Every state except Pennsylvania has adopted a version of the Uniform Prudent Management of Institutional Funds Act, which sets the floor for how charities handle restricted endowment funds. A charity must follow a specific donor restriction, but it can ask a court to modify or release the restriction if it becomes impracticable, wasteful, or hard to administer. In some cases it does not need a court. A charity can change a restriction on its own, without the donor’s consent and without telling the donor, if the fund is worth less than $25,000 and the gift is more than twenty years old. Only the attorney general has to be notified.
Enforcing donor intent can be tricky in Arizona. Arizona’s version of UPMIFA is at A.R.S. 10-11802(A), which requires a charity to manage a fund consistent with the donor’s restriction, and A.R.S. 10-11805, which covers modification. Arizona is less protective than the model act on one point. A charity can release or modify a restriction it considers impracticable if the fund is worth less than $50,000, twice the model act’s $25,000 threshold.
Arizona has no donor-standing statute, but donors are not without a remedy. In Dunaway v. First Presbyterian Church of Wickenburg, 442 P.2d 93 (Ariz. 1968), donors gave stock to a church to build a Sunday school building. The church used it to buy property instead. The Arizona Supreme Court held that the church’s acceptance of the gift on those terms created an enforceable contract, and the donors could sue. A completed gift with a clearly stated condition can therefore be enforced as a contract in Arizona. For charitable trusts, Arizona has adopted the Uniform Trust Code, and A.R.S. 14-10405(C)(10) gives the settlor standing to enforce the trust’s terms.
The Bashas’ case shows the limit of that reasoning. In In re Bashas’ Inc., Eddie Basha pledged $25,000 a year for ten years to a St. Joseph’s hospital capital campaign. After Bashas’ filed for Chapter 11, St. Joseph’s Foundation tried to collect the unpaid balance. The federal district court affirmed the bankruptcy court’s ruling that the pledge could not be enforced. The foundation gave nothing in exchange for it, did not rely on it, and Arizona has not adopted the Restatement rule that charitable subscriptions bind without reliance. The court called it greedy for a charity to insist on a gift against a bankrupt donor’s other creditors. A promise to give later is much harder to enforce than a completed gift with a stated condition.
Washington’s version of UPMIFA is the Institutional Fund Act, chapter 24.55 RCW. Under RCW 24.55.045, a charity can release or modify a restriction with the donor’s written consent. Without consent, it can ask a court to modify a restriction that has become impracticable or wasteful, or that no longer serves the fund’s purpose because of circumstances the donor did not anticipate. The attorney general must be notified of the application and given a chance to be heard. Washington’s Nonprofit Corporation Act, at RCW 24.03A.185 and 24.03A.190, treats restricted and unrestricted gifts differently and sends modification questions back to chapter 24.55.
Like most states, Washington has no express donor-standing statute. A Washington donor or a donor’s estate would have to rely on general contract and trust principles to enforce a restriction directly.
An individual donor who wants to be able to enforce donor intent should think about the tax effect before adding a reversion clause. Under Treas. Reg. 1.170A-1(e), if a gift reverts to the donor or a third party when the charity fails to use it as directed, the donor can deduct the gift only if the chance of that happening is so remote as to be negligible on the date of the gift. Courts have read that to mean a chance most people would ignore in a serious business transaction. Suppose a donor conditions a large gift on the charity building a named wing, with the gift reverting if it does not. If there is any real chance the wing will not be built, the entire deduction may be disallowed.
A private foundation making a grant is in a different position. It takes no new deduction when it makes a grant, because it deducted the assets when they came into the foundation. A clause requiring the grantee to return unspent or misused funds is a standard part of a good grant agreement. It also supports the expenditure responsibility a foundation must exercise over certain grants to organizations that are not public charities, under Treas. Reg. 53.4945-5(b). The same clause that could cost an individual donor the deduction is an ordinary compliance tool for a foundation.
