Monday, January 17, 2022
New Article: Who’s Afraid of Bob Jones?: 'Fundamental National Public Policy' and Critical Race Theory in a Delicate Democracy
Professor Lynn Lu has a new interesting article forthcoming in CUNY L. Rev. looking at the broader impact of Bob Jones all these years later entitled Who's Afraid of Bob Jones?: 'Fundamental National Policy' and Critical Race theory in a Delicate Democracy. Here is the abstract:
In Summer of 2021, Republican legislators across the United States introduced a host of bills to prohibit government funding for schools or agencies that teach critical race theory (“CRT”), described by the American Association of Law Schools not as a single doctrine but a set of “frameworks” to “explain and illustrate how structural racism produces racial inequity within our social, economic, political, legal, and educational systems[,] even absent individual racist intent.” Characterizing such an explicitly race-conscious analysis of legal and social institutions as “divisive,” opponents of CRT, such as former Vice President Mike Pence, labeled it “nothing short of state-sponsored and state-sanctioned racism.”
The political campaign to “Stop CRT,” as articulated by strategist Christopher Rufo, seeks to redirect the time-honored civil-rights strategy of defunding racially discriminatory social institutions for use against race-conscious efforts to remedy the ongoing disparate racial, economic, and other social effects perpetuated by the same institutions. The movement to Stop CRT thus seeks to freeze civil rights progress where it stood decades ago, as when the Supreme Court acknowledged a “fundamental national public policy” against racial segregation in its 1983 decision in the notorious case of Bob Jones University v. United States, while leaving unresolved vital questions about whether and how to allocate public resources affirmatively to foster diversity, equity, inclusion, and accessibility in democratic society.
In Bob Jones, the Court upheld the federal taxation of private schools that excluded Black students because their religious beliefs allegedly mandated “racial separation.” Specifically, the Court ruled that the Internal Revenue Service (IRS) properly withheld federal tax-exempt status to otherwise qualifying entities to enforce “fundamental national public policy” (“FNPP”), as expressed by all three branches of the federal government, against racial segregation in schools, and deemed desegregation a compelling government interest that outweighed any burden on religion. As a private tax dispute, Bob Jones stands alongside legions of other complaints brought by taxpayers aggrieved by IRS actions. But as a case involving an educational institution raising a religious liberty claim against antidiscrimination regulation, Bob Jones raised broader public law issues involving constitutional and federal statutory interpretation, as well as judicial review of administrative action.
This article assesses the legal and symbolic influence of Bob Jones not to relitigate the case or to rewrite history, but to highlight the case’s lasting symbolic impact and lessons for future civil rights advocacy, especially as informed by CRTs that developed alongside the federal courts’ retreat from enforcing existing antidiscrimination norms. Part I examines the case of Bob Jones to show how its political and legal context shaped its unique posture and path to the Supreme Court. Part II examines the afterlife of Bob Jones and its symbolic importance to conservatives motivated to prevent its expansion, even as the decision limits its own impact by leaving crucial substantive questions unresolved: namely, the role of pluralism in enforcing civil rights against First Amendment claims, the viability of race-conscious remedies for racial discrimination, and the visibility of redistributive economic justice concerns. Finally, Part III shows how CRT’s insistence on confronting those same questions reveals persistent inequities sustained by U.S. social and legal institutions, drawing the fire of efforts to Stop CRT. Part III assesses the prospects for moving the difficult questions left unresolved in Bob Jones back to the center of analysis, even with the current Supreme Court in a polarized and partisan political climate. The Article ultimately concludes that the legal reorientation demanded by Bob Jones and initiated by critical theorists, whatever their fate in the Court’s jurisprudence in the near term, remains crucial for identifying and challenging ongoing power disparities in and through every level of democratic government and society.
Sunday, January 9, 2022
The litigation involving the NRA and the NRA Foundation continues its slow march without any recent major public developments. But in its latest IRS Form 990 (see page 46 of the 67-page filing, which provides Supplemental Information for Schedule L) the NRA acknowledged new excessive benefits paid to CEO Wayne LaPierre, the Wall Street Journal reports. The article says these include $44,000 in private jet flights, and notes that the NRA is investigating other transactions. And a detailed Open Secrets report shows how funds flowed between the NRA's section 501(c)(3) affiliates and its non-charitable entities. And I recently learned, thanks to the EO Tax Journal, that there is a donor class action suit pending in federal court against the NRA that is being tracked by NRA Watch. So lots to keep the NRA's lawyers busy for the foreseeable future.
Wednesday, January 5, 2022
Early last month New York issued a proposed rule amending the regulations relating charity annual reports to respond to the Supreme Court's decision in Americans for Prosperity Foundation v. Bonta. See NYS Register (Dec. 1, 2021), at 21-23. As our readers already know, the Court struck down as unconstitutional the California requirement that charities provide to state authorities unredacted copies of Schedule B to the IRS Form 990 series, which lists identifying information for significant donors. New York had a similar requirement, which it suspended in the wake of that decision.
The proposed rule gives "public charities" required to make annual filings (NY Form CHAR500) the option of providing either (1) a copy of Schedule B with the names and addresses of contributors redacted or (2) "a statement of the gross amount of contributions received during the reporting period from individuals and entities residing or domiciled in the state of New York." Note that the use of the term "public charities" apparently means that private foundations will still be required to submit their unredacted Schedule Bs to New York, presumably because those schedules are already publicly disclosed under federal tax law and so arguably are not reached by the Supreme Court's decision. The proposed rule also makes various unrelated amendments to the filing requirements.
Thursday, December 9, 2021
In November, the IRS issued an Action on Decision in the case of Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021),
rev’g, 412 F.Supp.3d 1038 (D. Minn. 2019). They will follow the precedent in the 8th Circuit, but refuse to accept the interpretation of the 8th Circuit reading out the Treasury regulation requiring formal instruction to be a primary function of an educational organization under section 170(b)(1)(a)(ii). I previously wrote about this case here.
