The following are just some of the many highlights from day one of the 2025 Western Conference on Tax Exempt Organizations (WCTEO). As with all of our posts capturing highlights of events, my interpretations and opinions may be sprinkled with the general information provided by the presenters.

Power Hour Plus

Ofer Lion, Seyfarth Shaw LLP; Jean Tom, Davis Wright Tremaine LLP; Moderator: Karl Mill, Mill Law Center

• The Current Moment for Tax-Exempt Organizations: Executive Orders, HR 9495, Illegality, public policy, equal protection and more
  • Executive Orders (for running lists, see 2025 Donald J. Trump Executive Orders (Federal Register) and Executive Orders Affecting Charitable Nonprofits (National Council of Nonprofits))
    • Federal contractors – eliminating all diversity, equity, and inclusion (DEI) programs and preferencing in federal government (EO 14173 and others)
    • Schools, nonprofit hospitals, healthcare providers, etc. – gender identity; gender ideology; gender affirming care
    • Schools – EO 14190: “Ending Radical Indoctrination in K-12 Schooling”
    • Cuts to foreign aid; eliminating United States Agency for International Development (USAID); reviewing US funding of 3 UN organizations (UNHRC, UNESCO, UNRWA)
    • Combatting Anti-Semitism (EO 14188 / 13899)
    • Cutting Indirect Cost Rates for Federally Funded Research to 15%
    • Cuts to funding fighting climate change and supporting environmental justice
    • Immigration
  • HR 9495 – did not pass through last Congress but could be reintroduced by this Congress – builds on IRC 501(p) and gives Treasury Secretary sole discretion to designate terrorist-supporting organizations with 90-days’ notice and some due process unless subject to an exception – there are strong concerns in the sector that HR 9495, if passed, may be a tool to chill speech, dissent, and views that are inconsistent with the current administration’s – see, e.g., H.R. 9495: What’s Next?
  • Race-conscious grantmaking and programming – historically not a 501(c)(3) exemption issue (i.e., they have been consistent with furthering charitable purposes) – Treasury Regulations define what constitutes a charitable purposes to include efforts to eliminate prejudice and discrimination and defend human and civil rights secured by law
  • General Rule: a 501(c)(3) organization cannot be operated for illegal purposes or purposes contrary to public policy (what is “public policy” now?) – see, e.g., The Public Policy Doctrine and 501(c)(3) Organizations (Congressional Research Service, 10/21/24)
  • 2024 Supreme Court cases on affirmative action – see, e.g., Supreme Court Affirmative Action Decision and Nonprofit Radio: Supreme Court Affirmative Action Case and Implications for Nonprofits
  • Fearless Fund case – see, e.g., Fearless Fund Case – 11th Circuit Opinion
  • Implications for nonprofit sector – individual risk tolerances and risk mitigation strategies or shared risks on existential issues relative to the nonprofits’ common purposes
  • Importance of nonprofit sector to comment on government actions and the power of the sector to advocate for changes (e.g., HR 9495 in 2024 as a nonprofit advocacy success story)
• Tax Reform Proposals
  • Eliminate tax-exempt status of nonprofit hospitals
  • Eliminate charitable contribution deductions to nonprofit hospitals and health care organizations
  • Expanding Section 4868 excise tax on the net investment income of certain university endowments by increasing the rate tenfold, from 1.4% to 14
  • Expanding the criteria to impose the university endowment excise tax to effectively require certain universities to either “enroll more American students or spend more of their endowment funds on those students,” or become subject to the endowment tax
  • Repeal Green Energy (Inflation Reduction Act) Tax Credits
  • Tax scholarship funds
  • Restore universal charitable deduction (driven by nonprofit sector)
• Charitable contributions and the latest from the IRS and the courts
  • IRS challenges to a charitable contribution alleging gross overstatement of value of contributed property – see, e.g., Conservation Easement Deduction Grossly Overstated; Penalty Applies (Tax Notes)
• Section 170(h) – conservation easement deduction cap at 2.5x basis
• Memorial Hermann case (2024)
• California Attorney General – Proposed Regulations regarding dissolution and leaving California
  • Notice of Proposed Adoption of Regulations published December 20, 2024
  • Technical problems: (1) requires dissolving charities to submit a final Form 990 to AG before assets distributed and spent down; and (2) requires foreign nonprofits who received assets “from California” to dispose of them to “California charity” before withdrawing
• Corporate Transparency Act (CTA) – Registration requirement vs. determination letter timing – UPDATE: Treasury has suspended reporting under and enforcement of the CTA (see., e.g., National Law Review March 7, 2025 article)

