Nonprofit Law Prof Blog

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

Local Regulation of Nonprofits

First things first: this story is a little frustrating. Apparently a bill has been introduced in Suffolk County, NY, that would attempt to cap nonprofit pay, but Newsday, which reported the bill, doesn't link to it. And, after spending a little time on the Suffolk County legislative website, I gave up all hope of finding it there. So this is all based off of the news story. (For real, journalists: if you write about a bill, a law, a legal filing, or other public legal documents, please please please link to or embed them!)

According to the Newsday story, Suffolk County is skeptical of nonprofits that pay their employees more than the governor of New York earns (which is currently $250,000). Naturally, the county can't actually cap the salaries of nonprofit employees, but the bill's sponsors "find it unfair" for "Suffolk County taxpayers to fund these exorbitant salaries."

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State Legislation: Georgia Governor Vetoes Baby FARA Bill; Hawaii Legislature Passes Crowdfunding Bill

States are often at the forefront of considering new laws that affect nonprofits. Two recent trends are of particular note.

As detailed on the Foreign Agents Registration Act webpage of the International Center on Not-for-Profit Law (ICNL) (under "State FARA Legislation"), over half a-dozen states have introduced bills that would create state "baby FARA" laws mimicking the existing federal law, which could have significant effects on nonprofits if enacted. The bill that had made the most progress was in Georgia, where the legislature passed it. But earlier this month, the governor vetoed it. As noted in the veto message the will would have "impose[d] additional state-level registration requirements on agents of foreign principals, some of which were unintended by the bill’s sponsor," indicating the bill's sponsor had requested the veto having learned about these unintended consequences.

As reported previously in this space, California enacted the first comprehensive regulation of online donative crowdfunding exemplified by GoFundMe and is now wrestling with developing regulations implementing that legislation. Hawaii may now join it, as the legislature has passed SB2983, described as "Beginning 1/1/2026, authorizes the Department of the Attorney General to regulate charitable fundraising platforms and platform charities. Includes provisions relating to the misuse of funds. Imposes vicarious liability upon a platform charity for a charitable fundraising platform's misuse of funds, and vice versa. Takes effect 1/1/2026." The bill now awaits the governor's signature.

Lloyd Mayer 

 

 

 

Massachusetts Legislation Would Tax University Endowments

Bloomberg 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

States & Hospitals: Minnesota Law Enhances Charity Care Requirements

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

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

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

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

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

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

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

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

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

Lloyd Mayer

NASCO's Latest Report on State Enforcement & Regulation

The National Association of State Charity Officials (NASCO) has issued its latest Annual Report on State Enforcement and Regulation covering September 2022 thru September 2023. The report does not attempt to provide comprehensive coverage of state activity with respect to charities during this period. Instead, it "is designed to provide and highlight a sample of activities for the covered period, not to encompass all matters addressed by state charity regulators." Here is the Table of Contents:

Introduction

1. Enforcement cases in key areas:

a. Deceptive Solicitations

b. Governance

c. Trusts and Estates

d. Other

2. Outreach efforts and published guidance

3. Transaction reviews

4. Regulations and legislation

The report provides numerous scenarios of alleged and proven wrongdoing relating to charities, some of which will be familiar to readers as they have been mentioned in this space. It also provides a useful, albeit anecdotal, snapshot of the many tasks of state charity officials. Those roles include pursuing misappropriation of charitable assets, enforcing registration and reporting requirements, helping parties resolve contentious governance disputes, and educating both the public and charity leaders about relevant laws and legal responsibilities.

Lloyd Mayer

Nevada, Nonprofits, and Conflicts of Interest

This morning I learned a lot more than I knew before about the Nevada legislature. For instance, the legislature only meets every two years, and legislators are only paid for up to 60 days of the 120-day legislative session, which means that, unless they're independently wealthy, they have to work another job to support themselves.

And what does this have to do with nonprofits? Well, the Nevada Independent is reporting a nonprofit-related political scandal (or maybe "scandal") stemming, in part, from the part-time nature of the legislature. 

See, Nevada also has what strikes me as a weird budgeting procedure. In essence, the governor proposes a 2-year budget based on previous revenues. If revenue comes in higher, the legislature can pass a "Christmas Tree bill," negotiated behind closed doors and exempt from state open meetings and public information laws.

