Monday, May 27, 2024

On this Memorial Day: An Introduction to the USO

As I sat to write a blog post on this Memorial Day, I was Googling recommendations for charities that support current service members, veterans, and their families.  As the USO repeatedly appeared as the first entry on a numbers of searches, I realized that I actually know very little about it.  I think we’ve all probably seen pictures of movie stars and famous singers visiting the troops out in the field from time to time (there’s a great collection of vintage photos here), but I never really thought about the organization that made that happen.

Until now. 

“USO” stands for the United Service Organizations, which reflects its origins as a collaboration among a variety of existing charities that were serving military members and families during World War II.  The USO is not part of the Department of Defense; rather it is one of a handful of federally chartered corporations in existence (see 36 USC 2201 et. seq.) – although its statute provides “the Corporation shall maintain its status as a corporation incorporated under the laws of New York, another State, or the District of Columbia.”  The 2022 Form 990 reports its state of legal domicile as the District of Columbia.

Per its organizing statute, the USO was designed, in party, to   

accept the cooperation of, and provide an organization and means through which, the National Board of Young Men's Christian Associations, the National Board of Young Women's Christian Associations, the National Catholic Community Service, the Salvation Army, the National Jewish Welfare Board, the Travelers Aid-International Social Service of America, and other civilian agencies experienced in specialized types of related work, which may be needed adequately to meet the particular needs of the members of the Armed Forces, may carry on their historic work of serving the religious, spiritual, social, welfare, educational, and entertainment needs of men and women in the Armed Forces and be afforded an appropriate means of participation and financial assistance,

According to its 2022 Form 990, the USO is a private organization that is tax-exempt under Code Section 501(c)(3) and a public charity under Code Section 170(b)(1)(a)(vi).

By statute, the USO is a membership organization overseen by a Board of Governors.  The Board consists of six members appointed by the President, the Secretary of Defense (or designed), and representatives of the organizations listed above (or the public at large) that have the power to appoint the board of directors.  It is a membership organization, but the voting members are the six appointees of the President. According to its 2022 Form 990, it has a 38-person board, of which 37 are reported as independent (the one person who is not independent is the current President & CEO – he is also the only compensated member of the Board of Directors).

It’s hard to summarize all that the USO does for our military service members and their families. In addition to the well-known entertainment tours, the organization provides care packages for service members, transition services for soldiers re-entering private life, and various support services for military spouses, among other things.  It operates in a number of foreign countries as well in order to provide services to our military service members stationed overseas.   I strongly recommend visiting its website or, for the tax nerds among us, reading the details of its program services on Form 990 Schedule O.

There is a separate USO Foundation, which the USO lists on its Form 990 as a directly controlled entity within the meaning of Code Section 512(b)(13).  It was formed in 2007 as a fundraising arm.  The USO Foundation’s Form 990 indicates that it is a Type I supporting organization of the USO and covered under the USO’s group exemption letter.

If you wish to read more: uso.org

To review the USO’s Forms 990 and financial statements, see here:  https://www.uso.org/about/financial-statements

If you wish to donate, link is here.

Thankfully and in remembrance,

eww

May 27, 2024 in Current Affairs, Federal – Executive, In the News | Permalink | Comments (0)

Volokh: Can Nonprofits That Help Organize Protests Lose Their Tax Exemptions?

Eugene Volokh (UCLA) has written a post on The Volokh Conspiracy titled Can Nonprofits That Help Organize Protests Lose Their Tax Exemptions? It concludes (correctly): "[n]ot because of the viewpoints they express—but yes if they engage in systematic illegal conduct."

Lloyd Mayer

May 27, 2024 in In the News | Permalink | Comments (0)

State AG News: DC AG Resolves Arabella Advisors & NRA Foundation Cases, TX AG Draws Criticism from Pope Francis

DC_Attorney_General_Seal 1200px-Seal_of_Texas_Attorney_General.svgState authorities and particularly Attorneys General offices continue to be at the forefront of nonprofit oversight. Several recent items of note:

  • Politico reports that District of Columbia Attorney General Brian Schwalb has ended his investigation of Arabella Advisors, according to an attorney for nonprofits that are overseen by the for-profit consulting firm. As previously reported in this space, the complaint against Arabella Advisors that led to the investigation was apparently in response to a complaint against several Leonard Leo-affiliated nonprofits that led to an DC AG investigation into those groups. It appears that investigation is still ongoing.
  • The DC Attorney General also announced a settlement of a lawsuit against the NRA Foundation that will "require thorough oversight and extensive operational changes to ensure that the Foundation operates independently from the NRA and fully complies with District nonprofit laws." The NRA also issued a press release about the settlement. The lawsuit related to allegations that the NRA had improperly controlled the Foundation, including using Foundation funds inappropriately. Coverage: N.Y. Times; Washington Post.
  • The San Antonio Current reports that Pope Francis has criticized Texas Attorney General Ken Paxton for attempting to shut down a Catholic charity that assists immigrants, as previously reported in this space. According to the report, in response to question about the lawsuit brought by the Texas AG Pope Francis said: "That is madness. Sheer madness. To close the border and leave them there, that is madness. The migrant has to be received. Thereafter you see how you are going to deal with him. Maybe you have to send him back, I don't know, but each case ought to be considered humanely, right?" Other coverage: San Antonio Express-News.

