Nonprofit Law Prof Blog

Is the OpenAI Kerfuffle the Nonprofit Law Story of the Decade?

I’ve been stewing over the power struggle at OpenAI for a couple of weeks, not sure what to think about it. It is either the biggest nonprofit law story of the decade, or not. And, unfortunately, we may never know which it is.

For those not in the know, OpenAI is the company that release ChatGPT about a year ago, revolutionizing the public perception of how far advanced AI technology is, and deeply freaking out professors who give open-internet exams. I didn’t know before a couple of weeks ago that OpenAI is a nonprofit/for-profit joint venture, and therefore a subject of academic interest to me, even if it doesn’t end up creating the robot overlords I will one day serve.  OpenAI, Inc. was created as a 501(c)(3) organization in 2015 “to advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by the need to generate financial return.” (That’s quoted from OpenAI Inc.’s first Form 990). OpenAI, Inc. raised over $130 million in tax-deductible contributions for that mission. However, according to OpenAI’s website, “[i]t became increasingly clear that donations alone would not scale with the cost of computational power and talent required to push core research forward, jeopardizing our mission.” So, in 2019, OpenAI Inc. formed a joint venture with for-profit providers of equity capital (almost exclusively Microsoft), which is naturally called “OpenAI.” (They then began referring to the original OpenAI Inc. as “Nonprofit OpenAI,” not to be confused with a wholly owned subsidiary of Nonprofit OpenAI that serves as the “manager” of OpenAI called OpenAI GP LLC). A couple of weeks ago, OpenAI’s board fired its founder Sam Altman for undisclosed reasons. Altman was immediately hired by Microsoft, many employees and key figures in OpenAI threatened to leave (possibly to go to Microsoft) unless the board re-hired Altman, which it immediately did as part of an agreement under which most of the board would be replaced by new board members.

If this is the nonprofit law story of the decade, it’s because of the federal law of nonprofit joint ventures. First it is important to distinguish between inurement (the possibility of nonprofit insiders benefiting themselves) and private benefit (the basis of the IRS’s rules about nonprofit joint ventures). My fellow blogger posted some thoughts on the risk of inurement in the OpenAI story, an issue I have worried about in general as well. But the OpenAI story is probably not primarily an inurement story; it is more likely a story about “private benefit.” The law on private benefit deals not primarily with the risk of insiders providing themselves with financial benefits, but rather with the risk that a charity could be diverted from its core charitable mission for other reasons, including benefiting outsiders. The worry is that, even without insiders financially benefiting themselves, the charity might abandon its mission. The law of joint ventures is derived from this doctrine, and at the risk of wild simplification, that doctrine can be summed up in a single word – control. In a string of revenue rulings and court cases in the late 1990s and early 2000s, the defining characteristic of a joint venture was determined to be whether the nonprofit controlled the joint venture. If a nonprofit and a for-profit formed a joint venture to carry out the nonprofit’s charitable mission and also provide profits to other members of the venture, it is permissible so long as the nonprofit effectively controls the venture and impermissible if the for-profit partners effectively control it. There was frustratingly indeterminate litigation about what exactly constitutes effective control on the margin, but it is clear that the nonprofit has sufficient control (as a legal matter) if a majority of the board of the venture is constituted by directors who are “independent,” meaning they have no financial interest in the venture. The control question is even more clear when the day-to-day management of the venture is controlled by a company controlled by the nonprofit rather than a company controlled by the for-profit partners. The embedded assumption is that so long as the venture is controlled by disinterested board members with a fiduciary duty to the charitable mission of the nonprofit, they serve as an adequate check on the nonprofit being diverted from its charitable mission to maximize the financial gains of the partners.

The OpenAI website states proudly that, “[w]hile our partnership with Microsoft includes a multibillion dollar investment, OpenAI remains an entirely independent company governed by the OpenAI Nonprofit. Microsoft has no board seat and no control.” At least formally, OpenAI’s independent board members did not have a financial interest in OpenAI and so were unconflicted in their duty to pursue OpenAI’s charitable mission. If this is the nonprofit story of the decade, it would go like this: OpenAI was created as a nonprofit joint venture, with 130 million dollars of charitable contributions. But, when there was a conflict between the guardians of its charitable mission and Microsoft, Microsoft won. Microsoft's champion, Sam Altman, returned to continue leading the venture, and the nonprofit board members stepped down, leaving the field open to the real goal of maximizing profit. In other words, the joint venture doctrine’s reliance on formal control just doesn’t work. If we care about protecting the integrity of the nonprofit sector, we need to find another legal doctrine to do so.

