — filed papers for Ginni Thomas to create a nonprofit group of a type that ultimately benefited from the decision. Leo was one of two directors listed on a separate application to conduct business in the state of Virginia. Thomas was president. She signed it on New Year’s Eve of 2009, and Crow provided much of the initial cash. A key Leo aide, Sarah Field, would come aboard to help Thomas manage the group, which they called Liberty Central.

After Liberty Central went public, it provoked an outcry over a Supreme Court justice’s wife promoting causes like overturning Obamacare that were before her husband’s court. Leo and Thomas changed gears. His network reactivated a dormant group, the Judicial Education Project, which would go on to become a major supplier of amicus briefs before the nation’s highest court. She created a for-profit consulting business using a similar name — Liberty Consulting — that enabled her to perform consulting work for conservative activist groups.

The Judicial Education Project supplied some of her business: Documents indicate Leo ordered at least one recipient of his groups’ funds, Kellyanne Conway, to make payments to Ginni Thomas for unspecified work, according to a Washington Post story earlier this year.

Now, Liberty Consulting is a focus of interest from congressional committees probing the Supreme Court’s ethics disclosures. Senate Democrats have demanded that Leo and Crow provide a list of “gifts, payments, or other items of value” they’ve given Thomas and her husband."

"Together, the probes have combined to raise the question of whether Leo’s groups have taken advantage of lax disclosure laws to send additional business and funds to Ginni Thomas, among other activists. That would be legal as long as Thomas was providing services commensurate with the payments."

Philip Hackney

University of Chicago Obtains Partial Summary Judgment in Dispute With Pearson Foundation

After more than five years of litigation - see previous coverage of the initial complaint and the federal district court's partial grant of a motion to dismiss - between The Thomas L. Pearson and The Pearson Family Members Foundation (and Thomas Pearson individually) and the University of Chicago, we have a ruling on the cross motions for partial summary judgment (2023 U.S. Dist. LEXIS 131701; 2023 WL 4868559). In a lengthy opinion dated July 31, 2023, the U.S. District Court for the Northern District of Oklahoma denied the plaintiffs' motion and granted the defendant University's motion in part.

The dispute arose over a $100 million grant to the University for The Pearson Institute for the Study and Resolution of Global Conflicts pursuant to a detailed Grant Agreement. According to the court, the Foundation and Mr. Pearson in an amended complaint asserted five claims: "(1) breach of contract, (2) breach of the duty of good faith and fair dealing, (3) fraudulent inducement, (4) unilateral mistake, and (5) equitable rescission." (The court in 2018 dismissed claims of breach of fiduciary duty and fraudulent concealment that had been stated in the initial complaint.) The court granted the University summary judgment on certain aspects of the breach of contract claim , on the unilateral mistake claim, and with respect to the plaintiffs' request for punitive damages (as well as striking one aspect of the breach of contract claim as being beyond the scope of the court-granted leave to amend the complaint). The remaining aspects of the breach of contract claim, along with the three other remaining claims, will now presumably proceed to trial, absent a settlement.

Lloyd Mayer

How to Not (and Maybe How To) Make Money Off of Tax-Exempt Political Organizations

Late last month, the U.S. Department of Justice announced the sentencing of three individuals "for soliciting millions of dollars in contributions to scam PACs." The press release further states:

According to court documents, from 2016 through at least April 2017, Tunstall, Reyes, and Davies operated two PACs – Liberty Action Group PAC and Progressive Priorities PAC – that solicited contributions from the public via robocalls and radio and internet advertisements. The two PACs represented that the contributions would be used to support the presidential nominees of the two major political parties, respectively.  Instead, the co-conspirators used the funds to enrich themselves and to fund additional fraudulent solicitations. Specifically, the two PACs raised approximately $4 million in contributions during the 2016 election cycle and subsequent months.

The penalties for this deception? A sentence of 10 years in prison, a sentence of 7 years in prison, and a sentence of 5 years of probation. Additional coverage: CNN.

As previously discussed in this space, the N.Y. Times recently had a lengthy story about five other tax-exempt political organizations that reportedly raised almost $90 million while only spending $800,000 on actual political activity. Yet that story indicates the four of those organizations still in existence have so far survived IRS scrutiny of their operations in the form of examinations that began a year or so ago. It remains to be seen whether this high profile coverage will lead to more critical IRS, and perhaps DOJ, attention.

I have not done a deep dive into the documents detailing the finances of either set of groups, but the key difference may be that the money flowing out of the tax-exempt section 527 organizations has to at least arguably go to outside vendors for actual services rendered, even if those services are mostly generating additional fundraising appeals.  Of course the fact that those vendors have financial connections to the individuals who also run the tax-exempt organizations sets off alarm bells, but that fact by itself does not make the payments illegal. And the organizations also have to be careful what is actually said in the irappeals for donations, as making specific promises to potential donors that are not kept is also problematic.

This last point is demonstrated by the recent sentencing of two individuals involved in the tax-exempt section 501(c)(4) organization "We Build The Wall" fundraising effort to 51 and 37 months in prison, respectively. The court also ordered that those individuals pay millions in restitution. In that case, one individual promised that he would  “not take a penny in salary or compensation” and that “100% of the funds raised…will be used in the execution of our mission and purpose.” In fact, the individuals involved directed for their personal benefit and use hundreds of thousands of dollars out of the more than $25 million raised.

Lloyd Mayer

Tax Law Center at NYU Files Brief in Buckeye Institute v. IRS

The recently formed Tax Law Center at NYU filed an amicus brief in the district court case of Buckeye Institute v. IRS. The Buckeye Institute has challenged the constitutionality of the IRS collecting substantial donor information on the Form 990.

