Ninth Circuit judges hear debate over university’s nonprofit status

PASADENA, Calif. (CN) — The Ninth Circuit heard arguments Wednesday on whether the U.S. Department of Education has the authority to override the Internal Revenue Service’s determination of a nonprofit entity. 

Hearing arguments from the department as to why it didn’t grant Grand Canyon University nonprofit status in 2021, the three-judge panel seemed unconvinced. 

“I still don’t understand how you understand the definition of nonprofit to carry over the entirety of the definition of 501(c)(3) so that you will be checking the IRS’ homework,” U.S. Circuit Judge Daniel Collins said to Education Department attorney Casen Ross. 

“The Department of Education did not check the IRS’ homework, your honor,” Ross countered. 

“You certainly did,” the Donald Trump appointee shot back. “You took their test, you applied it, and you then said they reached the wrong conclusion!”

The university has operated as a nonprofit for most of its existence since its 1949 founding. For a university, a nonprofit classification comes with the ability to accept charitable donations, more financial aid, easier recruitment processes, and the avoidance of property taxes which, for Grand Canyon University, is up to $9 million per year. 

The university’s board of trustees sold it to a for-profit corporation called Grand Canyon Education in 2000 amid financial troubles. After taking a decade to stabilize, the board created a new entity, known as “New GCU,” to buy back the university and return to a nonprofit status. It sued in 2021 when the Department of Education refused to recognize the change, and a federal judge denied the university’s motion for summary judgment the following year.

Under the 2015 transaction, New GCU pays Grand Canyon Education 60% of its revenue in return for marketing, accounting and other support services. GCU’s president also serves as CEO of Grand Canyon Education. The IRS officially recognized the university as a nonprofit in 2018, but the Department of Education did not, citing the agreement as evidence it still operates for profit. 

“Most of the revenue still went back to that corporation, and most of the university’s executives are employees of that corporation,” Ross told the panel Wednesday morning. 

Steven Gombos, attorney for GCU, said the service agreement between the school and the for-profit corporation is an industry standard, citing examples of universities with similar deals, like Purdue Global and Arizona State University. 

Ross argued the school’s revenue should go directly to students, not another corporation. Gombos said that’s why the deal exists in the first place. 

“Everything that GCE does at GCU benefits students at GCU,” he told the panel. 

Though the Education Department didn’t find the school to be a nonprofit when it reviewed it in 2020 and again in 2021, Gombos told the panel that the department never found evidence of private inurement — a business insider receiving any of the organization’s net income or assets for personal gain.

“If the department found private inurement, we may have a problem,” Gombos said. “But there is absolutely no showing on the facts of this transaction that an insider was paid net profit in this circumstance.”

Ross said the department doesn’t need to find evidence of private inurement to find that the university is operating for profit. U.S. Circuit Judge Danielle Forrest, a Donald Trump appointee, questioned on what authority the department had to make that determination in the first place. 

“Isn’t that the IRS’ job?” she asked? 

Ross said that while the IRS typically takes assertions of nonprofit operations at face value, the department has authority to conduct audits of an entity’s claims to ensure its operating as advertised. 

The judges seemed uncertain of Ross’ assertion. 

U.S. Circuit Judge Jennifer Sung, a Joe Biden appointee, rounded out the panel. The judges didn’t indicate when they will rule. 

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