The key question about the OpenAI kerfuffle then is whether that story is true. I know extremely little about what actually is happening, and the best analysis I’ve found is a podcast by Ezra Klein. The actual best coverage I’ve found is this, but because I have been a fan of Klein and his work for a long time, I care about the fact that Klein says he is not convinced by the depressing nonprofit story I just. For example, he very briefly discusses this issue (at minute 38:18) and takes seriously the idea that Altman’s return is not a concession by the nonprofit board, but instead a victory for the nonprofit in which, after the conflict, “maybe they have a stronger board that is better able to stand up to Altman.” (at 39:20). So, who knows. I assume someone is writing a book about this that will appear in a few minutes and then several minutes after that, we’ll get to watch a pretty exciting movie about it, hopefully starring Jonah Hill (who, by the way, I also think should play Sam Bankman Fried).

In addition to the question of what The Law should do about nonprofit joint ventures in the future, there is an equally intriguing question to me about what for-profit investors will do. We know that Microsoft is the primary for-profit investor in the OpenAI joint venture, and we could be tempted to think about why Microsoft agreed to make a “multibillion dollar investment” in a venture that is expressly devoted to charitable purposes rather than maximizing Microsoft’s profits. I’m guessing Microsoft rarely makes naïve or stupid multibillion dollar investments. Maybe they thought that when push came to shove, their investment gave them sufficient functional control that it would all work out, and maybe their takeaway from the kerfuffle is that they were right. If other investors conclude the same, then I think we may see a significant strain on the credibility of the nonprofit signal. (See my post yesterday if you don’t know what I mean). But what if investors take away the lesson that the kerfuffle was a loss for Microsoft, and they decide to avoid partnerships with nonprofits unless they too deeply value the charitable purpose more than their financial returns? That would be a win for the nonprofit sector.

Then, of course, the most interesting question is why OpenAI was formed as a charitable nonprofit in the first place. I’m hesitant to question Sam Altman’s charitable bona fides, but another founder of OpenAI was Elon Musk, who has very conveniently become an easily recognizable villain in the years since OpenAI’s founding. We don’t know who contributed the 130 million dollars of charitable funds that the OpenAI Nonprofit raised over the years, but one wonders what exactly these contributors were thinking. Why did Elon Musk, for example, think that a charity was a better “investment” in the future of AI technology than a for-profit company, given that he’s had some success with for-profit companies? The media coverage has a lot of speculation on that score, but I’m still unsure which of it is true and which is not. I’m looking to you, Jonah Hill, to get to the bottom of this.

Benjamin Leff

A Follow-Up on Late Night Musings: More on The Charitable Act

Lo and behold, I opened up Tax Notes Today (subscription required) this morning and found an article on the Charitable Giving Coalition’s position on the renewal of the above the line charitable deduction, which I discussed in my post yesterday.

The Tax Notes article notes that the Charitable Giving Coalition sent a letter to the House Ways and Means Committee and Senate Finance Committee in support of The Charitable Act. The Charitable Act reinstates the above the line charitable deduction, increases the limitation from $300 to one-third of the then standard deduction, and permits gifts to donor advised funds.  In support of the need for the Act, the Charitable Giving Coalition noted in its letter (cited in Tax Notes) that

Giving trends from 2020 and 2021, when the temporary non-itemizer charitable deduction was in place, indicate the deduction works. According to the Fundraising Effectiveness Project, charitable gifts of $300 — the cap of the temporary deduction in 2020 — increased by 28 percent on the last day of the year. Furthermore, interim Internal Revenue Service data for tax year 2021 shows 47 million households used the non-itemizer charitable deduction for donations totaling around $18 billion. A higher deduction cap, as included in the Charitable Act, would encourage even more charitable giving in communities across the country.

