Nonprofit Law Prof Blog

Horwitz, Aprill & Loui: egal complications await if OpenAI tries to shake off control by the nonprofit that owns the rapidly growing tech company

Jill Horwitz (UCLA), Ellen P. Aprill (Loyola Law School Los Angeles), and Rose Chan Loui have written Legal complications await if OpenAI tries to shake off control by the nonprofit that owns the rapidly growing tech company for The Conversation. Here our the opening paragraphs:

OpenAI, the tech company that created the popular ChatGPT chatbot, is at a crossroads.

It began as a nonprofit dedicated to developing artificial intelligence systems smarter than humans. Since its founding, OpenAI has boasted that it was upholding its nonprofit goal – “to build artificial general intelligence (AGI) that is safe and benefits all of humanity.”

Now, its tune has changed. OpenAI’s leadership is reportedly taking steps to transform it into a for-profit company. If that happens, the nonprofit would lose control.

We are law professors who specialize in nonprofits. As we explained in an earlier article, all charities must devote their assets to their legal purposes. If OpenAI hoped to have a quickie divorce from its charitable obligations, it is now learning how costly that could be.

Lloyd Mayer

Interesting Possible Private Benefit Scenario: Wreaths Across America

The Des Moines Register published an article titled Nonprofit's family connections to for-profit wreath company cloud mission to honor veterans. From the story:

That many people, even a local organizer like Palmersheim, don’t understand what happens to revenue after the wreath ceremonies is a problem for charity watchdogs, who question the close relationship between the nonprofit Wreaths Across America, the for-profit Worchester Wreath Co. and family members who run both. The vast majority of revenue from Wreaths Across America nationally — which has amounted to almost $150 million over the last five years — has gone directly to Worchester Wreath.

***

The CEO of Wreaths Across America is Karen Worcester, Morrill Worcester's wife, who does not draw a salary from the nonprofit. Their sons, Rob and Mike, own the majority interest in the wreath business and are married to two of the charity’s board members, Renee and Sarah Worcester, who also are employees of Worcester Wreath Co., according to the nonprofit's tax documents. Karen and Morrill Worcester's daughter, Pamela Slaven-Lee, also sits on the board, according to its 2023 Form 990 tax filing and its website.

***

Amber Caron, communications director for Wreaths Across America, downplayed concerns about its structure and transparency, saying it has been open from its inception about what she called the perceived conflicts and how they are handled.

She also contended the organization does much more for communities year-round than hold wreath ceremonies and said she believes it is growing because of that positive impact. Since 2007, she said, it has given $26 million to other organizations that support veterans and their families.

It will be interesting to see whether either the Iowa Attorney General's office or Senator Chuck Grassley, who after all is from Iowa, might take an interest in looking into this possible private benefit situation.

Lloyd Mayer

Federal Prison for Fraudulent Fundraiser and Syndicated Conservation Easement Accountants

While stories of fraud involving charities are unfortunately all too common, sometimes that fraud has very serious consequences for the perpetrators. Here are two recent examples.

In October, the U.S. Department of Justice reported that two accountants who helped promote millions of dollars in false tax deductions based on syndicated conservation easement tax shelters received sentences of 20 months in prison. From the DOJ press release:

According to court documents and statements made in court, Victor Smith was a CPA and founding partner of an Atlanta-based accounting firm. Beginning at least in 2014 and through at least 2019, Smith promoted and sold tax deductions to his wealthy clients in the form of units in illegal syndicated conservation easement tax shelters organized and created by co-defendants Jack Fisher, James Sinnott and others. Smith, along with his firm, sold approximately $14 million in false tax deductions to their clients, causing a tax loss to the IRS of about $4.8 million. He earned $491,400 in commissions from Fisher and Sinnott for his role in the scheme.

William Tomasello was a CPA at another accounting firm who, at least in 2015 and through at least 2019, also promoted and sold units to his wealthy clients in these same syndicated conservation easement tax shelters. Tomasello sold approximately $8.5 million in false deductions, causing a tax loss of about $2.3 million. He earned approximately $525,072 in commissions.

It will be interesting to see if more such convictions occur in the wake of Treasury finalizing the regulations classifying syndicated conservation easements as listed transactions, although the legislation that capped deductions for such arrangements at two and a-half times a taxpayer's investment has likely killed these arrangements going forward.

And earlier this week, the N.Y. Times published an article titled Fund-Raiser Who Pocketed Money Meant for Sick Kids and Vets Gets 10 Years in Prison, detailing the travails of "Richard Zeitlin, a telemarketing kingpin." The article details his decades of questionable fundraising practices, and the move into political fund-raising that led him into a specific and provable lie - in a word, fraud - and so into prison. See also the related DOJ press release.

Lloyd Mayer

HR 9495: The Good, the Bad?, and the (Potential) Ugly

Previously in this space fellow blogger Darryll Jones has covered contentious bill H.R. 9495, which has now passed the House of Representatives. Setting aside the provisions not relating specifically to tax-exempt organizations, H.R. 9495 (section 4) would amend Internal Revenue Code section 501(p). Currently section 501(p) suspends the tax-exempt status and eligibility to receive tax deductible contributions for an organization described in paragraph two of that section, which are organizations designated or individually identified under several federal laws or an Executive Order as a terrorist organization, an organization subject to sanctions relating to terrorism, or otherwise supporting or engaging in terrorism or terrorist activity. The section also currently denies an affected organization the right to bring any any administrative or judicial challenge to the suspension. The legislation would add a new paragraph extending section 501(p) to "terrorist supporting organizations," subject to certain procedural requirements and the ability to challenge designation as a terrorist supporting organization in federal district court.

The Good. As Darryll pointed out in his post, the new paragraph has procedural protections for affected organizations that are sorely lacking from existing section 501(p). Those protections include a notice requirement prior to the designation, a 90-day period from the mailing of the notice for the organization to challenge the proposed designation either as incorrect or as corrected with a commitment not to provide further support or resources to organizations described in paragraph two of section 501(p), administrative review of any designation by the IRS Independent Office of Appeals, and the ability to seek review in federal district court. While these procedural rules do not extend to the rest of section 501(p), they are a welcome protection for organizations subject to designation under the proposed new paragraph.