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Nonprofit Health Care Update: Bankruptcies, a Failed Merger, and Continuing Consolidation

It is difficult to keep up with the constant flow of news relating to nonprofit health care providers. The past two weeks alone saw these stories:

• The Wall Steet Journal reported (subscription required) that "California Nonprofit Hospitals Turn to Bankruptcy for Leverage Against State." According to the article, nonprofit hospitals in California are using bankruptcy filings to push the state's Attorney General's Office to consider permitting sales or mergers that otherwise might not make it through the state's review system for such transactions.

• In South Dakota, a second attempt to merge nonprofit rural health system Sanford Health with the Minnesota-based M Health Fairview (associated with the University of Minnesota) failed according to a report by Dakota News Now titled "What’s next for Sanford, Fairview after merger falls apart?" According to the story, at least one of the obstacles was Minnesota legislation requiring additional due diligence by state officials before any merger. Additional coverage: Fierce Healthcare; MPR News.

• A N.Y. Times opinion piece by a former physician who now works for KFF Health News titled "Your Exorbitant Medical Bill, Brought to You by the Latest Hospital Merger" (subscription required) details both the extent and perhaps the inevitability of health care consolidation. It notes that 75 percent of health care markets are now considered highly consolidated. The FTC has recently become more active in blocking mergers, stopping seven in the past two years, but this has occurred while 53 mergers and acquisitions went forward in 2022. And state legislatures can help protect healthcare systems from antitrust scrutiny by passing so-called Certificate of Public Advantage laws.

Lloyd Mayer

Kansas Passed a Law to Strengthen Enforcement of Donor Intent

This weekend, Kansas’s newly enacted donor-intent protection law will take effect (credit to Paul Streckfus at EO Tax Journal). The Philanthropy Roundtable recently published a policy primer arguing that donors have insufficient recourse under existing law when a charity violates their intent. Anyone who has taught (or taken) a nonprofit law class knows that the struggle between charities and their donors (or more often, the heirs of donors) is at the very heart of charity law. The oldest charitable trust cases are records of heirs and trustees fighting over the use of charitable funds. I’ve found that (like so many things) our intuitions about who should prevail in these battles often depend on whose use aligns best with our own philanthropic instincts and values. But many of the examples described in the Charity Roundtable primer are about simple frustration over the institution’s inability or unwillingness to use the funds effectively for the donor’s intended purpose.

In my nonprofit law class, the most important takeaway is that donor intent is best protected by well-drafted written restricted-gift agreements. In my view, existing law provides a perfectly adequate framework for enforcing well-drafted agreements, but I don’t pretend to understand the issue better than the Philanthropy Roundtable or the Kansas legislature. The Kansas law provides an explicit statutory mechanism for donors to bring a legal action to enforce the terms of their restricted gifts, but it is quite limited in its application.  First, it only applies to gifts to an endowment fund that are accompanied by written endowment agreements containing specific donor restrictions. Second, it only authorizes actions within the first forty years after the date of the agreement (so no prolonged “dead hand” control). Third, it does not permit the award of any damages to the donor or return of any donated funds to the donor. In two of the examples cited in the Philanthropy Roundtable report, the donor was seeking return of their donation. In one of them, the report described how an employee of the institution laughed when the donor requested her funds back. Under the Kansas law, the employee would feel even more certain in their laughter, given that the legislature just clarified that a return of funds is not permitted as a remedy for ignoring donor restrictions. In my view, the law should permit a wide range of possibilities with respect to donor control, since that’s the best way to encourage donations while still allowing existing institutions to use their funds effectively and well. I think existing law generally does that, but it does require a well drafted restricted gift agreement if the donor wants continuing control. In my view, the Kansas law does a pretty good job of providing a statutory mechanism for enforcing donor intent without tipping the scales too far in one direction or the other.

Benjamin Leff

Colorado Enacts Hospital Community Benefit Transparency and Accountability Law

Earlier this month Colorado enacted HB23-1243 relating to hospital community benefit. According to the a press release from the Colorado Department of Health Care Policy & Financing, the bill, which takes effect in August 2023, does the following:

1. It requires hospitals to provide more specific and detailed spending information, so policymakers and communities across the state can tell what activities and initiatives are being funded, and how those initiatives compare with what the community asked for. 
2. The bill requires the hospital to solicit, consider, and provide the community the opportunity for feedback in creating their community benefit spending plan and any changes to spending priorities, improving on the current annual public engagement process.  
3. The bill expands requirements for HCPF to undertake stakeholder work to develop community engagement best practices and efficiencies.
4. The bill includes the calculation of the value of the nonprofit hospitals’ tax exemption. Colorado’s communities need sound estimates of the value of the tax exemption to understand the value of hospitals’ community benefit spending in lieu of paying taxes.
5. The bill adds reasonable non-compliance measures.