While I am generally in favor of reviving the above the line deduction, I’m dubious that this thinking holds. The primary beneficiaries of the above the line deduction are lower and middle income tax payers, If the “universal” deduction (which isn’t universal because it’s not available to those who itemized…) is increased, then the question is whether individuals who don’t itemize have the financial ability to make significantly larger contributions.  There is a marked difference in $300 and $4600, the estimate for the higher deduction.  I’d also be curious to know how much of the $300 giving is giving that’s already occurred and is just being captured for the first time in tax statistics – things like the weekly contributions to the church plate and such not.  Maybe the last $25 dollars given on Giving Tuesday, but I’d be curious where the incentive effect of increase in the universal deduction tails off.  Probably an interesting project to look at…

Curiously, eww

Some Late Night Reflections on Giving Tuesday

If you are like me, your inbox today is filled with emails from nonprofits looking for donations – Giving Tuesday has been in full swing.  I’ll admit to being somewhat cynical about Giving Tuesday.   I support the charities I support during the year and I don’t need a special day to do it.  I suppose one could see it as a day of penance for the twin orgies of commercialism known as Black Friday and Cyber Monday.  I am, however, without shame and feel no need to buy any indulgences on Giving Tuesday for my recent overconsumption.

But it would appear that I’m alone in my cynicism and that’s a good thing – no one needs curmudgeons like me grumbling about such things!   GivingTuesday.org tracks the impact of Giving Tuesday on charitable donations.   There are a number of interesting observations in the information collected in their Data Commons about giving trends, including the impact of Giving Tuesday.   According to one of their reports, Giving Tuesday enhances giving among supporters, grows existing relationships, and importantly, engages younger volunteers.

Givewp.com, citing the 2022 GivingTuesday.com study, states that

• In 2022, donors in the United States gave $3.1 billion on Giving Tuesday, 15% more than in 2021

• More than 20 million people gave, with 6% more donors in 2022 than in 2021

• 82% of nonprofits that participated in Giving Tuesday tried something new

• #GivingTuesday trends annually on social media

• More than $1 billion of U.S. Giving Tuesday donations were contributed online

That lead me to think about a potentially tax law significant change that occurred between 2022 and 2021 – that being the sunset of the $300 above the line deduction for cash charitable gifts from the CARES Act.  It seems like that particular deduction would be beneficial to the folks that Giving Tuesday targets – smaller, younger, and online donors.  That deduction hasn’t been in effect for 2022 and 2023, but there is at least some noise about trying to bring it back.  There have been a number of bills trying to revive and maybe even increase the deduction – you can find a summary of them at the Charitable Giving Coalition website here.   The most recent bill would reinstate the deduction for 2023 and 2024 but increase the limit to 1/3 of the standard deduction.

Who knows what the future of the above the line deduction is, given that all of the tax cuts that are facing sunset will be revisited here in due time.   In a world where the increased standard deduction remains and fewer people itemize, the above the line charitable deduction has its merits, especially among younger and less wealthy donors.   That being said, Roll Call reports that the Joint Committee on Taxation estimates that the above the line charitable deduction cost $2.9 billion in 2021, which is a pretty significant chunk of change.

While we wait to see what the tax writers will do… it’s now 11 pm eastern on Giving Tuesday – there’s still time to support your favorite charity, even if you won’t get an above the line deduction for it.

Grumpily guilted into generosity, eww

Founder of Christian Health Care Sharing Ministry Pleads Guilty to $8 Million Wire Fraud Conspiracy

Following up on an earlier post that reported federal authorities had shut down section 501(c)(3) Medical Cost Sharing Inc., the U.S. Department of Justice has announced that the founder of this charity has pleaded guilty to conspiracy to commit wire fraud and making false statements on a tax return. According to the press release:

[Craig Anthony] Reynolds admitted that he and his co-conspirators used false and fraudulent promises to market Medical Cost Sharing as a “Health Care Sharing Ministry” to defraud hundreds of “ministry members.” Reynolds and his co-conspirators collected more than $8 million in member “contributions,” yet paid only 3.1 percent in health care claims so that they could personally profit and take most of the members’ contributions for themselves

Of course health cost sharing ministries do not automatically qualify for section 501(c)(3) status, for the reasons discussed in the recent IRS ruling discussed by fellow blogger Darryll Jones earlier this week. But this case highlights that even when they do appear to qualify, problems can still arise from their actual operations.

Coverage: KMBC; Medium.

Lloyd

UCLA Sues Mattel for Allegedly Failing to Make Good on $49 Million Pledge

According to the L.A. Times (subscription required), UCLA and related entities have filed a lawsuit against Mattel for failing to make good on a 2017 pledge to donate $49 million to the UCLA children's hospital over 12 years. Mattel had previously given $25 million to support the children's hospital, in exchange for naming rights. While UCLA Health initially agreed to allow the company to suspend payments because of asserted financial issues, the company's profits in recent years and this year's Barbie movie success led to the lawsuit when payments did not resume. In defense, Mattel is asserting that the donation related to a new hospital tower that UCLA Health is no longer committed to building.