From the Tax Law Center: "The Tax Law Center filed this amicus brief supporting the government’s motion to dismiss in The Buckeye Institute v. IRS. The case involves a constitutional challenge to a federal statute that has existed for more than 50 years—the requirement that charitable organizations identify their major donors in their federal tax filings if they wish to receive the benefits of tax-exempt status under section 501(c)(3) of the Internal Revenue Code. The Tax Law Center’s brief explains why this reporting requirement directly advances the government’s interest in revenue collection. As the brief concludes: “A finding that the requirement is unconstitutional would directly undermine the federal tax base and would threaten the integrity of the tax system. The requirement is crucial to the federal government’s revenue collection efforts, and it should be upheld in its entirety.” 

You can read the brief here.

Philip Hackney

Another Federal District Court Concludes the TEGE Commissioner Can Approve Church Tax Inquiries

While we continue to wait for Treasury to finalize the proposed regulations issued in 2009 (!) under Internal Revenue Code 7611 , churches subject to IRS church tax inquiries continue to challenge the approval process for those inquiries. Late last month, another federal district court concluded that the IRS Tax Exempt and Government Entities (TEGE) Division Commissioner is a sufficiently "high-level Treasury official" to approve such inquiries under that section. In God's Storehouse Topeka Church v. United States, the U.S. District Court for the District of Kansas rejected the church's arguments that only a higher official - either the Deputy Commissioner for Services and Enforcement or perhaps only the Commissioner or Treasury Secretary - are of high enough rank. In doing so, the court relied heavily on the reasoning that led to the same conclusion in United States v. Bible Study Time, Inc., 295 F.Supp.3d 606 (D.S.C. 2018). The court also rejected other objections to the IRS' third-party summons in the case.

Hat Tip: EO Tax Journal.

Lloyd Mayer

One Civil RICO Claim by LDS Donor Survives Motion to Dismiss in Federal District Court

Late last month, the U.S. District Court for the District of Utah issued an opinion in a lawsuit brought for a former member of and donor to the Church of Jesus Christ of Latter-Day Saints. In Gaddy v. Corporation of the President of the Church of Jesus Christ of Latter-Day Saints, the court dismissed almost all of the plaintiff's claims stated in an amended complaint on a variety of grounds, including that some of them would have required the court to inquiry into the truth of the Church's religious teachings and doctrines (which was the primary basis for dismissal of the plaintiff's original complaint as well). But a civil RICO claim survived for the following reasons, as stated in the court's opinion:

As alleged in the Amended Complaint, the court concludes Gaddy's third alternative civil RICO theory is based on a secular dispute concerning statements by Church leadership about the specific ways tithing, once received, would in fact be spent. . . . .

Here, Gaddy does not challenge the Church's tithing doctrine or teachings related to it. The court does not read her Amended Complaint to advance a claim that the doctrine is false. Gaddy instead points to specific factual statements allegedly made by the Church through its representatives concerning the Church's use of tithing funds and alleges those statements are false. The inquiry required to adjudicate this claim does not implicate religious principles of the Church or the truth of the Church's beliefs concerning the doctrine of tithing. This claim further does not require the court to determine whether the Church or its members were acting in accord with what they perceived to be the commandments of their faith. Gaddy has instead challenged secular representations concerning the use of money received by the Church. While the statements were made by Church officials, the church autonomy doctrine does not apply as a defense. The Church has not asserted any other challenge to Gaddy's RICO claim based on this alternative theory of liability. Accordingly, Gaddy's RICO claim based only on this alternative theory survives the Church's Motion to Dismiss.

The court also granted the plaintiff leave to further amend her complaint.

Lloyd Mayer

Federal District Court Affirms Bankruptcy Court's Approval of Boy Scouts Settlement

The Boy Scouts of America (BSA)'s comprehensive reorganization plan and global settlement of sex abuse claims continues its slow march through the federal judicial system. Late last month, the U.S. District Court for the District of Delaware affirmed the U.S. Bankruptcy Court's previous approval of a reorganization plan that provides $2.46 billion to settle sex abuse claims against the BSA, over the objections of some insurance companies and abuse claimants. While the opinion is lengthy (156 pages), here is the District Court's bottom line:

Appellants argue on many fronts that the Plan did not meet requirements for confirmation, and I have carefully considered each of these arguments. Based on the record, Appellants have failed to put forth evidence that would demonstrate clear error in the Bankruptcy Court's careful findings of facts. Finding no error in the Bankruptcy Court's legal conclusions either, I will affirm the Confirmation Order.

Coverage: Reuters.

Lloyd Mayer

Conservation Easements Update: Cert. Denial; Hearing on Proposed Regs; New Articles

The long legal grind relating to conservation easements continues, with no end in sight. Setting aside the periodic issuance of dispositive and procedural decisions in the many pending cases - about half-a-dozen such decisions over the past three or so months by my count - there have been two significant developments and two new articles of interest.

First, the Supreme Court of the United States denied certiorari in Oakbrook Land Holdings, LLC v. Commissioner, one of two federal appellate court decisions that had created a circuit split over the validity of a conservation easement regulation. The Court apparently took to heart Professor Michael Kane's recommendation that it not take up this issue.

Second, the Treasury Department held its public hearing earlier this month on proposed regulations designed to address court decisions holding syndicated conservation easement listing Notice 2017-10 to be invalid under the Administrative Procedure Act. According to a Thompson Reuters article, many commentators urged Treasury to retain a carveout for donee organizations. According to a Law360 article, some of the commentators also questioned whether the proposed regulations are needed now that Congress has enacted a new charitable deduction disallowance rule for certain conservation easement contributions. 

As for the articles, Vanderbilt Law Review has published a note authored by Molly Teague and titled Conservation Options: Conservation Easements, Flexibility, and the “In Perpetuity” Requirement of IRC § 170(h). And the Wildlife Society Bulletin published a short article by several scholars titled Conservation Easements: A Tool for Preserving Wildlife Habitat on Private Lands and proposing "a shift from primarily negative clauses and restrictive language to a more affirmative approach, developing language to proactively improve management of properties under conservation easement in order to maximize benefits to wildlife and ecosystems."