The Bad? As good as the procedural provisions are, there may be serious issues raised by the substantive rule that brings an organization within the reach of the new paragraph. The paragraph defines as terrorist supporting organization as "any organization which is designated by the Secretary as having provided, during the 3-year period ending on the date of such designation, material support or resources (within the meaning of section 2339B of title 18, United States Code) to an organization described in paragraph (2) (determined after the application of this paragraph to such organization) in excess of a de minimis amount." Three aspects of this rule raise concerns:

• The three-year look-back, especially since it appears to include support provided to a group that at the time of the provision of the support was not described in paragraph two but subsequently came to be so described.

• The incorporation of 18 U.S.C. 2339B, which in turn incorporates the definition of "material support or resources" from 18 U.S.C. 2339A.  That latter provision defines this term broadly to include "any property, tangible or intangible, or service, including currency or monetary instruments or financial securities, financial services, lodging, training, expert advice or assistance, safehouses, false documentation or identification, communications equipment, facilities, weapons, lethal substances, explosives, personnel (1 or more individuals who may be or include oneself), and transportation, except medicine or religious materials." 

• Unlike the two above criminal statutes, there is no requirement in the proposed new paragraph of section 501(p) that the material support or resources be provided "knowingly" (section 2339A(a)) or "knowing or intending" (section 2339B(a)) it would be used to violate certain federal criminal laws.

My understanding is that critics have also raised concerns that if Organization A provides support - say a grant - to Organization B that in turn independently provides support (without using any of the support provided by Organization A to do so) to Organization C and it then turns out that Organization C is described in paragraph two, Organization A will fall afoul of the new paragraph, and that this chaining effect could extend to an indefinite number of organizations. I have not, however, been able to confirm that this is the case or how the above criminal statutes interpret material support or resources in this respect. (For more about those statutes, see this recent Congressional Research Service report.)

The (Potential) Ugly. My understanding is that perhaps the greatest concern critics have raised is that the designation under this new paragraph is no longer with other agencies that specialize in terrorism investigations (or the President via Executive Order) but instead with the Secretary of the Treasury. While I am not familiar enough with the designation processes listed in current section 501(p)(2) and so how politicized they are or could be, the concern with this new designation power appears to be that the Secretary is a politically appointee who could - either directly or through reliance on a politically motivated underling - target the new designation against politically disfavored tax-exempt organizations. And while the procedural provisions described above are available to try to prevent or challenge any incorrect designation, invoking them of course can be costly and time consuming process, which many tax-exempt organizations may not realistically be able to afford. 

The bottom line is that the legislation raises many questions that do not appear to have been addressed much if at all in the run-up to the House's passage. Hopefully therefore the Senate will not take up the bill but instead leave it to the next Congress, perhaps with more deliberation, to consider.

Lloyd Mayer

 

Are NILprofits Nonprofits?

The holidays are nearing, and with them, the expanded college football playoff. I, for one, am here for it. And on the subject of college athletics, the IRS recently denied tax-exempt status to an organization facilitating name, image, and likeness (NIL) compensation for student-athletes. The IRS’ decision, formalized in IRS Letter Ruling 202428008, highlights the tension between emerging NIL markets and the requirements of Section 501(c)(3) for charitable tax-exempt organizations. Even if you’re not a college sports fan like yours truly, you’ll want to keep reading. Below, I explore the IRS's reasoning and its broader implications.

The Facts

The organization in question sought 501(c)(3) status, presenting itself as a supporting organization of a public charity. Its stated mission included leveraging student-athletes' NIL through public appearances and social media to support charitable endeavors. Compensation for NIL activities would be paid by the public charity, while the applicant organization managed contributions and coordinated relationships.

Despite its framing, the IRS was no fool. It found the organization’s primary purpose to be facilitating NIL compensation rather than advancing a public charitable purpose. Central to this determination was the private benefit conferred to student-athletes, which the IRS deemed substantial and inconsistent with Section 501(c)(3).

Private Benefit and Exempt Purposes

Under Section 501(c)(3), organizations must operate “exclusively for exempt purposes,” serving a public rather than private interest. Any private benefit must be incidental—both quantitatively and qualitatively—to the organization’s public benefit. As an example of the former, the private benefit must be minimal compared to the public benefit. The IRS concluded that compensating student-athletes outweighed the broader charitable impact of the organization’s activities. Characterizing the latter, private benefits must be necessary byproducts of achieving a public purpose. The IRS rejected the argument that compensating student-athletes was essential to further the mission of supporting partner charities.

Perhaps rightly, the IRS emphasized that the organization’s activities served identified individuals—student-athletes—rather than a broader charitable class. This structure resembled a business model rather than a charitable endeavor. The IRS cited precedents, such as Better Business Bureau v. United States, reinforcing that even a single substantial nonexempt purpose disqualifies an organization from tax exemption.

Moreover, the IRS rejected comparisons to exempt organizations paying honorariums for professional services. Unlike those cases, NIL compensation primarily benefited private individuals without demonstrable public necessity. And it wasn’t the first time that the IRS determined as much.

Implications for NIL Collectives

This ruling is part of a growing body of IRS guidance clarifying the limitations of tax-exempt status in the NIL context, and the organization in question should have probably seen that coming. For one, if the organization wanted to win the day, the organization should have structured its programs to ensure that private benefits are secondary and incidental to public purposes. For another, its beneficiaries must fit within a charitable category (college athletes ain’t it). Finally, its activities must directly further exempt purposes without relying on private benefit as a primary mechanism. That wasn’t done here, and it’s doubtful that any NIL-related “charities” can accomplish this.

So, in summary, the IRS’s decision underscores the challenges of aligning NIL initiatives with the strict requirements of Section 501(c)(3). This ruling also sets a clear precedent for the IRS’s scrutiny of emerging nonprofit models and their adherence to exempt purposes.

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law

Nonpartisan Nonprofit Election Administration Assistance

There's a great article over at the Chronicle of Philanthropy about the rapid growth in philanthropic funding for nonpartisan election administration and integrity. The range of support provided is extremely broad.  For example, the article says,

    "Funders and nonprofits threw support behind election offices, which are often underfunded and under siege. They provided     equipment, technical assistance, and pro bono legal support to fight lawsuits, and even bulletproof windows and parking lot     lights."

