Nonprofit Law Prof Blog

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

HBCU's of Maryland may win big with upcoming legislation

    This year may well prove to be one of exciting developments for historically black colleges in Maryland: a pair of bills currently undergoing the legislative process in the state stand to bring nearly six hundred million dollars to Morgan State University, Coppin State University, Bowie State University and the University of Maryland Eastern Shore (all of which are public universities). These funds are being pursued as settlement in a lawsuit dating back to 2006: this action alleges decades of discriminatory funding allocation by the state’s funding entities in favor of Maryland’s predominantly white educational institutions. Despite more than a decade of litigation and a veto by the state’s governor last year in the midst of the pandemic, it appears that supporters for the bill’s passage have amassed sufficiently overwhelming bipartisan support to assure the bill’s passage. Quite possibly the problems identified by this lawsuit are not unique to Maryland’s educational structure: perhaps the next decade will see similar actions in other states across the country.

For more information on the lawsuit and the legislative battle for the passage of this bill, see the attached Baltimore Sun article by Bryn Stole: https://www.baltimoresun.com/politics/bs-md-pol-hbcu-lawsuit-20210119-hkwjten5pzdybcem7pj5r5ppji-story.html

For information regarding Michael Jones, one of the Maryland lawyers spearheading the lawsuit on behalf of the plaintiffs, see yesterday’s Law360 article by Sameer Rao: https://www.law360.com/articles/1360192/a-kirkland-partner-s-journey-to-a-historic-hbcu-settlement

By David Brennen, Professor of Law at the University of Kentucky

Negative Scrutiny of Nonprofit Hospitals Continues, Along With Consolidations

Nonprofit hospitals are, along with all hospitals, struggling with the COVID-19 pandemic. But that role has not caused a let up in negative scrutiny of their activities by journalists, Senator Chuck Grassley, or state legislators. It also has not halted the continuing consolidation of health care entities.

For example, ProPublica reports that "Nonprofit Hospital Almost Never Gave Discounts to Poor Patients During Collections, Documents Show," describing the practices of Methodist Le Bonheur Healthcare, Memphis' largest health care system. And the N.Y. Times reports that "The largest hospital system in New York sued 2,500 patients for unpaid medical bills after the pandemic hit," describing the activities of state-run Northwell Health system, which consists primarily of 501(c)(3) tax-exempt nonprofits. 

Responding to these and other concerns, Senate Finance Committee Chairman Chuck Grassley wrote a public letter to every member of the Senate Finance and Judiciary Committees about the need for new attention to the tax laws governing nonprofit hospitals. Senator Grassley is rotating off of the Finance Committee, having hit his term limit for that committee under Senate GOP rules, and of course his influence would have been reduced by the Democrats taking control of the Senate under any conditions. But he likely will still have influence over such matters in the new Congress, giving his longstanding interest in the rules for tax-exempt organizations.

In the states, the Philadelphia Inquirer reports that "New Jersey may be the first state to impose per-bed fees on nonprofit hospitals for municipal services." The $3 per day per licensed bed fee is paired with preservation of nonprofit hospital property tax exemption, which has been under increasing attack in New Jersey, with approximately two-thirds of the state's nonprofit hospitals having been taken to tax court. However, Governor Phil Murphy has not yet said if he will sign the bill.

Finally, consolidation of nonprofit health care providers also continues. For example, the Federal Trade Commission recently lost an appeal of a federal district court's denial of a motion for a preliminary injunction to block the merger of Thomas Jefferson University and Albert Einstein Healthcare Network in the Philadelphia area. And 501(c)(4) nonprofit health insurers Tufts Health Plan and Harvard Pilgrim Health Care have now completed their merger after having received federal and state approvals (after some divestment).