UPDATE: Thanks to fellow blogger Darryll Jones, I now have a link to the complaint in this case.

Additional coverage: CBS News; KTLA.

Lloyd Mayer

990 Data Repository Goes Live

From an email sent by the Aspen Institute Program on Philanthropy and Social Innovation:

A centralized repository of raw 990 data is now freely accessible to the nonprofit sector! Through the GivingTuesday 990 Data Infrastructure Site, this Data Lake provides the sector with timely, consistent, and complete 990 data, supporting much-needed foundational infrastructure for US nonprofits.

As the first stage of our sector-leading collaboration announced in August, the Data Lake is a centralized and regularly updated dataset built to serve the sector's 990 needs. 990 tax form data is a core pillar of knowledge and accountability in the US nonprofit sector and until recently, this information was either difficult to access or unsuitable for the majority of the nonprofit sector.

Although this is just the first iteration of a broader, multi-stage project, it would not have been possible without the generous support of Schwab Charitable and the collaborative efforts of GivingTuesday, the Aspen Institute’s Program on Philanthropy and Social Innovation (PSI), Charity Navigator, CitizenAudit, the Urban Institute, ProPublica’s Nonprofit Explorer, and Candid.

We’re excited about the next steps and opportunities for this project, which will include an automated pipeline that pulls in data as soon as it's released by the IRS, online tools to work with and investigate 990 data, precut datasets for facilitated use, and a relational datastore to facilitate and empower future research. We welcome input as we continue to improve and strengthen the dataset, working towards our goal of making 990 data accessible and useful to the sector at large.

Lloyd Mayer

Lenkowsky: Universities and anti-Israel groups may find their nonprofit status under scrutiny

Leslie Lenkowsky (Indiana University) has published an Opinion piece in the Wall Street Journal (subscription required) titled Terrorism and Tax Advantages: Universities and anti-Israel groups may find their nonprofit status under scrutiny. In this piece, he analyzes the constitutional and practical issues raised by recent calls from members of Congress and others to re-examine the tax-exempt status of universities, student organizations, and other groups that have been critical of Israel's actions in the wake of the terrorist attack by Hamas. He also notes that arguments made in the past to support challenging the tax-exempt status of hate groups may also support today's challenges to the tax-exempt status of anti-Israel organizations.

Lloyd Mayer

Zelinsky: The Case for Taxing Nonprofit Hospitals

Following up on his 2022 article The Commerciality of Non-Profit Hospitals Requires Them to be Taxed: Bringing the Debate to a Conclusion, 42 Virginia Tax Review 401, Edward A. Zelinsky (Cardozo) has written The Case for Taxing Nonprofit Hospitals, Tax Notes, Oct. 24, 2023. From the Introduction:

Despite the label “nonprofit,” the contemporary nonprofit hospital is an essentially commercial institution, indistinguishable from its taxed, for-profit competitors. To enhance fairness and efficiency, similar institutions should be taxed similarly. Because the profitable operations of nonprofit hospitals today resemble the remunerative activities of for-profit hospitals, the federal income tax and the states’ income, sales, and property taxes should tax all of these hospitals in the same way.

Lloyd Mayer

A New Way for Nonprofits to Fix Broken Markets?: Civica Rx

KSL TV recently reported "Utah nonprofit pharmaceutical company is fixing the market, producing 80 drugs." The company is Civica Rx. Launched five years ago, its stated purpose is "to reduce and prevent drug shortages and the price spikes that can accompany them" by "mak[ing] quality generic medicines accessible and affordable to everyone." As detailed in its Form 990 filings, it is tax-exempt under section 501(c)(4) and was approaching $100 million in gross revenue in 2021. Does its emergence help confirm law and economics theories about the role of nonprofits when there are apparent market failures? It would certainly be an interesting case study to explore. 