It involves whether Mayo Clinic may use an exception to the unrelated business income tax provided to educational organizations under section 514(c)(9)(C)(i). Mayo Clinic claims to be "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." The IRS, relying upon Treasury regulations, that require that an educational organization must have as "its primary function . . . the presentation of formal instruction," did not allow Mayo the exception.
The district court held that the primary function test was not a legitimate interpretation of the statute. While the Appeals court disagreed in part, it held that the IRS was wrong in its application of a primary function test. It remanded the case to the district court with instructions to ensure that Mayo Clinic primarily promotes education.
I expressed concern regarding the case because I think it provides an easy path to public charity status for any organization that is primarily educational by normally having 1 faculty and some students. I did not expect the IRS to appeal, but thought they may choose to fight the case in other circuits. They have expressly taken this latter path.
In supporting its reasons the IRS stated: "We disagree with the Eighth Circuit’s invalidation of the long-standing regulatory requirement that the primary function of an educational organization described in section 170(b)(1)(A)(ii) must be formal instruction (the formal instruction requirement). First, in concluding that the formal instruction requirement “has no long history of congressional acceptance,” the Eighth Circuit did not consider the numerous times Congress has amended section 170(b), increasing the percentage of the allowable deduction and adding to the categories of organizations eligible for the preferential allowable deduction, since the regulations under section 170(b)(1)(A)(ii) were published in 1958, which is persuasive evidence of Congressional acceptance of such regulations. See, e.g., CFTC v. Schor, 478 U.S. 833, 846 (1986) (“It is well established that when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress.’”). Second, the Eighth Circuit did not consider that the faculty-curriculum student-place requirement provides a statutory basis for the formal instruction requirement in the regulations. Finally, the Eighth Circuit did not consider the Government’s arguments regarding over one dozen Code sections cross-referencing section 170(b)(1)(A)(ii) (many of which predated the regulation’s 1958 publication), which further support the position that the purpose of the formal instruction requirement is to ensure that section 170(b)(1)(A)(ii) “could not reach very far, if at all, beyond schools, colleges, and universities in its coverage.” Brundage v. Commissioner, 54 T.C. 1468, 1474 (1970)."
Wednesday, December 1, 2021
Today the Supreme Court hears arguments in Dobbs v. Jackson Women’s Health Organization, a case that will consider the constitutionality of a Mississippi law that entirely bans abortions after fifteen weeks of pregnancy.
The case is important and momentous. Important and momentous enough that more than 140 amicus briefs were filed with the Court. And a not-insignificant percentage of those briefs were filed by tax-exempt organizations. Those amici ran a relatively broad gamut of types of tax-exempts, views on the Mississippi law, and approaches toward the law. And I'm not going to pull out every single tax-exempt, but I'm going to highlight a handful. (I didn't read every amicus brief because SCOTUSblog did it so that I didn't have to! I'm not going to link to the org's briefs, but they're all linked on the SCOTUSblog post.) (I'll highlight which of the organizations that I list aren't 501(c)(3)s; if I don't list the section an org is exempt under, it is a 501(c)(3).)
Wednesday, November 17, 2021
Bloomberg Law is reporting on a number of nonprofit Christian schools, churches, and seminaries that are launching legal challenges to the OSHA test-or-vaccinate rules. (To add nonprofit on top of nonprofit, at least a handful of the cases are being handled by the nonprofit Alliance Defending Freedom.)
Essentially, the ADF's suit (and, I imagine, many of the others) assert that the OSHA mandate overreaches and represents a "serious intrusion on religious autonomy and free exercise that cannot withstand scrutiny under the First Amendment and the Religious Freedom Restoration Act."
I'm not a Religion Clauses scholar but I know enough to know that Religion Clause jurisprudence is kind of a mess. Enough of a mess that I wouldn't put money down on how these challenges turn out. Still, because the religious organizations challenging the test-or-vaccine mandate fit into the world of nonprofits, it's worth keeping an eye on how these challenges turn out.
Tuesday, September 28, 2021
A couple weeks ago, a California federal judge dismissed a lawsuit filed by James Huntsman against the Church of Jesus Christ of Latter-day Saints. The suit got a reasonable amount of attention in my (Mormon, legal) circles, and seems to have gotten a fair amount of play in Utah, for two reasons. One is that it involved the Mormon church and a mall (more on that in a minute). The second was, it involved James Huntsman, brother of former (among other things) Utah governor Jon Huntsman and part of the prominent-within-the-Mormon-church Huntsman family.[fn1]
And what was his suit? In short, Huntsman was suing for the return of a couple decades' worth of tithing he had paid into the church.
As we all know, unless you make a restricted gift to a charity, the general rule is that once you make a charitable contribution, the money is out of your hands. If you don't like what the charity does with the money, you take your charitable deduction and you stop donating to that charity going forward. But you can't get your unrestricted donations back. (And in case it doesn't go without saying, tithing payments are unrestricted gifts.)
Thursday, September 9, 2021
Writing for today's edition of Religion News Service (RNS) news, Kathryn Post states that the Supreme Court’s August 26 decision to end the federal eviction moratorium brings new challenges for religious leaders and organizations working to aid those at risk for homelessness. Post cites to recent data from the U.S. Census Bureau indicating that more than 3.6 million Americans say they could face eviction in the next two months.
This startling statistic has brought the following response from Sarah Abramson, vice president of strategy and impact at Combined Jewish Philanthropies in Boston: "We’re very, very nervous. There is already a tremendous housing shortage in Boston. And we know from our data, and from the experience of our partners who do this work, just how difficult it was for somebody who has been evicted in the past to get housing.”
Jerrel T. Gilliam, executive director of Light of Life Rescue Mission in Pittsburgh, also shared concerns: “We are going to need to be very creative, and to think outside the box in order to prepare for what could be a potential onslaught of people needing assistance in a short amount of time.”
