Thursday, February 25, 2021
Exciting times in the world of nonprofit law, as the Supreme Court will soon decide a case with potentially significant implications for regulation of nonprofits. Nonprofits challenge the constitutionality of a California law that requires the organizations to provide their unredacted Form 990 – including Schedule B’s list of major donors – to the State as a condition of soliciting donations in the state.
The petitioners/plaintiffs – conservative organizations Thomas More Law Society and Americans for Prosperity Foundation -- cite the risk of the information being publicly disclosed by the state and the fear their donors possess of being harassed if their support for these organizations is made public. The plaintiffs rely heavily on the NAACP v. Alabama case from the 1950s, where the Supreme Court struck down an Alabama ruling that required the NAACP to publicly disclose its members, finding that such a disclosure would pose significant challenges to the ability to associate to advocate against oppression. Petitioners do argue that their donors may be less willing to donate and may face reprisal if their identities are known, but they do not and cannot argue that they face the same levels of risk that members of the NAACP faced in the 1950s South. The analogy is further strained by the fact that California has promised not to publicly disclose the identity of major donors, which further reduces the risk to associational rights.
The government, in contrast, cites to Citizens United and Doe v. Reed, which blessed laws requiring disclosure of donors in election-related contexts as a way of supplying the electorate information on which to judge the messages we’re hearing. Yet California’s law isn’t triggered by election-related speech as in Doe and Citizens United. Instead, it is triggered by charitable solicitation for any cause, and applies broadly to organizations across the nonprofit spectrum.
Relying on precedent, the 9th Circuit rejected out of hand the plaintiffs’ facial challenge to California’s law. And finding that the plaintiffs failed to prove their case (rejecting the district court’s factual findings to the contrary), the 9th Circuit also rejected the plaintiffs’ as-applied challenge to the disclosure requirement. The Second Circuit had reached a similar conclusion in a challenge to an analogous provision in New York’s law, and there wasn’t a split on this narrow point. Yet the Supreme Court agreed to take the case, which will be argued towards the end of this term. There are a lot of vulnerabilities in the case for California (such as unfavorable factual findings by the district court, a sloppy regulatory canvas (for example, not enshrining the rule against public disclosure in statute)), but a loss for California could have ramifications well beyond California and well beyond the specific mandate challenged here.
While the entire case is complex, here are some of the questions that the Court might find it necessary to address:
- What is the standard of review: Is it strict scrutiny, intermediate scrutiny, “exacting” scrutiny, or something else entirely?
- Is the case best decided as a facial or as-applied challenge? Does it matter?
- Is a constitutional analysis only required upon a threshold associational showing of a risk of threats/violence/harassment/something else, or does it apply even in the absence of this predicate showing?
- Assuming that the mode of analysis is, or is similar in structure to, strict/exacting/intermediate scrutiny, what are valid government interests that would justify the compelled disclosure, and what level of proof is needed? Conversely, what are the relevant associational interests at stake, and what level of proof is needed?
- Does the rule change depending on the content area of the association’s speech (political v. ballot initiative v. lobbying v. other)? The parties seem keen to use content of speech (election-related versus something else) as a dividing line.
- What effect, if any, does the fact that these organizations already provide this information to the IRS have on their challenge? (For example, does the constitutional analysis change depending on whether the compelled disclosure is in the context of granting tax exemption (the IRS requirement) versus engaging in charitable solicitation (California rule)?
Joseph W Mead
Saturday, January 9, 2021
While not necessarily covered much in the nonprofit press, there has been a steady stream of news about federal officials charging pharmaceutical companies with using charities to funnel illegal kickbacks under Medicare. Just last month, Biogen agreed to pay a $22 million fine to resolve claims it used two 501(c)(3) foundations as conduits to cover the copay obligations of Medicare patients in order to induce those patients to purchase its drugs. In its press release, a Department of Justice official noted that is but the latest of a number of settlements relating to similar misconduct.
And also last month, a federal district court denied the motion of pharmaceutical company Regeneron Pharmaceuticals to dismiss similar charges brought against it. The 501(c)(3) foundation involved in that case is the Chronic Disease Fund, now operating as Good Days, which allegedly received tens of millions of dollars from Regeneron.