The Challenges of For-Profit/Nonprofit Structures

Rob Wexler, Adler & Colvin; Mary Beckman, Massachusetts Attorney General’s Office (*former); David Shevlin, Simpson Thacher & Bartlett LLP; Moderator: Rose Chan Loui, UCLA School of Law

• Joint Ventures (pass-through entities) — A tax-exempt organization forms a joint venture, in the form of an LLC or partnership, along with non-exempt investors, to carry out an activity, usually because the activity requires additional investment capital.
  • With respect to ancillary JVs, under Rev. Rul. 2004-51:
    • Activities conducted through JV cannot be a substantial part of nonprofit’s activities
    • Activities must be substantially related to nonprofit’s tax-exempt purpose and functions
    • Nonprofit must maintain sufficient control to ensure furtherance of charitable purposes
    • All JV contracts must be at arm’s-length and for fair market value
    • Governing documents of JV should limit nonprofit’s participation to only those activities that will not jeopardize the nonprofit’s tax exemption
    • Ownership interests in JV must be in proportion to the respective capital contributions (tricky to determine, particularly when intellectual property is involved – determination process must be reasonable) and all revenue generated must be distributed pro rata
    • JV must be in furtherance of nonprofit’s charitable purpose and venture must expand the nonprofit’s ability to accomplish that purpose
    • Typically most of JV not expected to produce unrelated business income
• For-Profit Subs (not wholly owned) — A tax-exempt organization forms a for-profit corporation, in which it invests and which also takes on investments from non-exempt investors to operate an activity that requires outside capital and that may not be entirely consistent with the tax-exempt mission of the organization.
• Private benefit, private inurement, and excess benefit considerations:
  • Formation
  • Operations
  • Major changes
    • Is EO getting fair value for whatever it is giving up?
    • Is EO paying no more than fair value for whatever it is buying?
• Attorney General perspective to charity entering into one of the relationships (and information AG will need to assess whether AG may want to sue the charity’s directors for breach of fiduciary duties)
  • Is notice required to the AG for the transaction (e.g., transfer of substantially all assets)? Even if not required, consider informal notice
  • Will the transaction further the charitable purposes?
  • In JV, does charity have control to ensure that its assets are used to further appropriate purposes?
  • Has there been consideration and management of any conflicts of interest?
  • Does the transaction result in a substantial change in activities or purposes of charity?

Data Protection and Privacy Law

Tenaya Rodewald, Sheppard, Mullin, Richter & Hampton LLP; Lynn Sessions, BakerHostetler; Arun Baheti, The California Wellness Foundation; Moderator: Terri Wagner Cammarano, Cedars-Sinai

• Cyberattacks
  • Incident Types:
    • Network intrusion – 51%
    • Business email compromise – 26%
    • Inadvertent disclosures – 11%
    • Intentional access/disclosure – 5%
  • Root Causes:
    • Unpatched vulnerability – 23%
    • Phishing – 20%
    • Other (e.g., device theft, skimmers) – 17%
    • Misconfiguration – 6%
• Ransomware Epidemic
  • 27% pay the ransom
  • 63% restored from backup without paying ransom
  • 85% found evidence of data exfiltration when there was a claim of data theft in the ransom note
  • 76% of incidents involved theft of data resulting in notice to individuals
• Who do you call?
  • Cyber insurer, privacy/incident response counsel, external forensics, ransom negotiation firm, law enforcement – FBI
• Stakeholder Impact and Communications
• To Pay or Not to Pay?
  • Can the threat actor provide “proof of life” – (1) sample data from files; and (2) sample decrypted files evidencing both (a) they have a decryption key; and (b) they exfiltrated data?
  • Will the threat actor comply after a ransom is paid? – they have their own business model and “market pressure” to comply in order to continue to demand ransoms from other victims of their attacks
• CIPA (California Invasion of Privacy Act)
  • prohibits a third party’s unauthorized wiretapping or eavesdropping on a communication, or a party’s recording a confidential conversation, without the consent of all parties
  • Section 631 – a third party may not read, attempt to read, or learn the contents of a communication without consent of all the parties
  • Section 632 – nobody (not even a party to the conversation) may record a confidential communication (“any communication carried on in circumstances as may reasonably indicate that any party to the communication desires it to be confined to the parties thereto, but excludes a communication made in a public gathering or in any legislative, judicial, executive, or administrative proceeding open to the public, or in any other circumstance in which the parties to the communication may reasonably expect that the communication may be overheard or recorded”) without consent of all the parties
• Proactive steps
  • Educate your teams and encourage keeping legal counsel informed
  • Know your websites and apps
• Situational Awareness
  • What data are you collecting and do you really need it?
  • Do we have clear policies around storage, access, usage?
  • Staff behavior is probably the weakest link to a cybersecurity threat – need more staff literacy and data and security

When Should Universities Speak Out?

