Texas Appellate Court Allows Texas AG to Proceed Against Nonprofit for Alleged Political Activity

A Texas appellate court has reinstated a lawsuit brought by Texas Attorney General Ken Paxton against FIEL Houston, Inc., a nonprofit that provides educational and social services to immigrants. The AG alleges that the nonprofit has engaged in political activity in contradiction to state law and its corporate charter and so should be required to dissolve. The alleged political activity included encouraging the public to vote against then-candidate Donald Trump, attempting to influence state legislation, criticizing federal immigration policies under President Joe Biden, and criticizing enacted state legislation. This activity allegedly violated both federal tax law, specifically Internal Revenue Code section 501(c)(3), and Texas state law that the AG argues implicitly incorporates the political activity limitations found in federal tax law.

The appellate court concluded that while the alleged violation of state law did not provide grounds for the state’s quo warranto proceeding against the nonprofit, the alleged political activity may have violated the provisions of the nonprofit’s certificate of incorporation that prohibited the nonprofit from engaging in political campaign intervention or in substantial lobbying prohibited by section 501(c)(3). In other words, the nonprofit allegedly acted ultra vires by going beyond the scope of its purposes or powers under its certificate of incorporation. The court emphasized that at this stage of the litigation the AG only had to plead sufficient facts to provide “probably ground” for proceeding, with factual disputes and other legal issues, including any legal defenses, to be resolved later. The court therefore remanded the case for further proceedings, including a determination on whether to grant the AG’s request for temporary injunction relief halting the nonprofit’s operations during the pendency of the action.