The Supreme Court of the United States agreed yesterday to hear two cases challenging a California law that requires charities to share the donor information reported to the IRS with state authorities, subject to those authorities keeping the information confidential. The cases are Americans for Prosperity v. Becerra and Thomas More Law Center v. Becerra. The Court consolidated the cases, with one hour of oral argument total.
The question presented by the petition a write of certiorari in the first case is:
Whether the exacting scrutiny this Court has long required of laws that abridge the freedoms of speech and association outside the election context—as called for by NAACP v. Alabama ex rel. Patterson, 357 U.S.
449 (1958), and its progeny—can be satisfied absent any showing that a blanket governmental demand for the individual identities and addresses of major donors to private nonprofit organizations is narrowly tailored to an asserted law-enforcement interest.
The questions presented by the petition a write of certiorari in the second case are:
1. Whether exacting scrutiny or strict scrutiny applies to disclosure requirements that burden nonelectoral, expressive association rights.
2. Whether California’s disclosure requirement violates charities’ and their donors’ freedom of association and speech facially or as applied to the Law Center.
The Court did not announce a decision with respect to a third case involving the same law (Institute for Free Speech v. Becerra). If the Court decided not to hear that case, it is expected to issue an order to that effect on Monday.
For more details, follow the links provided above to the SCOTUSblog pages for the cases.
Friday, January 8, 2021
Nonprofit hospitals are, along with all hospitals, struggling with the COVID-19 pandemic. But that role has not caused a let up in negative scrutiny of their activities by journalists, Senator Chuck Grassley, or state legislators. It also has not halted the continuing consolidation of health care entities.
For example, ProPublica reports that "Nonprofit Hospital Almost Never Gave Discounts to Poor Patients During Collections, Documents Show," describing the practices of Methodist Le Bonheur Healthcare, Memphis' largest health care system. And the N.Y. Times reports that "The largest hospital system in New York sued 2,500 patients for unpaid medical bills after the pandemic hit," describing the activities of state-run Northwell Health system, which consists primarily of 501(c)(3) tax-exempt nonprofits.
Responding to these and other concerns, Senate Finance Committee Chairman Chuck Grassley wrote a public letter to every member of the Senate Finance and Judiciary Committees about the need for new attention to the tax laws governing nonprofit hospitals. Senator Grassley is rotating off of the Finance Committee, having hit his term limit for that committee under Senate GOP rules, and of course his influence would have been reduced by the Democrats taking control of the Senate under any conditions. But he likely will still have influence over such matters in the new Congress, giving his longstanding interest in the rules for tax-exempt organizations.
In the states, the Philadelphia Inquirer reports that "New Jersey may be the first state to impose per-bed fees on nonprofit hospitals for municipal services." The $3 per day per licensed bed fee is paired with preservation of nonprofit hospital property tax exemption, which has been under increasing attack in New Jersey, with approximately two-thirds of the state's nonprofit hospitals having been taken to tax court. However, Governor Phil Murphy has not yet said if he will sign the bill.
Finally, consolidation of nonprofit health care providers also continues. For example, the Federal Trade Commission recently lost an appeal of a federal district court's denial of a motion for a preliminary injunction to block the merger of Thomas Jefferson University and Albert Einstein Healthcare Network in the Philadelphia area. And 501(c)(4) nonprofit health insurers Tufts Health Plan and Harvard Pilgrim Health Care have now completed their merger after having received federal and state approvals (after some divestment).
Tuesday, December 29, 2020
The Washington Post has a story, "Girl Scouts rebuke Boy Scouts in escalating recruitment war," that begins:
The Girl Scouts are in a “highly damaging” recruitment war with the Boy Scouts after the latter opened its core services to girls, leading to marketplace confusion and some girls unwittingly joining the Boy Scouts, lawyers for the century-old Girl Scouts organization claim in court papers.
The Girl Scouts' summary judgment brief is available here and begins:
This is a trademark dispute brought by Girl Scouts to halt ongoing marketplace confusion caused by Boy Scouts throughout the United States, and to prevent further harm to the famous GIRL SCOUTS brand. The level of confusion resulting from Boy Scouts’ use of terms like GIRL SCOUTS, SCOUT, SCOUTS, SCOUTING, SCOUTS BSA and SCOUT ME IN to market its core programs to girls is both extraordinary and highly damaging to Girl Scouts.