Lloyd Mayer

May 27, 2024 in In the News, State – Executive | Permalink | Comments (0)

Thursday, May 9, 2024

Potential Self-Dealing in the Conservative Partnership Institute

Last week my co-blogger posted about a recent New York Times article by David Farenthold about the Conservative Partnership Institute (“CPI”), a 501(c)(3) charity. In my view, Farenthold does a remarkable job of reporting on the nonprofit sector, but the article illustrates the limits of public knowledge on nonprofit spending. He reports on numerous insider transactions at CPI, involving millions of dollars flowing to for-profit entities formed by CPI leaders. Farenthold correctly notes that, “[w]hile hiring insiders is permitted when certain safeguards are in place, the payments moved money out of daylight and into opaque entities that the nonprofit’s leaders helped control.”

The obvious question, of course, is whether those “safeguards” were in place in CPI's case; safeguards that would presumably be described in a robust conflict-of-interest policy. Farenthold was at the mercy of CPI, which declined to provide details about its processes. There are many legitimate charities that legitimately pay for services from companies that their founders or directors own or control. There is no law against that; nor should there be in my opinion. But, of course, such payments produce risk. Farenthold quotes non-profit law scholar Linda Sugin, who correctly notes that CPI “could have reduced its risk by soliciting bids from competing firms to gauge whether insiders were charging market rates [and it] could have asked its leaders to recuse themselves from the decision to hire their own companies[.]” But because CPI refused to comment, we just don’t know whether they did. I’m guessing that they had good enough lawyers that they probably did have those procedural safeguards in place and make use of them. That doesn’t mean that they didn’t manage to overpay the companies that are connected to insiders anyway; it also doesn’t mean that they did pay too much. That’s a question that we the public are extremely unlikely to be able to judge accurately.

So, who should police whether payments from charities to insiders are excessive? That burden falls on the IRS and state charity regulators. It’s important for two different reasons. First, donors receive a tax deduction for charitable contributions, and that tax deduction is not warranted when the money is diverted from its charitable use. But even more important is that charitable donors generally rely on the regulation of nonprofits to enable them to trust that their donations will be used for their intended purpose. The one donor who would talk to Farenthold explained that he didn’t need that legal protection because of his personal relationship with the leaders of CPI, saying, “I’ve known them a long time …. They’re good people.” But most charitable donors don’t have that luxury, and the charitable sector would be much smaller (and able to do much less good) if every donor had to personally know the directors of every charity they want to support. And, obviously, the donor who talked to Farenthold could be wrong in his trust of CPI.

--Benjamin Leff

May 9, 2024 in Federal – Executive, In the News | Permalink | Comments (0)

Thursday, April 25, 2024

Tax-Exempt Organizations and Antisemitism

Naturally, Darryll beat me to the punch. Yesterday, he blogged about a letter from the Ways and Means Committee to the IRS asking primarily about tax-exempt organizations with ties to the Chinese Communist Party.

But then, in the middle, as Darryll notes, there's a strange diversion into questions of antisemitism and tax-exempt organizations. In one paragraph in the middle of the letter, the House writes,

Continue reading

April 25, 2024 in Federal – Legislative, In the News | Permalink | Comments (0)

Monday, April 1, 2024

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.   I'm going to shamelessly block quote Benjamin's description here:

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

With the Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

  • Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
  • Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
  • Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
  • While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
  • Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww

  

 

April 1, 2024 in Current Affairs, Federal – Executive, In the News, Sports | Permalink | Comments (0)

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.    I'm going to shamelessly block quote Benjamin's description here:

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

With th Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

  • Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
  • Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
  • Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
  • While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
  • Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww

  

 

April 1, 2024 in Current Affairs, Federal – Executive, In the News, Sports | Permalink | Comments (0)

Thursday, February 22, 2024

Washington Post Investigates Nonprofits Providing Covid Misinformation

The Washington Post published a good look at charities engaged in covid misinformation and promoting anti-vaccine campaigns this week.

From the article: "Four major nonprofits that rose to prominence during the coronavirus pandemic by capitalizing on the spread of medical misinformation collectively gained more than $118 million between 2020 and 2022, enabling the organizations to deepen their influence in statehouses, courtrooms and communities across the country, a Washington Post analysis of tax records shows.

Children’s Health Defense, an anti-vaccine group founded by Robert F. Kennedy Jr., received $23.5 million in contributions, grants and other revenue in 2022 alone — eight times what it collected the year before the pandemic began — allowing it to expand its state-based lobbying operations to cover half the country. Another influential anti-vaccine group, Informed Consent Action Network, nearly quadrupled its revenue during that time to about $13.4 million in 2022, giving it the resources to finance lawsuits seeking to roll back vaccine requirements as Americans’ faith in vaccines drops.