Lloyd Mayer 

 

Varsity Blues and Corner Boys: Defending The 568 Cartel

Corner boys, The Wire

Twenty years ago, HBO premiered a gritty urban drug crime drama set in B'more called The Wire.  It focused primarily on corner boys -- the small fry hustlers, the inner city version of last mile delivery in a long distribution chain.  The corner boys retailed pharmaceuticals from local retail shops set up at strategically located corners.  They were rich relative to overall wealth of the neighborhood.  They always had nice jeans, gold or silver jewelry and brand new Nikes or Lugs.  Of course the real wealth resided uptown -- Guilford, maybe -- at the start of the distribution chain.  More on that later. 

In other news it looks like its all over but the crying in the Varsity Blues scandal.  The mastermind, Rick Singer got 42 months for selling access to prestigious colleges and universities.  Felicity Huffman and a few less well known wealthy moms and dads received from 2 to four months in jail.   Lots of coaches got fired, too.  If what Rick Singer and the coaches were selling were drugs, rather than admission to highly selective universities, they would have been corner boys.  And if Rick and the coaches were corner boys, who would have been the kingpins, the ones getting rich at the start of the distribution chain?

THE TAX STUFF

Henry v. Brown University, et. al, an antitrust case working its way through the  Northern District of Illinois, pretty much identifies the elite colleges themselves as the kingpins.  At the same time, the complaint call into question whether those universities adequately serve the less wealthy.  DOJ is on the side of the plaintiffs.  And you can view all the pleadings and lots of media coverage here at plaintiff's counsel's website. 

For now, here is the long and short of it:  Colleges and Universities have, for about the past 20 years, enjoyed an antitrust exemption (the 568 exemption, which was allowed to sunset late last year) allowing them to fix prices by forming what the plaintiffs smartly label the "568 Cartel," But the exemption required the kingpins implement and adhere to need-blind admission policies.  Need blind admission policies means colleges can't give preferences to wealthy parents or donors in the hopes that admitting those students will lead to more big donations.  The complaint makes a serious case -- with many examples -- that elite universities, especially, practice affirmative action for the wealthy by giving rich kids preference.  Some of the universities even implement "separate and equal" admissions procedures for children of wealthy donors.  Here are a few snippets from the 61 page complaint (which has survived an onslaught of motions to dismiss):

1. Defendants are private, national universities that have long been in the top 25 of the U.S. News & World Report rankings for such schools. These elite institutions occupy a place of privilege and importance in American society. And yet these same Defendants, by their own admission, have participated in a price-fixing cartel that is designed to reduce or eliminate financial aid as a locus of competition, and that in fact has artificially inflated the net price of attendance for students receiving financial aid. Defendants participate in the cartel claiming the protection of Section 568 of the Improving America’s Schools Act of 1994 (the “568 Exemption”). This exemption from the antitrust laws, which otherwise prohibit conspiracies among competitors, applies to two or more institutions of higher education at which “all students admitted are admitted on a need-blind basis.” Section 568 defines “on a need-blind basis” to mean “without regard to the financial circumstances of the student involved or the student’s family.” 

2. Defendants have not been entitled to the 568 Exemption. Under a true need-blind admissions system, all students would be admitted without regard to the financial circumstances of the student or student’s family. Far from following this practice, at least nine Defendants for many years have favored wealthy applicants in the admissions process. These nine Defendants have thus made admissions decisions with regard to the financial circumstances of students and their families, thereby disfavoring students who need financial aid. All Defendants, in turn, have  conspired to reduce the amount of financial aid they provide to admitted students. This conspiracy, which has existed (with slightly varying membership) for many years, thus falls outside the exemption from the antitrust laws.

3. Defendants are members of the so-called “568 Presidents Group,” in which the members have agreed on “a set of common standards for determining the family’s ability to pay for college,” which the members describe as the “Consensus Approach.” Based on the Consensus Approach, in approximately 2003 the 568 Presidents Group (the “568 Cartel”) devised the Consensus Methodology, which is a common formula for determining an applicant’s ability to pay. Under the Consensus Methodology, an applicant’s ability to pay is a substantial determinant of the net price, which is the institution’s gross tuition plus fees for room and board, less institutional grant aid, charged to the applicant for attendance.

5. Defendants’ longstanding conspiracy would be immune from the antitrust laws only if they have all been complying with the 568 Exemption. In fact, however, at least nine Defendants (Columbia, Dartmouth, Duke, Georgetown, MIT, Northwestern, Notre Dame, Penn, and Vanderbilt) have been members of the 568 Cartel and have not qualified for the 568 Exemption throughout the Class Periods (defined below).

Essentially, the complaint alleges that the universities were never entitled to fix prices because they were hardly charitable, as that term relates to serving all without regard to wealth.  I am not an antitrust expert, but I imagine price fixing hurts the poorest consumers the most.  Which makes me wonder why Congress would ever sanction price fixing amongst charities. If the universities were honest (naturally they deny it all), they would argue that giving a relative few super wealthy people preference helps the charitable mission, even if the preference disadvantages a few less wealthy people,.  Then we could have a serious debate acknowledging both sides of the issue.  The private benefit to the super wealthy advantage so many other less wealthy people that its worth the trouble.  Here is what I thought of to help me think of a plausible justification:

Suppose a soup kitchen had enough soup to feed ten hungry people per day.  People queue every day for soup and every day at least five people don't eat because the kitchen runs out of soup.  Every once in awhile, the 10th person -- Number 10 -- is passed over in favor of somebody behind her.  The unlucky Number 10 that day doesn't eat.  It doesn't matter that Number 10 worked harder, waited in line longer, or was otherwise more legitimately deserving of soup that day.  The person given preference -- Number 11 -- is someone who needs the soup and has lots of other assets that can help the soup kitchen feed more people per day.  It doesn't really matter that Number 11 didn't work as hard, woke up late and got in line late.  Because if Number 11 gets soup today, she may donate some of her other wealth to the kitchen and the kitchen will be able to increase the amount of soup available to 15 bowls a day maybe.  The average number of hungry people per day decreases dramatically.  Ultimately, the increase in charitable outreach -- from 10 to 15 bowls of soup per day -- outweighs the private benefit inuring to the preferred person able to afford to get to the front of the que, or at least ahead of number 10.     