Coverage: Denver Post (subscription required); Greeley Tribune.

Lloyd Mayer

Montana Senate Passes Bill to Tax Nonprofits That Sue the State Under Environmental Laws

The Daily Montanan reports that the Montana legislature is seriously considering Senate Bill 524, which would impose the Montana business tax of 6.75% on spending by nonprofits incurred to sue the state under specific natural resources and environmental laws by treating those expenditures as unrelated business taxable income. (Yes, an expenditure would be treated as income.) Since the news report, the Senate passed a third reading of the bill (31 to 19) and transmitted the bill to the House for consideration, where it has been referred to the Committee on Taxation with a hearing scheduled for April 13th.

The sponsor of the bill accuses the targeted nonprofits, which are apparently tax-exempt section 501(c)(3) organizations, as "disrupting our lifestyles and economy." He also said "[i]f the IRS would be doing its job like it should be doing, we have a number of nonprofits and 501(c)(3)s that are operating outside of their scope and mission." 

During a Senate committee hearing, almost a dozen opponents spoke in opposition to the bill, citing constitutional and policy concerns. The opponents included the executive director of the Montana Nonprofit Association (MNA), who is also the board chairwoman of the National Council of Nonprofits. Here is the brief summary of the bill on MNA's website:

SB524 – Revise UBIT to Include Legal Fees

This bill proposes to charge tax on any income certain nonprofits use to “challenge or support certain government actions” under the presumption that this would be unrelated to the mission of the organization and therefore subject to Unrelated Business Income Tax. The bill is somewhat narrow in scope (see p. 2 lines 2-5) but it’s important to read and understand the impact on litigation, lobbying, or simply meeting with a legislator or member of administration. The hearing date is not set. MNA will oppose.

Lloyd Mayer

New Nonprofit News Outlets: Chronicle of Philanthropy, The Intercept, Magnolia Tribune

The shift toward nonprofits in journalism continues, with three prominent announcements:

• Last month the Chronicle of Philanthropy announced that its plan to become an independent nonprofit organization this spring is moving forward, with over $6 million in commitments already received from major foundations.

• In January The Intercept announced it would restructure as a standalone nonprofit organization, spinning off from the First Look Institute. As part of the restructuring, the Institute has committed to provide a significant (but not quantified) multiyear gift.

• And in December, Mississippi Today reported that a prominent Mississippi conservative group leader is launching a new nonprofit news organization in 2023 called Magnolia Tribune (which now appears to be up and running). It has apparently absorbed the assets and work of a conversative blog, Y'all Politics.

In related news, a Texas legislator appears to have missed that nonprofit news outlets can be conservative as well as liberal. The San Antonio Express-News reports he has proposed a bill "that would ban colleges and universities in the state from supporting nonprofit news organizations." The story makes it clear his motivation is to cut off a revenue source for what he views as "mouthpieces for far-left liberal institutions." There is no indication to date that the bill has significant support in the Texas legislature.

Lloyd Mayer

NYTimes looks at Hasidic Jewish Schools in New York City

The New York Times provided an interesting, though critical, look into Yeshivas in New York City. The two points that stand out are that the children of these schools, particularly the boys, are roundly not able to pass basic competency state tests assessing learning, and that the schools are taking in lots of public dollars to accomplish this result.

The story necessarily raises the issue of what role education plays within the nonprofit sector; what role nonprofits should play in primary and secondary education in a democratic order; what role primary and secondary education ought to provide in a democratic order; and what role religion should play in shaping any of that education. I have a draft paper thinking about charter schools within that order that I will be posting soon, that confronts some of those questions. But, it does not confront the role of religion in that order.

Primary and secondary education play many roles, but the two most significant that resonate in the US conception seem to be preparing individuals to be able to be employed and support themselves and also to support a democratic order. We are not born with the ability to do either of these things and it is in all our interests to ensure the children of the country have the ability to engage in both endeavors. From the description in the article, these schools are likely failing on both counts.