Lloyd Mayer

DAFs: Surge in Giving Amid Concerns, Proposals for Change at Federal & State Levels, Maybe New Regs Soon

There has been a lot of news recently relating to the quickly growing universe of donor-advised funds. A recent analysis by the Chronicle of Philanthropy reports that eight of the nation's largest community foundations have seen giving from DAFs they oversee increase by 42% from March to April of this year. And a recent study by the Lilly Family School of Philanthropy (pictured)  finds that seven of ten nonprofits surveyed have received DAF grants, even as many nonprofit leaders expressed concerns relating to seeking and processing DAF gifts, especially relating to communicating with donors who give through a DAF.

Not surprisingly, the growth and spread of DAFs continues to attract proposals for increasing oversight of and rules for them. Last month the Chronicle of Philanthropy reported that billionaire John Arnold and law professor Ray Madoff have joined forces as part of their Initiative to Accelerate Charitable Giving to propose a set of federal tax law changes that would, among other goals, accelerate giving from DAFs. Push back was quick, including from the Philanthropy Roundtable.

At the same time, proposals related to DAFs are also being made at the state level. For example, members of the California legislature continue to pursue possible DAF-related bills, as detailed by Gene Takagi earlier this year. And a recent attempt in California to pass a bill (AB 2936) that would have established a state-law category of DAF sponsoring organizations failed in August, according to CalNonprofits. In Minnesota, a new report by the Minnesota Council of Nonprofits recommends that state law there be changed to "require charitable trusts transferring funds to a donor advised fund (DAF) to include in their annual trust filing with the office of the attorney general an itemized list of all grants and contributions made or approved for future payment during the year from that DAF."

Regardless of whether any of these proposals advance, we do know that Treasury is working on regulations relating to DAFs. As tweeted by Gene Takagi, Cindy Lott said at the NAAG/NASCO conference to expect some sort of DAF regulations in the next few months.

Finally, the Stanford Law School Policy Lab on Donor Advised Funds published Are Donor Advised Funds Good for Nonprofits? in the Stanford Social Innovation Review (SSIR). That article follows an earlier SSIR podcast on How Nonprofits Are Leveraging Donor-Advised Funds.

Lloyd Mayer

NY AG seeking Dissolution: A bridge too far?

On August 6, 2020, the New York Attorney General Letitia James filed a complaint against the NRA seeking restitution from officers and directors, removal of officers and directors, and the dissolution of the nonprofit organized in New York in 1871. While it looks like few think the suit for restitution and removal wrong, many are criticizing the AG for bringing the dissolution action.

I think she was right to bring the dissolution action, but I doubt a court will grant it, and I think that is all fine.

The AP provided a good rundown of the case and immediate reactions.

Last year when leadership in the NRA was in disarray and widely predicting that the misuse of the nonprofit by its officers and directors could lead to its dissolution, I wrote that this was highly unlikely:

"At the same time, I think it’s possible that the New York authorities investigating the group might remove officers and members of its 76-member board of directors. There is even a slight possibility, as NRA CEO Wayne LaPierre warned in a fundraising letter, that New York authorities could cause the NRA “to shut down forever.” But I doubt it."

Ruth Marcus has questioned the NY AG.

The NRA has filed a lawsuit challenging the AG action on many grounds including first amendment grounds, defamation, and procedural grounds trying to nullify the dissolution action. Asher Stoker has a nice tweet thread explaining why the procedural effort was unlikely to work. The NY AG amended its complaint to comply with the strict requirements of filing a dissolution.

The AG lays out the basis for dissolution on page 138-39 of the complaint:

562. Under N-PCL § 112(a)(5), the Attorney General is authorized to maintain an action or special proceeding to dissolve a corporation under Article 11 (Judicial dissolution).
563. Under N-PCL § 1101(a)(2), the Attorney General may bring an action seeking the dissolution of a charitable corporation when “the corporation has exceeded the authority conferred upon it by law, or … has carried on, conducted or transacted its business in a persistently fraudulent or illegal manner, or by the abuse of its powers contrary to public policy of the state has become liable to be dissolved.”

Here is the N-PCL. 