Donors in Arizona or Washington who want a restriction to hold should not rely on a general statement of wishes in a pledge letter. Put the purpose in a signed gift agreement. Either set the gift up as a charitable trust, which gives you standing as settlor, or write the restriction as a specific condition on the gift, as the donors did in Dunaway. If you are an individual claiming a deduction, talk to a lawyer before adding a reversion clause. If you are a foundation, include a return or repayment right in your grant agreements. Charities that accept multi-year pledges should document them as binding obligations with consideration on both sides, so they do not end up where St. Joseph’s did.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
]]>The New York Post reported on August 27, 2026, that Treasury officials are reviewing the tax-exempt status of several organizations, including the Open Society Foundations, the Southern Poverty Law Center, and the Council on American-Islamic Relations, along with other labor-aligned and “anti-corporate” groups. According to that reporting, members of Treasury Secretary Scott Bessent’s inner circle are developing a “blueprint” for possible revocations, and officials reportedly hope to complete a substantial part of the effort before the November 2026 midterm elections.
On September 2, 2026, Senate Finance Committee Ranking Member Ron Wyden and Senator Raphael Warnock sent a letter to Secretary Bessent and IRS Cheif Executive Officer Frank Bisignano demanding documents and answers by September 15, 2026. The letter connects the reported blueprint to two other actions: National Security Presidential Memorandum 7, which directed federal agencies to target the financial networks of “Antifa” and domestic terrorists, and a December 2025 memorandum from then-Attorney General Bondi ordering law enforcement to map the financial sponsors of “Antifa-aligned extremists.” The senators argue that both documents blur the line between actual violence and disfavored political viewpoints on capitalism, religion, race, and immigration.
The letter also raises a specific legal concern under IRC Section 7217, which makes it unlawful for covered executive branch officials, including the President, the Vice President, their staff, and Cabinet-level officials, to request, directly or indirectly, that the IRS conduct or terminate an examination of a particular taxpayer. A willful violation carries criminal penalties of up to five years in prison. IRS employees who receive such a request must report it to the Treasury Inspector General for Tax Administration.
None of this changes the underlying legal standard. Whether an organization qualifies for exemption under Section 501(c)(3) turns on objective criteria applied through the IRS’s own examination procedures, not on whether Treasury or White House officials approve of the organization’s advocacy. Mr. Bisignano testified before the Senate Finance Committee in April that the IRS has never acted on the President’s public statements about political opponents and that those statements have no influence on IRS decisions.
The case law points the same way. In Regan v. Taxation With Representation of Washington, the Supreme Court said that Congress may not discriminate invidiously in its tax subsidies in a way that aims at suppressing dangerous ideas. Bob Jones University v. United States, which is sometimes cited for the proposition that the IRS can revoke exemption on public policy grounds, involved racially discriminatory admissions and discipline policies. It was a case about conduct, not about the views an organization expressed.
We covered the revocation process in an earlier post. It bears repeating, with one important qualification. In most cases, revoking an organization’s exemption requires an individual examination, with notice and multiple opportunities to respond and appeal, and ultimately the right to seek a declaratory judgment in court under Section 7428. There are two exceptions. The first is automatic revocation for failing to file an annual return for three consecutive years. The second is Section 501(p), which suspends the exemption of an organization designated as a terrorist organization, for example under Executive Order 13224 or as a Foreign Terrorist Organization. Suspension under Section 501(p) takes effect on the date the designation is first published, requires no IRS examination, and cannot be challenged in any proceeding relating to federal tax liability, including under Section 7428. Contributions made during the suspension are not deductible.
That exception is worth understanding in the current environment. It is triggered by a designation made outside the IRS, and it applies only to an organization that has itself been designated. The State Department designated four antifa groups in Germany, Italy, and Greece as terrorist organizations in November 2025, and NSPM-7 directs agencies to use their existing authorities against domestic networks. Section 501(p) is the route by which a designation decision, rather than a tax examination, could end an organization’s exemption.
A press report about a blueprint is not a revocation, and it is not evidence that the ordinary process is being bypassed. It is, however, a reason for organizations in politically exposed categories, and frankly for organizations of every political stripe, to make sure their own compliance is airtight before anyone comes looking.
If your organization’s mission or advocacy work makes it plausible you could appear on a list like the one reported, this is a good time to have counsel review your Form 990 filings, your lobbying and political activity documentation, and your governance records for anything that would not hold up well under an unfriendly examination. This is sound practice regardless of whether the reported blueprint is real, accurate, or ever acted on. The organizations best positioned to weather a politically charged environment are the ones whose compliance file was already in order before anyone was looking for a reason to open it.