Of course, there's so much election misinformation these days, it's hard to judge which philanthropic interventions improve elections and which could possibly undermine them. As the article points out,

    "While many organizations stress their nonpartisan status, they are often viewed as working on behalf of a     political candidate. As philanthropy dollars flow in, fears of partisan motivations could erode the very trust in elections     that groups seek to fortify, says Hale of the Election Center. 'There’s real suspicion that private funds are being used to design     what is a public process.'"

I recommend the whole article.

--Benjamin Leff

Government $ + Nonprofit Lax Internal Controls = Theft Waiting to Happen

This hypothesis is based only on anecdotes, but it appears that there are an increasing number of reported high-dollar thefts from charities that involve a mix of government funding - and so potentially lots of money - and lax internal controls that unfortunately are all too common at nonprofits. In this space we have reported on perhaps the largest such instance, which is the Feeding Our Future scandal in Minnesota that allegedly added up to at least $250 million. But there have been a number of other, alleged multi-million dollar scandals that involve similar fact patterns, including:

• The FBI is investigating an Orange County, California nonprofit that the County is suing based on claims that it misused more than $13 million in COVID-19 relief funds. The daughter of a County Supervisor works for the nonprofit, Viet America Society, and has also been named in the lawsuit. Additional coverage: L.A. Times (subscription required); N.Y. Times (subscription required); Orange County Register.

• The U.S. Attorney's Office in the Eastern District of Missouri announced late last month the indictment of a St. Louis nonprofit executive who allegedly fraudulently obtained "more than $2 million in funds intended to feed low-income Missouri children, both before and during the coronavirus pandemic." Coverage: St. Louis Post-Dispatch (subscription required).

• The CFO of the Detroit Riverfront Conservancy pled guilty late last month to stealing nearly $15 million from the nonprofit. As an earlier Detroit Free Press article detailed, the theft raised serious questions about the nonprofit's internal controls, including not only with respect to its privately provided funds but also the at least $15 million in direct government grants received over the past decade and the $3 million per year provided by the city of Detroit for operating costs.

• In August the U.S. Attorney for the Southern District of New York announced the conviction of the "shadow executive director" of a nonprofit for stealing millions of dollars from the federal Head Start Program. Apparently the defendant lied to the U.S. Department of Health and Human Services when forms he submitted claimed the nonprofit had an independent board of directors and controls in place to guard against fraud, waste, and abuse.

And I could keep going, especially if I included smaller dollar amount cases that state and local authorities are investigating or prosecuting. As Professor Nicolas Duquette (USC) commented for the Detroit Free Press article about the Detroit Riverfront Conservancy, reliance on nonprofits to handle public business can present a “fundamental problem” for accountability. These examples raise the concern that a perhaps not sufficiently appreciated downside of governments farming out the provision of public services to nonprofit organizations is that this farming out often comes with substantial funds but not sufficient internal control requirements.

Lloyd Mayer

California Bans Legacy Admissions

The ink was barely dry on the Supreme Court's 2023 affirmative action decision when both the U.S. Department Education and a prominent civil rights nonprofit started questioning legacy admissions at Harvard because of their racial impact. And Lauren Rogal (Vanderbilt) has written an article highlighting federal tax issues raised by legacy admissions (Legacy and Largesse: The Tax Law of College Admissions, 43 Va. Tax Rev. 169 (2023).

Now California has moved to prohibit legacy and donor preferences in admissions by private higher education institutions that are formed as nonprofit corporations in California, accredited by the U.S. Department of Education, and receive or benefit from state-funded student financial assistance or enrolls students who receive such assistance.  (The public University of California system eliminated legacy preferences more than 25 years ago.) This category apparently includes schools such as Stanford (pictured), USC, Claremont McKenna College, and Santa Clara University, The Governor approved Assembly Bill No. 1780 this week, which is effective as of September 1, 2025. The law also requires covered institutions to report on their compliance to the Legislature and the California Department of Justice.Coverage: AP; L.A. Times (subscription required).

See also: Politico, Why Legacy Admissions Have Exploded in the US (hat tip: EO Tax Journal). The article notes that four other states also currently ban legacy admissions, three only for public institutions (Colorado, Illinois, and Virginia) and one for private institutions as well (Maryland).

Lloyd Mayer

Donors: You Can't Live With Them, You Can't Live Without Them

Two recent lawsuits involving multi-million donations and donor demands for their return highlight the difficulty charities face when large donors become upset with how their donations allegedly have, or have not, been spent.

As reported by the Boston Globe, one lawsuit has been brought by an alum of the College of Holy Cross, who pledged $25 million for a performing arts center (named after the donor and pictured here) but now wants $18 million back plus another $3 million he donated for new athletic facilities. He accuses the College of refusing to account for the use of the donated funds. In response, the College has asserted that the donor reneged on the remaining $7 million he pledged for the center in a 2014 written agreement. A federal magistrate judge is now considering whether to compel mediation and arbitration, which the college asserts are required under the agreement.  The case is Prior, Jr. v. Trustees of the College of the Holy Cross.  (Full disclosure: My former colleague, Vincent Rougeau, is the current President of Holly Cross College..) Additional coverage: Inside Higher Ed.

As reported by the Gothamist and previously blogged about in this space (with a link to the complaint), the other lawsuit has been brought by the Stella and Charles Guttman Foundation against City University of New York (CUNY) relating to a $25 million donation made more than 10 years ago. The Foundation alleges that CUNY failed to fulfill a commitment to build a new campus for CUNY's New Community College in Midtown, now named the Stella and Charles Guttman Community College. The Foundation is asking for $15 million that was committed to an endowment to benefit the new campus, plus interest, for a total of $21 million.

Lloyd Mayer

 

 

Indiana Court Approves Valparaiso University's Controversial Art Sale Plan

Artnet reports that a trial court in Indiana has approved the proposed sale by Valparaiso University of three artworks, concluding that "it is no longer economically or practically feasible to display those three paintings, and that keeping those three paintings in storage would only impair, not enhance, the original purpose of the Trust." The Trust referred to is the Percy Sloan Trust, the donor of the funds used to purchase the art at issue.  The three artworks (one of which is pictured here) are estimated to be worth $20 million. The court's actual order does not appear to be available publicly.

The university's plan has been opposed by the namesake founding director of the Brauer Museum of Art at the University, and by the leadership of several national museum organizations. It appears, however, that no party was willing to fund a legal challenge to the University's petition in court, and the Indiana Attorney General did not object to the petition. The Museum itself has been closed since June 2024, with no re-opening date announced.