Lloyd Mayer

States & Hospitals: Minnesota Law Enhances Charity Care Requirements

Several media outlets reported last week that a new Minnesota law designed to increase public access to existing hospital charity care programs has just taken effect.  The provision was part of a lengthy health care bill enacted by the state legislature (picture: Minnesota State Capital) earlier this year.  Article 4, Section 40 of the bill contains the relevant provision, including this subdivision:

Subd. 4. Prohibited actions. A hospital must not initiate one or more of the following actions until the hospital determines that the patient is ineligible for charity care or denies an application for charity care:

(1) offering to enroll or enrolling the patient in a payment plan;

(2) changing the terms of a patient's payment plan;

(3) offering the patient a loan or line of credit, application materials for a loan or line of credit, or assistance with applying for a loan or line of credit, for the payment of medical debt;

(4) referring a patient's debt for collections, including in-house collections, third-party collections, revenue recapture, or any other process for the collection of debt;

(5) denying health care services to the patient or any member of the patient's household because of outstanding medical debt, regardless of whether the services are deemed necessary or may be available from another provider; or

(6) accepting a credit card payment of over $500 for the medical debt owed to the hospital.

Coverage: CBS News Minnesota; Health Care Dive; Star Tribune.

Lloyd Mayer

Proposed Class Action for Solicitation Fraud Filed Against LDS Church

We previously reported about the August 2023 Ninth Circuit decision reinstating John Huntsman's claim against the Church of Jesus Christ of Latter Day Saints (more on that decision here) and the March 2023 survival in the face of a motion to to dismiss of a civil RICO claim against the LDS Church by another disgruntled donor. Now a different set of unhappy donors have filed a proposed class action against the LDS Church.

The thrust of their complaint is that the Church told them that their donations would be used immediately for charitable purposes, including "humanitarian relief," but instead some or all of their donations became part of a now multi-billion dollar endowment. The specific claims filed in the U.S. District Court in Salt Lake City include breach of fiduciary duty, fraud, and unjust enrichment. The docket is available on Pacer, but I have not been able to find a copy of the actual complaint that is not behind a paywall. 

Coverage: AP; Law360 (subscription required); NY Post.

Major DAFs Support Anti-Vax Organizations

Yesterday, Rolling Stone reported that Fidelity Charitable and the Vanguard Charitable Endowment Program had given millions of dollars to organizations that push vaccine misinformation, including RFK Jr.'s Children's Health Defense. 

And how did two of the largest public charities in the U.S. give money to anti-vaccination groups? As DAF sponsors.

But wait, you might say. DAFs? DAFs are controlled by individual donors who decide where the money goes. The sponsor is basically only the holder of the dollars.

Continue reading

Building an Open Form 990 Data Clearinghouse

Last last summer, several organizations announced the formation of a collaboration to build a clearinghouse for IRS Form 990 data. Here is the start of the announcement:

Today, a partnership that includes GivingTuesday, the Aspen Institute’s Program on Philanthropy and Social Innovation (PSI), Charity Navigator, CitizenAudit, and the Urban Institute announced that they have kicked off the building of a clearinghouse for raw, clean, and standardized US nonprofit tax data. This collaboration combines the efforts of nonprofits, scholars, charitable giving data platforms, and many others to more widely share essential information captured on the IRS Form 990.

Lloyd Mayer

Mother Jones: "Chuck Feeney’s Legacy Is a Lesson for America’s Billionaires"

Mother Jones reported on the philanthropy of Charles "Chuck" Feeney, who died last week. From that story:

In 2016, Feeney’s charitable foun­dation pledged the last remaining sliver of his staggering wealth to Cornell, cap­ping an epic three-decade giving streak. All told, starting in the early 1980s, Feeney had doled out $8.6 billion, setting aside a scant $2 million for himself and his second wife, Helga, to live on in their old age. For every $100,000 Feeney gave away, he kept about $25.

Other Coverage: Forbes.

Lloyd Mayer

Forbes: "Charles Koch Has Given More Than $5 Billion Of His Stock To Two Nonprofits"

Forbes reported this week that Charles Koch gave $4.3 billion to 501(c)(4) Believe in People last year and another almost $1 billion to 501(c)(4) CCKc4 in 2020. As noted in the story:

Unlike a traditional 501(c)3 nonprofit–which includes the private charitable foundations commonly used by wealthy individuals–a C4 can own an entire for-profit company indefinitely and (so long as these activities support its principal purpose) benefit private individuals; engage in an unlimited amount of issue lobbying; and get directly involved in politics.