This post describes matters currently under congressional inquiry and public reporting. Facts here may change as more information becomes available, and nothing in this post should be read as confirming the accuracy of any report referenced.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
]]>The Fair Labor Standards Act (FLSA) requires employers to pay minimum wage and overtime to employees. It does not require payment to volunteers. For private nonprofits, the Department of Labor (DOL) treats an individual as a volunteer when he or she serves for civic, charitable, or humanitarian reasons, without promise, expectation, or receipt of compensation.
The label the organization uses does not control. In Tony and Susan Alamo Foundation v. Secretary of Labor (1985), the Supreme Court held that workers in a religious foundation’s commercial businesses were employees even though they testified that they considered themselves volunteers and did not want wages. They received food, clothing, and shelter in exchange for their work, and the Court looked at the economic reality rather than the workers’ own description of the arrangement. A signed volunteer agreement helps, but it does not settle the question.
The DOL and the courts look at the whole relationship. The following facts push a volunteer toward employee status:
A regular schedule alone does not make someone an employee. Plenty of genuine volunteers show up every Tuesday. The risk comes from the combination of a staff role, staff hours, and something of value flowing back to the worker.
Nonprofits may reimburse volunteer expenses, provide reasonable benefits, and pay a nominal fee without destroying volunteer status. The DOL’s benchmark, drawn from its public agency regulations and opinion letters, is that a fee is presumed nominal if it does not exceed 20 percent of what the organization would otherwise pay to hire someone for the same services. The fee also cannot be tied to productivity or hours worked. A $50 per shift payment is a problem even if the annual total is small.
This is the rule organizations tend to underestimate. A nonprofit’s employees can volunteer for their employer only in a capacity that is genuinely different from their regular job. A paid development associate who volunteers at the gala registration table is probably fine. The same associate who “volunteers” an extra ten hours a week finishing grant reports is owed wages for that time, and overtime if those hours push the week past 40.
Both of our practice states have their own minimum wage laws, and both carry more bite than the federal rule.
Washington’s Minimum Wage Act excludes individuals serving a charitable or nonprofit organization where an employer-employee relationship does not in fact exist or the services are rendered gratuitously (RCW 49.46.010). That language helps, but it is still a factual test. Washington’s 2026 minimum wage is $17.13 per hour, the highest statewide rate in the country, and an employer that willfully withholds wages can be liable for double damages plus attorney’s fees under RCW 49.52.070.
Arizona courts look to FLSA standards in deciding who is an employee under the Arizona Minimum Wage Act. Arizona’s 2026 minimum wage is $15.15 per hour, and A.R.S. § 23-364 allows a worker to recover the unpaid wages plus an additional amount equal to twice the underpayment.
To put numbers to it, a volunteer office manager working 30 hours a week, 50 weeks a year, for two years has logged 3,000 hours. At current Washington rates, that is $51,390 in unpaid wages, which can double to $102,780 before attorney’s fees. The same facts in Phoenix produce $45,450 in unpaid wages and potential liability of $136,350. A wage claim also rarely travels alone. Reclassification can bring back payroll taxes, unemployment insurance contributions, and workers’ compensation questions, and these often surface when the relationship ends badly and the former volunteer files for unemployment.
Volunteers are the backbone of many nonprofits, and nothing here should discourage organizations from relying on them. But a volunteer who works a staff schedule in a staff role is a wage claim waiting to happen, and good feelings at the start of the relationship are not a defense. If your organization has volunteers in traditional staff roles, now is a good time to review those arrangements.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
]]>If your organization already holds a group exemption letter issued before January 20, 2026, you have until January 22, 2027 to confirm that every subordinate organization covered by that letter satisfies the affiliation and supervision or control tests under the new rules. This is more than a formality. The IRS is giving existing group rulings a transition window to clean up their subordinate rosters, and organizations that don’t use it will be maintaining a group exemption letter that no longer matches what the subordinates on file can support.
Revenue Procedure 2026-8 keeps the longstanding requirement that a central organization have at least five subordinate organizations to obtain a new group exemption letter. The IRS considered lowering that number and decided against it, concluding that five subordinates strikes the right balance between the burden on the agency and the burden on organizations seeking the benefit.