On its motion, Boy Scouts asks the Court to ignore all of this and hold, as a matter of law, that confusion and dilution are unlikely, even though the GIRL SCOUTS trademark is concededly famous, the parties’ marks are obviously similar, and the services they offer are, since 2017, directly competitive. This proposition is untenable, and based on a wholly misleading factual presentation that sidesteps or ignores the mountain of evidence of confusion and dilution that is central to this case. Most fundamentally, Boy Scouts repeatedly downplays the momentous change in its business that was announced in 2017, when it decided to abandon its historic identity as an organization that only served boys by expanding to girls its two core programs: CUB SCOUTS and the program now known as SCOUTS BSA, formerly known as BOY SCOUTS. That major change brought the parties squarely into the same market
The Boy Scouts' summary judgment brief, available here, begins:
GSUSA's trademark lawsuit against the Boy Scouts of America (the “BSA”) arising from the BSA's 2018 “Scout Me In” marketing campaign is utterly meritless, and should never have been filed. The BSA is the senior user of SCOUT-formative branding, having been founded before GSUSA. When GSUSA chose to change its name from Girl Guides to Girl Scouts, it assumed the risk that Americans might assume the parties are related. Not surprisingly, GSUSA's own research confirms that half of Americans indeed held that belief as of 2017—before any of the events in question in this lawsuit. GSUSA also has voluntarily associated itself with the BSA for decades, including by participating in joint events and sharing facilities. And, GSUSA deliberately abandoned the use of SCOUT alone at least 30 years ago, in favor of always using GIRL before SCOUT.
GSUSA's present claim that the BSA's 2018 “Scout Me In” marketing slogan suddenly has caused marketplace confusion is bereft of any evidence supporting a causal connection to confusion. The Court should grant summary judgment in the BSA's favor on all claims.
Friday, December 11, 2020
In Americans For Prosperity Foundation v. Becerra, California recently filed a Supplemental Brief countering the US brief in the case, which argued that while the US Schedule B requiring donor disclosure of charitable organizations was constitutional, the California version was unconstitutional:
"1. The United States principally contends that the court of appeals applied the wrong standard of scrutiny. U.S. Br. 8-19. But it is difficult to see any material difference between the standard embraced by the United States and the one applied below. According to the United States, “compelled disclosures that carry a reasonable probability of harassment, reprisals, and similar harms are subject to exacting scrutiny.” Id. at7. Exacting scrutiny, in turn, calls for “a form of narrow tailoring” (id.) that requires “‘the strength of the governmental interest [to] reflect the seriousness of the actual burden on First Amendment rights’” (id. at 9); that dem ands a means-ends fit that is “‘reasonable’” but not “‘perfect’” (id. at 16); and that ensures that the compelled disclosure does “not sweep significantly more broadly than necessary to achieve [a] substantial governmental interest” (id. at 12). See also id. at 9 (compelled disclosure requirements are valid where “the public interest in disclosure outweighs the harm”) (internal quotation marks and ellipses omitted). The United States also asserts that “narrow tailoring is to some degree implicit in the requirement that the governmental interest in the compelled disclosure be ‘legitimate and substantial’” because “it is difficult to demonstrate a ‘substantial’ interest in a broad disclosure scheme when narrower disclosures would be sufficient.” Id. at 10-11.
The court of appeals held that California’s Schedule B filing requirement is subject to “‘exacting scrutiny,’” and it understood exacting scrutiny in the same way as the United States. Pet. App. 15a.1 It recognized that the “strength of the governmental interest must reflect the seriousness of the actual burden on First Amendment rights.” Id. (internal quotation marks omitted). It examined whether the State’s chosen approach swept too broadly. See id. at 19a-23a, 29a. And it determined that concerns about overly broad regulation are part and parcel of the substantial-relationship test. See id. at 15a-16a (requirement “that the State employ means ‘narrowly drawn’ to avoid needlessly stifling expressive association” is not “distinguishable from the ordinary ‘substantial relation’ standard”).
The United States ignores the overlap between the court of appeals’ approach and its own and asserts that the lower court erred in declining to require an adequate means-ends fit. U.S. Br. 16. But what the court of appeals declined to adopt was “the kind of ‘narrow tailoring’ traditionally required in the context of strict scrutiny,” including the requirement that “the state . . . choose the least restrictive means of accomplishing its purposes.” Pet. App. 16a; see also Opp. 6, 14-15. And the United States itself agrees that strict scrutiny and its “particularly stringent form of narrow tailoring” do not apply to information-reporting requirements like the one at issue here. See U.S. Br. 16."