Two other groups, Front Line Covid-19 Critical Care Alliance and America’s Frontline Doctors, went from receiving $1 million combined when they formed in 2020 to collecting more than $21 million combined in 2022, according to the latest tax filings available for the groups.

The four groups routinely buck scientific consensus. Children’s Health Defense and Informed Consent Action Network raise doubts about the safety of vaccines despite assurances from federal regulators. “Vaccines have never been safer than they are today,” the Centers for Disease Control and Prevention said on its webpage outlining vaccine safety."

Philip Hackney

February 22, 2024 in In the News, Science | Permalink | Comments (0)

Monday, February 12, 2024

NRA update by the New York Times

A few weeks ago, I wrote a post entitled "The NRA Saga Continues... wayne LaPierre Takes the Stand,"  in which I discussed the continuing downfall of the organization that once embodied nonprofit political power.    I just wanted to flag that the today's New York Times email news letter, The Morning, (Sub required) has a write up of the current status of the NRA.  Here's a quote and a link:

Today, the N.R.A. has shed hundreds of thousands of members and large sums of money. It is standing trial for fraud and self-dealing in New York. “The N.R.A. is little more than a shell of itself after hemorrhaging hundreds of millions in legal fees,” Joshua Powell, a former top N.R.A. official who settled with the state before the trial, told The Times. The organization’s fall is not a death knell for Second Amendment advocates, but it is a blow.

Today’s newsletter will explain what went wrong with the group.

 

With the updates! eww

February 12, 2024 in In the News, State – Executive, State – Judicial | Permalink | Comments (0)

UCLA Law Upgrades Program on Philanthropy & Nonprofits to an $11 Million Center

Download (23) Rose+Chan+LouiUCLA School of Law announced last month the launch of the Lowell Milken Center for Philanthropy and Nonprofits. Funded by more than $11 million in gifts from Mr. Milken, the Center "is poised to become the national destination in the field, bringing together scholars, practitioners, nonprofit and philanthropic leaders, and policymakers to research this critical area and educate law students and experts in the discipline." Professor Jill Horwitz will serve as the Center's faculty director, and Rose Chan Loui will serve as its executive director.

Lloyd Mayer

February 12, 2024 in In the News | Permalink | Comments (0)

Friday, February 9, 2024

Feeding Our Future Continuing Fallout: A Guilty Plea, More Indictments, and New Counterclaims

6a00d8341bfae553ef0278806cd3f2200d-320wiThe U.S. Attorney's Office for the District of Minnesota announced last month that the executive director of House of Refuge Twin Cities pleaded guilty to one count of wire fraud in the $250 million fraud scheme centering on the nonprofit Feeding Our Future. The charge related to her redirection of millions of dollars in federal funds to pay personal expenses and family members. According to the press release, she is the seventeenth defendant to plead guilty to charges arising from this fraud scheme. Coverage: CBS News; Sahan Journal; Star Tribune.

And she is unlikely to be the last, as this week the same U.S. Attorney office announced federal criminal charges against 10 additional defendants arising from the same fraud (on top of approximately 60 already charged). Those defendants included six members from the same family who allegedly used a variety of legal entities to receive and launder the stolen federal funds, as well as four others who allegedly falsely claimed to have provided meals to children. Coverage: MPR News.

Not all the action is on the government's side, however. According to an MPR News article, the founder of Feeding Our Future and alleged leader of the fraud conspiracy is pushing back. She is asserting that Minnesota Department of Education officials who oversaw the hunger relief funds intentionally mislabeled document and used burner phones to improperly thwart a 2020 lawsuit brought by the nonprofit challenging the Department's treatment of Feeding Our Future. Her attorney stated that she plans to raise these allegations as part of her defense against federal wire fraud and bribery charges.

Lloyd Mayer

 

February 9, 2024 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

NCAA Update: NLRB Employee Ruling and NIL Rules & Disputes

DownloadThe Associated Press reports a National Labor Relations Board (NLRB) Regional Director has ruled that Dartmouth basketball players are employees, which would allow them to create a labor union. The decision is particularly significant because the players, in common with other Ivy League athletes, do not receive athletic scholarships  As the story notes, this holding is consistent with the NLRB General Counsel's 2021 memo concluding that certain college athletes should be considered employees. The decision is subject to review by the NLRB. Additional coverage: Inside Higher Ed; N.Y. Times; Slate; Washington Post.

Separately, in the rapidly developing name, image,  and likeness (NIL) area the Division I Council of the NCAA approved new rules relating to disclosure and transparency. The press release highlights "four elements of student-athlete protections": voluntary registration for NIL service providers; required disclosure by student-athletes to their schools of more than nominal NIL agreements; development of a template contract and recommended contract terms; and development of an education plan for student-athletes and other stakeholders. The Council also introduced new proposals for consideration relating to school involvement and recruiting in NIL activities, including ones that would remove certain restrictions on school support for such activities.

