Grand Canyon University v. Cardona is About to Define Revenue Sharing Private Inurement
I’d say we are about seven or eight months away from a judicial determination of whether a revenue sharing arrangement between a (c)(3) and an entity controlled by disqualified persons constitutes private inurement. I don’t know whether that will be the first since judicial ruling Treasury reserved the issue in the excess benefit regulations. Treasury seems to have forgotten about the issue. The Grand Canyon University case and OpenAI’s joint venture with Microsoft are good reasons why Treasury needs to gin up the think tank again.
We have previously blogged about Grand Canyon University. That is the Arizona nonprofit university that received a (c)(3) determination letter but then entered into a revenue sharing management agreement with its for-profit predecessors — most of whom also serve as insiders and disqualified people vis-à-vis GCU. The management agreement, which had not been in existence when the determination letter issued, caused the Department of Education to deny GCU’s application for recognition of nonprofit status for purposes of the Higher Education Act (HEA). That status apparently comes with advantages relating to the School’s ability to qualify for federal financial aid for its students.
Well, the HEA statute defines “nonprofit” in the normal way, specifying only that the entity cannot violate the prohibition against private inurement. It does not include all the other restrictions — lobbying and campaign activity, nor the private benefit prohibition — stated or implied in 501(c)(3). The Education Department regulations defines nonprofit as one organized under state law and recognized as 501(c)(3). GCU argues that the Department’s definition exceeds statutory authority to the extent it allows denial of “nonprofit” status on the basis of anything in 501(c)(3) other than inurement. The Department denied “nonprofit” status based on an assertion that the management contract conveyed private benefit. Education must not have been educated about United Cancer Council. That nearly ten year case was finally remanded because Posner said the Service applied private inurement when it should have applied private benefit. GCU is the opposite. Education applied private benefit, the case is about private inurement though that too is private benefit. Its just that GCU says the HEA law incorporates only inurement. GCU also argued that Education had no authority to make an adverse determination as to whether GCU met the requirements of 501(c)(3) once the IRS issued the determination and before IRS revokes. On inurement or anything else. Only the IRS can make the determination.
You can listen to the oral argument last week above. But here’s what’s I think is gonna happen. It looks like two judges — not understanding the prospective and largely cursory review of 1023s — are likely to say Education is out of its lane and cannot second guess the IRS, even in the face of new evidence regarding operation rather than organization. But two judges also think that even though Education may not second guess IRS, the HEA definition specifically prohibits inurement and thus Education may make an independent determination of that. But that in doing so, apparently, it should refer to Treasury Department regulations, maybe. Education may not about any other determination regarding (c)(3) status, including private benefit which the Court still thinks is entirely distinct from inurement. Education made private benefit findings but no private inurement findings. Thus, the case will be remanded with instructions to determine whether a revenue sharing agreement with a disqualified person — in this case, an LLC owned by the President and other GCU disqualified persons — constitutes private inurement even though the agreement results in FMV compensation, as determined via independent third parties.
Clumsy way of getting there but we might just get some new law on revenue sharing.
darryll k. jones