So it might be knee-jerk to condemn the universities or the soup kitchens.  Maybe we can tolerate a little private benefit today, for much more public benefit tomorrow.  We should think this through because Rick and the coaches were just corner boys.    

 

darryll jones

Tik Tok, Chinese Exclusion, and Charitable Tax Exemption

 

@johnleehooker Happy Friday, folks. Here’s John Lee performing “Crawlin' King Snake'' with Ry Cooder on the BBC show 'John Lee Hooker And Friends.' #JohnLeeHooker ♬ original sound - John Lee Hooker

John Lee Hooker hums the blues.   

Here are the first two sections of the infamously racist Chinese Exclusion Act:

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That from and after the expiration of ninety days next after the passage of this act, and until the expiration of ten years next after the passage of this act, the coming of Chinese laborers to the United States be, and the same is hereby, suspended; and during such suspension it shall not be lawful for any Chinese laborer to come, or having so come after the expiration of said ninety days to remain within the United States.

SEC. 2. That the master of any vessel who shall knowingly bring within the United States on such vessel, and land or permit to be landed, any Chinese laborer, from any foreign port or place, shall be deemed guilty of a misdemeanor, and on conviction thereof shall be punished by a fine of not more than five hundred dollars for each and every such Chinese laborer so brought, and maybe also imprisoned for a term not exceeding one year.

There has been no other time in American history that we have excluded a whole race of people from our shores, except perhaps through de facto measures employed at various times of panic.  In light of this history, we ought to take a good hard look in the mirror before we start targeting Chinese companies.  Just to make sure we are competing legitimately against the biggest dog in the geopolitical realm, and not from irrational fear like that leading to Exclusion Act.  And yes, I know that some Chinese kid's tandem tractor-trailer sized birthday balloon floating across the heartland (taking pictures of American backyard birthday parties, no doubt!) does not make easier our efforts to be rational.  But we should remember that speech has consequences and as we constantly and continually make the word "China" and anything "Chinese" a pejorative, we unwittingly and with imperception put targets on the backs of little old Asian ladies walking to the grocery store.  And then some crazy despicable coward strikes, thinking nobody will care because these are our "enemies" anyway.  

I try -- in my increasingly desperate attempts to generate clicks on this blog -- to get at least a little background on the underlying topic of every post.  I haven't read "Slaying the Global Coolie Myth" but it sounds very interesting.  I just wish I had time.  Here is just a snippet from Oxford University Press (scroll down to the tax stuff if you want me to shut up and get to the charities):

"Contrary to stereotypes of docile and powerless coolies, Chinese in Anglo-American societies were real people who worked hard, adapted, and persisted” So reads the caption to the final photo in Ngai’s magisterial work on global Chinese exclusion. It articulates the central theme of the book: that Chinese migrants had names, families, and communities of their own.

In tracing how the Chinese Question began in California and “circumnavigated the Anglo-American world,” Ngai demonstrates how debates over the ability of Chinese to enter and access rights in the world’s three “largest gold-producing regions”— the United States, Australia, and South Africa—were “an integral part” of the “global capitalist economy” that was emerging in the nineteenth and early twentieth centuries. The discovery of gold fueled the rise of U.S.-UK dominance; according to one statistic, the United States and Great Britain controlled eighty-eight percent of the world’s gold supply by 1904. Ravaged by the Opium Wars and unequal treaties, China engaged from a position of comparative weakness. Out of a convergence of economic dominance, colonial dispossession, and global racisms, the Chinese diaspora in the Anglo-American world was born. Questions of how to contain and control it arose immediately, and the coolie myth presented an answer.

THE TAX STUFF

I am on my soapbox today about the DITCH Act, a recent proposal sponsored by Sen. Josh Hawley and Rep. Gallagher mandating nonprofit divestment from Tik Tok and others like it.  And before you dismiss the effort as unlikely, just know that there is nothing more bipartisan in Congress today than a hatred of Tik Tok and many more things Chinese.   This proposal isn't just some crazy election denying, back bencher calling the President a liar . . . . during the SOTU, on national and international TV.  The bill has a good chance of being swept along with the other anti-Chinese sentiments stoked, but not validly provoked by Tik Tok, COVID, and balloons.  On the bright side, though, proposed 501(s) is full of wonderful, intricate, regulatory- and fee-generating complexity so there's that.  A veritable feast for the eyes:  

501(s) RESTRICTION ON  INVESTMENT  IN  CHINESE COMPANIES BY TAX-EXEMPT ENTITIES.

—

‘(1) IN GENERAL.—An organization shall not be treated as described in subsection (c) or (d) or section 401(a) for any taxable year if such organization —

‘(A) holds any interest in a disqualified Chinese company at any time during such tax-able year, or

(B) fails to timely transmit the annual report described in paragraph (5) for such taxable

(2) DISQUALIFIED  CHINESE  COMPANY.—For purposes of this subsection—

(A) IN GENERAL.—The term ‘disqualified Chinese company’ means any corporation—

(i) that is incorporated in China, or

(ii) more than 10 percent of the stock of  which (determined by vote or value) is held (directly or indirectly through any chain of ownership) by any of the following (or combination thereof):

(I) 1 or more corporations described in clause (i).

(II) China or any governmental agency

(III) Provincial,  regional,  municipal, Special  Administrative Regions, prefecture, county, township, village, or any other Chinese sub-national governmental entity or

(IV) Any entity controlled (directly or indirectly) by the Chinese Communist Party or any Chinese Communist Party

(V) Any Chinese National 

(B) APPLICATION TO ENTITIES TO OTHER THAN CORPORATIONS.—In the case of any business organization which is not a corporation, subparagraph (A) shall apply to such organization in the same manner as though such organization were a corporation.