Additional coverage: Chicago Tribune (subscription required).

Lloyd Mayer

The Ghost of Loper Bright and the FTC’s Jurisdiction over Nonprofits

I have an abiding interest in a particular type of nonprofit: higher education institutions. Call it an occupational hazard. I'm also interested in the Federal Trade Commission’s (FTC) enforcement mechanisms. Chalk this one up to being a policy wonk. So, I have been following a case rather closely involving both of these interests.

In a recent ruling, a federal district court in Arizona has significantly narrowed the FTC's ability to bring enforcement actions against nonprofit organizations. The case involved Grand Canyon University (GCU), which the FTC alleged had made deceptive claims about its nonprofit status and doctoral programs. This decision is notable because it constrains the FTC’s reach over nonprofit institutions and raises important questions about the scope of the FTC's authority under the FTC Act.

The FTC’s Claims Against GCU

GCU, originally a for-profit higher education institution, became a nonprofit in 2014 after being purchased and rechartered by Grand Canyon Education, Inc. (GCE). Although GCE operates GCU under a master services agreement, GCU is recognized as a nonprofit entity. The FTC, however, argued that GCU operated as a for-profit institution in substance, even though it held nonprofit status on paper. The agency claimed that GCU’s financial and operational ties to GCE meant it was still engaged in profit-driven activities, and therefore subject to FTC oversight under Section 5 of the FTC Act.

The crux of the case centered on whether GCU could be considered a “corporation” under the FTC Act. The FTC Act allows the FTC to prosecute “persons, partnerships, or corporations,” defining a corporation as an entity organized for its own profit or the profit of its members. The FTC contended that GCU’s formal corporate structure was less important than its operational reality, suggesting that GCU acted like a for-profit entity due to its GCE parentage.

The Court’s Ruling

The court sided with GCU, holding that the FTC could not apply the definition of a “corporation” to GCU under the plain language of the FTC Act. The key issue was that GCU’s sole member is the Grand Canyon Foundation, not GCU itself or any individuals benefitting from its operations. So, the court concluded that GCU did not fall under the category of an entity organized for its own profit or the profit of its members as defined by the FTC Act.

Citing to the Supreme Court’s recent decision in Loper Bright, which curbed the power of federal agencies by limiting judicial deference to agency interpretations of statutes, the court rejected the FTC’s broader interpretation of its jurisdiction. The court emphasized that the FTC’s authority extends only to entities explicitly organized for profit, as defined by the statute. While the court acknowledged potential policy reasons for why nonprofits benefiting insiders or related businesses should fall under the FTC’s purview, it maintained that the statutory language did not support the agency’s claims.

Implications for Nonprofits

This ruling limits the FTC’s ability to pursue enforcement actions against nonprofit organizations unless the agency can demonstrate that these entities are organized for profit. The decision could have far-reaching implications. If nonprofits are anything like their for-profit cousins, one could expect them to behave strategically in the wake of this ruling. For instance, nonprofits with for-profit parentage could reexamine their organizational structures to ensure they fall outside the FTC’s jurisdiction. Likewise, the decision could encourage more nonprofits to enter into relationships with for-profit entities, knowing that they may still be shielded from FTC scrutiny.

The decision is expected to be appealed. But should this ruling stand, it could set a high bar for the FTC to prove jurisdiction over nonprofits.

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law

The Corporate Transparency Act (CTA) and Tax-Exempt Organizations

This year, a new congressional act has drawn a good deal of attention in the corporate world: the Corporate Transparency Act (CTA). But what does it have to do with tax-exempt organizations? Potentially, a lot. After all, many nonprofits are organized as LLCs or corporations—just the do-good kind. :) In this post, I’ll attempt to explain what the CTA is and what it may require of nonprofits.

Effective from January 1, 2024, the CTA introduces new beneficial ownership reporting requirements aimed at increasing transparency in the corporate landscape. The legislation primarily targets entities at risk for financial crimes. While the CTA predominantly applies to for-profit entities, tax-exempt organizations are subject to nuanced exemptions that require careful attention.

Exemptions for Tax-Exempt Entities

Tax-exempt organizations are generally exempt from CTA reporting requirements—and exemption which applies to entities recognized under Section 501(c) of the Internal Revenue Code—provided they maintain their tax-exempt status. Notably, it appears that tax-exempt entities do not need to report to FinCEN that they qualify for an exemption if they have always been exempt, reducing administrative burdens for longstanding tax-exempt organizations. However, tax-exempt entities that lose their exempt status after January 1, 2024, must file beneficial ownership information (BOI) reports with FinCEN if they do not regain their tax-exempt status within 180 days. This creates a narrow window for organizations to restore their exempt status before they are subject to reporting obligations.

Implications for Newly Formed Tax-Exempt Entities

Organizations formed after the January 1, 2024, effective date of the CTA face different challenges. These newly established entities typically do not receive recognition of tax-exempt status from the IRS within the 90-day window that FinCEN grants for submitting an initial BOI report. All this to say that newly formed entities pursuing tax-exempt status potentially may be subject to BOI reporting requirements before receiving an IRS determination letter.

Subsidiaries of Tax-Exempt Entities

Subsidiaries wholly controlled by tax-exempt organizations are also exempt from BOI reporting requirements under FinCEN’s guidance and the statute. This exemption applies to subsidiaries wholly owned by tax-exempt entities, such as a C corporation or an LLC where the tax-exempt entity is the sole shareholder or member.

However, FinCEN’s guidance on what constitutes "control" of a subsidiary is somewhat limited. FinCEN adds the term “wholly” to modify “control” in its guidance, but that modifier isn’t present in the statute. From this, one could reason that the tax-exempt parent must entirely control the ownership interests in the subsidiary. But it raises questions in joint ventures where ownership is shared between a tax-exempt entity and a for-profit entity. Whether these partially owned entities qualify for an exemption from the reporting requirements—and what proportion of ownership must be met to exempt it—is not entirely clear.

In Summary

While many tax-exempt entities are potentially shielded from the reporting obligations, maintaining exempt status is crucial to avoid falling into the purview of the CTA’s BOI requirements. Even though current legal challenges as to the constitutionality of the CTA could impact the viability of the act, organizations should still implement careful monitoring processes to stay compliant, particularly if their status changes or they enter into joint ventures. For more detailed information on the CTA's requirements, visit FinCEN's BOI FAQ page.