Friday, November 20, 2020
There is some much continuing activity relating to to conservation easements that it is difficult to keep track of everything. Fortunately, fellow blogger Nancy McLaughlin (Utah) has recently updated her comprehensive summary of court decisions, Trying Times: Conservation Easements and Federal Tax law (Sept. 2020). It undoubtedly will need to be updated for many years, as just last month taxpayers filed at least 27 Tax Court petitions relating to claimed conservation easement deductions according to Tax Notes (subscription required).
The Department of Justice has also provided more information in its lawsuit against promoters of syndicated conservation easements, including identifying 42 additional such deals, again according to Tax Notes. The Internal Revenue Service this week issued a memo emphasizing the use of summons and summons enforcement in syndicated conservation easement cases, among others, and Chief Counsel recently issued a Notice providing further guidance about the settlement of such cases. Finally, Senators Grassley, Daines, and Roberts recently reintroduced the Charitable Conservation Easement Program Integrity Act targeting abusive conservation easement arrangements.
Additional Coverage: Washington Post ("Wealth investors seem to be exploiting land-conservation breaks, and the Senate is taking notice").
Tuesday, November 17, 2020
With the fading but still heated allegations about the 2020 election came at least two legal issues for Internal Revenue Code section 501(c)(3) charities seeking to be involved in the post-election litigation. One issue is to what extent charities can be involved in that litigation and related public debate without engaging in political campaign intervention. The Bolder Advocacy Program at the Aliiance for Justice provides helpful guidance on this point. But the other, perhaps more surprising issue, was whether 501(c)(3) Project Veritas may have put its tax-exempt status at risk during its attempts to find evidence of voter fraud. Fellow blogger Sam Brunson unpacks this issue over at The Surly Subgroup, concluding that if Project Veritas broke the law by helping and encouraging perjury by a Pennsylvania postal worker it may indeed have placed its tax-exempt status at risk.
But the bigger issue for most nonprofits is how the election may directly affect them or the positions they support. Before the election, the Chronicle of Philanthropy noted that the announced Biden tax plan "would steer aid to the poor but could deter some wealthy donors from giving." And in the wake of the election, the Chronicle of Philanthropy has collected a roundup of stories about how it is likely to affect philanthropy more generally. The consensus appears to be that incremental change is likely, with charities supporting more progressive policies cautiously optimistic but expecting a lot of hard work ahead.
UPDATE: The Chronicle of Philanthropy also just published an article with this headline: "Biden Transition Team Signals Big Role for Nonprofits Throughout Government." While that article is behind a paywall, the NonProfit Times has a list of over 40 nonprofit leaders that are among the 257 members of Biden's Agency Review Teams.
Monday, November 2, 2020
Surprising no one, there is a flurry of litigation in federal and state courts right now seeking various remedies regarding the right to vote. While some of these challenges are brought by political parties or candidates or individual voters, many of these challenges are brought by nonpartisan nonprofits asserting standing on their own behalf and/or their members to challenge state laws that impede ballot access. Drawn from the SCOTUSBlog Election Litigation Tracker, meet some of the nonprofit litigants shaping election litigation in the courts, and the interests that they represent (below the break).
Thursday, October 29, 2020
Further troubles continue to rain down upon the heads of the top authorities at the National Rifle Association. Earlier this month it was announced that the Internal Revenue Service is investigating the possibility of bringing criminal charges against Wayne LaPierre, the executive vice president of the organization since 1991. Given the extent of the civil charges brought against the organization and its leaders by New York Attorney General Letitia James, which have been discussed in this blog in several prior posts, it is perhaps unsurprising that criminal prosecution might follow.
The Wall Street Journal, which reported this development at the beginning of October, states that the IRS is investigating LaPierre in particular (as opposed to the NRA at large) for potential tax fraud. Possibly the agency is investigating LaPierre’s taxes for activities entirely outside his decades-long role as an executive for the powerful nonprofit: however, given the proximity of this news in relation to Attorney General James’ attempt to entirely dissolve the NRA for its alleged shady business dealings, the possibility seems remote. LaPierre was unquestionably a central piece in the high-level decision making of the large 501(c)(3) organization, and the New York Attorney General called LaPierre out by name when she brought suit. It would seem that the civil suit seeking its dissolution is only the beginning for the NRA, and whether leaders within its network besides LaPierre will draw the Internal Revenue Service’s ire remains to be seen.