(C) APPLICATION TO INDIRECT DERIVATIVE, OR OTHER CONTRACTUAL INTERESTS, ETC.—For purposes of this subsection, an organization shall be treated as holding an interest in a disqualified Chinese company if such organization—

(i) holds such interest (or any instrument described in subparagraph (A)) directly or indirectly through any chain of ownership, or

(ii) holds any derivative financial instrument or other contractual arrangement with respect to such interest or company (including any financial instrument or other contract which seeks to replicate any financial return with respect to such interest or such company).

Here is the PR announcing the measure late last year:

Thursday, December 1, 2022

Today U.S. Senator Josh Hawley (R-Mo.) and Congressman Mike Gallagher (R-Wisc.) introduced the Dump Investments in Troublesome Communist Holdings Act (DITCH Act). The new legislation requires university endowments, public pension plans, and other entities exempt from federal income tax to divest their investments in Chinese companies or lose their tax-exempt status.

Senator Hawley said, “Universities, foundations, and other entities are exempt from federal income tax for their work promoting the public good in the United States. Investing in China does the opposite: it advances the economic ambitions and military modernization efforts of the Chinese Communist Party while selling out American workers and values. These tax-exempt entities must stop investing in China or lose their tax-exempt status.”

"Tax-exempt entities that invest in CCP-directed companies are not only profiting off of genocide, destroying the environment, and financing the PLA's ability to build weapons that can kill Americans, but are also making U.S. taxpayers unwittingly subsidize it. This has to stop," said Congressman Gallagher. "Any entity that receives preferential tax treatment must make a choice: are they committed to their professed values, or are they committed to financing a genocidal communist regime and its malign efforts around the world? If a tax-exempt entity chooses to continue to sell out its own country for a small slice of the Chinese market, then they must lose their tax-exempt status."

To combat threats posed by investments in China, the DITCH Act would:

• • Prohibit entities exempt from federal income tax from investing in Chinese companies. Tax-exempt entities that do not divest investments would lose their tax-exempt status.
     
  • Allow the Treasury Secretary to grant a waiver to certain tax-exempt entities if they detail why their need for holding Chinese assets outweighs the national security risk.
     
  • Require the Treasury Secretary to publish a report within 360 days and then annually thereafter detailing outbound investment into the Chinese market.

Actually, this whole post is tax stuff.  That's why I like taxation.  Since it intrudes upon every aspect of life, from birth to death, marriage and divorce, kids, going to work, starting a business, or immigration or emigration, tax is the door to intellectual renaissance.  So read your tax code everyday, boys and girls!

 

darryll jones

Supreme Court Issues Report of Investigation into Leak of draft abortion opinion

Yesterday, the Supreme Court released the Marshal's Report of Investigation concerning the leak of the draft opinion in Dobbs v. Jackson.   Here is the Court's statement.

SUPREME COURT OF THE UNITED STATES

STATEMENT OF THE COURT CONCERNING THE LEAK INVESTIGATION

    In May 2022, this Court suffered one of the worst breaches of trust in its history: the leak of a draft opinion. The leak was no mere misguided attempt at protest. It was a grave assault on the judicial process. To meet our obligations as judges, we accept submissions from parties and amici, we engage advocates at oral argument, and we pub­lish explanations of our final decisions. All of this we do in the open. Along the way, though, it is essential that we deliberate with one another candidly and in confidence. That phase of the judicial process affords us an opportunity to hone initial thoughts, reconsider views, persuade one an­ other, and work collaboratively to strengthen our collective judgment. It is no exaggeration to say that the integrity of judicial proceedings depends on the inviolability of internal deliberations.

For these reasons and others, the Court immediately and unanimously agreed that the extraordinary betrayal of trust that took place last May warranted a thorough investigation. The Chief Justice assigned the task to the Marshal of the Supreme Cow1 and her staff. After months of diligent analysis of forensic evidence and interviews of al­ most 100 employees, the Marshal's team determined that no further investigation was warranted with respect to many of the "82 employees [who] had access to electronic or hard copies of the draft opinion." Marshal's Report of Findings & Recommendations 11 (Jan. 19, 2023). In following up on all available leads, however, the Marshal's team per­ formed additional forensic analysis and conducted multiple follow-up interviews of certain employees. But the team has to date been unable to identify a person responsible by a preponderance of the evidence. Id., at 17. A public version of the Marshal's report is attached.

Recently,  this  Court consulted  Michael  Chertoff. Mr. Chertoff is a former Secretary of Homeland Security, Judge of the U.S. Court of Appeals for the Third Circuit, Assistant Atton1ey General for the Criminal Division of the U.S. Department of Justice, and U. S. Attorney for the District of New Jersey. We invited Mr. Chertoff to assess the Marshal's investigation. He has advised that the Marshal "undertook a thorough investigation" and, "[a]t this time, I cannot identify any additional useful investigative measures not already undertaken or underway. Statement from Michael Chertoff 1 (2023). A copy of Mr. Chertoff's statement is attached.

The Marshal reports that "[i]nvestigators continue to review and process some electronic data that has been collected and a few other inquiries remain pending." Marshal's Report 2. "To the extent that additional investigation yields new evidence or leads, the investigators will pursue them." ibid. The Marshal and her team will continue to have our full support.

JANUARY 19, 2023

 

 

dkj

American Council on Education et. al. Defend NCAA's Educational Mission

The Third Circuit will hear oral arguments next month in Ralph "Trey" Johnson vs. National Collegiate Athletic Association, a case in which plaintiffs allege that student athletes are employees under federal law, and thus should be paid compensation.  I read through the briefs because of my general bias in favor of the conclusion, like that strongly implied  in National Collegiate Athletic Association v. Alston, that the NCAA is anything but nonprofit or deserving of tax exemption.  But the American Council on Education's brief in Support of the NCAA (ACE Amici Brief) makes a very strong case that the NCAA really is engaged in a charitable mission, notwithstanding the incredible revenues and coaching salaries paid in Division I football and basketball.  Maybe the NCAA and some coaches should pay taxes on excess benefits, but ACE almost convinces me that I have just been hating on football and basketball salaries all along.  ACE' argument resonates with me because my daughter -- pictured below with a swing that makes me wonder if I am even her biological father -- played college golf at the D-1 level; she put in long hours and certainly she and her teammates never made a dime in NIL or even ticket sales.  She had a four year golf scholarship, that's it.  The only walking around money came straight from my pockets!  I am pretty sure her experience was much more typical than football and basketball players in the Power 5 conferences.  But her college golf complimented her academic studies immeasurably.  She graduated last spring and I think that swing of hers even helped her get a job in the oil and gas industry.  Collegiate golf pays even if your dad is not Tiger Woods, though who really knows in this case?