At the same time, disputes between the NCAA and schools relating to NIL arrangements are heating up. Last month the NCAA announced an agreement relating to a violation of NCAA rules by a Florida State assistant football coach, including various recruiting-related restrictions. Coverage: ESPN; Washington Post. And earlier this month USA Today reported a federal judge refused to issue a temporary restraining order relating to the NCAA's NIL rules in an antitrust lawsuit brought by Tennessee and Virginia. A preliminary injunction hearing in that case is set for next week.  Additional coverage: Law360 (subscription required). 

Lloyd Mayer

 

 

 

February 9, 2024 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

Wednesday, February 7, 2024

Washington Post: "Luxury spending, internal strife leave NRA staggering into 2024 election"

National_Rifle_Association_official_logo.svgAs the NRA trial continues in New York state court, with the Attorney General ending the presentation of her case last Monday and closing arguments scheduled for February 15th, the Washington Post has a lengthy story on what has come to light during the trial and its effects on the NRA's still significant political clout. The details that have emerged so far appear to provide a case study for what can happen when a single, highly successful leader is able to operate with little effective board or other oversight for years. Not surprisingly, revenues have slumped by about 50 percent since 2018 (from about $160 million to $83 million in 2022) and legal fees have skyrocketed to about $40 million per year from 2019 to 2022. And former president Wayne LaPierre resigned just days before the trial began and may end up owning the NRA millions of dollars depending on the trial's result.

Lloyd Mayer

February 7, 2024 in In the News, State – Judicial | Permalink | Comments (0)

Massachusetts Legislation Would Tax University Endowments

DownloadBloomberg reports that state legislators in Massachusetts are considering two bills that would target Harvard and other wealthy universities and colleges. Here is a description of the bills from the article:

One would hit Harvard and 10 other private colleges that have more than $1 billion in assets, including the Massachusetts Institute of Technology and Williams College, with an annual 2.5% excise tax to fund state universities. A second bill would charge a fee on rich colleges that give legacy applicants a leg up in admissions and pass along the funds collected to community colleges.

The first bill appears to be H.2824 (parallel bill S.1834), introduced almost a year ago and currently under consideration by the Joint Committee on Revenue. The revenue it would generate would be used for broader purposes than the above quote indicates, as it would go to a state-administered fund to "be used exclusively for the purposes of subsidizing the cost of higher education, early education and child care for lower-income and middle-class residents of the commonwealth."

The second bill appears to be H.3760 (parallel bill S.1819), introduced last April and currently under consideration by the Joint Committee on Higher Education.  It would impose on schools that violate the legacy admission rules it creates a sliding scale percentage tax for their endowments based on the endowment per student, ranging from 0.01% for schools with an endowment per student of less than $50,000 up to 0.2% for an endowment per student of more than $2 million, with a minimum amount owed on endowments of more than $1.5 billion. There has also been at least one other bill introduced targeting legacy admissions by public universities, H.1282 (parallel bill S.821).

Lloyd Mayer

February 7, 2024 in In the News, State – Legislative | Permalink | Comments (1)

Tuesday, February 6, 2024

Ministry Watch: "Bankruptcy Case Forces Churches to Repay Hundreds of Thousands of Dollars in Donations"

Download (23)I previously blogged about a U.S. Bankruptcy Court decision that required a church to repay over $500,000 in donations. It turns out that a test case, as MinistryWatch reports that because of that result dozens of churches (including some that have settled) are required to repay donations they received. The donors were apparently shareholders in the now-bankrupt Health Diagnostic Laboratory of Richmond, Virginia.  And this is in addition to other, non-church charities from which the bankruptcy trustee is also seeking to recover donations. Critical to the court's holding was that the Bankruptcy Code section at issue does not allow the court to take into account potential hardship to a subsequent transferee, even if that subsequent transferee is unaware of the fraudulent nature of an earlier transfer.

Lloyd Mayer

February 6, 2024 in Federal – Judicial, In the News | Permalink | Comments (0)

Wednesday, January 31, 2024

The NRA Saga Continues ... Wayne LaPierre Takes the Stand

In the continuing saga of everything not to do as a nonprofit organization, the trial of the NRA and some of its top executives is in full swing.

If you haven't been keeping track, in 2020, New York Attorney General Letitia James brought suit against the NRA alleging correcption and misuse of assets under a variety of New York statutes, including "New York’s Estates, Powers & Trusts Laws; New York’s Not-for-Profit Corporation Law; the New York Prudent Management of Institutional Funds Act; and New York’s Executive Law." Around that time, we also found out that the NRA owed the IRS roughly $3.4 million in taxes and penalties as detailed more fully here, complete with commentary from Nonprofit Law Prof Blog's own Phil Hackney.  And of course,  as detailed in this NPR article, the NRA tried to file for bankruptcy, but it petition was dismissed on the basis that the" group had not filed the case in good faith" and was "using the bankruptcy case to address a regulatory enforcement problem."