And yet, the notion of freedom of religion for parents to train children to uphold the values they uphold remains strong in our nation. This comes into stark contrast though with maintaining a just political order. I think there is a lot for the nonprofit world to reflect upon in this article. Worth some thought.

From the story: "The leaders of New York’s Hasidic community have built scores of private schools to educate children in Jewish law, prayer and tradition — and to wall them off from the secular world. Offering little English and math, and virtually no science or history, they drill students relentlessly, sometimes brutally, during hours of religious lessons conducted in Yiddish.

The result, a New York Times investigation has found, is that generations of children have been systematically denied a basic education, trapping many of them in a cycle of joblessness and dependency.

Segregated by gender, the Hasidic system fails most starkly in its more than 100 schools for boys. Spread across Brooklyn and the lower Hudson Valley, the schools turn out thousands of students each year who are unprepared to navigate the outside world, helping to push poverty rates in Hasidic neighborhoods to some of the highest in New York.

The schools appear to be operating in violation of state laws that guarantee children an adequate education. Even so, The Times found, the Hasidic boys’ schools have found ways of tapping into enormous sums of government money, collecting more than $1 billion in the past four years alone."

There are many highly critical responses of this article from the Orthodox community. Here is one.

Philip Hackney

Miami Herald Story on FPL Supporting Spoiler Democratic Candidate Through Dark Money

The Miami Herald has an interesting look at how Florida Power and Light used different means to support candidates in a Florida state senate race, including PACS and social welfare organizations. 

From the story:

"A strong Democratic challenger was threatening to unseat a friendly Republican incumbent in a Gainesville-area state Senate race in 2018. FPL, one of the country’s largest utilities, needed to make sure the GOP held onto the seat.

So FPL used a shadowy nonprofit group to secretly bankroll a spoiler candidate, a longtime Democrat named Charles Goston, according to new documents obtained by the Miami Herald. Running as a no-party candidate in the general election, Goston helped split the liberal vote, siphoning off enough votes from the Democratic challenger to swing the race to the GOP incumbent.

The documents show that FPL sent $200,000 to the nonprofit, a Washington D.C.-based group called Broken Promises, in the fall of 2018. Within five weeks, Broken Promises had donated $20,000 to Goston’s political committee and spent roughly $115,000 on mailers and advertising supporting him. Best of all for FPL: Because of its nonprofit status, Broken Promises didn’t have to disclose its donors — meaning the cash was untraceable. No one would know that FPL had paid to secretly manipulate a state election in favor of Republicans. Voters were in the dark about who funded Goston and why."

Read more at: https://www.miamiherald.com/news/politics-government/state-politics/article264196761.html#storylink=cpy 

Philip Hackney

Nonprofits and Dobbs v. Jackson Women's Health Organization

    Today, the Supreme Court overturned Roe v. Wade in Dobbs v. Jackson Women's Health Organization, a historic decision holding there is no longer a federal constitutional right to an abortion.  While the nation reacts in various ways to the decision, it is undeniable that nonprofits played a major role.  Since there are restrictions on the political activity of 501(c)(3) organizations, 501(c)(4) organizations also known as “social welfare organizations” featured heavily.  For a brief summary of advocacy groups and respective restrictions, including 501(c)(3) organizations, 501(c)(4) organizations, and political action committees,  see the website of the non-partisan 501(c)(3) Open Secrets.  

    The anti-abortion group Susan B. Anthony List was created in the 1990s after the formation of Emily’s List, a political action committee (PAC) designed to support abortion rights candidates.  Susan B. Anthony List’s 501(c)(4) is permitted to engage in some lobbying and political activity as long as they do not eclipse its primary purpose.  Susan B. Anthony List’s 501(c)(3) called the Susan B. Anthony Education Fund is subject to lobbying restrictions but can disseminate the group’s anti-abortion message. Here is further reading about Susan B. Anthony's List and today’s decision. 

Propublica Piece Examines Nonprofits Pushing Anti-CRT Movement

Propublica has a great but tough story that provides insight into the nonprofits engaged in the Anti-Critical Race Theory movement across the country, including the terrifying impact it has on the lives of many people. It's a reminder of how central a role nonprofits play in our collective American life in the political battles in which we engage and that they can have both great positive effect, but also very dark impact at the same time. 

It's a sprawling story and hard to summarize but the lead does about the best job of describing its focus: "Cecelia Lewis was asked to apply for a Georgia school district’s first-ever administrator job devoted to diversity, equity and inclusion. A group of parents — coached by local and national anti-CRT groups — had other plans."