The ACE brief makes me seriously reconsider my position that the NCAA ought to be stripped of its tax exemption.  In addition to some excess benefit taxes on coaching salaries, maybe we should just have a private foundation-like excise tax on certain public charities (i.e., non-private foundations) that reach a certain amount of revenues or retained earnings, or something.  Anyway, here are excerpts from the  ACE Amici Brief.

 

PRELIMINARY STATEMENT

This lawsuit is built on a false narrative that student-athletes are exploited by colleges and universities for profit. In reality, only about 2% of the NCAA's 1,100 member institutions had athletics departments that generated enough revenue to cover operating costs in 2019, and the overwhelming majority of the 500,000 student-athletes in the NCAA participate on teams that generate little or no revenue. Those facts should not be surprising given that intercollegiate athletics is not a business but rather a mosaic of programs that, at their core, enrich students' educational experiences.

The colleges, universities, conferences, and governance organizations that oversee intercollegiate athletics have always emphasized the primacy of education for student-athletes and the contribution to their education that participation in intercollegiate athletics offers. Indeed, student-athletes graduate from four-year colleges and universities at a higher rate than their non-athlete counterparts. Athletics programs have long played a crucial role in a student-athlete's education. Among other things, student-athletes learn valuable lessons about teamwork, discipline, sportsmanship, and time management. They also receive unique opportunities to engage with their student community, participate in a significant aspect of campus life, and serve as formal and informal leaders among their peers and representatives of their universities.

ARGUMENT

The college years are a period of tremendous learning and growth. University attendance represents the first time many students venture out on their own, living independently of parents and caretakers. This formative time offers students a new level of autonomy, allowing them to guide their own development as scholars and adults. They choose not only their fields of study but also the activities they participate in, the communities they join, and how they lead their daily lives on campus.

Accordingly, a critical part of the educational mission of institutions of higher education is providing a rich array of learning opportunities and experiences beyond academics. Students can typically aspire to participate in many extracurricular offerings. For example, they can write for a student newspaper; sing or play an instrument in a student musical group; involve themselves in their school's civic life through student governance; participate in political, social, or faith-based student organizations; or join an athletics team, to name a few. Participants in extracurricular activities often are called on to commit significant time and effort on top of their coursework and embrace that opportunity with passion and fervor. In return, they learn life lessons and skills not readily gathered in the classroom-- lessons about leadership, time management, and community engagement. They also benefit from the structure and social connections that come with their membership and participation in these pursuits. And student participants become more well-rounded individuals, who are more likely to succeed academically in college and professionally following graduation. See Anne E. Lundquist, The Essential Role of Co-curricular Programs in Student Success, Retention, Persistence, and Graduation, Anthology (2020) (collecting sources showing that student co-curricular and extracurricular participation is associated with increased student retention, satisfaction, and academic and post-graduation success); Peter Chalfin et al., The Value of Intercollegiate Athletics Participation from the Perspective of Employers who Target Athletes, 8 J. Issues in Intercollegiate Athletics 1, 3-4 (2014) (collecting literature tracking additional benefits specifically for student-athletes).

Participation in intercollegiate athletics is demanding and requires commitment, to be sure. But it provides all of the benefits of extracurricular activities and more. Studies show that being a student-athlete builds self-confidence and imparts unique lessons about teamwork, self-discipline, and physical fitness. See Erianne Allen Weight et al., Holistic Education through Athletics: Health and Health-Literacy of Intercollegiate Athletes and Active Undergraduate Students, 1 J. Higher Ed. Athletics & Innovation 38, 50-52 (2016). Further, as key participants in an integral aspect of student community life, student-athletes are often viewed as campus leaders of their educational institutions. Student-athletes thus report holding more leadership roles in student organizations, having meaningful mentor relationships at higher rates, and “thriving” in areas of social, community, and physical wellbeing following graduation. Gallup, A Study of NCAA Student-Athletes: Undergraduate Experiences and Post-College Outcomes at 2-9, 18-19, 21 (2020).

Those benefits underscore that intercollegiate athletics are central to the educational mission of colleges and universities, not outside it. Unlike professional sports, whose primary purpose is to generate profits, the various intercollegiate athletics teams at issue in this case exist to provide students with valuable opportunities to pursue development outside the classroom, enriching their college experience. See Weight et al., 1 J. Higher Ed. Athletics & Innovation at 50 (“personal development” and “citizenship” stemming from athletic experiences “are concepts difficult to teach, but fundamental to holistic student development”). Like student musicians, student newspaper reporters, student-body presidents, and student volunteers, student-athletes are students first, notwithstanding the time they commit or the benefits they derive from their additional activities.

For most student-athletes, participation in intercollegiate athletics is the culmination of their long-running competitive dreams and aspirations. Only a small fraction of student-athletes expect to have a professional career playing sports. See Nat'l Coll. Athletic Ass'n, NCAA Recruiting Facts (Aug. 2020). There is a unique joy of comradery and competition, and a sense of pride, that student-athletes can derive from participating in intercollegiate athletics. If colleges and universities curtail or end athletics programs because they are forced to pay wages to their student-athletes that they cannot afford (see Point IV, infra), it would have a devastating impact on generations of young people who would lose the opportunity to compete in college.

