New York Attorney General Letitia James is aiming to dissolve the National Rifle Association of America (NRA) as a nonprofit tax-exempt organization. As this conflict proceeds, questions continue to surface about whether this effort is a bullseye, a misfire, or something in between. If successful, it will undoubtedly have a lasting impact on the nonprofit sector.
Established in 1871 by Col. William Conant Church and Gen. George Wood Wingate, two Union army veterans, the NRA originally sought to “promote and encourage rifle shooting on a scientific basis.” Today, the NRA, recognized by the Internal Revenue Service as a tax-exempt social welfare organization under Section 501(c)(4) of the Internal Revenue Code, continues to teach firearms training and marksmanship, and also promotes and advocates for gun rights and firearm possession. The organization is largely considered to be one of the most influential and notorious advocacy groups in the United States, but it now faces a major obstacle: potential corporate dissolution.
New York AG Lawsuit
The NRA was chartered by special New York legislation, in November 1871. The NRA remains a New York corporation, although its principal place of business is now located in Virginia. As legally required, the NRA is also registered with the Charities Bureau of the New York Attorney General’s Office. The Bureau oversees charitable activities in New York, requiring all charitable organizations that hold assets or solicit funding in any manner in the state to comply with certain legal requirements, including annual reporting. Interestingly, New York is one of several states that expansively defines the word “charity” to include not only charitable organizations under 501(c)(3), but also those nonprofits organized for the promotion of social welfare under 501(c)(4), and nonprofit organized for “many other purposes beneficial to the community.” Thus, while the NRA may not be required to register in most states because it is not charitable, New York’s regulatory structure is again, unusually broad.
On August 6, 2020, New York’s Attorney General Letitia James filed a Complaint against the NRA, alleging that the NRA conducted business in a “persistently fraudulent or illegal manner” and failed “to provide for the proper administration” of assets and funds. The complaint also alleges that certain persons in the NRA’s leadership “looted or wasted” corporate assets and operated the organization solely for “personal benefit.” Based on these allegations, James seeks, in part, to dissolve the NRA for the public interest and for the interest of the members of the organization.
Attorney General’s Allegations
The Complaint focuses primarily on defendants Wayne LaPierre, Wilson Phillips, John Frazer, and Joshua Powell. In summary, the Complaint asserts that LaPierre violated his duties to the organization while he served as the NRA’s Chief Executive Officer and Executive Vice President by exploiting his offices for personal financial benefit and for the benefit of a “close circle of NRA staff, board members and vendors.” Also, the Complaint contends that individual Defendants ignored, overrode, and otherwise violated the bylaws, internal policies, and procedures that they were responsible for enforcing on a regular basis. As a result, the NRA’s charitable assets benefited insiders and favored vendors, and the financial mismanagement contributed to the organization’s net asset loss of $63 million from 2015 to 2018.
The Complaint also alleges that Phillips, the NRA’s former Treasurer and Chief Financial Officer, created a system allowing NRA executives to incur entertainment and travel expenses that were charged to the NRA as payouts by its largest vendor. Powell, former Chief of Staff and Executive Vice President of Operations allegedly received large pay increases in less than three years as directed by LaPierre, despite evidence of improper and illegal behavior. Frazer allegedly served as General Counsel and failed, due to inexperience, to ensure procedural compliance for related party transactions with NRA insiders and to enforce the whistleblower and conflict of interest policies.
The Complaint concludes that the NRA “persistently engaged in illegal and unauthorized activities” through its business conduct and transactions and through its oversight failures. The Complaint also asserts that the NRA’s officers and directors disregarded internal controls, wasted charitable assets, and assisted in providing “materially false and misleading” annual reports to the New York Attorney General and consequently should be judicially dissolved.
The New York Attorney General also requests the following specific actions against the individual Defendants: (1) to account, make restitution and pay all penalties resulting from the breach of fiduciary duties and misuse of funds; (2) remove LaPierre and Frazer from their positions; (3) prohibit the individual Defendants from serving as an officer, director, or trustee, or in any other capacity as a fiduciary of any not-for-profit or charitable organization in New York, or which solicits charitable donations or holds charitable assets in the state; (4); rescind related party transactions by the individual Defendants and direct them to account for their profits and to pay the NRA up to double the value of each benefit improperly received by such transactions; (5) direct the NRA to account for its official conduct regarding the management of its institutional funds; and (6) order restitution from the individual Defendants to recover illegal, unauthorized, or ultra vires compensation, reimbursements, benefits or amounts unjustly paid to them.