Late last week and into this week, Wayne LaPierre, now ex-CEO of the NRA (apparently, his resignation is effective today, accoring to the New York Times), took the stand in the New York law suit against the NRA and some of its top executives, including LaPierre.  In an interesting turn, LaPierre is ... sort of... testfying for the NRA.  And sort of... against... the NRA.   It's confusing for sure.  He's an individual defendent and the NRA is also a defendant as an organization.  According to the Times and other outlets, LaPierre admitted to poor management and personal use of NRA assets under the questioning of the NRA's lawyers (not the state's lawyers) in an effort to blame the organization's issues on LaPierre personally and not on the institution.   The organization is taking the position that subsequent changes to its expense reimburement plan and other governance reforms are sufficient to show that it shouldn't be liabile institution

New York can penalize the organization and can also ask for restitution to the organization from the executives that misued its assets.   The resulting blamefest is an interesting watch.    Having watched the rise of the NRA as a political force in the gun rights movement (see Matthew Lacombe's book, Firepower: How the NRA Turned Gun Owners into a Political Force), it is interesting to watch the once formidable organization fall from those heights.   It will be interesting to see what remains when all is said and done.

With popcorn, eww

 

January 31, 2024 in Current Affairs, In the News, State – Judicial | Permalink | Comments (0)

Monday, January 29, 2024

The Nonprofit Leadership Crisis: A Natural Consequence of the "Running Like a Business" Mentality

In Friday's Chronicle of Philanthropy,  an opinion piece by Frances Kunreuther and Sean Thomas -Brietfleld of the Building Movement Project discusses a new study on nonprofit leadership generally and specifically, on barriers to increasing the number of diverse nonprofit executives.  The report follows similar studies done by the organization in 2016 and 2019, so it is able to identify some key trends in nonprofit leadership.   The key findings of the most recent report, entitled "The Push and Pull: Declining Interest in Nonprofit Leadership, " is that, despite increases in mentorship, coaching, and other types of support,  there is

a decreased interest in top leadership roles and a simultaneous increase in respondents who said they were not interested in these roles. The report also shows that, contrary to our hypotheses, respondents who had received more supports were less interested in the executive director role while respondents who faced more challenges in their careers were more likely to pursue top leadership positions. BIPOC respondents more commonly faced these challenges overall, though the trend in aspiration was true for both BIPOC and white survey takers. These trends suggest a “push” into leadership roles to ameliorate the issues nonprofit staff have experienced, rather than a “pull” into these roles on their merit. Finally, to explain why BIPOC staff were particularly less interested in the executive director position, this report looks at the obstacles BIPOC leaders face in their roles.

While there does appear to be a general increase in leadership resources available to aspiring nonprofit leaders, signficant challenges remain - challenges that are exacerbated for people of color.  According to the study, these challenges continue to include low and/or inequitable pay, lack of board of director and senior executive leadership, and signficant increases in job responsibility and expectations leading to high levels of burnout.  The report's summary conclusion highlights these issues:

Nonprofit organizations and the sector have an opportunity to address the declining interest in top leadership positions. This means creating more pulls towards leadership, particularly investing in well-functioning (rather than dysfunctional) internal operations so that leaders have the ability to succeed without constant self-sacrifice. Making executive positions doable and adding more support for leaders could address not only what is pushing, rather than pulling, BIPOC staffers into leading, but also pushing Executive Directors out of their jobs. This is even more important given the types of external challenges leaders will continue to face in the coming years.

As I read the report and its conclusions, I couldn't help but zoom out to see this as a evidence of the error of the "run charity like a business" mentality. Personally, nothing irks me more than that notion, which I will rail against at all turns. In my view, this notion devalues the very real need for high level human capital in the nonprofit space. Nonprofit salaries are "overhead" to be minimized because they not "programmatic" - leading to individual donors scouring for overhead percentages and institutional funders limiting the scope of reimbursable expenses.  We challenge nonprofits to do more with less as funding sources dry up and needs increase, and it seems that the first place we look to criticize is nonprofit salaries.  "Do less with more" is code for squeezing more out of our people - it's no wonder that people walk away saying enough is enough. Even more troubling, this view is calclified into how we regulate grantmaking, fiduciary duties, and compensation, which creates barriers to change.  So long as we continue to view - socially and legally - nonprofit labor as an expense to be minimized rather than a resource to be nutured, this leadership crisis will continue.

Frustratedly, eww

 

 

 

January 29, 2024 in Current Affairs, In the News, Paper Presentations and Seminars | Permalink | Comments (0)

Friday, January 19, 2024

Trifecta Follow-up to Title IX, NIL Collectives, and NRA Trial

This fine Friday, I have follow-up mini posts about all three of the things I blogged about this week: Title IX, NIL collectives, and the NRA trail. So, in reverse chronological order, here they are:

Yesterday, I wrote about the suit against Hillsdale college asserting that it was subject to Title IX regulation on account of its tax-exempt status. My colleague Darryll Jones alerted me to a press release from Senator Marco Rubio on Wednesday announcing proposed legislation to clarify that tax exemption is not “Federal financial assistance” for the purpose of Title IX. Obviously, if the legislation passes, that clarifies the law. But our legislative branch is not designed to easily pass legislation, and (it sure seems like) that the problem is worse these days, so I think it’s likely courts will probably have to make up their own mind what the original statute means.