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law

Information Costs, Section 179D, and the Slow Uptake of “Greening” Nonprofit Buildings

The Inflation Reduction Act brought about a host of incentives aimed at catalyzing a shift to renewable energy. Yet, the response from nonprofits to retrofit their physical spaces to accommodate renewable energy sources appears to be lagging other sectors. So, why aren’t more nonprofits taking advantage of incentives to turn their physical spaces “green”? Amy Turner (Columbia) has an excellent and informative blog post on the Climate Law Blog in which Section 179D is framed as the culprit. Here’s a snippet:

“Under the IRA, clean electricity technologies like distributed solar and wind, battery storage, and geothermal energy, along with electric vehicles and charging stations, are the subject of tax credits that cover between 30 and 70 percent of eligible project costs. In contrast, the IRA’s main tax tool for building decarbonization is a tax deduction that nontaxable entities can transfer to a limited set of other parties but cannot use directly. Section 179D offers a $0.50 to $5.00 per square foot tax deduction (inflation-adjusted) for whole-building energy efficiency retrofits that achieve a 25 to 50 percent reduction in energy costs as compared to the ASHRAE 90.1 Reference Standard or a 25 to 50 percent reduction in building energy use intensity (a measure of energy use per square foot) as compared to the building’s own baseline. In either case, the deduction is capped at the cost of qualifying equipment and retrofits: interior lighting systems, HVAC and water heating equipment, and improvements to the building envelope.

Though the 179D deduction is not eligible for elective pay, it is available to local governments and other nontaxable entities in that a public or nonprofit building owner can transfer the deduction to the designer (specifically an architect, engineer, contractor, or subcontractor) of the building improvements underlying the deduction. Thus, they can offer the deduction to a designer in the hopes of negotiating down the designer’s price. In this way, Congress allowed for the broad applicability of the 179D deduction in the public and nonprofit sectors, but these sectors face significant practical challenges in taking advantage of it.

In particular, nontaxable entities are acting with imperfect information when transferring the 179D deduction, as the project designer will almost certainly balk at disclosing the sensitive business information – taxable income and tax rate – that would help the parties properly value the deduction and use it to negotiate price. The transaction costs associated with negotiating the value of the deduction can be significant, with the municipal representative or nonprofit building owner either using internal capacity or hiring outside advisors to assess the value of the deduction and ensure that qualifying costs are spent in connection with whole-building energy reductions – a more difficult endeavor than a simple percentage or set deduction amount with no performance requirement.”

In other words, the business realities of passing on the deduction could create frictions for nonprofits in simply trying to avail themselves of the incentives Congress intended them to use. Information costs, a particularly pernicious transaction cost, are getting in the way. So, what can be done? Turner observes:

“In an ideal scenario for nontaxable entities, Congress would enact a building decarbonization tax credit payable directly to nontaxable entities via elective pay. Absent such a solution, support will be needed help nontaxable entities value their 179D deductions, negotiate with designer counterparties, document their agreements in contract and ensure designers are properly reporting 179D transfers with the IRS. As the elective pay process for tax credits begins to hit its stride, 179D is a natural place for the IRS, technical assistance providers, and advocates to next turn their attention.”

Hear, hear!

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law

Study: Some Nonprofit Workers Live in Poverty, Struggle Financially

Writing in TheNonProfitTimes, Paul Clolery reports on a 2022 study conducted by United For Alice and Independent Sector. United For Alice is a U.S. research organization, led by United Way of Northern New Jersey, that drives innovation, research and action to improve life across the country for ALICE(R) (Asset Limited, Income Constrained, Employed) and for all. Independent Sector is a coalition of nonprofit organizations, foundations and corporate giving programs in the United States. Founded in 1980, it is the first organization to combine the grant seekers and grantees. The study, titled “ALICE in the Nonprofit Workforce: A Study of Financial Hardship,” reveals that more than one in five nonprofit employees (22%) live in poverty and struggle financially. 

According to the study's findings:

Among nonprofit workers in 2022, 5% were below the official U.S. poverty level, and another 17% qualified in the category of ALICE®. ALICE nonprofit employees live in households that earn more than the federal poverty level, but less than what it costs to survive in the counties where they live. They cannot afford the basics: housing, childcare, food, transportation, healthcare, technology and taxes.

ALICE households include those employed by nonprofits and otherwise. Those in poverty represented 42% of all households across the United States in 2022. For example, the federal definition for poverty is $18,310. The ALICE Household Survival Budget gives three distinct examples of costs for a two-person household (a single adult and a school-age child) in three counties. These examples illustrate the cost of basics below the national average (El Paso County, Texas, $40,032), near the average (Franklin County, Ohio, which includes Columbus, $46,932), and above the average (Alexandria City, Virginia ($71,436).

To determine a nonprofit worker’s financial status, the Household Survival Budget for that worker’s county is compared to the worker’s total household income as reported in the U.S. Census Bureau’s American Community Survey’s Public Use Microdata Sample.  

Commenting on the study's findings, Independent Sector President and CEO Akilah Watkins, Ph.D., stated: “The nonprofit sector is fundamental to American society, delivering vital services and resources to those who need them most. Yet it is deeply troubling that so many of our own nonprofit workers – those who dedicate their lives to supporting others – are themselves facing financial hardship." Dr. Watkins continued: "This groundbreaking study gives us both a starting point and a call to action. We must find data-informed solutions, whether through policy or practice, to meet the needs of nonprofit workers who are struggling financially. Investing in the health of our workforce is essential, because it takes a thriving and well-equipped workforce to drive meaningful and sustained change in our communities and our nation.”

According to the study:

Among the 13.9 million nonprofit workers, there were substantial differences in financial hardship by industry sector. The largest industry sector in 2022 was healthcare, with 4.9 million nonprofit employees. Most industry sectors had fewer than 400,000 nonprofit employees. Among the nine largest industry sectors, rates of financial hardship for nonprofit employees varied from 16% in both the healthcare and the finance and insurance industry sectors to 42% in retail trade.

“Nonprofit workers in the social services sector take care of our most vulnerable citizens, including seniors and children. Yet, one-third (32%) of social service workers cannot make ends meet and take care of their families. That stress and uncertainty impacts the health and well-being of our communities and economy overall,” said Kiran Handa Gaudioso, CEO of the United Way of Northern New Jersey and president of United For ALICE.