Requesting a court to require the insiders to correct the transactions and prohibit the individuals from serving in similar positions for other charitable organizations are fairly common remedies in cases alleging the misuse of charitable assets to improperly benefit insiders. What makes this case so unusual is that the New York Attorney General is also asking the court to completely dissolve the corporation. Such a drastic remedy should concern nonprofit entities in general because it acts to destabilize the relationship between the Third Sector and the state. The state’s role is to help protect charitable assets to ensure that the organization’s assets are properly used to advance the specific purposes for which the funds were solicited, and not inure to the benefit of private insiders. Thus, in seeking to dissolve the corporation, how is the New York Attorney General’s office seeking to protect the NRA’s mission or purpose? This additional step is causing many to question whether the Attorney General’s motivation behind this lawsuit is not also directly tied to the shutting down the purposes and ideas that the NRA is organized to advance.
New York Law
The AG brings this action against the NRA based on four different statutory frameworks: The New York Estates, Powers, and Trusts Law (“EPTL”), the New York Not-For-Profit Corporation Law (“N-PCL”), The New York Prudent Management of Institutional Funds Act (“NYPMIFA”), and the Executive Law. With respect to the request for corporate dissolution, the AG relies on several legal footings. First, Sections 112(a)(1), 112(a)(5), and 1101(a)(2) of the N-PCL, grant the Attorney General the authority to bring proceedings to dissolve a corporation for acting “beyond its capacity or power...” (see §112(a)(1)). Second, the sections allow the Attorney General to bring an action for judicial dissolution under Article 11 of the N-PCL (see §112(a)(5)). Finally, Section 1101(a)(2) allows for dissolution where a “corporation has exceeded the authority conferred upon it by law, or … has carried on, conducted or transacted its business in a persistently fraudulent or illegal manner,” or abused its powers contrary to public policy of New York.
Additionally, Section 112(a)(7) of the N-PCL grants the Attorney General the authority “[to] enforce any right given under [the] chapter to members, a director, or an officer” of the organization with the accompanying status of a member, director or officer. In turn, Section 1102(a)(2)(D) allows for a petition for judicial dissolution to be entered by any director when “directors or members in control” of the entity “have looted or wasted the corporate assets, have perpetuated the corporation solely for their personal benefit, or have otherwise acted in an illegal, oppressive or fraudulent manner.”
However, the judicial dissolution of any corporation is an extreme measure, and particularly one that has substantial operations, extensive activities, and otherwise adheres to corporate formalities. Typically, a corporation is judicially dissolved because the corporation itself is a sham or being used as an alter ego to commit fraud. Such actions should be used sparingly and as a last resort.
On the day when the AG complaint was filed, the NRA filed its own complaint against the AG in the Federal District Court for the Northern District of New York. The NRA complaint alleges that the New York Democratic Party motivated the AG “to harass, defund, and dismantle the NRA” because of its political positions. Also, it alleges that that the AG made disparaging and threatening remarks toward the NRA during her election for Attorney General. The NRA asks the court for declaratory and injunctive relief under the First Amendment. Additionally, it asks for a judicial declaration that the organization “operates in substantial compliance” with New York law.
The NRA’s Complaint challenges the AG’s objectivity toward the organization by claiming that she campaigned on the promise to “‘take down the NRA.” The NRA Complaint further alleges that the AG wrongly characterized the NRA as a “‘terrorist organization” and a “‘criminal enterprise.’” These allegations, along with the charge that the AG failed to honestly investigate the NRA, potentially paint an alternative picture that focuses on the politically partisan nature of her lawsuit. Meanwhile, the NRA posits that its organization has pursued a principled, legally compliant path in its charitable operations.
IRS Investigates LaPierre for Criminal Fraud
The Wall Street Journal reported on October 5, 2020 that the IRS was investigating LaPierre for “possible criminal tax fraud related to his personal taxes.” LaPierre will then need to justify his reported $11.2 million in NRA pay as “reasonable” for nonprofit compensation purposes, as well as possible additional financial matters involving him individually. This IRS scrutiny adds another layer of growing legal complexity, showing how both the IRS (as tax law enforcer) and a state Attorney General office (as protector of charitable assets) can dovetail in government enforcement against alleged abuse of tax-exempt charitable resources.
Is the New York AG acting properly, or is she abusing her position of high office? Unchecked corruption within any nonprofit harms the Third Sector as a whole, but partisan politics cloaked in government oversight likewise undermine the office’s legitimacy and public trust. In this instance, a significant question focuses on the sought-for remedy of dissolution—is it appropriate even if all the allegations are true?
In The Wall Street Journal, David Cole, national legal director at the American Civil Liberties Union, decried the effort of dissolution and urged that the NRA should not be punished “for the wrongs of some of its leaders.” Cole offers a sobering thought: if the New York AG can do this to the NRA, “why couldn’t the attorney general of a red state take similar action against the ACLU, the AFL-CIO, Common Cause, or Everytown for Gun Safety?” Such politicization of nonprofit law could severely threaten the Third Sector by opening the field to political witch-hunts and scoresheets.
It is for these reasons that the New York AG’s case against the NRA should be closely followed by all nonprofit organizations.
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