In its August 26 decision, the Court ruled that the Centers for Disease Control and Prevention lacked the authority to establish a federal eviction moratorium. According to the Court, such a moratorium requires congressional approval. The decision comes as renters and landlords face a backlog of promised funds. According to Census Bureau data, the government has thus far distributed only about $5.1 billion of the $46.5 billion in federal rental assistance funds intended to prevent eviction.
“We definitely have to work hard to make sure that money reaches people,” said Shams DaBaron, a New York activist who also goes by “Da Homeless Hero.” “We have to cover both sides: these small landlords that need it, and those who are extremely poor.”
DaBaron is currently living in an apartment with the support of a voucher program, but he says the city is behind on three months of rent. An eviction moratorium is one measure that can help buy more time while such funds face bureaucratic delays.
DaBaron gained national attention as unofficial spokesperson for the residents of the Lucerne, a hotel-turned-shelter during the pandemic in Manhattan’s Upper West Side that became the center of New York’s “homeless hotel” debate. When he was not advocating for his fellow residents, DaBaron partnered with local group Open Hearts to develop a program called Soulful Walk and Talks. The program provided hotel shelter residents the opportunity to walk to the nearby Riverside Park with local faith leaders from a range of religious traditions who provided a safe space for spiritual reflection.
“We didn’t want to make it a religious thing, but we understand the value of spirit, of soul, of that deep essence within everybody,” said DaBaron. “One of the things that came out of it, from talking to many of the faith leaders, is that many of them were transformed, just as many of us were transformed.”
“It was definitely very impactful,” said Rabbi Lauren Herrmann of the Society for the Advancement of Judaism, who joined in the Walk and Talks and organized other clergy participants. “For one thing, I really understood for the first time in my life the issues surrounding the shelter system, and why people choose to be on the streets instead of being in shelters. … The shelter system is deeply broken, and some of the stories I heard were deeply upsetting.”
Herrmann and DaBaron see the Soulful Walk and Talks as tending to the essential spiritual needs of those facing homelessness. They hope to continue and expand the program as the federal eviction moratorium lifts. Yet, DaBaron and Herrmann also pointed to structural changes that need to take place. New York state implemented a new eviction moratorium on Sept. 1 that extends until January 2022. However, the moratorium does not address the city’s lack of affordable housing, the income cliffs that foster dependence on government programs and the health and safety risks facing those in congregate shelters, where many former Lucerne residents are finding themselves since the hotel shelter closed this summer.
In Pittsburgh, Light of Life Rescue Mission takes a multifaceted approach to homelessness by providing a range of services including case management, education, unemployment services and accommodations for those facing housing insecurity.
Gilliam, the Christian organization’s executive director, is concerned the end of the eviction moratorium will mean a sudden, sharp increase in the number of residents facing evictions. At one point during the pandemic, evictions in Pittsburgh slowed to a complete halt — in a typical year, according to Gilliam, Pittsburgh sees 14,000 evictions.
Gilliam suggested implementing preventive measures that would allow landlords to receive rent payments while enabling those at risk for evictions to find suitable housing.
“We’re pleading with everyone,” said Gilliam. “Let’s try to get people help while they’re still in the home and help the landlord have another month or two of rent, so that we can find a place for them without them having to pass through homelessness to get assistance.”
The pandemic has not been as kind to all religious organizations working to serve those facing housing insecurity. Chaplain Asma Inge-Hanif, founder and executive director of Muslimat Al Nisaa, has been serving the Baltimore community for 30 years. The organization provides health, education and social services to all, regardless of their ability to pay, and its Home Shelter is especially designed to meet the needs of Muslim women. She says her organization has served thousands of people over the years.
In the last year and a half, Inge-Hanif almost died from COVID-19 and lost her organization’s signature location. “I couldn’t pay the rent anymore, even though they claim there was an eviction moratorium,” she said. Now, Inge-Hanif is working to keep the shelter open on a small scale so she can help meet housing needs, especially those of people arriving from Afghanistan.
“I’m getting so many requests all the time from people who are getting evicted,” she said. “It’s often people who have no status and people of color. Everyday I get seven to 10 requests for shelter and housing. And I can’t help them.”
As the federal eviction moratorium ends, Inge-Hanif is hoping to raise money for an apartment building so she can house more people. She also says governments need to make rental assistance and other services more accessible.
“That’s why people are being evicted. They can’t get through the paperwork,” said Inge-Hanif. “The people who need the help are not in a position to maneuver through all the red tape. … The way the system is set up prevents the people who are most in need from actualizing success and being self-sufficient.”
That, indeed, appears to be the sad truth.
Prof. Vaughn E. James, Texas Tech University School of Law
Friday, September 3, 2021
Sackler Settlement Includes Releasing Control of Two Foundations and Temporarily Not Seeking Naming Rights
Tbis week a bankruptcy court approved a settlement with the Sackler family, which has faced allegations that it bore responsibility for the deadly opioid crisis. In-depth Coverage: NPR, N.Y. Times, Wall Street Journal. Several states have already announced they will appeal the ruling, and it remains to be seen whether the U.S. Department of Justice will join that appeal.
An earlier MarketWatch report on the settlement highlights two nonprofit-related provisions. First, the family has agreed to surrender control of two foundations to parties appointed by the bankruptcy court or to the trustees of the National Opioid Abatement Trust. Here is the relevant provision from the settlement:
In addition, the individual trustees of NOAT, or such other qualified party or parties as shall be selected by the Bankruptcy Court, will, subject to receipt of necessary approvals, become the controlling members of the Raymond and Beverly Sackler Foundation and the Raymond and Beverly Sackler Fund for the Arts and Sciences, which shall have an aggregate value of at least $175 million, and will be required to limit the purposes of the Foundations to purposes consistent with philanthropic and charitable efforts to ameliorate the opioid crisis.