Many question the AG's partiality because she is a Democrat and so vocally stated she would investigate the NRA during her campaign, and called it a terrorist organization.

I encourage everyone to read the complaint. When you read the allegations of a long running, substantial, and extensive fraud on the members of the NRA, I am left wondering when the AG may use the dissolution provision that is in New York nonprofit law, if she does not use it now. 

Importantly, and I think interestingly for the process, the New York statute states that the AG “may” bring a dissolution action under these circumstances. But, the judge then still has to decide. 

N-CPL 1109 tells the judge what to take into consideration. It says:

(a) In an action or special proceeding under this article if, in the court's discretion, it shall appear that the corporation should be dissolved, it shall make a judgment or final order dissolving the corporation.

(b) In making its decision, the court shall take into consideration the following criteria:

(1) In an action brought by the attorney-general, the interest of the public is of paramount importance.

(2) In a special proceeding brought by directors or members, the benefit to the members of a dissolution is of paramount importance.

(c) If the judgment or final order shall provide for a dissolution of the corporation, the court may, in its discretion, provide therein for the distribution of the property of the corporation to those entitled thereto according to their respective rights.  Any property of the corporation described in subparagraph one of paragraph (c) of section 1002-a (Carrying out the plan of dissolution and distribution of assets) shall be distributed in accordance with that section.

It seems to me that the appropriate way for this process to play out is for the AG to bring the dissolution action. She should present the evidence for that claim. It may be that the power structure associated with what we consider the NRA today is so impossibly entangled with the wrongdoers that it would be impossible for the NRA to be reformed to actually further the mission of the NRA. If that is the case, dissolution is the answer. I am just skeptical that this is the answer. 

Though I do not believe in the same ideological beliefs that the NRA seeks to further, I do believe a robust defense of the Second Amendment should be a part of American life. I think the large membership is entitled to an organization that honestly and fairly furthers that mission. I believe we are better off in a world where the folks that believe in that right have good representation. Because of that, I find it hard to believe it will be impossible to reform the entity with that substantial membership in mind. That said, I think it possible the AG could prove her case. I think she should be allowed the respect to bring that forward. I think we will be better for it, including especially those who are conservatives. AG James is insisting on a rule of law. We should all be grateful to her for that commitment.

I shared my general thoughts with BBC World Tonight on the day the complaint was filed. You can listen to those starting at about 27:45 in on this link.

Many have wondered whether the NRA can just move out of New York to avoid the problem. The NY AG has the direct answer by tweet. No.

It is also worth watching the DC AG complaint against the NRA Foundation. 

If you want a deep and rich understanding of the matter of the NRA I highly recommend the Gangster Capitalism podcast on the NRA.

By Philip Hackney

Brunson, God Is My Roommate?

Happy March! To start my week here at the Nonprofit Law Prof Blog, I'm going to do some shameless self-promotion. I recently posted God Is My Roommate? Tax Exemptions for Parsonages Yesterday, Today, and (if Constitutional) Tomorrow to SSRN. I'll copy the abstract below, but a little non-abstract information first:

I wrote this in response to the Seventh Circuit's decision in Gaylor v. Mnuchin. In that case, the court held that section 107(2), which allows "ministers of the gospel" to receive a tax-free housing allowance, did not violate the Establishment Clause. It based its ruling on two tests: the Lemon test and, in the alternative, what it called the "historical significance test." The second of these tests, it said, essentially provides that if something was accepted at the time of the Framers and has continuously been accepted since, it doesn't violate the Establishment Clause.

The big problem? Well, the income tax hasn't been around nearly that long. The court held that the property tax exemption for parsonages had no substantive difference (n.b.: the two differ substantially, both substantively and constitutionally), and instead looked at that. Or, rather, looked at a caricature of the history of property tax exemptions for parsonages.

Continue reading

California Assembly Passes Law Regulating Donated Medical Supplies

CORRECTION: A reader commented that AB 1181 actually regulates the way that the recipient nonprofit reports the contribution, not the deductibility of the part of the donor.

