Here are some of the highlights from the American Bar Association Exempt Organizations Committee meeting held on October 17, 2023 as part of the ABA Virtual 2023 Fall Tax Meeting. Part Two to follow next week.
Subcommittee on Political & Lobbying Activities of Exempt Organizations
Advocacy on the Selection of Speaker of the House – unclear whether this would be lobbying and not prohibited political intervention activity for a public charity (no ruling or official guidance making this distinction), but seems unlikely that the IRS will enforce without guidance.
Comments to the Ways and Means Committee’s request for information on Potential Violations of Rules on Political Activities, Inappropriate Use of Charitable Funds, & Rise in Foreign Sources of Funding – many comments from many sources, but according to one attendee, there was near consensus on the IRS’s inability to make the necessary determinations and enforce on the political intervention prohibition. There may be a question of whether the request was more a case of political positioning than a genuine desire to examine whether a change to the laws or to enforcement is necessary.
Rev. Rul. 74-117 (Political activities; assisting in transition of office of Governor) and its application to current events was discussed.
A nonprofit organization formed to implement an orderly change of administration of the office of Governor of a State by assisting the Governor-elect, during the period between his election and inauguration in screening and selecting applicants for State appointive offices and preparing a legislative message and program reflecting the party’s platform and budget, is an ‘action’ organization under section 1.501(c)(3)-1 of the regulations, and does not qualify for exemption.
Application of the Foreign Agents Registration Act (FARA) is becoming of increasing importance and public attention (e.g., Sen. Menendez indictment). For a quick background on FARA, see Is it legal for a senator to work as a foreign agent? The answer won’t surprise you. (Josh Gerstein, Politico). Note that the definition of political activities under FARA is much broader than under IRC Section 501(c)(3).
he term “political activities” means any activity that the person engaging in believes will, or that the person intends to, in any way influence any agency or official of the Government of the United States or any section of the public within the United States with reference to formulating, adopting, or changing the domestic or foreign policies of the United States or with reference to the political or public interests, policies, or relations of a government of a foreign country or a foreign political party;
FARA, Section 611(o).
Federal Tax Update from the IRS and Treasury
TD 9981, released Oct. 13, 2023, published final regulations on Type I and Type III supporting organizations. A summary and explanation of revisions is available on the Federal Register here.
Green Energy Tax Credit Monetization – Treasury and the IRS released guidance and proposed regulations on June 14, 2023 interpreting the Inflation Reduction Act provisions for direct pay (i.e. “elective pay”) and credit transferability that enable state, local, and Tribal governments; non-profit organizations, U.S. territories; and other entities to take advantage of clean energy tax credits. See U.S. Department of the Treasury, IRS Release Guidance on Provisions to Expand Reach of Clean Energy Tax Credits Through President Biden’s Investing in America Agenda.
Name, Image, and Likeness (NIL) Collectives – General Legal Advice Memorandum 2023-004 was released on June 9, 2023 and included the following conclusion: “An organization that develops paid NIL opportunities for student-athletes will, in many cases, be operating for a substantial nonexempt purpose—serving the private interests of student-athletes—which is more than incidental to any exempt purpose furthered by the activity.”
Use of Race in a Post-Affirmative Action World: Evolving Standards and Applications
What are race-conscious policies? They might be thought of as belonging to 4 groups:
- Motivated by racial animus – strictly prohibited by Supreme Court precedent
- Designed to promote racial diversity to address societal racial discrimination using race as a ‘plus factor’
- Designed to promote racial diversity to address societal racial discrimination but without using race as a ‘plus factor’
- Designed to prevent noncompliance with anti-discrimination laws
Title VI of the Civil Rights Act of 1964 – Prohibits discrimination on the basis of race, color, or national origin in any program or activity that receives Federal funds or other Federal financial assistance
Title VII of the Civil Rights Act of 1964 – Protects employees and job applicants from employment discrimination based on race, color, religion, sex, and national origin
EEOC Regulations re: Title VII and Affirmative Action Programs
- The principle of nondiscrimination in employment because of race, color, religion, sex, or national origin, and the principle that each person subject to Title VII should take voluntary action to correct the effects of past discrimination and to prevent present and future discrimination without awaiting litigation, are mutually consistent and interdependent methods of addressing social and economic conditions which precipitated the enactment of Title VII.
- Affirmative action plan or program must contain three elements: (1) a reasonable self analysis; (2) a reasonable basis for concluding action is appropriate; and (3) reasonable action.
Section 1981 of the Civil Rights Act of 1866
- Prohibits discrimination on the basis of race, color, and ethnicity when making and enforcing contracts
- Procedural considerations: no cap on damages, longer statute of limitations, no requirement to file an EEOC charge
Students for Fair Admissions (SFFA) Cases
The Supreme Court struck down the schools’ race-conscious admissions policies as unconstitutional, reasoning that the policies failed to pass strict scrutiny because they were not narrowly tailored to a compelling government interest. But the opinion did not create a complete bar on race consciousness, particularly using race-neutral means.
Fearless Fund
Unlike SFFA, there is no conclusive ruling on this case yet. Fearless Fund (FF) may signal a wave of similar litigation. FF invests in women of color led businesses and offered a $20,000 grant program only available to “black females.” American Alliance for Equal Rights (AAER) alleged that FF is operating a racially-discriminatory program in violation of Section 1981. See 11th Circuit Court of Appeals Granted AAER’s Preliminary Injunction against Fearless Fund (Foley & Lardner). Expect more on this case, including briefs from interested parties, in the coming months.
Law Firms Programs
Morrison & Foerster (MoFo) offered a 1L Fellowship for which applicants initially did not qualify unless they were “African American/Black, Latinx, Native Americans/Native Alaskans, and/or members of the LGBTQ+ community.” AAER alleged that MoFo was violating Section 1981. MoFo revised its eligibility criteria and AAER dropped its lawsuit. The current criteria include:
- Demonstrated commitment to promoting diversity, inclusion, and accessibility
- Ability to bring a diverse perspective to the firm as a result of adaptability, cultural fluency, resilience, and life experiences
Perkins Coie offered a similar fellowship for “students of color,” “students who identify as LGBTQ+,” or “students with disabilities.” AAER alleged that Perkins Coie was violating Section 1981. Perkins Coie revised its eligibility criteria and AAER dropped its lawsuit. The firm does state that it considers the following factors:
- Academic Achievement: a demonstrated record of academic achievement and excellent writing and interpersonal skills, as well as experience that will contribute to a successful career in the legal field
- DEI Leadership: engagement in efforts to advance diversity, equity, and inclusion within the community and/or legal profession, including during college or law school
- Resilience: obstacles or challenges that have been encountered and overcome, how those obstacles have been overcome, and lessons learned
- Perspective: life experiences that have shaped perspectives and professional goals
Potential Arguments in Favor of Programs
- Grant, not a contract
- First Amendment protections – freedom of expressive association
- Affirmative action programs
Illegality and the Public Policy Doctrine
Restatement Trusts (Second), 377 Comment c (1959): trusts violating law or public policy cannot qualify for charitable status.
Rev. Rul. 71-447: “all charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy.”
Rev. Rul. 75-384: organization didn’t qualify as exempt under IRC Section 501(c)(3) where its primary activity was to sponsor antiwar protest demonstration in which demonstrators urged to violate local ordinances and commit acts of civil disobedience.
Bob Jones University vs. United States, 461 U.S. 574 (1983): racially discriminatory policies of schools cannot be charitable. Two part test:
- Is there a public policy against a particular activity?
- Is the public policy so fundamental as to require the denial or revocation of exempt status for organizations participating in that activity?