Second, the Sackler familly will be barred from putting their names on buildings or institutions to which they donate money until they complete the agreed-upon payment of $4.5 billion (over nine years) and are no longer involved in the opioid business. Here is the relevant provision from the settlement:
A prohibition with regard to the Sackler family’s naming rights related to charitable contributions until they have fully paid all obligations owed by them under the terms of the contemplated settlement and exited, worldwide, all businesses that engage in the manufacturing or sale of opioids.
The settlement does not prevent the family from making charitable donations, and it does not require the removal of the Sackler name from existing buildings and institutions, although the report notes some charities have already done so and others are considering doing so.
In Kissel v. Seagull, the U.S. District Court for the District of Connecticut recently granted in part and denied in part a motion for preliminary injunction relating to Connecticut's Solicitation of Charitable Funds Act. The court provided this helpful summary of its holdings:
This case is about the First Amendment and a Connecticut law that regulates the activities of paid solicitors for charitable organizations. Plaintiff Adam Kissel wishes to engage in paid fundraising work for a non-profit civics education organization. But he claims that a Connecticut law known as the Solicitation of Charitable Funds Act (the "SCFA") violates his First Amendment right to engage in speech involving charitable fundraising. Kissel now seeks a preliminary injunction.
Kissel first claims that the SCFA is based on a definition of "solicitation" that is unconstitutionally vague and overbroad. I do not agree that the law is vague or overbroad simply because it regulates not only "direct" solicitation activity but also "indirect" solicitation activity. Accordingly, I will deny Kissel's motion for a preliminary injunction as to his challenge to the statutory definition of what activity qualifies as a solicitation.
Kissel next claims that various provisions of the SCFA that apply to paid solicitors violate his First Amendment right to free speech. He challenges four requirements: (1) that he submit to the Connecticut Department of Consumer Protection ("DCP") a notice 20 days in advance of his intent to engage in solicitation activity; (2) that he submit the text of his intended solicitations to the DCP; (3) that he tell prospective donors what percentage of their donation will be given to the charitable organization; and (4) that he keep records of donors and donations for the DCP to inspect.
Because every one of these requirements is predicated on a content-based evaluation of the subject matter of Kissel's speech, I conclude that they are subject to strict scrutiny and that Kissel has established a strong likelihood of success under the demanding strict scrutiny standard. Except as to one of the four requirements (that he tell prospective donors what percentage of their donations will be given to the charitable organization), I conclude that Kissel has shown irreparable harm and that the balance of equities and the public interest weigh in his favor. Accordingly, I will grant the motion for a preliminary injunction to enjoin the Commissioner's enforcement of the requirement that he submit a notice 20 days before engaging in solicitation, to enjoin the requirement that he submit the text of his intended solicitations, and to enjoin the requirement that he keep records of his donors and donations so that they may be subject to inspection by the DCP.
Wednesday, September 1, 2021
- The 11th Circuit upheld the denial of a conservation easement deduction and imposition of accuracy-related penalties in TOT Property Holdings, LLC v. Commissioner. For an analysis of the decision, see Peter J. Reilly, TOT Property Holdings Highlights Fundamental Flaw In Conservation Syndications.
- In Hancock County Land Acquisitions v. United States, 2021 U.S. Dist. LEXIS 143312, 2021 WL 3197336 (N.D. Ga. July 7, 2021) (all Internet-accessible copies of the decision appear to be behind a paywall, including I assume PACER), a Federal district court rejected an attempt by a partnership and its tax matters partner to require the IRS Appeals Office to consider its conservation easement deduction dispute before forcing them to pursue litigation, even though the IRS had already issued a Final Partnership Administrative Adjustment (FPAA) notice. The court found that given the procedural poster of the case, it had to grant the government's motion to dismiss because it lacked federal subject matter jurisdiction. The dispute therefore will instead proceed in U.S. Tax Court, where the partnership and its tax maters partner have already filed a petition for readjustment of the FPAA.
- In perhaps the most ominous development for individuals involved with these claimed deductions, the Department of Justice announced the First Federal Indictment in Cases Involving Syndicated Conservation Easements. The first paragraph of the June 9, 2021 press release states:
A federal grand jury sitting in Atlanta, Georgia, returned an indictment today charging an Atlanta certified public accountant with one count of conspiracy to defraud the United States; 24 counts of wire fraud; 32 counts of aiding or assisting in the preparation of false federal tax returns; and five counts of filing false federal tax returns relating to a wide-ranging, abusive tax shelter scheme.
UPDATE: A reader commented that 1st Circuit has cited but distinguished the AFPF decision in rejecting a constitutional challenge to certain Rhode Island disclosure and disclaimer laws applicable to election-related communications, possibly setting the stage for the Supreme Court to consider the AFPF decision's applicable to campaign finance disclosure laws. See Gaspee Project v. Mederos (1st Circ. Sept., 14, 2021). In contrast, a federal district court in Colorado has relied in part on the AFPF decision in enjoining a municipal independent expenditures disclosure law. See Lakewood Citizens Watchdog Group v. City of Lakewood (D. Colo. Sept. 7, 2021). And finally, the Hawaii Attorney General has posted the following notice on its Tax & Charities website: "Effective immediately, the State of Hawaii Department of the Attorney General’s Tax & Charities Division will no longer require the filing of Schedule B to the IRS Form 990 as part of the registration and annual reporting requirements."
The first effects of the Supreme Court's decision in Americans for Prosperity Foundation v. Bonta are now being felt, although it will take years for the full effects of this landmark donor disclosure case to be realized.
Not surprisingly, California quickly posted the following notice on its Charities webpage in recognition of its loss:
Effective July 1, 2021, the Registry of Charitable Trusts will no longer require the filing of Schedule B to the IRS Form 990 as part of the registration and annual reporting requirements.