Earlier this month the California Assembly passed legislation (AB 1181) to limit charitable contribution deductions for donated medical supplies that are conditioned on being used outside the United States, as well as strengthening the state's charitable solicitation laws in a variety of other ways. This legislation presumably grew out of several enforcement actions taking by the California Attorney General targeting such activities, one of which resulted in a $410,000 settlement. The bill is now on the governor's desk, where it joins the previously passed bill (SB 206) "to allow athletes at California's 58 NCAA schools the right to receive compensation for the use of their names, images and likenesses" and a bill (AB 136) to ensure that defendants in the Varsity Blues college admissions scandal are refused a deduction under state law, whether as a charitable contribution or a business expense, for any unlawful payments. Governor Gavin Newsom has until October 13th to decide whether to sign or veto each bill, along with hundreds of others currently on his desk.

Bills to regulate community foundations (AB 1338), charitable crowdfunding (AB 1539), and donor-advised funds (AB 1712) were also introduced in the current legislative session, but have not advanced.

Lloyd Mayer

From Bad to Worse?: The NRA and University of Maryland Medical System Scandals

The drip-drip of bad news about the National Rifle Association and the University of Maryland Medical System continues. For the NRA, the newest revelation was that 18 members of the NRA's 76-member board had direct or indirect financial transactions with the organization at some point during the past three years even though board members are not compensated for their service. Transactions with board members of tax-exempt nonprofit organizations are generally allowed if the terms, including the amounts paid, are reasonable in light of what the organization receives in return, and particularly if they are vetted through a conflict of interest policy (which policy the NRA has). Nevertheless, the number of board members involved and the amounts - ranging from tens thousands of dollars to in one case over $3 million in purchases - raises the question of whether the judgment of those board members might be affected by the transactions, particularly when it comes to evaluating the performance of the executives who control such transactions. As Mother Jones reports, however, the IRS is unlikely to try to revoke the tax-exempt status of the NRA even given these recent revelations. The more potent threat to the organization is instead the ongoing New York Attorney General investigation, as the NRA is incorporated in New York.

Meanwhile, similar governance issues continue to come to come to light at the University of Maryland Medical System, but with somewhat different results. These issues include longstanding financial relationships with a number of board members, including a former state Senator, and disregard for the two consecutive five-year terms limit on board service. Unlike the situation with the NRA, these revelations have also claimed a number of leadership casualties, most recently four top executives (including the system's primary lawyer) who resigned earlier this month. Given the ongoing federal and state investigations and legislative calls to force all current board members to step down, more leadership changes are probably likely.

Lloyd Mayer

 

New Jersey "Dark Money" Disclosure Bill Poised to Become Law

New Jersey Governor Phil Murphy has reversed course, announcing last week that he will sign bill S1500 after initially vetoing it conditionally because of constitutional and policy concerns. Assuming he follows through on his commitment, any group that is tax-exempt under either section 501(c)(4) (social welfare organizations) or section 527 (political organizations) of the Internal Revenue Code that engages in certain activities will have to publicly disclose donors who contribute $10,000 or more. The triggering activities are raising or spending $3,000 or more for the purpose of "influencing or attempting to influence the outcome of any election or the nomination, election, or defeat of any person to any State or local elective public office, or the passage or defeat of any public question, legislation, or regulation, or in providing political information on any candidate or public question, legislation, or regulation." Groups that engage in these activities will also have to report details of their relevant expenditures. The bill will become law despite opposition from the New Jersey chapters of both the ACLU and American for Prosperity.

So far it appears that state-level expansions of required public disclosures by politically active nonprofits have been limited to a handful of Democratic-controlled states, although significant ones in terms of their size (California, New Jersey, and New York). It remains to be seen whether disclosure legislation introduced in many other states becomes law (see the end of this Ballotpedia News story for a nationwide update on such legislation).

