The following are just some of the many highlights from the 2024 Western Conference on Tax Exempt Organizations (WCTEO). Because of a change in the timing of the WCTEO from late fall to late winter, there was no conference in 2023, but that gave us a few more months of developments and events to discuss.

The Latest from Washington

Gifts of Businesses: Failing to Plan Is Planning to Fail

  • Increased use of 501(c)(4) organizations as recipients of business interests during the owner’s life (gift tax deduction, but no income tax deduction and no estate tax deductions)
  • Some use of purpose trusts as recipients of business interests that represent majority of voting interests (no deduction, but retention of control) – e.g., Chouinard – Patagonia

Power Hour

  • Illegality, public policy, equal protection – impact on grantmaking>
  • Lessons from NYAG NRA case
  • Name, Image, and Likeness (HILs) guidance
  • “Boomer business” (charitable) succession planning: Newman’s Own, Patagonia, other
  • Corporate Transparency Act (CTA) – who’s exempt?
  • New developments in DAF Regulation
  • The latest from the IRS and the courts on charitable contributions
  • OpenAI and other for-profit/nonprofit combinations
  • Creating enforceable and more durable trusts and restricted grants
  • Impact investing vs. ESG/SRI

Can Nonprofits Save Journalism?

  • Conversions of for-profit journalism organizations to nonprofit journalism organizations
    • May be tax recognition event for for-profit owners
    • Must consider whether revenue sources will create issues (e.g., too much advertising revenue could jeopardize 501(c)(3) status)
    • Cannot engage in political campaign intervention (e.g., publishing op-eds that contain electioneering messages)

Watt’s Up with Energy Credits

  • The DOE describes the Inflation Reduction Act of 2022 as the single largest investment in climate and energy in American history, enabling America to tackle the climate crisis, advancing environmental justice, securing America’s position as a world leader in domestic clean energy manufacturing, and putting the United States on a pathway to achieving the Administration’s climate goals, including a net-zero economy by 2050.
  • Treasury calls it the most significant legislation to combat climate change in our nation’s history, and one of the largest investments in the American economy in a generation. Already, this investment and the U.S. Department of the Treasury’s implementation of the law has unleashed an investment and manufacturing boom in the United States unlike anything seen in decades—especially in disadvantaged communities.
  • The Act address climate change mitigation; economic development (especially development in low-income communities, certain communities with higher-than-average unemployment, and on Indian tribal land); workforce development (incentives for jobs paying good wages and apprenticeships); and operating cost reductions for charities and others
  • For many credits, if new prevailing wage and apprenticeship requirements are met, the base credit starts at 30% (vs. 6% if not met)
  • Additional “bonus” credit rates are possible – depending on the type of property, where the property is placed in service, and whether domestic content requirements are met – for potential credit rates of up to 70% of the eligible cost basis of the energy property
  • New “elective pay” election (aka, “direct pay”) allows tax-exempt and government entities to access credits by making them “refundable”
  • See Nonprofits and Energy Tax Credits
  • See A Clean Energy Future for America’s Colleges and Universities (Treasury)

Every Number Counts – Nonprofit Accounting Update

Take-Aways from Recent Supreme Court Decisions

  • In Students for Fair Admissions Supreme Court cases, the U.S. 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 toa compelling government interest
  • Section 1981 bars racial discrimination in contracting; Fearless Fund case is going to be decided on its merits by the 11th Circuit
    • Is the contest a contract, making 1981 applicable?
    • 1981 doesn’t apply even if it is a contract because it is a remedial program; 1981 has never been applied in a donative context; and it shouldn’t apply in personal associational relationships
    • 1981’s application here would violate Fearless Fund’s First Amendment rights
  • Can focus on race-based communities but may keep eligibility criteria open to avoid Section 1981 claim
  • Definition of charity includes eliminating prejudice and discrimination
  • Section 1981’s historical background is inconsistent with its requested application by the plaintiffs in the Fearless Fund case – see, e.g., 42 U.S.C. § 1981’s Contract Clause: Racial Equality in Contractual Relationships (Congressional Research Service)
  • AFP – entire 990 subject to exacting scrutiny standard and narrow tailoring – many provisions won’t survive (compelled disclosures “that relate to core associational values” (unstated))

Good Governance When the Board Is in Discord

  • Nonprofit director standing cases (CA) – who has standing to bring actions for the benefit of charitable organizations?
    • Summers v. Colette (2019) – An appellate court in California held that a director of a California nonprofit public benefit corporation who had standing to sue the corporation and sue another director for self-dealing did not lose standing after she was removed
    • Turner v. Victoria (2022) – confirms that if a director had standing at the time the lawsuit was filed, the director did not lose standing just because they stopped being a director at some later date while the litigation was still pending
    • AG Relator status – exceedingly rare because it requires a higher level of oversight and supervision by the AG (more likely the AG will take on the case itself)
  • Policies for protecting charitable assets from theft, diversion, and/or waste
    • Will allowing more (very costly, very burdensome) lawsuits achieve this?
    • Note that a single removed director might sue all of the other directors on behalf of the nonprofit and each director may have its own attorney and the nonprofit may need to advance payments to all those attorneys pursuant to their indemnification obligations (practically speaking, allowing standing to such removed director may divert more charitable assets away from mission-related activities than protect them from misuse)
    • Boards make their best decision with collective deliberation and decision-making, not with individual authority
    • If former board members have standing, do they have fiduciary duties to act with reasonable care in the best interests of the organization or can they act in their personal self-interest?
    • Tip: avoid litigation, bring in a lawyer or other professional to help ensure all directors understand the applicable laws or circumstances and avoid misunderstandings

Breaking News for Private Foundations

  • Self-dealing and disqualified persons – Incidental and tenuous benefits examples – shared services exception – Internal Revenue Manual Issue Indicators and Audit Tips – see, e.g., Private Foundations
  • Contemporaneous written acknowledgment from the recipient charitable organization is required by donors desiring a charitable contribution deduction and must contain, among other thngs, the address of the donee organization (if you don’t include the recipient charitable organization’s address, the deduction can be denied)

Advocacy in an Election Year

  • 501(c)(3) prohibition against political campaign intervention (including with respect to foreign campaigns)
  • Tax laws generally permit 501(c)(3) organizations to participate in voter registration drives and get-out-the-vote (GOTV) efforts, but the organization cannot encourage voting by referencing a wedge issue in the election
  • 501(c)(4) organizations can lobby without limit on matters related to their exempt purpose and they can engage in political campaign intervention so long as it doesn’t represent their primary activity
    • The amount allowed and measuring of campaign intervention is uncertain
    • Some say 49% of their total expenditures
    • Safe harbor for exemption applications is 40%
  • Public charities can lobby so long as it’s not a substantial part of their activities, which can be measured under a facts and circumstances test or under the 501(h) exoenditure test
  • Tax law permits section 501(c)(3) organizations tobe affiliated with section 501(c)(4) organizations – a revised publication of AFJ Bolder Advocacy’s The Connection will be out next week!