This pursuit of intercollegiate student-athlete opportunities is something that high school students do voluntarily and embrace in college out of self-interest. Significantly, more than 40% of Division I students choose to play on their school's team without receiving any athletics scholarship money. See id.

darryll jones

 

Other Shoe Drops: Lawsuit Filed Challenging Schedule B for Section 501(c)(3)s

It will probably come as no surprise to readers of this blog that a section 501(c)(3) organization has now filed a lawsuit challenging the statutory requirement that it disclose its substantial donors to the IRS, a requirement fulfilled by completing Schedule B to Form 990. The Buckeye Institute last week announced its complaint against the IRS, filed in the U.S. District Court for the Southern District of Ohio, Columbus Division. Its lawyers include attorneys from the national Institute for Free Speech, indicating that the forum choice of a district court in the Sixth Circuit was intentional. The lawsuit follows in the wake of the Supreme Court's 2021 decision in Americans for Prosperity Foundation v. Bonta, where the Court struck down as unconstitutional a state rule requiring disclosure of charity donor information to a state agency. That case led many, including the non-profit organization scholars who filed an amicus brief supporting California's rule, to predict other donor disclosure requirements could be at risk.

Lloyd Mayer

Meds Update: Mayo Clinic is an "Educational Organization"; More Charity Care Complaints (including for Mayo)

On remand from the Eighth Circuit, the U.S. District Court for the District of Minnesota in Mayo Clinic v. United States, No. 16-cv-03113 has concluded that the Mayo Clinic's primary purpose is educational and therefore it qualifies as an "educational organization" exempt from unrelated business income tax on its debt-financed income. As a result, the Mayo Clinic is eligible for an $11.5 million refund (plus interest). Especially given this was a factual conclusion, it is uncertain whether the government will appeal the result since it would presumably be subject to clearly erroneous review. Nevertheless, the decision could have major implications not only for nonprofit hospitals and other tax-exempt organizations that have unrelated debt-financed income, but also for tax-exempt organizations that could plausibly seek educational organization status so as to escape private foundation classification. It is likely in part for this reason that the IRS issued an Action on Decision refusing to accept the Eighth Circuit's decision that lowered the bar for qualifying as an educational organization, which bar the District Court applied. Coverage: Law360, Tax Notes.

Ironically, on the same day the court issued this decision the Post Bulletin published a story headlined They could have qualified for charity care. But Mayo Clinic sued them, that included this damning information:

The Post Bulletin interviewed 20 patients sued by Mayo Clinic for unpaid bills and determined that 14 could have qualified for charity care based on the household income information provided during the interview. Yet all but one were forced to pay their bills in full after they were sued, often through wage garnishment. Most had no idea charity care was an option .

Of course the Mayo Clinic is far from alone among nonprofit hospitals in facing complaints relating to charity care. The L.A. Times also recently reported that Hospitals had to put charity care rules on their websites months ago. Some didn’t do it. A new California law requires hospitals to "prominently post their financial assistance policies on their websites," but "more than nine months after the California law went into effect, some hospitals still had not put up their charity care policies in readily apparent spots on their websites, The Times found after reviewing websites for hospitals around the state."

Lloyd Mayer

 

Conservation Easements Update: Proposed Listed Transactions Regs; Kane on Circuit Split

Last month the U.S. Tax Court held that the syndicated conservation easement listing notice was invalid for failure to follow Administrative Procedure Act requirements. Without agreeing with the Tax Court's decision, the Treasury Department has now issued proposed regulations that would identify these transactions as listed transactions. Here is the Federal Register summary:

This document contains proposed regulations that identify certain syndicated conservation easement transactions and substantially similar transactions as listed transactions, a type of reportable transaction. Material advisors and certain participants in these listed transactions are required to file disclosures with the IRS and are subject to penalties for failure to disclose. The proposed regulations affect participants in these transactions as well as material advisors. In addition, while the proposed regulations exclude qualified organizations from being treated as participants or parties to a prohibited tax shelter transaction subject to excise tax, this notice of proposed rulemaking requests comments on whether the final regulations should remove the exclusion from the application of the excise tax for qualified organizations that facilitate syndicated conservation easement transactions. Finally, this document provides notice of a public hearing on the proposed regulations.

Comments are due by February 6, 2023. For additional coverage of the Tax Court's decision, see Peter J. Reilly's Forbes article.

I also previously noted the circuit split relating to a conservation easement regulation. Now Mitchell Kane (NYU) has published The Dispute Over Perpetual Conservation Easements Just Got Worse in Tax Notes, arguing that Supreme Court should not grant certiorari to resolve that split. Here is a paragraph from the introduction:

In Section I, I explain why certiorari is not warranted in Oakbrook. Further, the stakes transcend conservation easements and the proceeds regulation: A grant of certiorari in this case could lead down a path that would destabilize tax regulations generally and greatly hinder effective tax code enforcement. To argue against cert grant is not to say that the status quo is optimal. IRS challenges to easements under the proceeds regulation seem to have involved instances with suspiciously high valuations. There is nothing wrong with that strategy from a litigation standpoint; we should expect the IRS to focus its scarce resources on high-value cases, and the agency has won cases bringing challenges under the proceeds regulation. Even so, this litigation at least raises the prospect of casting a cloud over existing, or future, easement transactions that are not abusive and are within the set of transactions that Congress plausibly wanted to encourage. The status quo is thus not obviously the best outcome in terms of the law applicable to the tax treatment of conservation easements under section 170. For this reason, in Section II, I will consider alternatives to the status quo.

For previous coverage of the circuit split, see Kristin E. Hickman (Minnesota), The Federal Tax System's Administrative Law Woes Grow, ABA Tax Times, May 26, 2022.

Lloyd Mayer

Steve Bannon Associate Convicted For We Build The Wall Fraud

The N.Y. Times reports that a federal jury has convicted Timothy Shea, who was charged along with former advisor to President Trump Stephen K. Bannon (since pardoned) and two others for federal crimes relating to raising funds for the section 501(c)(4) We Build the Wall, Inc. Mr. Bannon currently faces state charges, not forestalled by the pardon, relating to the same facts. The other two defendants pled guilty to federal crimes.