Lloyd Mayer

Donor Disclosure Update: New NJ Rule; Veto of NJ Proposed Statute; 9th Circuit Divided

New Jersey is the latest state to compel disclosure of significant donors in the wake of the federal government's decision to eliminate reporting to the IRS by tax-exempt organizations (other than 501(c)(3)s) of their significant donors. NJ Attorney General Gurbir S. Grewal and the NJ Division of Consumer Affairs announced a new rule earlier this week that will require both charities and social welfare organizations that have to file annual reports with the Division's Charities Registration Section to include the identities of contributors who have given $5,000 or more during the year. (Like a number of states, New Jersey apparently defines "charitable organization" broadly for state registration purposes, so as to encompass not only Internal Revenue Code section 501(c)(3) organizations but also Internal Revenue Code section 501(c)(4) social welfare organizations.) According to statements accompanying the new rule, the donor information will not be subject to public disclosure. This announcement was in the wake of New Jersey and New York suing the federal government for failing to comply with Freedom of Information Act requests submitted by those states relating to that earlier decision, and New Jersey joining a lawsuit brought by Montana challenging the decision. 

Interestingly, however, last week New Jersey's governor vetoed a bill (S1500) that would have compelled donor disclosure by organizations engaged in independent political expenditures, among other measures. Governor Philip D. Murphy's 20-page explanation raised both constitutional concerns with the legislation as enacted and policy concerns that the bill did not go far enough in certain respects. The constitutional concerns included ones relating to the bill's application to legislative and regulatory advocacy, not just election-related expenditures. The policy concerns includes ones related to a failure to extend pay-to-play disclosures and to require certain disclosures from recipients of economic development subsidies.

In other disclosure news, the U.S. Court of Appeals for the Ninth Circuit rejected petitions fo rehearing en banc of the earlier three-judge panel decision in Americans for Prosperity Foundation v. Becerra, turning away an as applied challenge to the California Attorney General's requiring that the foundation provide a copy of its Form 990 Schedule B (which identifies significant donors) to that office. The rejection is notable because it was over a lengthy dissent by five judges, to which the three judges on the initial panel responded.

I think it can be safely predicted that in this era of "dark money" we will continue to see state level compelled disclosure developments, and litigation in response, for the foreseeable future.

Lloyd Mayer

 

States Continue to Chip Away at Donor Anonymity for Politically Active Nonprofits (Missouri and Washington)

With the nonprofit created by now former Governor Eric Greitens very much in the news, the Missouri Ethics Commission (MEC) issued an advisory opinion clarifying that nonprofits are considered "committees" and so subject to registration and public reporting of donor requirements under Missouri law if they receive more than a nominal amount for the primary or incidental purpose of influencing or attempting to influence voters with respect to an election to public office or a ballot measure. Perhaps as importantly, the MEC's opinion also notes that the use of a nonprofit to attempt to conceal the actual source of a contribution to a candidate committee or other (political) committee is prohibited. See also St. Louis Post-Dispatch.

In Washington, the legislature passed and the governor signed the DISCLOSE Act of 2018. The legislation, which will not be effective until January 1, 2019, creates a new category of entities required to register and publicly report their significant donors known as "incidental committees." Such committees are any nonprofit organization that is not a political committee but that makes political contributions or expenditures above a $25,000 annual threshold directly or indirectly through a political committee. The donor disclosure provision only applies to the top ten donors in a calendar year who give, in the aggregate $10,000 or more.

Lloyd Mayer

Fershee: The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy

My friend and colleague Josh Fershee recently posted this piece on SSRN, which is cross blogged at the Business Law Prof Blog under the screaming headline, “These Reasons Social Benefit Entities Hurt Business and Philanthropy Will Blow Your Mind!!!!!”   Okay -  I added the exclamation points.  And the bold.   Alas, there are no cat pictures or bad high school year book photos of celebrities, but there is an important discussion about impact of the existence of social enterprise entities on traditional for profit businesses engaged in social activity.     The abstract:

The emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.

The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.

EWW