On Wednesday, I wrote about NIL collectives, and got a very good series of questions from a commenter that I think are worth answering. A reader commented, “How do they determine the amount of the payments to avoid them being classified as excess benefit payments?  Do equal payments have to be paid to all players on the team?  How do you determine if one player's NIL is more valuable than another? I heard that Univ. of Texas is paying $50,000 to new football linemen; can they pay this to certain players and not to others?”

The answer to the first question is easy: “excess benefit” payments (if this is meant in its technical sense to refer to “excess benefit transaction” penalties in the Tax Code) occur between an organization and “disqualified persons” (people who have some level of control over the organization). Players are unlikely to be disqualified persons, so payments between NIL collectives and players will probably never be “excess benefit” payments. That’s why the question for NIL collectives is whether there too much private benefit, not whether there is any “inurement.” Honestly, if I were to try to identify the five most important things to understand about nonprofit law (for the students who take my introductory class, for example) this line between inurement and private benefit is definitely on the list, and so I can’t help point it out, even at the risk of fetishizing the phrase “excess benefit.”

But charities still have an obligation not to make excessively large payments to private persons who are not “disqualified persons,” notwithstanding the fact that “excess benefit” is technically the wrong word for such payments. As a state law matter, this obligation is found somewhere in the duty of care or the duty of obedience, the concept of “waste,” or in statutes that try to clarify this obligation. Some people (including the IRS) think that this duty is also reflected in the Federal-law concept of “excess private benefit.” Jurist Richard Posner famously proposed that idea (in dicta) in his opinion in the United Cancer Council case. This is also plausibly what the IRS means when it says that private benefit can be excessive either quantitatively or qualitatively. As I mentioned on Wednesday, Hail! Impact (the charitable NIL collective that has received IRS approval of tax-exempt status) solves the quantitative problem by only using 30% of its fund expenditures to pay NIL fees to athletes and uses the other 70% for truly charitable expenditures. But that 30/70 solution doesn’t solve the “qualitative” problem.

So, how should a charitable NIL collective make sure that it is not providing an excessive private benefit to athletes qualitatively through the wrong structure of its individual payments? The answer is: hard to know. The theory should be that it’s pretty safe if it pays them “fair market value” for the rights. That’s what American University (my employer, a charity) does when it decides how much to pay me. It tries to figure out what the market would bear, and then (if my economic theory serves me in this case) pays me the lowest it can get away with to keep me from jumping ship and to motivate me to do whatever it is that it wants me to do. So, as to the question of whether the NIL collective must (or can) pay the same amount to all players or must (or can) pay each player based on the value of their individual NIL, the default answer should be that it makes more sense to pay them based on an evaluation of their individual NIL value. But, of course, if the collective thinks that it can get away with paying all players the same amount, and if it thinks that’s good for the team or school, I can’t think of an argument for why that would violate the “private benefit” doctrine (or the directors’ state-law duty of care or obedience). But because the “qualitative” aspect of the private benefit doctrine is so under-developed as a legal matter, I’m not sure there is a clear answer to how it would apply in this case. Now that the IRS Chief Counsel’s office is focused on NIL collectives (as evidenced by the pretty quick and excellent Memorandum), I could imagine them using this opportunity to provide some guidance on their interpretation of the question. But, just like with Congress clarifying the scope of Title IX, I wouldn’t hold my breath. They’ve got a lot of other legitimate priorities, to say the least.

On Tuesday, I wrote about the expert testimony given by Jeffrey Tenenbaum in the NRA case. It was pointed out to me that there is some tension in what I wrote (that I wasn’t really aware of) about the purpose of Mr. Tenenbaum’s testimony: whether it was to establish “customary” practices among nonprofits or “best” practices. As I pointed out in the first paragraph, the court permitted his testimony about “what is regular and customary in the nonprofit sector.” But then in that same paragraph, I said he testified that “best practices” counsel against boards of more than 30 members because large boards make it “impossible [for individual board members] to fulfill their duties.” That’s a confusing quote because “best practices” is a quote of my source, NRA Watch, which said that “Tenenbaum said that best practices typically dictated an ideal non-profit board size of between 12 and 20 people.” But it did not quote him as using the term “best practices.” Instead it quoted him as saying that if a board has more than 30 people, it “becomes impossible [for individual board members] to fulfill your duties.” Anyway, in case it was confusing at all, I changed my own sentence in my final paragraph to clarify that I think it is valuable for juries to be educated about customary practices in the nonprofit sector, and that I’m glad Mr. Tenenbaum did that in this case. Although, obviously, it is still true that the jury will have to apply the legal standard, not whether NRA practices are “customary” or not.