For a discussion of the Wall Street Journal piece and the underlying facts, see this article by Nonprofit Quarterly.
David Brennen, Professor at the University of Kentucky College of Law
Monday, October 19, 2020
Figured readers would be interested in this look by Brian Mittendorf at the implications for Donor Advised Funds of Fairbairn v. Fidelity that appears in HistPhil.org.
"One way the concern that commercial DAFs are donor-centric arises is in the competition between sponsoring organizations. The lawsuit alleges that Fidelity Charitable differentiated itself from other charitable options by its “superior ability to handle complex assets,” even stating in correspondence about the possibility of receiving a gift of one particular type of asset that “Vanguard can’t do this but we do it frequently.” The general public may think of competition among charities as focusing on who can best put gifts to charitable use. It turns out this is an antiquated notion: the intense competition centering on seamlessly receiving and converting complex assets for donors presents a stark contrast.
A related issue is that DAFs increasingly are vehicles that provide disposal options to donors for illiquid assets. In the Fairbairn case, the assets donated were technically liquid (they were publicly traded) but the size of the donation would threaten share price if it were a sale instead of a donation, an eventuality that formed the basis for the lawsuit. However, donating such assets permits a tax deduction for the value, even though an outright sale at that value would be problematic. "
And, "A final issue that surfaces in the Fairbairn case is that some DAF sponsors may implicitly or even explicitly be beholden to their commercial affiliates. Legally speaking, Fidelity Charitable is a distinct entity from Fidelity Investments; as is the case for Vanguard Charitable and Vanguard; and so on. Yet, the shared names and logos underscore a nontrivial affiliation. Critics have argued that the commercial DAFs invest funds heavily in their affiliated investment companies and, as such, generate substantial fees for them. This, in turn, could create incentives to retain funds in investments rather than distribute them to charitable endeavors. The allegations in the Fairbairn case are consistent with this fear."
Saturday, September 19, 2020
First, in CREW v. FEC the U.S. Court of Appeals for the D.C. Circuit affirmed a district court decision that struck down the FEC's narrow interpretation of a statute relating to public disclosure of contributor information when the recipient organization makes independent expenditures, as defined by federal election law. The FEC had taken the position that the statute only required disclosure if a contribution was earmarked to support a particular independent expenditure. The court concluded that this position contradicted the plain terms of the statute, which at a minimum required disclosure if a contribution was made to generally support independent expenditures. However, the court did not resolve whether the statute could be interpreted by the FEC to only require disclosure of contributions with this general intent or instead required disclosure of all contributions (above a modest threshold set by the statute) given to an organization that makes independent expenditures. For further analysis, see the FEC summary. For coverage, see Politico. This ruling may be especially important as the use of so-called dark money increases on both sides of the aisle.
Second, the states of New Jersey and New York quietly ended their lawsuit against the Department of Treasury seeking documents relating to the Revenue Procedure (2018-38), which initially eliminated reporting of information about significant contributors to the IRS for tax-exempt organizations other than section 501(c)(3) and 527s. That Revenue Procedure was struck down by a federal district court and eventually replaced by regulations. According to Tax Notes, the parties filed a stipulation of voluntary dismissal that provides the states are satisfied Treasury and the IRS have produced the documents requested.
Third and finally, the Washington Post reports the FEC Chairman said during an interview earlier this week that a 2017 executive order freed churches to endorse political candidates. This was in the context of criticizing Catholic church leaders for admonishing priests who appear to do exactly that. He apparently acknowledged that the so-called Johnson Amendment, which prohibits section 501(c)(3) organizations, including churches, from supporting or opposing any candidate for elected office, is still good law, but asserted that it was unlikely to be enforced. Regardless of your views regarding the wisdom or even constitutionality of the Johnson Amendment, it is a bit shocking to hear a public official and lawyer say it is okay to break the law because it probably won't be enforced against you. (Not to mention the executive order he relies upon does not actually prohibit such enforcement.)