Since 2015, when Congress exempted donations to C4s from the 40% federal gift tax, in a move a Koch lobbyist promoted, a number of other billionaires have donated their entire companies to C4s. The most high profile of them: Patagonia founder Yvon Chouinard, who transferred all of his outdoor clothing and gear retailer’s nonvoting stock to the environmentally-focused Holdfast Collective in September 2022; at the time of the gift, Patagonia was reportedly valued around $3 billion. Koch’s $4.3 billion gift to Believe in People is now the largest publicly disclosed donation to a C4.

Lloyd Mayer

New Senate Finance Committee Majority Staff Report Critical of Nonprofit Hospitals

This week the majority staff of the Senate Finance Committee issued a report titled Executive Charity: Major Non-Profit Hospitals Take Advantage of Tax Breaks and Prioritize CEO Pay Over Helping Patients Afford Medical Care. From the introduction to the report (citations omitted):

[H]ospitals have gladly accepted the tax benefits that come with nonprofit status but have failed to provide the required community benefits. Non-profit hospitals spent only an estimated $16 billion on charity care in 2020, or about 57 percent of the value of their tax breaks in the same year. Those hospitals have made information about their charity care programs difficult to access, leaving many patients unaware that they may qualify for free or discounted care. Some hospitals also aggressively try to collect from patients through practices that verge on extraordinary collection practices. One recent study found that in 2017, non-profit 2 hospitals billed $2.7 billion to patients who were likely eligible for charity care. At a time when a record number of Americans report delaying medical care due to high costs, those choices from well-resourced hospitals ensure that future patients, including those who qualify for charity care, will hesitate before they seek necessary care out of a fear of accruing medical debt. That is unacceptable.

Not surprisingly, the American Hospital Association quickly responded with its own study, announced in a press release titled Tax-Exempt Hospitals Provided Nearly $130 Billion in Total Benefits to Their Communities. The press release begins:

Even in the face of a once-in-a-century pandemic, all hospitals, regardless of ownership type, continued to provide a comprehensive range of benefits, programs and essential services to their communities. New analysis released today by the American Hospital Association (AHA) shows that tax-exempt hospitals provided more than $129 billion in total benefits to their communities in 2020 alone; the most recent year for which comprehensive data is available. The analysis calculates that tax-exempt hospitals’ and health systems’ total community benefits were 15.5% of their total expenses in 2020, based on data from the Internal Revenue Service.

Coverage: Axios; The Hill; Law360 (subscription required).

Photo credit: Mary Free Bed. (Memorial Hospital in South Bend, Indiana)

Lloyd Mayer

IRS Issues Final Supporting Organization Regulations

The IRS has issued final regulations (T.D. 9981) relating to supporting organizations and amendments by the Pension Protection Act of 2006 (yes, 2006) to Internal Revenue Code section 509(a). As compared to the proposed regulations, the final regulations clarify the definition of "control" for persons who are restricted with respect to donating to the supporting organization because they control the governing body of the supported organization. The final regulations also modify certain requirements for Type III supporting organizations and make some non-substantive, technical corrections.

Coverage: Bloomberg Law (subscription may be required).

Lloyd Mayer

AGs in Action: Recent Cases Involving Involving Allegations of Millions Stolen

There is unfortunately but not surprisingly a steady litany of stories involving charity insiders allegedly stealing significant funds from the charities they operate. Of course some malfeasance among the approximately one and a-half million charities (based on IRS data and so not counting all charities and particularly all churches) is unavoidable. And often the amounts are small, reflecting both the small financial size of many charities and likely their related lack of strong internal controls to prevent such theft. That said, it is worth noting when the amounts at issue cross into seven-figure territory. There are at least two such stories last month, one from Florida and the other from Ohio.

The Florida case involves the former CEO of the Florida Coalition Against Domestic Violence (FCADV) being "charged with one count each of organized scheme to defraud, grand theft and official misconduct, all felonies." Readers of this blog may remember that this has been a long-simmering situation, which began with a state audit triggered by public reports that the CEO had been paid $761,000 in the fiscal year that ended on June 30, 2017. That audit led in 2021 to the former CEO repaying to FCADV $2.1 million in alleged excess compensation, as well as payments from FCADV's insurer and other former officials, and FCADV's dissolution. But those payments were apparently not enough to protect the former CEO from criminal charges. Coverage: Florida Politics; Miami Herald.