Existing group rulings are treated differently. An organization with a group exemption letter issued before the new rules took effect is not required to have five subordinates to keep it; it can maintain the ruling with fewer, as long as it satisfies the other requirements. New applicants don’t get that benefit.
One requirement is new for everyone. Subordinate organizations that share the same purpose now have to use the same uniform purpose statement in their governing documents. If a group exemption covers subordinates with different purposes, each purpose group needs its own uniform statement. It is worth pulling your subordinates’ articles of incorporation and comparing them side by side rather than assuming they are consistent because they were all approved at one time.
Central organizations used to satisfy their annual reporting obligation with a letter. That is gone. Central organizations with one or more subordinates now use Form 15644, Supplemental Group Ruling Information, and it has to be filed every year, no earlier than 90 days and no later than 30 days before the close of the central organization’s annual accounting period. It currently must be submitted by fax, as the IRS has specified. Beyond the annual filing, a central organization can also submit Form 15644 during the year to report changes to its subordinate list, including additions, removals, or name and address changes, without waiting for the annual cycle.
Churches and conventions or associations of churches are the one exception. They’re permitted to file Form 15644 but not required to, which tracks the general pattern of relaxed reporting rules for religious organizations elsewhere in the tax code.
If your organization holds an existing group exemption, don’t wait until late 2026 to start this. Pull the current list of subordinates and confirm each one still meets the affiliation and supervision or control tests, since that’s the specific thing due by January 22, 2027. Compare governing documents across subordinates that share a purpose and fix any inconsistency in the purpose statement now, while there’s time to amend articles or bylaws if needed. And build the Form 15644 filing window, 30 to 90 days before your fiscal year-end, into your compliance calendar so it doesn’t get missed the way the old annual letter sometimes did.
Organizations considering a new group exemption should plan around the five-subordinate minimum from the outset. If you’re close to that number but not quite there, it may be worth waiting until you clear it rather than applying and being turned away.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
]]>Lobbying Rules for Public Charities and Private Foundations – Two Different Rule Sets
Public charities are allowed to lobby, within limits. Private foundations are not allowed to lobby at all. A 501(c)(4) social welfare organization, by contrast, can lobby without limit. The distinction matters because a lot of foundation board members come out of the corporate or public charity world and assume the flexible rules they are used to apply everywhere in the nonprofit sector. They do not.
A communication is lobbying when it meets specific elements. It goes to a legislative body, a government official who may help formulate legislation, or the general public; it refers to specific legislation; and it reflects a view on that legislation. If the audience is the general public rather than a legislator, there is a fourth element, a call to action asking the recipient to do something about the legislation, such as contacting their representative.
A letter to a member of the Arizona legislature expressing support for or opposition to a specific budget item is lobbying. A television ad describing the merits of a pending ballot initiative is lobbying too, even without a call to action, because the public is acting as the legislature when it votes on a ballot measure directly.
What Does Not Count as Lobbying
Several categories of activity fall outside the definition entirely:
This is the one that catches organizations off guard. A report or study that was not lobbying when it was written can become a lobbying expenditure later if it gets reused with a call to action added, for example when it is dropped into a legislative advocacy packet. There are two safe harbors that protect the original expenditure: the non-lobbying distribution of the material was larger than the later lobbying distribution, or the lobbying use happened more than six months after the material was first created and distributed. Organizations that commission research and then hand it to their government relations team a few months later should check both before assuming the original work stays clean.
Public Charities: Insubstantial Part vs. the 501(h) Election
Without an election, a public charity’s lobbying has to remain an “insubstantial part” of its activities, a vague standard the IRS has never defined with a bright line. Filing Form 5768 to make the 501(h) election trades that ambiguity for actual numbers. A charity can spend 20% of its first $500,000 in exempt purpose expenditures on lobbying, plus 15% of the next $500,000, plus 10% of the next $500,000, up to a total lobbying cap of $1,000,000. Grassroots lobbying, meaning lobbying aimed at the public rather than legislators directly, is capped at a quarter of the total lobbying limit. Most charities that lobby with any regularity are better off under the 501(h) election than guessing at “insubstantial.”