Thursday, September 17, 2020
DAF Donor Prevails: In Dickinson v. Commissioner, the Tax Court rejected an attempt by the IRS to recharacterize donations of appreciated stock in a privately-held company to a donor-advised fund followed by the redemption of that stock as a redemption of the stock from the donor followed by donations of the proceeds (resulting in taxable gain to the donors). The Tax Court granted summary judgment to the donor (and his spouse), and denied the government's motion for summary judgment, even though the donor and the board of directors of the privately-held company knew at the time the board authorized each donation that the DAF sponsoring organization (the Fidelity Investments Charitable Gift Fund) had procedures requiring the immediate liquidation of donated stock.
The court found that the uncontradicted evidence established that the donor had transferred all of his legal rights in the donated stock to the sponsoring organization. The court further held that the donor was not obligated to redeem the donated stock if the donations had not occurred, and also that the government did not allege that the donor had a right to redemption at the time of donation and so Revenue Ruling 78-197 was not applicable even if the court were to follow it. It therefore concluded that the form of the transaction controlled. For a detailed analysis of the case by Bryan Camp (Texas Tech School of Law), see this TaxProf Blog post.
Charitable Class Failure?: In The Korean-American Senior Mutual Association v. Commissioner, the Tax Court upheld the revocation of tax-exempt status under Internal Revenue Code section 501(c)(3) for failure to operate exclusively for exempt purposes. The organization (KASMA) offered paid memberships to anyone who was 55 to 90 years old residing in the New Your City area and in return paid a certain amount toward the member's funeral expenses when they died, along with a separate amount directly to the deceased's family according to a Korean tradition. Membership in the organization was not limited to Korean-Americans, despite its name.
The court concluded that while KASMA was formed to benefit the elderly, the elderly are not a recognized charitable class unless aid to them is designed for their special needs by, for example, providing goods or services at substantially below cost or without regard to an individual's ability to pay. Since KASMA only provided benefits to its dues-paying members, it did not satisfy this requirement or serve the distinct charitable class of the poor. This is an interesting analysis, since it would seem that the elderly (even limited to the NYC area) are an indefinite and large enough group to be considered a charitable class, so the lesson here is more along the lines that serving a charitable class by itself is not always sufficient to constitute operating to further a charitable purpose. The court also held that KASMA operated in a commercial manner and did not serve a public interest because it primarily benefited its members, and that the IRS was not equitably estopped from revoking KASMA's tax-exempt status because of the IRS' previous recognition of that status when KASMA first applied. The revocation was prospective from the date that the IRS Appeals Office issued a final adverse determination.
Wednesday, August 26, 2020
The 11th Circuit recently ruled on a case which might prove relevant on a far larger scale. On July 7th this summer, Judge William Thomas held that the Opa-Locka Community Development Corporation’s (Opa-Locka) right of first refusal could be exercised against the attempted sale of Aswan Village, an affordable housing project that Opa-Locka financed as a nonprofit corporation. The controversy of the case revolved primarily around whether an affiliate of HallKeen Management, the owner of Aswan Village, triggered Opa-Locka’s right of first refusal and thus had to allow Opa-Locka to purchase the housing project at well-below fair market value by sending a letter to Opa-Locka indicating their intent to sell Aswan Village to a third party. Under IRC 42(i)(7) of the United States Code, a qualified nonprofit corporation such as Opa-Locka can automatically insert itself into the sale of an affordable housing project ahead of other interested buyers. The 11th Circuit held that, absent more specific language in Opa-Locka’s contract containing its right of first refusal for Aswan Village, HallKeen’s indication of its intent to sell via a letter was sufficient to trigger Opa-Locka’s right of first refusal.
The immediate case is interwoven into a far broader national tapestry: demand for affordable housing options is high, and the availability of that housing could come under threat as for-profit companies seek to capitalize on market values for these areas which have risen steadily higher. Whether the 11th Circuit’s stance strongly favoring nonprofit corporations’ defense of these low or fixed income housing areas will stand remains to be seen, as the firm representing HallKeen filed a motion in Miami-Dade circuit court at the end of July to have the order set aside.