According to the original federal indictment, the crimes stemmed from the defendants' promises to donors not to use any funds raised for salary or compensation. Instead, they promised that all of the millions of dollars raised would be used for private efforts to build a border wall. These promises were made as part of an effort to convince donors to an initial crowdfunding effort to permit their donations to be redirected to the new nonprofit, once it became clear the crowdfunding campaign was not legally allowed to donate the funds raised to the U.S. government for construction of a border wall. But the defendants allegedly instead directed hundreds of thousands of dollars in donor funds toward compensation of themselves and personal expenses. 

Lloyd Mayer

Tax Court Conservation Easement Setbacks for IRS

The IRS suffered two significant partial defeats this month in the U.S. Tax Court relating to conservation easements.

First, the court in Green Valley Investors, LLC v. Commissioner held that the listing notice (Notice 2017-10) for syndicated conservation easements was invalid because of the failure of the IRS to comply with procedures required by the Administrative Procedure Act (APA). Coverage: Bloomberg (subscription required); Forbes; JDSupra; National Law Review.

Second, the court in four cases denied government motions for partial summary judgment on the grounds that the regulation relied upon by the IRS had been found invalid (you guessed it - on APA grounds) by the relevant circuit court and because "partial summary judgment would neither expedite resolution of this case nor make trial unnecessary" with respect to a Form 8283 issue raised by the government. The relevant, essentially identical orders are in Baker's Farm Nature Reserve LLC v. Commissioner, East Village Reserve LLC v. Commissioner, Jack's Creek Reserve LLC v. Commisioner, and Rock Cliff Reserve LLC v. Commissioner. 

Lloyd Mayer

Nonprofits In the News (Not in a Good Way): Brett Favre; J.D. Vance; Hershel Walker; Indictments in Minnesota

Sometimes it seems every scandal has a nonprofit involved, and every politician has a questionable nonprofit connection.

For example, the continuing revelations about Brett Favre and alleged misuse of government welfare funds include both a nonprofit that was in the middle of that misuse and also new allegations about Favre's own foundation and its grants to support college athletes (and possibly the volleyball facility at the heart of the welfare funds scandal), even given the foundation's purported purposes being limited to helping children and cancer patients. (Favre's foundation is, despite the name, a public charity that appears to receive much of its contributions from people other than the former NFL football player.)

As for politicians, the N.Y. Times published an article over the weekend titled "J.D. Vance’s First Attempt to Renew Ohio Crumbled Quickly. In 2017, the Republican candidate for Senate started a nonprofit group to tackle the social ills he had written about in his 'Hillbilly Elegy' memoir. It fell apart within two years." And it earlier published an article titled "Herschel Walker’s Company Said It Donated Profits, but Evidence Is Scant," reporting that of the four charities that supposedly received 15 percent of the profits from Walker's company, "one declined to comment and the other three said they had no record or recollection of any gifts from the company in the last decade."

And in Minnesota, the other shoe dropped for the Feeding Our Future scandal, with a U.S. Department of Justice press release stating "U.S. Attorney Announces Federal Charges Against 47 Defendants in $250 Million Feeding Our Future Fraud Scheme." In addition, a federal court has denied the request of another nonprofit, Partners in Nutrition, to be reinstated to the child nutrition program given its ties to some of the alleged participants in the fraud.

Lloyd Mayer

Bankruptcy Court Grants Final Approval to Boy Scouts Reorganization Plan; Appeals Now Filed

Reuters reports that after several changes to the reorganization plan for the Boy Scouts of America (BSA), the U.S. Bankruptcy Court for the District of Delaware last month issued a final approval of that plan. The changes included removing a $250 million settlement payment from the Church of Jesus Christ of Latter-Day saints from the plan, which the judge in the case refused to approve because the claims against the Church were only loosely connected to scouting activities. The plan had received support from 86% of claimants who voted on it and from the two largest insurers for the BSA. It provides $2.46 billion to settle sex abuse claims against BSA. Reuters later reported that other insurers and sexual abuse victims have filed appeals challenging the plan. 

Additional coverage: CNN; Insurance Journal; Law360.

Ninth Circuit Finds That DAF Donor Lacked Standing to Pursue Alleged Fiduciary Duties Breach

In Pinkert v. Schwab Charitable Fund, the U.S. Court of Appeals for the Ninth Circuit found that the contributor to a donor advised fund (DAF) lacked standing to sue the DAF sponsoring organization, Schwab Charitable Fund, for allegedly breaching its fiduciary duties, including by deducting excessive fees from the contributor's DAF. The contributor alleged that the excessive fees arose because of the Fund partnering with Schwab & Co. for brokerage, custodial, and administrative services. The contributor, who sought to pursue his claims individually, on behalf of a class of similarly situated individuals, and on behalf of the general public, asserted that "although he donated the funds to Schwab Charitable for some purposes, he retained a property right to direct the funds to charities, and the excessive fees and Schwab Charitable’s related mismanagement of the funds impair his ability to exercise that property right." The contributor also asserted claims based on reputational and expressive harm, as well as having to make additional contributions to the DAF to compensate for the alleged excessive fees.

With respect to his property-rights argument, the court found that the documents relating to the contribution established that he did not retain any right to direct where the funds would be invested or donated, but only retained the ability to provide non-binding advice regarding investing and donating. As for whether that ability constituted a property right, the court concluded:

Pinkert does not cite any authority establishing that his right to provide non-binding recommendations to Schwab Charitable is a property right. But whether that right is properly characterized as a property right, a contractual right, or something else does not matter for present purposes because Pinkert has not alleged that Schwab Charitable refused to listen to his advice. In fact, he acknowledges that Schwab Charitable has followed his advice in the past by donating funds from his DAF to charities he supports. 

The court also noted that the written documents disclosed that the DAF would be subject to various fees. 

As for the reputational, expressive, and additional contribution claims, the court disposed of them based on its conclusion that the contributor had failed to allege he had actually experienced or would experiences any of these specific injuries. A concurring judge would have concluded that the contributor also lacked standing to pursue those claims given that he had irrevocably relinquished the contributed amounts.

Lloyd Mayer