New Jersey, which has a filing requirement similar to California's, announced it would not be enforcing its requirement on its Charities Registration Section webpage, saying:
In light of the United States Supreme Court’s recent decision in Americans for Prosperity v. Bonta, the Division's Charities Registration Section has determined that the requirement that charities submit the Internal Revenue Service (IRS) Form 990 Schedule B upfront as part of their initial and yearly registrations can no longer be enforced. The Division will therefore be revising its rules, and in the interim will not be taking enforcement action based on the failure to include Schedule B or an equivalent donor schedule in such registrations. The Division will deem any entities that were previously deemed non-compliant solely because they failed to submit Schedule B or an equivalent donor schedule to be in compliance with registration requirements. All other regulations at N.J.A.C. 13:48-1.1 et seq. remain in effect and the Division continues to require the submission of all other schedules and statements.
And as already noted in this space, New York has also suspended collection of that schedule pending review of the decision. Both New York and New Jersey faced legal challenges from the Liberty Justice Center to their collection of the schedule, which may have pushed them to get these notices out quickly. No word yet on whether Hawaii, which is the other state with a similar requirement, will follow their lead. (Ballotpedia also identifies Kentucky as having such a requirement, but filings in the AFPF litigation indicate this is not accurate.) Coverage: The NonProfit Times.
For recent, in-depth analysis of the possible further effects of the decision, see Americans for Prosperity Foundation v. Bonta: Questions and Answers, written by Professor Bradley A. Smith (Capital University) for the Institute for Free Speech. One interesting aspect of his analysis is his take on the possible effect on the federal tax law donor disclosure requirement (operationalized through Schedule B) (footnotes omitted):
Does This Mean Nonprofits No Longer Have to File Schedule B With the IRS?
No. In 2020, the IRS repealed the requirement that donor names and addresses be reported on Schedule B for most nonprofits, but not for those operating under Sections 501(c)(3) or 527 of the Internal Revenue Code. The AFPF majority specifically noted that, “revenue collection efforts and conferral of tax-exempt status may raise issues not presented by California’s disclosure requirement.”
It is hard to say how the courts would respond to a challenge to the IRS’s Schedule B filing requirement. Such a challenge would now be analyzed under the AFPF framework, meaning the IRS would have to show an important need for the information and that the demand was narrowly tailored. However, as 501(c)(3) donors claim a tax deduction, the IRS would likely argue that the information is needed to ensure tax compliance – i.e., that the donations claimed by individual filers are actually received by charities. Given the potential revenue consequences, and a more direct connection between the information sought and the potential fraud than existed under California’s policy, courts might still uphold the rule, as the majority appears to suggest.
As often happens with Supreme Court decisions announcing new or clarified standards of review, how lower courts interpret the case going forward will be almost as important as the case itself.
Court decisions involving section 4958, the intermediate sanctions imposed on excess benefits paid to insiders at section 501(c)(3) charities and 501(c)(4) social welfare organizations, are relatively rare. So two recent decisions involving intermediate sanctions are worth noting, even if their holdings are not surprising.
In Fumo v. Commissioner, T.C. Memo 2021-61, the Tax Court had little difficulty concluding that convicted former Pennsylvania state senator Vincent J. Fumo was a disqualified person because of his substantial influence over a charity, even though he did hold any formal position with the organization. More specifically, the court found that Fumo "used his power and influence as the chairman of a senate appropriations committee to obtain funding for the organization from a variety of public and private sources." The amount obtained for the section 501(c)(3) Citizens Alliance totaled in the tens of millions of dollars. In addition, during his criminal trial Fumo testified that he approved most significant projects and directed many major expenditures, as well as receiving many perks and gifts from the charity. He further testified that he "viewed it as my entity, my baby." The court therefore granted summary judgment to the IRS on the question of whether Fumo was a disqualified person, while denying summary judgment on the factual question of whether Fumo received excess benefits during the years at issue, leaving that issue instead for trial.
In Ononuju v. Commissioner, T.C. Memo 2021-94, the Tax Court concluded that the wife of a section 501(c)(3) charity's founder and president was a disqualified person because of that relationship, choosing not to rely instead on the fact that she was listed on the charity's Form 990 for the relevant years as also holding various positions with the charity, including as a director and as secretary. The court's reluctance to rely on her apparent positions with the charity may have stemmed in part from evidence that it was the taxpayer's husband who ran the charity while the taxpayer was fully occupied with caring for their eight children. Nevertheless, the court also found that she had received $27,000 in "payroll" payments from the charity that failed the contemporaneous substantiation requirement for such payments to be treated as compensation. The court also found her testimony that an additional $88,000 received from the charity she had just turned over to her husband was not credible because he received directly significantly more from the charity during the same year and she could provide no records regarding the disposition of those funds. The court therefore concluded that the petitioner had received $115,000 in excess benefits and so owed both the first-tier intermediate sanctions tax of $28,750 and the second-tier tax of $230,000, plus various penalties. But the court further noted that the petitioner could still avoid the second-tier tax (and possibly the first-tier tax as well) because the "correction period" for repaying the excess benefits remained open "at least until this Court's decision has become final following any appeal."
Tuesday, August 31, 2021
IRS Requires Division Counsel Consultation for Some Public Charity Status Claims in Wake of Mayo Clinic Decision
The IRS has issued a memorandum providing "Interim Guidance on Processing a Request for Public Charity Classification under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii) when Applicant’s Primary Function is not the Presentation of Formal Instruction". The guidance comes in the wake of the Eighth Circuit's Mayo Clinic decision relating to the definition of "educational organization". As provided in the memo:
Because of ongoing litigation in the Eighth Circuit Court of Appeals regarding Treasury Regulation Section 1.170A-9(c)(1), the specialist must coordinate with TEGE Division Counsel when:
- An applicant is seeking classification or reclassification of public charity status as an educational organization under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii), and
- The applicant’s primary function is not the presentation of formal instruction.
Of course the most interesting but unanswered question is to what extent the IRS will choose to follow that appellate court decision in making these determinations, including outside of the Eighth Circuit.