The Ohio case involves former executives of the Columbus Zoo and Aquarium being charged with alleging diverting over $2 million for their own benefit. The Attorney General's press release alleges that "the former executives manipulated credit-card and check authorization forms for more than a decade" and that the "stolen money was spent on lavish non-zoo related items, including suites and tickets to concerts and sporting events; golf memberships; trips to multiple states and foreign countries; meals, beverages and alcohol; and motor vehicles." Coverage: Columbus Dispatch;  N.Y. Times.

Lloyd Mayer

DC AG’s Investigation of Nonprofits Incorporated in “Foreign” Jurisdictions: Is it a Violation of the “Internal Affairs Doctrine”?

Last week, the Wall Street Journal published an opinion piece about a letter that 12 Republican state AGs sent to DC AG Brian Schwalb. In it, they complained about the DC AG’s investigation into several nonprofits associated with conservative activist (and Federalist Society founder) Leonard Leo. (There is no link to the letter because none is published online and I have been unable to get a copy, perhaps because of my truly pathetic journalistic skills). According to the WSJ,

“Mr. Schwalb [issued] subpoenas. This is remarkable because the D.C. AG lacks jurisdiction. All of Mr. Leo’s affiliated businesses and nonprofits mentioned in the complaint are based outside of D.C., including in Virginia or Texas. Under a longstanding legal principle known as the internal affairs doctrine, matters relating to an entity’s internal workings are governed by the laws of the state of its incorporation and enforced solely by that state’s officials.”

(Politico also has an article about the DC AG’s investigation, which, unsurprisingly has a different take on it).  (UPDATE: Politico posted another article today that reports that the Leo-affiliated entities are not cooperating with the DC AG and that the DC AG is also investigating Arabella Advisors, a "liberal 'dark money' group" that was the subject of a complaint from a conservative watchdog group.)

But, of course, the internal affairs doctrine applies to – you guessed it – internal affairs, and so the claim that DC does not have jurisdiction over the Leo-affiliated entities raises the question of the claim at the heart of DC’s investigation. Is it an investigation into the internal affairs of the Leo-affiliated entities, or something else? Unfortunately, I don’t have access to the DC AG’s subpoenas or any other source for its legal reasoning establishing jurisdiction. The WSJ piece claims that the investigation was initiated because of a letter sent by the Campaign for Accountability to the DC AG in April, but unfortunately CfA only posted its companion letter to the IRS (which obviously has jurisdiction).  That letter identifies the alleged misconduct, saying,

“There are questions as to whether the Leo-Affiliated Nonprofits have diverted substantial portions of their income and assets, directly or indirectly, to the personal benefit of Leonard Leo. Most of these entities have either made substantial independent contractor payments one or more of his for-profit business entities or made major contributions to other Leo-Affiliated Nonprofits that made such payments. Such payments were generally listed as made in exchange alleged consulting, research, public relations, or similar services, however, CfA has reasonable questions about whether those alleged services were actually rendered at all or, if services were rendered, whether the payments made were substantially in excess of the fair market value of those services.”

So, the question is, under DC state law are diversions of nonprofit assets to the personal benefit of someone who directly or indirectly controls that nonprofit an “internal affair” or not? Not to get too confusing on matters of jurisdiction, but it seems clear that DC has personal jurisdiction over at least some of the entities (all of the ones I checked) because they maintained their principal office in DC and they may well have conducted fundraising operations in the District. So, the question is just about the scope of the internal affairs doctrine, not about the “reach” of state authorities over foreign entities.

Anyway, if anyone from the DC AG’s office, or the Republican AGs who wrote the letter, would like to provide their analysis of the question, I and my students would love to see it!

Benjamin Leff

Can You Smell What The Rock is Getting in Bad Tax Advice?

In my recent post, "Can You Smell What the Rock is Donating?", I talked a little bit about a number of different nonprofits that were accepting donations from some high profile folks, such as The Rock, in order to provide charitable support for those involved in the SAG-AFTRA and the (hopefully now ended) Writers' Guild strike.  Well, The Rock and his charitable donations are back, at least indirectly.  With a h/t to this thread started by Andrea Carr CPA (@andreacpa0 on X formerly known as Twitter) - she found the following on the website of the Entertainment Industry Foundation.  The EI Foundation is sponsoring a "People's Fund of Maui," which is giving "direct financial assistance to Maui community members experiencing devestating losses form the fires in Lahaina and Kula."  Apparently the People's Fund will make monthly payments to impacted residents of Maui for as long as it has funds, which include some hefty initial gifts from Oprah and, you guessed it, The Rock.  Which is amazing all around.