Private Foundations: You Cannot Lobby, But You Can Fund a Charity That Does
A private foundation cannot earmark a grant for lobbying. It can, however, make a general support grant to a charity that lobbies, since general support is not earmarked for anything specific. It can also make a grant for a specific project that includes a lobbying component, provided three things are true: the grant is not earmarked for lobbying, the total the foundation gives that grantee for that project in that year does not exceed the project’s budgeted non-lobbying activities, and the foundation has a signed budget from a grantee officer with no reason to doubt its accuracy. Get those three elements right and the foundation’s expenditure responsibility obligations are satisfied even though the grantee goes on to lobby with the money.
The practical takeaway for foundation boards is to separate what the foundation itself can say and fund from what its grantees are free to do with unrestricted or properly structured project support.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
]]>The New Deduction for Non-Itemizers
When the 2017 tax law nearly doubled the standard deduction, most households stopped itemizing, and most lost any federal tax benefit for their charitable gifts. Starting in 2026, taxpayers who take the standard deduction can also deduct up to $1,000 in cash gifts to charity, or $2,000 for married couples filing jointly. The limits are not indexed for inflation, and unused amounts do not carry forward.
The deduction is narrower than the headlines suggest. It does not apply to:
A married couple who takes the standard deduction and writes a $2,000 check to their local food bank gets a $2,000 deduction. The same couple writing the same check to their donor-advised fund gets nothing under this provision. Charities that promote DAF giving in year-end appeals should keep that distinction in mind, since many smaller donors will be claiming this deduction for the first time.
The 0.5% Floor for Itemizers
For donors who itemize, charitable contributions are now deductible only to the extent they exceed 0.5% of adjusted gross income. A married couple with $400,000 of AGI who gives $5,000 to charity loses the first $2,000 to the floor and deducts $3,000.
The part donors tend to miss is that the disallowed amount is generally gone. It does not carry forward to future years unless the donor’s giving also exceeds the regular percentage-of-AGI limits that year. If a donor’s deduction looks smaller than last year’s and the gift amount didn’t change, the floor is the likely reason.
Bunching Makes More Sense Now
The floor applies once per year, so concentrating several years of giving into one year means the donor loses the floor once instead of every year. Take the couple above. If they give $15,000 in 2026 and nothing in 2027 or 2028, they lose $2,000 to the floor once, rather than $2,000 each year for a total of $6,000. A donor-advised fund works well for this, since the donor gets the deduction in the year of the contribution and can still make grants to charities on the usual schedule. That donor won’t benefit from the non-itemizer deduction in the off years, though, because DAF contributions don’t qualify.
Top-Bracket and Corporate Donors
Donors in the 37% bracket now have their itemized deductions reduced so that each deducted dollar saves no more than about 35 cents. Corporations face a new floor of their own. Charitable contributions are deductible only to the extent they exceed 1% of taxable income, and the existing 10% ceiling still applies. For most corporate donors the effect is marginal, but companies that give a small, steady amount each year may find some or all of it no longer deductible.
A Note for Arizona Donors
Arizona’s charitable tax credits have not changed with the federal law. For 2026, a gift to a Qualifying Charitable Organization can generate a dollar-for-dollar state credit of up to $506 for single filers and $1,009 for married couples filing jointly. Gifts made through April 15, 2027 can be claimed on the 2026 return. Donors should remember that a gift claimed as a state credit generally cannot also be claimed as a federal deduction. That includes the new non-itemizer deduction.
What Hasn’t Changed
The substantiation rules are the same as before:
Donors should keep their acknowledgment letters with their tax records, and charities should make sure year-end receipts go out on time.
None of these changes are a reason to give less. They are a reason to think about how and when to give. For some donors that means writing checks directly to charities instead of routing them through a DAF. For others it means bunching several years of gifts into one.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
Since Rev. Rul. 71-447 in 1971 and the Supreme Court’s decision in Bob Jones University v. United States in 1983, the IRS has treated racial discrimination in private education as contrary to a fundamental public policy of the United States, disqualifying a school from tax exemption regardless of what the Internal Revenue Code itself says about “charitable” or “educational” purposes.