The study reveals that in 2022, almost half (45%) of the nonprofit workforce was aged 25 to 44, followed by 38% aged 45 to 64. These two groups, in their prime working years, had the lowest rates of hardship: 23% of workers aged 25 to 44 lived in households with income below the ALICE threshold, as did 17% of workers aged 45 to 64. The youngest nonprofit workers, younger than age 25, had the highest rate of financial hardship at 37%. Nonprofit workers aged 65 and older made up 9% of the workforce with 22% below the ALICE threshold.

Of those 65 and older, 2% were considered in poverty based on salary and benefits; 19% were within the ALICE threshold. Stephanie Hoopes, Ph.D., national director, United For ALICE and chief research and impact officer of United Way of Northern New Jersey, stated: “The ALICE analysis is only of current workers; volunteers are not included. The lower percent of 65+ workers (5% for the overall population) below the ALICE threshold is likely because they are receiving social security benefits. But interestingly, even with their nonprofit salary it was not enough to get 19% above the ALICE threshold."

Surely, this is a chilling revelation of the plight of nonprofit workers, people who take care of our most vulnerable citizens, including seniors and children.  

Prof. Vaughn E. James, Texas Tech University School of Law

  

AmeriCorps Opens Federal Grants Competition

AmeriCorps, the federal agency for service and volunteerism, has announced that the 2025 State and National Grants Competition is now open for applications from organizations who wish to host AmeriCorps members beginning in the summer of 2025.

In announcing the competitive grants, AmeriCorps stated that

For this funding opportunity, AmeriCorps will prioritize consideration from organizations that:

Serve Communities

• Serve communities with concentrated poverty, rural communities, tribal communities, and historically underrepresented and underserved individuals. These may include people of color, immigrants, refugees, people with disabilities, LGBTQIA+ individuals, people with arrest or conviction records, religious minorities, etc.;
• Implement programs for or expand access to high-quality youth mental health and substance use recovery services and prepare AmeriCorps members to enter behavioral health careers. These may include individuals with lived experience with substance use and mental health challenges to support youth mental health efforts and continued AmeriCorps work on the opioid epidemic;
• Focus on improving the quality of life for veterans, active-duty members of the Armed Forces, and their families by recruiting veterans, military spouses, and their older children into national service; 
• Promote environmental stewardship to help communities (especially underserved households and communities) to be more resilient by reducing greenhouse gas emissions, conserving land and water, increasing renewable energy use and improving at-risk ecosystems; and
• Support civic bridgebuilding programs and projects to reduce polarization and community divisions; and providing training in civic bridgebuilding skills and techniques to AmeriCorps members.

Benefit AmeriCorps Members

• Provide benefits to AmeriCorps members aimed at enhancing member experience and bolstering member recruitment and retention such as paying more than the minimum living allowance, transportation, housing, food, etc.;
• Create workforce pathways for AmeriCorps members, including deliberate training, certifications, and hiring preferences or support;
• Enhance and expand services to second chance youth and/or engage those youth as AmeriCorps members; and
• Develop and train the next generation of diverse public health leaders through service while addressing pressing community health challenges. Review Public Health AmeriCorps Priority in the Mandatory Supplemental Information for eligibility information.

Use Evidence

• Utilize reports from the AmeriCorps Evidence Exchange on programs assessed as having Moderate or Strong evidence to scale, replicate, or adapt the intervention.

Faith-Based

• Organizations that are faith-based.

American Climate Corps 

Applicants may propose projects to be affiliated with the American Climate Corps (ACC), which is a federal government national service and workforce development initiative focused on training young people for the clean energy and climate resilience workforce.

Applicants who are interested must demonstrate that their project funds ACC eligible positions meeting the following criteria:

• The position has verifiable climate or environmental impact.
• The position is temporary (term-limited), and the term length is at least 300 hours.
• The position includes skills-based training as part of the program and provides a pathway to employment.
• The position must receive a living allowance and, in some cases, may receive additional member benefits.

To receive priority consideration, applicants must show the priority area is a significant part of the program focus and intended outcomes. Priority consideration does not guarantee funding.

The application deadline is 5 p.m., Thursday, January 23, 2025. Successful applicants will likely be notified by mid-April 2025. Funding will be released in July.

Prof. Vaughn E. James, Texas Tech University School of Law

 

National Catholic Reporter Names Wall Street Journal's James Grimaldi as Executive Editor

Today's edition of Religion News Service (RNS) is reporting that after being without a top editor for more than a year, the National Catholic Reporter, the 60-year-old, left-leaning Catholic media outlet, announced that James V. Grimaldi, a senior writer at The Wall Street Journal, has been named executive editor. 

According to RNS:

Grimaldi, 62, is set to begin work Sept. 16, filling a position that has been vacant since August of 2023, when Heidi Schlumpf stepped down after four years in the role, becoming a senior correspondent. Grimaldi will report directly to Joe Ferullo, the newspaper’s CEO and publisher.

In an arrangement in step with the technology-aided dislocations of modern journalism, Grimaldi will oversee the editorial operation of NCR, which is headquartered in Kansas City, from Washington, where the newspaper has offices in the historic Methodist Building on Capitol Hill. Ferullo, a retired television executive, works from Los Angeles. 

RNS reports that in a statement about Grimaldi's appointment, Ferullo stated:

James is dedicated to NCR’s mission; he will elevate and expand NCR’s excellent journalism at a pivotal moment in the history of the Catholic Church. All of us at NCR — including our readers — look forward to his extraordinary editorial leadership in this exciting and decisive time.

What do we know about Grimaldi? RNS has this to share:

In a long career that began at the San Diego Tribune, Grimaldi has become known for his accountability and investigative reporting. In more than two decades covering politics and governmental affairs at the Washington Post and the Journal, he reported on corruption by federal judges and government officials.

Grimaldi has received three Pulitzer Prizes for his investigative work. In 1996, he contributed to a Pulitzer win for the Orange County Register, reporting on unethical fertility practices by a research university. In 2006, he received a Pulitzer with two colleagues for an investigation of the Jack Abramoff lobbying scandal. In 2023, while at the Journal, he won another for exposing conflicts of interest among several federal employees.