In the not-so-amazing category ... in the FAQs for applicants, the website states:

Are there any restrictions on how funds are used?

Financial disbursements provided by the People's Fund of Maui are considered Qualified Disaster Relief Payments and are intended for the following expenses... (edited)

Will I need to report the monthly payments on my taxes?

No, you will not need to report the monthly income payments on your taxes.   Payments will be characterized under the IRS's "charitable gift status" which is non-taxable and only needs to be reported to the IRS if individuals receive $17,500 or more in one year.  Individuals will only need to report this income payment if they received additional cash/asset gifts that bring the total to more than $17,500 a year.

Um... no.  I mean, they aren't taxable, so that part is right but otherwise... no.

Whenever I talk about gifts under Section 102 (and our old friend, Commissioner v. Duberstein) to students in Tax I class, I always mention that the INCOME tax treatment of gifts is different from the ESTATE & GIFT tax treatment of these items.  It is a Federal income tax class so I always debate whether it is worth precious class time to go through the difference, but in my experience there is so much confusion on this point that it comes up year after year.  So thanks, EI Foundation, for validating my teaching.

Revenue Ruling 2003-12 posits the following hypo in Situation 2:

Situation 2. O, a charitable organization described in § 501(c)(3) that is exempt from tax under § 501(a), whose purpose is to provide assistance to individuals who are affected by disasters, also makes grants to distressed individuals affected by the flood described in Situation 1. The grants will pay or reimburse individuals for medical, temporary housing, and transportation expenses they incur as a result of the flood that are not compensated for by insurance or otherwise.

Substitute "flood" with "wildfire" and well, you have Situation 2 in Maui - I do note that Situation 1 in the Revenue Ruling involves a Presidentially declared disaster as defined in Code Section 1033(h)(3), which appears to include the Hawaii Wildfires. 

In any event, I'm not sure it really matters. Rev. Ruling 2003-12 concludes with regard to Situation 2 (emphasis added):

In Situation 2, the grants made by O are designed to help distressed individuals with unreimbursed medical, temporary housing, or transportation expenses they incur as a result of the flood. Under these facts, O’s grants are made out of detached and disinterested generosity rather than to fulfill any moral or legal duty. Thus, the grants are excluded from the gross income of the recipients as gifts under § 102. Because payments by non-governmental entities are not considered payments for the general welfare, the grants made by O are not excluded from the recipients’ gross income under the general welfare exclusion. Rev. Rul. 82-106, 1982-1 C.B. 16. It is not necessary to reach the question of whether § 139 applies to the grants.

Accordingly, assistance from a charity to a disaster recipient are straight up gifts under Section 102 and Duberstein.  Revenue Ruling 2003-12 is really clear that you don't need to get to the issue of whether the funds are "Qualified Distaster Relief Payments" under Code Section 139. Code Section 139 is important for GOVERNMENT payments for disaster relief and potentially for disaster relief payments from an EMPLOYER - but not grants from a private charity.

And finally, as Andrea Carr CPA put it on X/Twitter:

i'm tired and exhausted, what is "charitable gift status"?  Does someone know the IRC that covers this?  Where is $17,500 coming from?

I'm guessing here because it is a common mistake, but maybe they are referencing the gift tax annual exclusion under Code Section 2503(b), which is $17,000 for 2023 after inflation adjustment - as one X/Twitter person indicated, $17,500 could be a typo?  Of course, the gift tax doesn't apply to transfers to charity under Code Section 2522 (assuming we don't have DAF or supporting organization issues), so The Rock and Oprah are safe on that.  However, even if that's the case, the gift tax falls on the DONOR of the gift - not the recipient (assuming we don't have a net gift situation), so at no point would the gift tax exclusion impact recipient of the funds - and even then, it would never impact the income tax treatment of the funds.  Because this is a gift tax exclusion.  Different tax.  And the gift tax doesn't even apply here.  So... 

I got nothing on "charitable gift status."

So, EI Foundation, I know I'm coming down pretty hard on you here and I'm sorry for that.  Some on X/Twitter blame AI (see ... all my posts align in the universe).  Maybe there's something we can't tell from the information you've put up on your website that would change this anaylsis.  But let me repeat that the things you are doing, not only for Maui but for all of the other charitable purposes and recipients you fund, are really really awesome and thank you for all you do in that regard.   

Educationally, eww