Rev. Proc. 75-50 built the compliance framework schools use to document a nondiscriminatory policy. That guidance also included a carve-out: a policy or scholarship program that favored a racial minority group did not count as discrimination if its purpose and effect was to promote the school’s own nondiscriminatory policy.
The proposed regulation adds a new section, 1.501(c)(3)-2, and states plainly that a private school is not operated exclusively for exempt purposes if it discriminates on the basis of race, color, or national or ethnic origin in any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered program, “for any purpose.”
That last phrase is the point. The IRS is proposing to eliminate the sentence in Rev. Proc. 75-50 that shielded remedial or diversity-oriented race-based scholarships, along with the related sentences in section 4.05 covering financial assistance programs. A scholarship fund restricted to students of a particular race would no longer be defensible on the ground that it was designed to promote diversity or offset historical discrimination.
The IRS is explicit about the legal chain behind this: Brown v. Board of Education, the Civil Rights Act of 1964, Bakke, Grutter, Gratz, Fisher, and finally Students for Fair Admissions v. Harvard in 2023, which ended race-conscious college admissions. This proposed rule extends that same reasoning to K-12 private schools and to scholarship and financial aid programs specifically, an area SFFA did not directly address.
The preamble goes out of its way to preserve two things. A religious school can still select students based on religious affiliation, even where that affiliation correlates with shared ancestry or ethnicity, as long as the actual selection criterion is religion, not ethnicity. And a school can still adopt policies aimed at eliminating prejudice and discrimination generally, so long as it does so by means that do not themselves discriminate on the basis of race, color, or national or ethnic origin.
The IRS estimates roughly 18,000 private elementary, secondary, and postsecondary schools currently hold exempt status, and roughly 750,000 students attend schools that may currently offer race-based scholarships. The IRS’s own analysis notes that only a small share of scholarship dollars, no more than 16%, come from endowments with donor-restricted racial eligibility criteria, so the practical disruption may be concentrated in a relatively narrow set of legacy scholarship funds rather than across the sector broadly.
Comments are due November 3, 2026, and anyone who submits timely comments can request a public hearing. If finalized, the rule would apply to tax years beginning after May 31, 2027. For a school on a July 1 fiscal year, that means the 2027-28 school year, and scholarship awards for that year are often made next spring. The time to review scholarship criteria and donor-restricted funds is now, not after the rule is final.
Any private school or scholarship-granting foundation with race-restricted financial aid should start now, not after the rule is finalized. Pull the actual gift instruments and letters of intent behind any scholarship or loan fund that uses race, ethnicity, or national origin as an eligibility criterion.
Where a fund was created by donor restriction, that restriction generally cannot be changed unilaterally, and reworking it may require going back to the donor, the donor’s estate, or in some cases a court under the state’s doctrine for modifying charitable gifts. Where the criteria were set by the school itself rather than by a binding donor restriction, shifting to income, geography, or first-generation status as eligibility criteria is a more straightforward fix, and one the IRS’s own economic analysis assumes most schools will make.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
]]>None of these threats to nonprofits are unique to the United States, and it is not new in kind, even if the current scale is unusual here. Governments that want to constrain civil society have used a fairly consistent toolkit for decades. It is worth laying that toolkit next to what Chan Loui documented, not to make a partisan point, but because the comparison is genuinely useful for risk planning. Organizations that understand the pattern are better positioned to respond to any individual piece of it.
Political scientists who study what’s often called “closing civic space” have documented a remarkably consistent set of tools used across very different regimes. Russia’s 2012 “foreign agents” law required NGOs receiving foreign funding and engaging in loosely defined “political activity” to register under that label, submit to intensive audits, and carry the designation on all public materials;
Human Rights Watch has tracked similar foreign agent laws spreading to dozens of other countries since, describing them as a standard item in the authoritarian playbook. Hungary’s 2017 “Lex NGO” imposed similar transparency and registration burdens targeted at organizations critical of the government, while allowing ideologically aligned groups to operate without the same scrutiny.
Egypt’s 2017 NGO law restricted foreign funding and political advocacy outright, backed by criminal penalties. Between 2014 and 2016 alone, researchers tracked more than sixty countries imposing new restrictions on civil society funding and assembly.