More from the story: "Lewis, a middle school principal, initially applied for a position that would bring her closer to the classroom as a coach for teachers. But district leaders were so impressed by her interview that they encouraged her to apply instead for a new opening they’d created: their first administrator focused on diversity, equity and inclusion initiatives.

DEI-focused positions were becoming more common in districts across the country, following the 2020 protests over the killings of George Floyd, Breonna Taylor and Ahmaud Arbery. The purpose of such jobs typically is to provide a more direct path for addressing disparities stemming from race, economics, disabilities and other factors."

Examples of the role of nonprofits: "dozens of parents from across the county had assembled on a Sunday afternoon for a lesson in an emerging form of warfare. School board meetings would be their battlefield. Their enemy was CRT.

One of several presenters at the meeting was Rhonda Thomas, a frequent guest on conservative podcasts and the founder of the Atlanta-based Truth in Education, a national nonprofit that aims to educate parents and teachers about “radical ideologies being taught in schools.” “So what is critical race theory?” Thomas asked the crowd. “It teaches kids that whites are inherently racist and oppressive, perhaps unconsciously,” and that “all whites are responsible for all historical actions” and “should feel guilty.”

She added: “I cannot be asked for repentance for something my grandparents did or my ancestors did, right?”

Thomas stressed that parents should form their own nonprofit groups and cut ties with their schools’ Parent Teacher Associations. “The PTA supports everything we’re against,” she told them.

Another presenter, a local paralegal named Noelle Kahaian, leads the nonprofit Protect Student Health Georgia, which aims to “educate on harmful indoctrination” including “comprehensive sexuality education” and “gender ideology.”

Kahaian emphasized how to grab attention during upcoming school board meetings. Identify the best speakers in the group, she told them, adding: “It’s OK to be emotional.” Be sure to capture video of them addressing the board — or even consider hiring a professional videographer.

“It’s good in case Tucker Carlson wants to put you on air,” Kahaian said. “It really helps.”

The story gives great depth of understanding of the impact of this collection of nonprofits that work together to organize to push these narratives. It's well worth a read for those interested in the power of nonprofits and how they are being used today.

Philip Hackney

New Edition of the Model Nonprofit Corporation Act Now Available

The American Bar Association has published the Model Nonprofit Corporation Act, 4th Edition. Only time will tell if it is more successful than the 3d Edition, that was only adopted by one jurisdiction (the District of Columbia). Here is a description:

The 4th Edition of Model Nonprofit Corporation Act is a model statute governing nonprofit corporations designed for adoption by state legislatures. The 4th Edition of the MNCA was adopted in 2021 and is a substantial revision of the Act while preserving important aspects of the 3d Edition. The Act follows the Model Business Corporation Act provisions to the extent possible while highlighting and respecting the characteristics that distinguish nonprofit from profit corporations.

The original Model Nonprofit Corporation Act was approved by the ABA Business Law Section Corporate Laws Committee in 1952 and has evolved with revisions and updates by the Nonprofit Organizations Committee. The MNCA is a model set of statutes governing nonprofit corporations proposed for adoption by state legislatures. This updated Fourth Edition contains many changes that follow the updated provisions and revised official comments in the 2016 revision of the Model Business Corporation Act, along with a variety of other changes. New provisions in the Fourth Edition include the ability to renounce in advance corporation opportunities, procedures to ratify defective corporate actions and records, and the validity of forum selection bylaws. While it includes important new provisions, the Fourth Edition also stands in direct continuity with prior versions and continues the substantive approach of the Third Edition.

A general nonprofit corporation statute must be designed to provide rules for all types of nonprofit corporations from large hospital systems to small human services nonprofits to country clubs and to the other thousands of nonprofit corporations that exist in each state. Besides following the MBCA as much as possible, the MNCA provides as much flexibility as possible to nonprofit corporations as to how they are structured and governed. The Fourth Edition continues to provide great flexibility for nonprofit corporations to organize and operate in what they believe to be the most efficient and effective manner.