Hat tip: EO Tax Journal
Thursday, July 22, 2021
Thought I'd provide some quick reflections on the NCAA v. Alston a SCOTUS case handed down a month ago on June 21.
First a personal reflection. When I joined the IRS in the mid 2000s, I was told only somewhat in jest: there are two iron clad rules in exempt organizations -- preachers and college athletics ("hook em horns") always win. This latest case suggests that this iron clad rule may be beginning to subside in part at least.
Justice Gorsuch, writing for a unanimous Court affirmed the US 9th Circuit Court of Appeals in finding that the NCAA rules restricting educational benefits offered by colleges and universities to student athletes violated the Sherman Antitrust Act.
The Court affirmed the 9th Circuit that found that the NCAA limits on educational compensation violated the Antitrust Act only insofar as they involved educational benefits rather than other forms of compensation.
Probably the most significant aspect of the case that may have impact on other places for the NCAA and college athletics is that SCOTUS rejected the idea that the NCAA ought be treated differently because it deals with amateurs and is engaged in education rather than commercial activity.
This case does not change anything for how to think about universities and college athletics qualifying as charitable organizations under section 501(c)(3). John Colombo wrote an article The NCAA, Tax Exemption and College Athletics that is still relevant to this question today.
First, I would not expect this decision to effect college athletics entities like the NCAA or the university athletic activities to be found to be not charitable. This is because Congress amended the Code to provide that promoting amateur athletics is a purpose that meets the charitable requirement of section 501(c)(3). Perhaps, if universities start paying athletes and their amateurism is called into question, this would become an issue, but as of now, I do not see it threatening college athletics on the tax exemption angle.
Secondly, this ruling does not immediately impact the unrelated business income tax and college athletics either. The IRS and Courts have generally been favorable to college athletics. Just as Colombo concluded in his article some years ago, I think it still unlikely for that favorability to end because of the Alston holding.
However, as in the first matter, should the veneer of amateur begin to fall, and college athletics begin to compensate athletes, then the question of unrelated business income tax could become a real issue again for college athletics. The most dangerous possibility for college athletics and its expected tax treatment at least was raised in a concurrence by Justice Kavanaugh who suggested he would find the limitations on all forms of compensation to violate the Antitrust Act.
Tuesday, July 6, 2021
I have written a detailed analysis of last week's Supreme Court donor disclosure decision, Americans for Prosperity Foundation v. Bonta. It is available at Law360. Here are the first several paragraphs:
On July 1, the U.S. Supreme Court issued its opinion in Americans for Prosperity Foundation v. Bonta, striking down as unconstitutional California's requirement that charities registered in that state submit Schedule B to Form 990/990-EZ/990-PF, the federal tax schedule with identifying information for major donors, to the state on a confidential basis.
The decision not only prevents California from requiring all charities registered in that state to provide this information but also has implications for other donor disclosure requirements. Such requirements include ones imposed by a handful of other states as part of their regulation of charities, the federal tax law requirement that charities exempt under Internal Revenue Code Section 501(c)(3) and political organizations exempt under Section 527 disclose their donors to the Internal Revenue Service and, for private foundations and political organizations, also to the public, and federal and state donor disclosure laws relating to elections.
My read of the opinion is that it contains two significant holdings that will both encourage future constitutional challenges to these requirements and give those challenges a better chance of succeeding than they had under prior rulings.
Thursday, July 1, 2021
It’s rare we get a Supreme Court decision that falls squarely within the realm of “nonprofit law,” but today’s the day! The Court decided Americans for Prosperity Foundation versus Bonta. 501(c)(3)-exempt organizations challenged, on First Amendment grounds, a California law that required disclosure to the state of major donors to the organizations. Largely as expected, the Court vacated the 9th Circuit and struck down California’s donor disclosure requirements. Here’s my quick take, although I suspect other bloggers will be writing about this case as well.
No Threshold Chilling Showing is Required. One of the biggest divides between the majority and the dissent is whether the plaintiffs must first make a threshold showing that the disclosure requirement is meaningfully chilling its speech or its associational interests. As long as there is a “risk” of such a chill, the majority immediately places the burden on the government to show that the disclosure is justified. The dissent, in contrast, would first require "plaintiffs [to] plead and prove that disclosure will likely expose them to objective harms, such as threats, harassment, or reprisals."
Standard of review. The biggest thing we needed from the Court was clarification about what the standard of review was. And we didn’t get that. Instead, we have this breakdown:
Chief Justice (plurality in part II-1-B): "Regardless of the type of association, compelled disclosure requirements are reviewed under exacting scrutiny."
Thomas: Apply strict scrutiny: "Laws directly burdening the right to associate anonymously, including compelled disclosure laws, should be subject to the same scrutiny as lawsdirectly burdening other First Amendment rights."
Alito + Gorsuch: don't need to decide between strict and exacting scrutiny because California's law fails both (and "[t]he question is not even close.")
We fortunately did get some clarification on what exacting scrutiny means, at least in this context: “Where exacting scrutiny applies, the challenged requirement must be narrowly tailored to the interest it promotes, even if it is not the least restrictive means of achieving that end.” So the government must show more than a “substantial relation” between its goals and its ends, but need not show that it is the least restrictive. We’ll see how that turns out in practice.
Applying the standard.
The majority agrees "that California has an important interest in preventing wrongdoing by charitable organizations." However, the Court perceives a mismatch between amount of info disclosed (tens of thousands of charities) and the number of cases where that information is used/investigated (tiny). The Court describes the State's interest in broad proactive disclosure as "less in investigating fraud and more in ease of administration." Via Twitter, Phillip Hackney (@EOTaxProf) argues that this downplays the State's interests: first as a deterrent to those who might misuse the laws, and second to know who might be misusing a charity for fraudulent purposes. Without that information regulators are in the dark and unable to see fraudulent patterns." But the Court does not discuss this.