RNS also shares the following information about NCR:

With a staff of 40, NCR draws a million readers to its website monthly and publishes 26 print issues each year. Catholics’ options for reading about their faith and its institutions have shrunk in recent years. Diocesan newspapers, once considered essential guides to the thinking of local bishops and the national church, have in many places disappeared. In late 2022, the U.S. Conference of Catholic Bishops shuttered domestic operations of its Catholic News Service, which now maintains only its Vatican bureau. 

NCR has been a supporter of Pope Francis, and under Schlumpf was known to criticize U.S. Catholic bishops for what the paper’s editors regarded as politically motivated decisions on topics such as denying Communion to pro-choice Democratic politicians.

From the 1980s onward, the paper was pivotal in leading the Catholic Church to confront the sexual abuse scandal, first reporting not only on abusive priests but on the U.S. bishops’ cover-up in June 1985. The news outlet has also covered mismanagement of diocesan funds and the impact of conservative donors on the U.S. church.

With the 2024 Presidential Election a few weeks away, we wonder what impact Grimaldi's appointment to the position of executive editor will have on NCR and on Roman Catholic voters. Time will tell. 

Prof. Vaughn E. James, Texas Tech University School of Law

 

Bill Gates, Warren Buffet, and the Future of Huge Foundations(?)

I woke up this morning, opened my phone, and discovered that Bill Gates is in the news again.

And so is the Bill and Melinda Gates Foundation, albeit for unrelated reasons. There's no indication that Mr. Gates couldn't be alone with interns at the Foundation (in fact, there may not even be interns at the Foundation), but the Foundation may be facing an existential crisis: Warren Buffet and his heirs have made clear that after his death, none of Buffet's assets will go to the Gates Foundation. This pulling back isn't, apparently, related to the misdeeds of Bill Gates. Instead, reportedly, Mr. Buffet objects to the inefficiencies and bloat in the Gates Foundation.

But this is bad for the Gates Foundation, for a couple reasons. One is, Buffet was likely the largest donor to the Gates Foundation--his donations (roughly $39 billion) at least matched the donations by Bill and Melinda French Gates; some years, the Gates donated less than half a billion dollars. (That is, I realize, a crazy sentence--as charitable as I want to be, over my lifetime I will never half half a billion dollars to donate, much less in a single year!)

Continue reading

While I Wait for Women’s Single Sculls Repechages…. Exemption and the Olympics!

So … I never thought I’d see a concert lineup that included the metal band Gojira (complete with bloody severed heads in the background- BOLD!), Lady Gaga doing the can-can, and Celine Dion.   But here we are…. The 2024 Paris Summer Olympics opening ceremony.  And I’m down for it.  All of it.

I am an Olympics nerd. I have already watched Norway v. Sweden in Women’s Team Handball.  I’m disappointed I can’t find the Archery ranking rounds that happened yesterday streaming on Peacock.  I will wake up at 5 am to watch doubles badminton tomorrow.  I’m that person.

So, it seems only appropriate to do a little review of the tax-exempt status of the Olympics for the blog today, because there are no other competitions to watch on opening ceremony day and I’ve already watched all the available Rugby 7s replays (five stars – will watch again.)  So here’s a deep dive (pun intended) into the Olympics.

Section 501(c)(3) and Section 501(j)

If you are reading the Nonprofit Law Prof Blog, you probably already know that Section 501(c)(3) describes organizations that “foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment)…”   If, however, you are a “qualified amateur sports organization” under Section 501(j), you are exempt from the prohibition on providing athletic equipment.

Prior to 1976, the IRS would grant exempt status to athletic organizations if they could show that they were charitable or educational.   But those were pretty narrow buckets.   The amateur sports language was added to Section 501(c)(3) in 1976, but the IRS apparently took the provision of equipment provisions seriously – From a 1987 EO CPE Text: 

For example, an organization which, as part of its coaching program, made videotapes of athletes for the purpose of analyzing their performance could not be granted exemption as an amateur athletic organization under IRC 501(c)(3), since the use of videotape equipment was considered the provision of equipment.

As we all know from watching Cool Runnings, bobsleds are really expensive, so this simply could not stand. Section 501(j) wasn’t added until 1982.  While the definitions of a “qualified amateur sports organization” and the general 501c3 language are close, they aren’t completely co-terminus.  But it is clearly intended to cover Olympic-type organizations.   See e.g., GCM 39459, finding as exempt the organization for USA women’s bowling even though they supplied uniforms and equipment.

Bowling is not an Olympic sport but recognized by the US Olympic Committee and eligible for the Pan Am games, which is enough.  Apparently, bowling was a demonstration sport at the 1988 Seoul Summer Olympics and has lobbied to be added, making the short list for the 2020 Tokyo Summer Olympics but missing the cut to surfing, skateboarding, and sport climbing.  BUT I DIGRESS.

Your organization needs to be organized primarily to cater to serious athletes, so hosting running events open to all levels and not at Olympic distances didn’t get exempt status – it was deemed more recreational in nature. 

US Olympic & Paralympic Committee

So the USOPC is recognized by the International Olympic Committee as the National Olympic Committee for United States.  According to its website, it’s a “federally chartered nonprofit corporation” – you might remember my Veterans’ Day post on the USO, which is the same thing.  It’s a 501c3 and a public charity under 170(b)(1)(a)(vi) - the USOPC’s most recent Form 990 is in fact available on its website. It lists itself as a corporation formed in 1950 with a legal domicile in Washington DC but an HQ in Colorado Springs, Colorado.  A really interesting supplemental note on its Schedule D – wasn’t able to find a lot on this, does anyone have any details???

INSTALLMENTS FOR THE BROADCAST MEDIA RIGHTS, FOR THE OLYMPIC AND WINTER OLYMPIC GAMES, ARE HELD BY USOPC IN TRUST. THESE PAYMENTS ARE RECORDED ON THE STATEMENT OF FINANCIAL POSITION AS ASSETS HELD ON BEHALF OF OTHERS UNTIL THE GAMES OCCUR AND CERTAIN REQUIREMENTS ARE MET, THEN THE CASH WILL BE RELEASED AND THE AMOUNT WILL BE RECORDED AS REVENUE.