Lloyd Mayer

Hackney: Testimony on Donor Disclosure and Campaign Finance Regulations

Philip Hackney (Pittsburgh) has posted his written testimony before a committee of the Pennsylvania House of Representatives on donor disclosure and campaign finance regulations. Here is the abstract:

The following is written testimony provided to the Pennsylvania House State Government Committee for a hearing entitled Donor Disclosure and Campaign Finance Regulations: Reviewing Recent Legal Precedents held on February 7, 2022. In 2021, the U.S. Supreme Court in Americans for Prosperity Foundation v. Bonta struck down as facially unconstitutional under the First Amendment a law in California requiring charities soliciting donations in the state of California to disclose substantial donors identified on Schedule B to the IRS Form 990. The Form 990 is the information tax return nonprofits must file annually to maintain their tax-exempt status. Schedule B collects from charities information about substantial donors. California argued it had a compelling interest in collecting the information in order to police fraud on charities. The Court, however, found that the law chilled the free association rights of donors without narrowly tailoring the law to the state of California’s governmental interest. Notably, this was neither a tax case, nor a campaign finance case. Nevertheless, the reasoning of the Court may impact the constitutionality of disclosure laws associated with both domains of law. I will first describe the reasoning of Americans for Prosperity Foundation, briefly discuss prior Court precedents on disclosure in the campaign finance regime, then describe the tax law obligations of the nonprofit organizations that tend to populate and dominate the space of the political in our country.

Lloyd Mayer

California Enacts First State Charitable Crowdfunding Laws

California has enacted what I believe is the first U.S. law specifically relating to crowdfunding for the benefit of charities. The legislation is A.B. 488, which the Governor signed on October 7, 2021 and that will be effective on January 1, 2023. I have been tracking developments in this area for an article that is currently in the editing process at the Indiana Law Journal.

Here is a summary of its key provisions from the Legislative Counsel's Digest:

This bill, beginning January 1, 2023, would establish that charitable fundraising platforms and platform charities are trustees for charitable purposes subject to the Attorney General’s supervision. The bill would define “charitable fundraising platform” to mean certain legal entities that use the internet to provide a website, service, or other platform to persons in this state, and perform, permit, or otherwise enable certain acts of solicitation to occur. A “platform charity” would be defined to mean a trustee or charitable corporation as defined under the act that facilitates described acts of solicitation on a charitable fundraising platform.

 

The bill would require a charitable fundraising platform, before soliciting, permitting, or otherwise enabling solicitations, to register with the Attorney General’s Registry of Charitable Trusts, under oath, on a form provided by the Attorney General. The bill would require persons or entities that meet the definition of a charitable fundraising platform and platform charity to register as a charitable fundraising platform. The bill would require annual renewal of registration. The bill would require the Attorney General to impose registration and renewal fees and deposit revenues in the Registry of Charitable Trusts Fund, for use as specified.

 

The bill would require a charitable fundraising platform to file annual reports, under oath, with the registry on a form provided by the Attorney General. The bill would restrict a charitable fundraising platform or platform charity to soliciting, permitting, or otherwise enabling solicitations, or receiving, controlling, or distributing funds from donations for recipient or other charitable organizations in good standing, as defined. The bill would require a charitable fundraising platform or platform charity that performs, permits, or otherwise enables specific acts of solicitation, before a person can complete a donation or select or change a recipient charitable organization, to provide prescribed conspicuous disclosures that prevent a likelihood of deception, confusion, or misunderstanding.

 

The bill would require a charitable fundraising platform or platform charity that solicits, permits, or otherwise enables solicitations to obtain the written consent of a recipient charitable organization before using its name in a solicitation, as prescribed. Written consent would not be required for certain acts of solicitation if specific requirements are met. The bill would require a charitable fundraising platform or platform charity, after donors contribute donations based on certain solicitations, to promptly provide a tax donation receipt in accordance with specified provisions. The bill would prohibit a charitable fundraising platform or platform charity from diverting or otherwise misusing the donations received through solicitation on the charitable fundraising platform, and require the entity to hold them in a separate account and to ensure donations and grants of recommended donations are sent promptly to recipient charitable organizations with an accounting of any fees imposed for processing the funds and in accordance with rules and regulations.

Law Firm Summaries: For Purpose Law Group; Perlman & Perlman; Greenberg Traurig (addressing effects on cause-related marketing).