It's also significant that the district court made factual findings following a bench trial that rejected many of the state's asserted interests. The majority's ability to cite deference to the district court's findings allowed it to avoid a fact-intensive application of the standard.
Tax-Exemption. The Court left open the possibility that such disclosure requirements could be validly imposed through "revenue collection efforts and conferral of tax-exempt status." Recall that the California rules were implicated not by a charity's tax exempt status but merely operating in the state/soliciting donations. As the Court's citation to Regan v. Taxation with Representation confirms, the government has more latitude to impose restrictions as a condition of tax-exempt status (which is considered a government benefit) than it does when limiting/restricting/impeding on a constitutional right. Therefore, there's nothing about the opinion's logic that would call into doubt the constitutionality of the disclosure requirements in federal tax law.
Optics. One final note from me is that I worry about the way that this decision has been described in public discourse. This is ultimately a case about disclosure requirements for nonprofits that are not engaged in electioneering. The plaintiffs had support from a range of nonprofit ideologies -- such as the ACLU and the NAACP. This was not simply a case about campaign finance, or about conservative dark money. The news clips and commentary that reduce the case along political lines may be more dramatic and may fit in with some broader narrative, but they elide the actual dynamics of what is going on in the case.
That's my quick take. Look forward to reading others' views!
Sunday, June 27, 2021
In a 2000 EO CPE article entitled Private Schools, the Service stated, “private schools have long been of concern to the Service.” As stated therein, the Service’s determinations of whether private schools qualify for exemption under IRC 501(c)(3) were addressed in many of the CPE texts from 1979 through 1989. In Private Schools, the Service provided an important historical review, a discussion on the requirements of Rev. Proc. 75-50, 1975-2 C.B. 587, and a summary of the various filing requirements that apply to private schools.
In recounting the history of this problem, the CPE article notes the background and current status of an injunction (still in effect) that requires the Service to deny tax-exempt status to racially discriminatory private schools in Mississippi. The injunction resulted from a 1970 class action filed to prevent the Service from recognizing the tax-exempt status of or allowing IRC 170 deductions to private schools that engage in racial discrimination against black students. See Green v. Connally, 330 F. Supp. 1150 (D. D.C. 1971), aff'd sub nom., Coit v. Green, 404 U.S. 997 (1971). It is interesting to examine the injunction in place for Mississippi in considering how to handle the systemic problem of racially discriminatory private schools today. The CPE article states the following regarding Mississippi private schools:
These so-called “Paragraph (1) Schools” must demonstrate that they have adopted and published a nondiscriminatory policy. They must also provide certain statistical and other information to the Service to establish that they are operated in a nondiscriminatory manner. Most importantly, they must overcome an inference of discrimination against blacks.
As of now, the injunction from Green only applies to Mississippi schools. Clearly, Green provides a model for how to implement the restriction against private schools’ engaging in racial discrimination. The focus on “statistical” information is really the key. As we all know, numbers do not lie. If private schools were free and open to all, the student body at private schools would not be 90% or more white. The same is true regarding the bleak number of black teachers at private schools. The injunction from Green could cure some of the prevalent and pervasive problems of racial discrimination in private schools throughout the South.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Saturday, June 26, 2021
Last month, Forbes published an article entitled The Racist History of “School Choice.” The article underscores yet another way that racially discriminatory private schools are subsidized. Raymond Pierce points out that for equitable education to exist, public schools need true reform, such as more funding for faculty development and other support systems necessary for nurturing high-quality learning environments. Given the need for greater investment into public schools, the last thing that should be done is to take money from public schools that are struggling and give it to largely segregated private schools, but that is what is happening under a common practice referred to as “school choice.” Not surprisingly, “school choice” has its underpinnings in a racist history. Pierce states, “We are less than six months into 2021, and to date, ‘school choice’ legislation has been introduced in at least 20 states, half of which are in the South.” Generally, the legislation involves tax credits, school vouchers, or “education savings accounts.” A common thread is that these bills take money from “underfunded, under-resourced public schools” and give it to private schools. While some proponents maintain that the bills will provide better education opportunities for Black and Brown students and those from low-income families, the reality is they do not according to Pierce.
The article traces the roots of “school choice” legislation to a history of racism and school segregation that is important to understand. Interestingly, public education in the South emerged during Reconstruction. When the Fourteenth Amendment was passed, education in the South was mostly privatized and available only to white children from wealthy families. Black children and poor white children typically were not educated at all. The Southern Education Foundation (SEF), which was featured in the June 21, 2021 post, was one of the first proponents of public education. The Peabody Fund (which preceded SEF), provided funding as well as drafted and promoted legislation calling for funding of public education through taxes. Former slaves strongly supported public education initiatives because they viewed education as essential to true freedom and had a strong desire to have their children educated. As a result of public schools, literacy among both Black and white students increased tremendously. Additionally, starting in 1913, the Anna T. Jeanes Fund (another precursor of SEF), supported “Jeanes Teachers” who traveled across the South to strengthen curriculum and instruction in rural schools that Black students attended. They taught students and community members how to excel independently and economically and how to overcome the challenges of the Jim Crow South. From 1910 through 1940, public education in the South grew dramatically.
However, in the 1940’s, Southern white students began leaving public schools to attend private schools to avoid integration after it was clear that the “separate but equal doctrine” from the 1896 Plessy v. Ferguson Supreme Court ruling would be dismantled. After the Supreme Court’s landmark decision in Brown v. Board of Education in 1954, segregation was no longer constitutional, and school vouchers became a means for subverting integration. During the 1950’s, Southern politicians passed legislation establishing tuition voucher or grant programs that were used to annihilate completely the public school systems, instead of desegregate. Pierce goes on to provide an illustrative example from Prince Edward County, Virginia where public schools were closed for five years until the Supreme Court intervened. Ultimately, the Supreme Court ruled in Griffin v. School Board of Prince Edward County that the county’s transferring of public funds to private white schools, instead of supporting public schools, was a violation of the equal protection clause of the Constitution. The Court stated that private school tuition assistance covered up as “school choice” was a tool to “systematically exclude Black children from the educational process.”