Steve Poskanzer, Carleton College; Moderator: Jill Horwitz, UCLA School of Law

• Universities have some unique vulnerabilities
  • Cleavages in university communities reflecting the polarization of the country
  • Many people who distrust universities (some citing elitism) turning to other sources of expertise
  • Universities by their very nature are disruptive, and they have proven to be an important and celebrated asset of the country in no small part because of their freedom to be disruptive
• Report on the University’s Role in Political and Social Action (Kalven Report) (1967) – very short and vague so can be cited by persons on both sides of the issue of whether universities should take political and social stances
• The University’s Voice (Steve Poskanzer) – According to Google AI Overview: According to Poskanzer’s argument, “fidelity and focus” should lead universities to adopt a “General Rule of Reticence” because it ensures that institutions prioritize their core academic mission by being cautious about taking public stances on issues that are not directly related to their educational goals, thereby maintaining their credibility and avoiding potential distractions from their primary purpose of scholarly pursuit and research
• But universities must speak out in three circumstances: where (1) their core academic mission, (2) institutional values, or (3) the well-being of their community is directly at stake (each, an existential threat).
• It’s easier to identify an existential threat in hindsight; more challenging to respond in a timely manner without losing credibility and trust for claiming every substantial threat is an existential one

Loper Bright—The End of Chevron Deference for Treasury Regulations?

Michael Desmond, Miller & Chevalier Chartered; Steve Toscher, Hochman Salkin Toscher Perez P.C.; Moderator: Ellen Aprill, UCLA School of Law

• Loper Bright overruled the Chevron Doctrine, which was based on a presumption that, when Congress left an ambiguity in a statute (or silence in a statute) administered by an agency, it generally intended to let the agency resolve the ambiguity.
  • But court may have to defer where Congress has provided express delegation to an administrative agency
• See, e.g., End of Chevron Deference: What Does it Mean for Nonprofits?
• Alternative Skidmore standard: The weight given to an administrative judgment in a particular case depends upon, among other things, the thoroughness evident in its consideration, the validity of its reasoning, and its consistency with earlier and later pronouncements
• There may be a lot of litigation and re-litigation as a result due to the changed standard
• Problem: court can only look at the facts of the case in front of them; an administrative agency may be looking at a regulation’s broader impact and is in a far better position to draft a regulation benefiting the public
• Memorial Hermann case applying Loper Bright to deny the taxpayer the benefit of a favorable regulatory interpretation of the definition of a social welfare organization under section 501(c)(4).
• Recently regulations take the position that the IRS Independent Office of Appeals cannot administratively review a taxpayer’s allegation that a Treasury Regulation is invalid, unless there is an unreviewable decision from a Federal court holding it invalid
• Combined with Loper Bright, Corner Post’s expanded time frame to bring suit against administrative agencies will likely lead to more litigation challenges to federal regulations.

International Hot Topics: What in the World is Going On?

Ruth Madrigal, KPMG US; Atiqua Hashem, Conrad M. Hilton Foundation; Jennifer Becker Harris, Clark Nuber PS; Moderator: Ingrid Mittermaier, Adler & Colvin

• USAID has been the largest funder of foreign aid (roughly $40 billion per year); and the State Department is also a big funder (roughly $20 billion per year)
• USAID terminated funding to 5,800 grantees (even if work had already been done and grantees were just waiting for reimbursement), retained funding to 500 grantees (roughly 90% of the grants/contracts and anecdotally 90% of the dollars)
• USAID may be a test case for the administration to use again with respect to another agency
• Consider the human impact with the disappearance of $50 billion to this sector overnight – terminations, furloughs, discontinued services
• Locally-led country-driven development (“know your customer” rules) – prior to new administration’s early actions, this was a trending area for philanthropy
• Seismic shifts to international aid sector – collectively, we’ll need to see adaptations and hopefully some changes and collaborations that address problems in different and more effective ways
• Considerations for disclosures on Forms 990, 990-PF
  • Risk-tolerance for the organization should be considered for all public facing documents and information
  • Consider the “full story” of the Form 990 and what it is telling the IRS, funders, and other interested parties
  • Consider sensitive data that may create a security risk or violate other laws
  • Don’t forget to disclose all foreign activity on Schedule F, Part I
  • Grantee Oversight Disclosure: Consider including the organization’s procedures around checking the OFAC List of Special Designated Nationals and Blocked Persons (SDN List) along with the procedures to ensure the funds will be used for the intended exempt purpose
  • Consider 26 USC Section 6038 Policies and Forms (e.g., Form 5472)