For information on the case and its potential broader implications, see: https://www.prnewswire.com/news-releases/local-court-win-is-a-victory-for-affordable-housing-communities-nationwide-301091845.html
By David A. Brennen, Professor of Law at the University of Kentucky
Tuesday, August 25, 2020
On August 6th, New York attorney general Letitia James filed suit to dissolve the National Rifle Association, a powerful nonprofit quartered in New York. A 501(c)(4) tax-exempt organization, the NRA has stood for the protection of American second amendment rights since 1871: today, its leadership stands accused of seriously abusing organizational coffers and fraudulently concealing their actions. Attorney general James alleges in her complaint that the NRA at large instituted a culture of backroom dealing and illegal behavior which has resulted in the complete waste of millions of dollars in assets. As a tax-exempt charitable corporation, the NRA is required to use its resources to serve its members’ interests and advance its mission. James further asserts that the NRA’s internal policing mechanisms and boards routinely failed to put a stop to this illegal behavior, which is part of the reason why the attorney general now calls for complete dissolution of the organization.
In addition to attacking the organization at large, attorney general James lists in her complaint four individuals in the NRA’s leadership: the organization’s executive vice president, former treasurer/CFO, former chief of staff, and general counsel. James’ complaint includes an impressive amount of evidence indicating that these men channeled colossal sums of NRA resources into lavishing benefits on themselves and those closest to them. If successful, the attorney general’s suit will serve as a powerful reminder that no nonprofit organization, no matter how venerable its history may be, is above the fiduciary duties it owes to its members or its reporting duties to federal and state governments alike.
By David A. Brennen, Professor of Law at the University of Kentucky
For the attorney general's press release see:
The IRS hinted in June at further modifying an excise tax on highly-compensated employees of for-profit companies who also volunteer a portion of their time for nonprofit organizations. Section 4960, added to the Code in late 2017, imposed a significant tax on excess compensation to the five highest-paid officers of a nonprofit organization. Interpretation of this statute became the subject of debate in 2019 with the IRS’ release of 2019-04 I.R.B. 403 - a guidance on how to calculate taxes or liability under §4960. In that guidance, the IRS stated that the for-profit business employing an executive officer who also volunteers with or works for a tax-exempt business could be liable for the excise tax if the for-profit and tax-exempt businesses were deemed “related.” Following concerns voiced by commenters, the IRS proposed on June 11th of this year a possible exception to the definition of the five highest-paid employees of a tax-exempt organization. The §4960 exception applies if someone working with a tax-exempt organization works a number of hours no more than 10% of their total hours worked with related organizations that year and isn’t paid for their work with the tax-exempt organization. It appears that the IRS heeded industry concerns. Indeed, if for-profit companies don’t fear being held liable for an unexpected excise tax, then those for-profit companies will be more likely to allow their highly compensated employees’ dedicate spare time lending their valuable skills to tax-exempt organizations.
For the IRS' published proposal regarding this rule, see: https://www.federalregister.gov/documents/2020/06/11/2020-11859/tax-on-excess-tax-exempt-organization-executive-compensation
By David A. Brennen, Professor of Law at the University of Kentucky
Tuesday, August 18, 2020
A few weeks ago a federal grand jury indicted the Speaker of the House of Representatives of the State of Ohio, Larry Householder, along with 4 other individuals and a social welfare organization called Generation Now, exempt under section 501(c)(4) of the Internal Revenue Code, for engaging in a bribery scheme to pass legislation regarding nuclear energy that was worth about $1 billion. It involved approximately $60 million in bribes.
I was not blogging at the time, so writing this up after the announcement, but in my opinion this was a major indictment of the decision of the IRS to eliminate donor disclosure for dark money organizations like 501(c)(4) and (6) organizations. Disclosure of these dollars that the indictment alleges to be bribes could have very well alerted the IRS to a potentially problematic scheme. Additionally, there would have been the potential of asserting a false statement on the Form 990 filed by the social welfare organization.
The evidence is particularly indicative that unscrupulous folk may see dark money organizations as an easy method of laundering money now: "In March 2017, Householder began receiving quarterly $250,000 payments from the related-energy companies into the bank account of Generation Now. The defendants allegedly spent millions of the company’s dollars to support Householder’s political bid to become Speaker, to support House candidates they believed would back Householder, and for their own personal benefit. When asked how much money was in Generation Now, Clark said, “it’s unlimited.”"
In the Criminal Complaint, U.S. v. Matthew Borges, Case No. 1:20-MJ-00526 (July 16, 2020) on page 15 there is the following evidence: “Clark discussed with Householder, the use of a 501(c)(4), controlled by Householder, to receive payments: “what’s interesting is that there’s a newer solution that didn’t occur in, 13 years ago, is that they can give as much or more to the (c)(4) and nobody would ever know. So you don’t have to be afraid of anyone because there’s a mechanism to change it.”