Benjamin Leff

January 19, 2024 in Current Affairs, Federal – Judicial, Federal – Legislative, In the News | Permalink | Comments (0)

Thursday, January 18, 2024

Hillsdale College, Title IX, and the Charitable Contribution “Subsidy”

A recent Wall Street Journal opinion piece notified readers to a pending case against Hillsdale College by students who allege they were raped by classmates. The legal issue is whether Title IX -- the federal law that prevents sex discrimination in education -- applies to tax-exempt schools that do not receive federal funds. That’s the question that interest me. But I’m having trouble focusing on that issue because the WSJ piece is so weirdly inflammatory in its rhetoric that it is distracting. As tax professor Ted Seto pointed out in an email to the Taxprof Listserve, the claim (in the headline and first sentence of the piece) that the lawsuit is an “assault” on the college is absurdly hyperbolic.  Given that the plaintiffs are college students who allege they were raped by classmates at Hillsdale, the fact that the WSJ calls their lawsuit an “assault” on the college, despite the fact that they are trying to hold the school accountable for allegedly failing to meet minimum standards to protect them from harm, is to say the least distracting.  But, as they say, the WSJ Opinion Page will be the WSJ Opinion Page.

As for the substance of the legal issue, it’s actually quite important for nonprofit law generally, as well as being critical to the application of Title IX. Title IX is the federal law that governs sex discrimination in education. Congress wrote the law to apply to any “education program or activity receiving Federal financial assistance.” It does not apply to those that don’t. It is settled law that the “assistance” doesn’t have to go directly to the school, but that it is enough for the students who attend the school to receive them. What arguably is not settled is whether the fact that the school is exempt under section 501(c)(3) is sufficient by itself to constitute “Federal financial assistance.” On the one hand, there is a 2001 case out of the Northern District of Illinois called Johnny’s Icehouse, Inc., in which the court rejected the argument that the Amateur Hockey Association was subject to Title IX because of its tax exemption. It reasoned that Federal regulations define “Federal financial assistance” with a list of five enumerated types of assistance, none of which are the tax exemption provided in Section 501(c)(3) (to say nothing of the even juicier charitable tax deduction provided in Section 170). 34 C.F.R. 106.2(g). Since the regulations don’t define tax exemption to constitute Federal financial assistance for the purposes of law, the court held that it doesn’t.

On the other hand, there is a 2022 case out of the District of Maryland (currently on appeal to the Fourth Circuit) that holds the opposite. In that case, the court rejected a summary judgment motion by the defendant, who argued that Title IX didn’t apply to them because they receive no Federal financial assistance. The plaintiffs argued that tax exemption under section 501(c)(3) was sufficient financial assistance to subject the defendant school to Title IX, and the court agreed. It relied primarily on (very brief!) discussions of those two towering cases of the nonprofit law curriculum from 1983: Regan v. Taxation with Representation, 461 U.S. 540 (1983) and Bob Jones University v. United States, 461 U.S. 574 (1983). The court’s reasoning went something like this: (i) Taxation With Representation holds that tax exemption is a “subsidy;” (ii) in so holding, the Court said, “[a] tax exemption has much the same effect as a cash grant to the organization …;” (iii) Q.E.D., the fact that the Title IX regulations don’t specify that tax exemption is a form of financial assistance is not important because, “The Supreme Court has [recognized that tax exemption is] the equivalent of a cash subsidy.”

The problem with this reasoning is that it potentially opens up a can of worms in other areas of nonprofit law. At the heart of the theoretical foundation of all nonprofit law is the observation that tax exemption and the deduction for charitable contributions both acts as a subsidy and is different from other kinds of subsidies. It’s a subsidy that can be applied in a way that tries really hard to preserve the autonomy of the recipient from government control. That’s why it is a form of subsidy well designed for religious organizations, to take just one teensy example. Our Constitution prevents the government from establishing religion, which makes certain kinds of subsidies for religious organizations problematic. Because it is so broad and inclusive, the charitable tax exemption and contribution deduction serve the purpose of governmental support for religious organizations better in many instances than other types of more direct “financial assistance.” That’s true not just for religious organizations but in more instances than I could possibly list here.

With respect to actual question at hand – does Title IX apply to institutions that forego federal funds for themselves or their students – it seems to me that before deciding that based on the broad language of the Supreme Court about the equivalency of tax exemption and cash grants, I would want to know what Congress and/or the Department of Education think about the matter. By my reading, Congress’s choice of the phrase “Federal financial assistance” does not unambiguously include the concept of tax exemption. Therefore, the agency’s interpretation in regulations may be due some degree of deference (I know I know, everything I think I know about administrative law is either already wrong or will be by this time next year). In that case, I think a close reading of 34 C.F.R. 106.2(g) is warranted in this case. The operative question I think is whether Congress intended to apply Title IX to all schools that are tax-exempt? Or whether they intended Title IX to only apply to schools that accept some other kind of Federal financial assistance?