The closing civic space mechanisms vary, but they cluster around a few consistent categories. Threats to nonprofits include governments cutting off funding, either foreign or domestic.
They impose burdensome registration, reporting, or audit regimes not required of other organizations. They apply a stigmatizing label (foreign agent, extremist, terrorist) that chills donors and partners. And they back all of it with civil or criminal liability.
The Carnegie Endowment for International Peace has written specifically about how several of these same mechanisms have already appeared, in less concentrated form, in the United States over the past two decades, arguing that civic space here has been narrowing gradually and across administrations, not suddenly and from a single source.
Measured one way, the current administration had issued 274 executive orders, 84 presidential memoranda, and 167 proclamations by the time of Chan Loui’s presentation, an unusually high volume by historical standards; other trackers, using different cutoff dates and counting methods, put the executive order count somewhat lower, in the 260s as of mid-2026, but every count agrees the pace is historically fast.
Beyond the sheer volume, Chan Loui pointed to the use of federal agencies to change regulations and policy outside the ordinary legislative process, an increase in third-party lawsuits targeting organizations over DEI programming, and a marked shift in public rhetoric that treats philanthropy and the nonprofit sector as suspect rather than presumptively beneficial.
The threats she identified for individual organizations track the historical toolkit closely. They include loss of federal funding, loss of donor support or access to donor networks, tax audit or investigation (civil or criminal), loss of federal tax exemption or other favorable status, being labeled a domestic terrorist organization, and direct civil or criminal liability.
What makes this moment different from a simple political mood is that each of these threats is being tied to an actual legal theory, not just rhetoric. Chan Loui grouped the current bases into four categories.
This is the theory behind threats to revoke exemption over “illegal DEI,” or over an organization’s role in immigration, reproductive health, or environmental advocacy the government characterizes as unlawful. Ellen Aprill, in a widely circulated 2025 paper, walks through this and three related doctrines in detail and concludes that organizations have real statutory and constitutional arguments available to push back, but the doctrine itself is genuinely unsettled and worth taking seriously.
As we’ve written before, revoking exempt status, for any reason, still requires the IRS to follow an actual examination process with notice and appeal rights; a terrorism designation carries its own separate legal framework and consequences, and conflating the two threats can cause organizations to over- or under-react to either one.
Organizations receiving federal funds are exposed to FCA liability, which carries treble damages and allows private whistleblowers to bring claims on the government’s behalf, for misrepresentations in grant applications or reporting.
The Department of Justice stood up a new National Fraud Enforcement Division in April 2026, with enforcement priorities announced in August 2026 that explicitly include federal grants and benefits paid to nonprofits alongside other federal spending. Civil False Claims Act inquiries can now run in parallel with criminal fraud investigations out of the same office, which raises the stakes of any inquiry considerably.
None of this means every audit or funding decision reflects an authoritarian motive; governments have always had a legitimate interest in preventing actual fraud, and not every regulatory shift is targeted. The pattern is useful precisely because it is a pattern, not a verdict on any single action.
What it should tell you is which categories of risk to actively monitor rather than treat as background noise. Those include funding dependency, the accuracy and documentation behind every federal grant report and certification, the organization’s actual (not aspirational) compliance with its stated tax-exempt purpose, and its readiness to respond quickly and correctly if a demand letter, subpoena, or audit notice arrives.
Organizations that have never had to think seriously about FCA exposure or the illegality doctrine before should start now, while there is still time to build the documentation and internal controls that make the difference between a defensible position and a vulnerable one.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
]]>Arizona has run its own version of this since 1997. The federal program borrows the structure closely enough that anyone who has worked with an Arizona School Tuition Organization will recognize most of the rules, including the 90% spending requirement, which is lifted almost exactly from Arizona law.
Starting in 2027, an individual who donates cash to a qualifying scholarship granting organization, or SGO, can claim a federal tax credit of up to $1,700 a year. It is a credit rather than a deduction, so it reduces the tax bill directly rather than reducing taxable income. Arizona taxpayers have had access to the same mechanism at the state level through the state’s tax credit programs for close to thirty years.