This one is worth following and contemplating as we conceive of better policy to govern our nonprofit tax exempt sector.
By: Philip Hackney
Thursday, July 2, 2020
On Tuesday, the Supreme Court released a second opinion of interest to the nonprofit world. In Espinoza, the Court looked at the constitutionality of excluding private religious schools from a scholarship program.
Broadly speaking, the scholarship program worked like this: the state created a tax credit for donations to “student scholarship organizations.” A to qualify as a student scholarship organization, an organization must be exempt under section 501(c)(3) of the Code, must allocate 90% of its annual revenue to scholarships, and those scholarships couldn’t be limited to a single school. Student scholarship organizations also have to comply with certain reporting and audit requirements. The scholarships are meant to help pay for grade school—they can only be given to students who are at least 5, but not older than 18.
Scholarship money must be paid directly to the school; it’s the school’s job to inform parents that their child received a scholarship.
So far, so good, right? This is a scholarship program administered by private nonprofit entities, so there’s no state action to invoke the Constitution. But it’s the next step that implicates constitutional questions: the state provided a dollar-for-dollar tax credit to Montanans who donated to student scholarship organizations, for a credit of up to $150. (Note that, to get the tax credit, the donor can’t designate the parent or private school that will receive scholarship assistance.)
And that intersected with Montana’s Blaine Amendment. The Montana constitution prohibits “any direct or indirect appropriation or payment from any public fund or monies… to aid any church, school, academy, seminary, college, university, or other literary or scientific institution, controlled in whole or in part by any church, sect, or denomination.” Believing that a tax credit represented indirect aid to schools that received scholarship money, the Montana Department of Revenue promulgated a rule that religious schools were not “qualified education providers,” eligible to receive these scholarship funds. The Montana Supreme Court ultimately agreed that the scholarship program violated the state constitution and invalidated the whole scholarship program.
Wednesday, July 1, 2020
This week, the Supreme Court released a couple opinions of interest in the nonprofit world. The first was Agency for International Development.
Background on the case: in 2003, Congress allocated billions of dollars to U.S. and foreign NGOs to combat HIV/AIDS abroad. That money was conditioned, however, on an organization having an explicit policy opposing prostitution and sex trafficking.
Some organizations that would otherwise qualify for these grants have found that a neutral stance toward prostitution is more helpful in their work, and oppose the policy requirement. Some U.S. NGOs filed suit and, in 2013, the Supreme Court held that the requiring that an organization have an explicit policy against prostitution to qualify for grant money violated the First Amendment. As a result, U.S. NGOs do not have to have an explicit policy opposing prostitution and sex trafficking.
But that left foreign NGOs. And it's worth noting that at least some of the foreign NGOs pursing this grant money are affiliated with U.S. NGOs that aren't subject to the policy requirement
In Agency for International Development, the Supreme Court held that the policy requirement is valid with respect to non-U.S. organizations. It based that conclusion on two grounds:
Friday, June 12, 2020
One helpful service that government agencies can provide is issuing reports summarizing their activities, saving researchers and practitioners the work of gathering such information piecemeal based on reviewing every pronouncement and ruling that is issued. Two recently issued summaries relating to nonprofit law are particularly helpful in this regard, one relating to state enforcement efforts and the other to federal charitable contribution deduction disputes.
First, the National Association of State Charity Officials (NASCO) has issued a report detailing the activities of state officials with respect to charities from January 2019 to March 2020. From the introduction:
The contents of this report are a representative sample of cases and other initiatives from January 2019 to March 2020 in the areas of: I. Deceptive Solicitation; II. Governance and Breach of Fiduciary Duties; III. Trust & Estate Issues; IV. Health Care; and V. Other, including Registration, Legislation, and Guidance. Descriptions were provided by the relevant state, and questions regarding particular cases should be directed to that state. Contact information for state regulators can be found at www.nasconet.org.
Second, the Office of Chief Counsel, Internal Revenue Service has released an internal memorandum (CCA 202020002) that summarizes the issues and holdings in 121 federal court decisions from 2012 through mid-April 2020 relating to the charitable contribution deduction under Internal Revenue Code Section 170.