So, what is there to say about the pending lawsuit against Hillsdale College? First, the court will have to decide (without Sixth Circuit precedent) whether tax exemption alone constitutes “Federal financial assistance” sufficient to trigger the application of Title IX. In doing so, it has the reasoning of two sister district courts to aid its own analysis, one that applied a relatively narrow textual analysis of the Title IX regulations, one that reasoned in a broader way from principles announced in a 40 year old (but still great!) Supreme Court case. Obviously, I prefer the narrower analysis, although that doesn’t mean I necessarily know what that narrow analysis will produce in the suit against Hillsdale College. But also, while it is probably hyperbole to say (as Hillsdale’s president reportedly said) that a ruling for the plaintiffs on this issue would “sweep into the government’s net hundreds of thousands of American institutions that have sought to stay out of it,” it is also probably not completely untrue. Too many double negatives? Let me try again: I think that a ruling that relies on reasoning that tax exemption is the same as a cash subsidy in all cases is bad for nonprofit law. 

Benjamin Leff

January 18, 2024 in Church and State, Federal – Judicial, In the News | Permalink | Comments (0)

Wednesday, January 17, 2024

More Thoughts on NIL Collectives

Sometimes I like to share my own perspective on issues previously covered well by my colleague bloggers. In this case, I’m following up two posts (this one and this one) by my colleague Darryll Jones on IRS guidance issued last May about the possibility of tax-exempt status for so-called NIL collectives.  I also like to take the opportunity to recommend podcasts when they are informative, and in this case there are excellent episodes of The Daily and Taxes for the Masses (discussion of tax-exemption begins at minute 12:50).

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

In my view, the weakest part of the Memorandum is that it doesn’t really explain why NIL payments to student athletes do not potentially serve the charitable purpose of advancing education or amateur sports competitions, even though athletic scholarships presumably would. Instead of distinguishing between merit-based athletic scholarships (that presumably do not create an impermissible private benefit) and NIL payments (that do), it discusses need-based scholarships, which would clearly be permissible because mitigating poverty is a well-established charitable purpose. The comparison between need-based scholarships and NIL payments is kind of a red herring, since it’s so obvious how those two kinds of payments are different from each other. But I know of no authority to support the idea that scholarships based on athletic ability rather than need fail to advance a charitable purpose because they are not need-based. Obviously, NIL payments and athletic scholarships are different from each other, and so this weakness of the Memorandum does not mean that it is wrong. It just fails to explain what is materially different between NIL payments and athletic scholarships when evaluating private benefit to student athletes.

But the fact that NIL payments do not themselves constitute a charitable purpose does not mean that NIL Collectives that pay them necessarily fail to qualify for tax-exempt status. Once a noncharitable purpose (NIL payments) is identified, the collective must determine if its noncharitable activities constitute a private benefit to the student athletes that is too substantial, either quantitatively or qualitatively. Professor Jones’s January 10 post cites a Chronicle of Philanthropy article that describes a new charitable NIL collective (“Hail! Impact”) that purports to qualify for tax-exempt status even though it makes NIL payments to student athletes. The organization’s theory is that so long as 70% of its funds are used for a proper charitable purpose, the 30% of its funds that are used for NIL fees do not create a substantial private benefit, either quantitatively or qualitatively. The article also states that the organization, “worked with the IRS and believes it is the first NIL collective to be designated a charity since the agency issued its guidance about donations.” In other words, the IRS appears to have blessed this 70/30 split as the proper way to structure an NIL collective. Given that donating money in general support of athletic programs at a tax-exempt college or university has always been treated as a tax-exempt purpose, NIL Collectives could be formed to transfer 70% of all contributions to the university in support of its athletic programs (and presumably could be spent on merit-based athletic scholarships) and the remaining 30% could be spent on NIL payments to student athletes. It remains to be seen how many NIL collectives will choose this path and how many will simply organize as profit-making ventures for their investors, taking as much profit as they can from exploiting the NIL rights of student athletes.

The podcasts I recommended take the position that charitable NIL collectives are an abuse of the Tax Code. But the fact is that under current law, there is nothing impermissible about an NIL Collective making NIL payments to athletes, as long as that activity is insubstantial in relation to its charitable activities. That’s why charities can engage in lobbying activities, for example, or enter into a joint venture with for-profit partners, or pay relatively high (but reasonable!) fees to fundraising firms, or engage in any number of other activities. As many of the Nonprofit Law Professor Blog posts point out, there are areas in which the law of private benefit probably fails to sufficiently protect the nonprofit sector. I definitely agree that a more coherent framework would be preferable to the one we have. But I’m not sure I am persuaded that I should be outraged by tax-exempt NIL collectives. If donors want to give to universities’ athletic programs and “on the side” provide NIL payments to student athletes, I’m OK with that. I think these NIL payments are less likely to undermine the educational objectives of the schools than those made by ordinary for-profit investors, and I even (perhaps naively) think they might be less exploitative of the athletes. If fans want to donate to make payments to student athletes, don’t we imagine, at least as a starting point, that they are might care more about those student athletes than investors who are simply trying to make a buck off a teenagers’ NIL value? Or do I need to go back and re-read my Milton Freidman?

--Benjamin Leff

January 17, 2024 in Current Affairs, Federal – Executive, In the News, Sports | Permalink | Comments (1)