To qualify as an SGO under the federal statute, an organization has to:
1. Hold 501(c)(3) status as a public charity. Private foundations do not qualify.
2. Keep contributions in a segregated account, separate from general operating funds.
3. Serve at least ten students who do not all attend the same school.
4. Spend at least 90% of qualified contributions on scholarships.
The 90% requirement matches what Arizona has required of school tuition organizations since the program began. The segregated account requirement is new for organizations used to Arizona’s framework, which does not impose the same accounting separation, and it is worth setting up before an organization starts accepting these contributions rather than after.
The credit is not automatically available to donors in every state. A state has to elect to participate, and its governor, or whoever state law designates, has to certify a list of approved SGOs to the Treasury Department. The IRS described the process in Revenue Procedure 2026-6, which allows a state to make an advance election for 2027 through Form 15714, filed on or after January 1, 2026.
Twenty-seven states have made that election so far: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming.
Arizona is not on that list yet, and neither is Washington, our other practice state. Organizations running Arizona STOs should not tell donors to expect the federal credit until Arizona actually opts in.
A student must be eligible for public school and live in a household earning no more than 300% of the area median gross income, a figure HUD calculates annually by location. That threshold covers roughly nine out of ten K-12 students nationally, so income screening is unlikely to disqualify many applicants.
Organizations that already run an Arizona STO have most of what this program requires already in place operationally. The main gap is the segregated account rule and the requirement to serve students across more than one school. Organizations building an SGO in a state without Arizona’s history should look to Arizona’s STO practices as a starting point, since that program has already worked through most of the practical issues this one will raise.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
]]>For each fiscally sponsored project, the bill would require a fiscal sponsor to report the aggregate amounts made available during the year for that project, a description of the project’s activities, the name of the individual designated as the principal officer managing the arrangement, and the dates the arrangement began and, if applicable, ended. This is new. Fiscal sponsors currently do not report at this level of project-by-project detail.
The bill defines a “fiscal sponsorship arrangement” narrowly enough to matter but broadly enough to create real ambiguity. It applies to an arrangement between a fiscal sponsor and a non-exempt party (an individual or an entity that is not itself tax-exempt, including 501(c)(4), (c)(5), or (c)(6) organizations) where either the sponsor is paid to receive and administer funds on the other party’s behalf, or the sponsor publicly solicits funds for a specifically identified project, agrees to receive and administer those funds for the project, and either party can terminate the arrangement.
Traditional Model A fiscal sponsorship, where the sponsor takes full ownership and control of a project and its funds, appears to be the bill’s primary target. Model C arrangements, where the sponsor acts more like a grantor to a separately operating project, are treated differently under the bill’s language, and commentators analyzing the bill have flagged real uncertainty about how it would apply to a Model C sponsor providing management services, and about whether the disclosure requirements could sweep in ordinary restricted grants and project-specific funding agreements that were never meant to be fiscal sponsorship at all.
The bill also creates a new excise tax for what it calls an “improper conduit arrangement,” meaning an arrangement where a tax-exempt organization solicits or receives contributions intended for a specific non-exempt person and fails to exercise discretion and control over how the funds are used. The organization itself would face a first-tier tax of 20 percent of the amount improperly transferred, rising to 100 percent if not corrected. Organization managers, including board members and officers, who knowingly permit the improper transfer would face their own tiered tax of 5 percent, rising to 50 percent. This is a meaningful personal exposure for board members, not just an organizational penalty.
HR 9721 has been approved by the Ways and Means Committee but has not passed the full House, has not been taken up by the Senate, and is not law. Bills at this stage frequently change substantially, and this one is likely to see further revisions given the ambiguity around Model C arrangements and disregarded entities. Fiscal sponsors should track it, not react to it as though it is final.
Even before this bill moves further, it is a good prompt to clean up two things that fiscal sponsors should already have in order. First, every fiscal sponsorship agreement should clearly document that the sponsor retains discretion and control over sponsored funds, not just as boilerplate language, but in how the arrangement actually operates in practice. Second, sponsors should be able to identify, for every active project, who the responsible principal officer is, when the arrangement began, and what has been disbursed to date. Organizations that already track this at the project level will have little to do if the bill becomes law. Organizations that do not will have real work ahead of them.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C., licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.
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