Despite the prohibition against this approach, Southern legislatures used it as a “blueprint” in an attempt to circumvent integration. From 1954 to 1964, Southern legislatures passed at least 450 laws and resolutions to prevent public school desegregation, many of which permitted the transfer of public funds to private schools. From 1958 to 1980, private school enrollment in the South increased by over half-a-million students. Indeed, hundreds of private segregated schools were established. At the same time, schemes to fund private schools at the expense of public schools, by using vouchers or tax credits to cover large portions of student tuition and operating costs, also increased. By the 1980’s, the 11 states that made up the former Confederacy had enrolled 675,000 - 750,000 white students. Of these students, 65 to 75% attended schools where 90% or more of the student body was white.
Today, school vouchers still are used to support segregated private schools and to continue de facto segregation. The numbers speak for themselves. In the United States, public schools have a student body that is comprised of 51 % white children and 48.3% children of color (mainly Black and Latino). In stark contrast, almost three out of every four private school students are white. As Pierce notes, this is part of a historical pattern.
The question becomes whether tax funding and subsidizing of a directed, intentional system of inequality, namely segregation, should be tolerated. As I recounted in the June 22, 2021 post, private schools are required to publicize their policies disavowing racially discriminatory practices. However, the numbers show that there are unspoken policies and practices that are being used to perpetuate both segregation and unfair treatment. One solution is to develop a better way of reporting racially discriminatory treatment so that private schools engaging in such practices would lose their tax-exempt status. Another solution is to re-examine the concept of “school choice” programs and school vouchers in their proper historical context and to require some form of accountability for the low numbers of minority enrollment in the private schools benefiting from these programs.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Monday, June 21, 2021
It is widely known that private schools in the South were used during the later part of the 20th century as a way to escape mandatory desegregation mandates. However, it may come as a surprise that many private schools in the South and across the country continue to engage in racially discriminatory practices today and still benefit from federal tax-exemption. In other words, as two of my tax colleagues pointed in their article “Subsidized Injustice,” tax money is used to subsidize or fund these discriminatory schools. If such schools faced the loss of tax-exemption for racially discriminatory policies and practices, the two-fold fall out effect would require them to change their harmful ways. First, a loss of tax-exemption would mean the schools would have to pay tax on their net income for a given year. Many private schools cost on average over $20,000 per student per year. At the same time, they tend to have numerous business deductions, including salaries, which would decrease their overall tax liability. Second, a loss of tax-exemption would mean such schools could no longer provide donors with a tax deduction for their contributions. Most private schools rely on donations from affiliated families and board members to support their programs. In addition, as observers have noted, a loss of tax-exempt status would "signal" to potential applicants and current families that a private school was engaging in racially discriminatory practices.
It is important to observe the history of private schools in the South, as it provides important insight as to the continued racially discriminatory practices today and how tax law can provide a solution. As the Southern Education Foundation explains, a large-scale exodus from public schools in the South started in the 1940’s, which resulted in an approximately 43% increase in private school enrollment. This exodus from public schools began in the 1940s, after US Supreme Court decisions forbidding segregation in graduate and professional schools in the South. Even though the Supreme Court decisions only dealt with higher education, they were a signal to Southern families that public elementary and secondary schools were next.
Once the Supreme Court destroyed the “separate but equal” doctrine, another road to staying “separate” emerged in the form of private school migration. Notably, from 1950-1965, private school enrollment grew at rapid rates across America, with the South having the highest rates. According to the Southern Education Foundation, by 1958, private school enrollment in the South increased by over $250,000 in an eight-year period, resulting in one million students by 1965.
To bolster this migration, Southern state legislatures enacted approximately 450 laws and resolutions between 1954 and 1964 to subvert desegregation, including by specifically authorizing the systematic transfer of public assets and monies to private schools. Although ultimately federal courts invalidated these laws, which also caused some Southern states to recant, many private schools still found more secretive ways to funnel public funds to private schools.
During the next wave of migration from the mid-1960s to 1980, as public schools in the Deep South began to slowly desegregate due to federal court orders, private schools increased their enrollment by more than 200,000 students. Approximately 67% of the growth occurred in the following six states: Alabama, Georgia, Louisiana, Mississippi, North Carolina, and South Carolina. At the same time, the issue of federal tax exemption for segregated private schools came to the forefront. In the early 1960s, the IRS temporarily suspended applications of self-professed “segregation academies” given the pressure from civil rights organizations. In 1970, the IRS announced a non-discrimination policy applicable to private schools, which due to continued resistance took eight years to implement.
Meanwhile, private school enrollment in the South grew at an alarming rate. During the beginning of the 1980’s, the eleven Southern states that had made up the Confederacy enrolled around 675,000 and 750,000 white students. The racial composition of these schools was startling, with an estimated 65 to 75 percent of enrolled students attending schools having a student body that was 90 percent or more white.
In the end, the IRS was successful in implementing its new policies, but faced criticism from religious private schools in the South. Eventually, this controversy led to the landmark 1983 case, Bob Jones University v. United States, 461 U.S. 574 (1983). In Bob Jones, the Supreme Court held that the Internal Revenue Service (IRS) may deny tax-exempt status to schools with racially discriminatory policies. Such policies were denounced as “contrary to established public policy,” despite allegedly being based on religious beliefs.
Due to the new IRS rules and the Bob Jones case, all private schools in the South adopted statements of non-discrimination in admission and began admitting at least a small number of black students and other students of color. The story should have ended back in 1983 of federally funded segregation in private schools and a new story of integration and opportunity should have started. Unfortunately, the racist practices in private schools simply took on more covert forms in the South and in other areas, and private schools have continued to reap the benefits of tax exemption.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School