As a final note on related entities, there is a US Olympic and Paralympic Foundation, which “generates philanthropic support to empower Team USA athletes to achieve sustained competitive excellence and well-being.”  It appears that the USOPC doesn’t support athletes directly; athlete support comes from the USOP Foundation.  Formed in 2013 out of Colorado, it lists itself as a 170(b)(1)(A)(vi) on its Form 990.  The Foundation reports a management agreement with the USOPC on its Part VI and Schedule R.

National Governing Bodies.

If you look on the lists of grants made by the USPOC, it includes the national governing bodies for the various sports.  The list includes, USA Artistic Swimming,  the United States Curling Association (which is so much fun – try it if you can) and the Unites States Amateur Confederation of Roller Skating (OMG can we have roller derby in the Olympics?  I mean this year, breaking is an Olympic sport, so why not?  It does make me feel bad for bowling…) They are all listed as separate Section 501c3 organizations.

Because I had to, obviously, I did check out the US Amateur Confederation of Roller Skating, which is d/b/a USA Roller Sports (way better) and headquartered in that hotbed of roller sports, Nebraska (why Nebraska?  Any roller skaters out there know?)  Its 990s are also available, although curiously they report that they are a 509(a)(2) public charity.  

Apparently, rink hockey played on skates was a demonstration sport in the Olympic Games in Barcelona in 1992.  They tried for the 2016 Rio Summer Olympics but lost out to rugby 7s (I see why though – super fun) and golf.  BUT I DIGRESS.

International Olympic Committee. 

I would be remiss if I didn’t mention them.  It is an association under Swiss law, but many international organizations get exempt status from the IRS if they are worried about US source income – so I figure I’d check on the IRS’ website.  Et Voila!!!! And here’s its Form 990.  Interestingly, the list themselves as a Section 501(c)(4) organization, formed in 1894.  I immediately wondered if there is a US Friends of the IOC, or something like that, to take US-based charitable contributions (since 170 deductions are limited to domestic gifts… and they are a 501(c)(4) anyway). 

A quick check of the IOC’s website didn’t show anything that looks like a US fundraising arm, so if anyone has an info, let me know.   I’d keep looking, but it’s getting kind of late and I need to get some sleep before doubles badminton qualifying rounds at 5 am.

Frenziedly, eww

The Trust for Civic Life and Reflections on Rural Philanthropy

The Chronicle of Philanthropy had an article on the new Trust for Civic Life back on June 17, 2024 – it came to my attention today as U.S. News had an article published a shorter version, (via the Associated Press) today. The article focus on a a new initiative by larger grant makers to focus on rural philanthropy – seeing “small, local groups as instruments of change.”  According to the article, The Trust for Civic Life was established as a collaborative of 15 grantmakers. The Trust’s first round of funding consisted of $8.0 million in grants focused on “rural, often high-poverty towns, regions, and tribal areas.” The Trust’s website indicates that they are focusing on the Black belt, Central Appalachia, Tribal Lands, the Southwest border, and “communities in transition in the rural U.S.” Apparently, the first round of grants are “between $300,000 and $425,000 in general-operating support over three years.” 

The US News article doesn’t list all fifteen of the funders (the Chronicle does), but notes that they come from organizations from different ends of the ideological spectrum, including the Ford Foundation, the Rockefeller Brothers Fund, the Walmart Foundation, Stand Together (aka Charles Koch’s foundation) are listed in the article.   The others can be found on the Trust’s website, and include notables such as the Omidyar Network, the MacArthur Foundation, the Packard Foundation, and the Knight Foundation, among others.   As a technical matter, according to the Trust’s website, it is a “sponsored project” of Rockefeller Philanthropy Advisors, which introduced the project earlier this year.

I really welcome a renewed attention to rural philanthropic structures.    I went to school in Boston; I practiced in NYC, Chicago, and Indianapolis.   As a result, my views on philanthropy were somewhat skewed, to be honest, by my experience in these very large, urban markets.   I didn’t really appreciate the differences in the philanthropic experience of rural areas until I moved here to West Virginia, especially the impact of isolation from the lack of infrastructure (general and philanthropic).  In that regard, I’m happy to see that the West Virginia Community Development Hub was one of the first of the Trust’s grantees. 

On a broader level, however, I thought about a recent post here on the Blog entitled “The Great DAF Debate” by my colleague Ben Leff.   As a re-read that post, I note that so much of the discussion about DAFs, and endowments generally, doesn’t think about the impact on smaller communities.    In small, rural communities, a community foundation may be the only philanthropic infrastructure available.   Unlike Boston or New York, a mandatory spend down requirement might not be a problem, as philanthropic dollars might flow in continually to replace that which is spent.  In smaller communities, DAF/endowments might be the lifeblood of social services in the area - if there is no endowment, there may be no critical funds for the community center, no emergency clinic, no low-cost day care.   The flow of charitable money is sporadic – the expectation that the coffers will refill in due time may not be true.   This thought of a paper has been floating around in my head (and my scholarship agenda) for some bit.  I hope that this perspective isn’t lost in the grand DAF/endowment debate, and I’m happy to see the Trust for Civic Life taking up the change and will be interested to see how things develop. 

Hopefully, eww

 

Another Report from AMT/EITC… A Late Addition: Nonprofits' Role in Protecting and/or Promoting Speech

Hi all – a quick hit for you all late on this Wednesday night.   As you might recall, I did a number of posts back at the end of May/beginning of June reporting on the charitable presentations at the AMT/EITC scholarship conference held at the beginning of the summer.   You can find those reports here, and here, and here.

My May/June blogging week ended, and I had one more report to go… so in the category of “better late than never,” I do want to talk about Miranda Perry Fleisher’s presentation, tentatively titled A Space for Dissent, because I think it is so critical at this moment in time.   In it, she explores the role of the nonprofit community in protecting and promoting speech, especially when that speech is challenging to the community and/or establishment (to the extent that those are different things.)   Her hope is to address these issues looking critically and thoughtfully at “long-standing First Amendment principles, the value of free speech in a democracy, and the role of the non-profit sector as a forum for dissent.”   I won’t give away the ending … no spoilers here on the Nonprofit Law Prof Blog.   So, keep an eye out for a law review near you!

In all seriousness… at the time, I remember thinking that this is an incredibly important project, at a time when nonprofits are getting called before Congress!!! to discuss their own speech and the speech that happens around them. The world events, international and domestic, that have occurred since my first few postings about the conference just reinforce my thinking of how important Miranda’s project will be.

Anticipatorily, eww