Lloyd Mayer

School Choice Programs & Subsidizing Segregation

Last month, Forbes published an article entitled The Racist History of “School Choice.”  The article underscores yet another way that racially discriminatory private schools are subsidized.  Raymond Pierce points out that for equitable education to exist, public schools need true reform, such as more funding for faculty development and other support systems necessary for nurturing high-quality learning environments.  Given the need for greater investment into public schools, the last thing that should be done is to take money from public schools that are struggling and give it to largely segregated private schools, but that is what is happening under a common practice referred to as “school choice.”  Not surprisingly, “school choice” has its underpinnings in a racist history.  Pierce states, “We are less than six months into 2021, and to date, ‘school choice’ legislation has been introduced in at least 20 states, half of which are in the South.”  Generally, the legislation involves tax credits, school vouchers, or “education savings accounts.”  A common thread is that these bills take money from “underfunded, under-resourced public schools” and give it to private schools.  While some proponents maintain that the bills will provide better education opportunities for Black and Brown students and those from low-income families, the reality is they do not according to Pierce.

              The article traces the roots of “school choice” legislation to a history of racism and school segregation that is important to understand.  Interestingly, public education in the South emerged during Reconstruction.  When the Fourteenth Amendment was passed, education in the South was mostly privatized and available only to white children from wealthy families.  Black children and poor white children typically were not educated at all.  The Southern Education Foundation (SEF), which was featured in the June 21, 2021 post, was one of the first proponents of public education.  The Peabody Fund (which preceded SEF), provided funding as well as drafted and promoted legislation calling for funding of public education through taxes.  Former slaves strongly supported public education initiatives because they viewed education as essential to true freedom and had a strong desire to have their children educated.  As a result of public schools, literacy among both Black and white students increased tremendously.  Additionally, starting in 1913, the Anna T. Jeanes Fund (another precursor of SEF), supported “Jeanes Teachers” who traveled across the South to strengthen curriculum and instruction in rural schools that Black students attended.  They taught students and community members how to excel independently and economically and how to overcome the challenges of the Jim Crow South.  From 1910 through 1940, public education in the South grew dramatically. 

However, in the 1940’s, Southern white students began leaving public schools to attend private schools to avoid integration after it was clear that the “separate but equal doctrine” from the 1896 Plessy v. Ferguson Supreme Court ruling would be dismantled.  After the Supreme Court’s landmark decision in Brown v. Board of Education in 1954, segregation was no longer constitutional, and school vouchers became a means for subverting integration.  During the 1950’s, Southern politicians passed legislation establishing tuition voucher or grant programs that were used to annihilate completely the public school systems, instead of desegregate.  Pierce goes on to provide an illustrative example from Prince Edward County, Virginia where public schools were closed for five years until the Supreme Court intervened. Ultimately, the Supreme Court ruled in Griffin v. School Board of Prince Edward County that the county’s transferring of public funds to private white schools, instead of supporting public schools, was a violation of the equal protection clause of the Constitution.  The Court stated that private school tuition assistance covered up as “school choice” was a tool to “systematically exclude Black children from the educational process.” 

Despite the prohibition against this approach, Southern legislatures used it as a “blueprint” in an attempt to circumvent integration.  From 1954 to 1964, Southern legislatures passed at least 450 laws and resolutions to prevent public school desegregation, many of which permitted the transfer of public funds to private schools.  From 1958 to 1980, private school enrollment in the South increased by over half-a-million students.   Indeed, hundreds of private segregated schools were established.  At the same time, schemes to fund private schools at the expense of public schools, by using vouchers or tax credits to cover large portions of student tuition and operating costs, also increased.  By the 1980’s, the 11 states that made up the former Confederacy had enrolled 675,000 - 750,000 white students.  Of these students, 65 to 75% attended schools where 90% or more of the student body was white.

Today, school vouchers still are used to support segregated private schools and to continue de facto segregation.  The numbers speak for themselves.  In the United States, public schools have a student body that is comprised of 51 % white children and 48.3% children of color (mainly Black and Latino).  In stark contrast, almost three out of every four private school students are white.  As Pierce notes, this is part of a historical pattern.

The question becomes whether tax funding and subsidizing of a directed, intentional system of inequality, namely segregation, should be tolerated.  As I recounted in the June 22, 2021 post, private schools are required to publicize their policies disavowing racially discriminatory practices.  However, the numbers show that there are unspoken policies and practices that are being used to perpetuate both segregation and unfair treatment.  One solution is to develop a better way of reporting racially discriminatory treatment so that private schools engaging in such practices would lose their tax-exempt status.  Another solution is to re-examine the concept of “school choice” programs and school vouchers in their proper historical context and to require some form of accountability for the low numbers of minority enrollment in the private schools benefiting from these programs.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School