Three Observations from Recent Media Coverage of Liberty University
Napa Legal Institute takes no positions on particular legal or public policy matters. Any expressions of opinions are solely those of the author.
by John C. Peiffer II, President & General Counsel, NLI
Earlier this year, Liberty University was the subject of several less-than-flattering articles regarding certain conflicted transactions and governance-related issues, such as here, here, and, in most detail, in this Politico article by a former Liberty University student. The articles suggest that some of the leaders of the university used their authority at the organization to benefit themselves and their supporters financially and otherwise.
Assuming the accuracy of the facts reported (many of which, admittedly, are disputed by representatives of Liberty University and the Falwells), there are a multitude of observations that can be made, but for our inaugural blog post, I will limit myself to three.
Before getting to those three observations, however, it’s worthwhile to remind ourselves that Section 501(c)(3) of the Internal Revenue Code exempts from federal income tax the following organizations:
“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” (Emphasis added.)
The Two Tests: Organizational and Operational
In nonprofit tax jargon, Section 501(c)(3) presents both an “organizational” requirement and an “operational” requirement that must be met in order for an organization to be exempt from federal income tax.
Specifically, the organization must be “organized and operated exclusively” for one or more of the stated purposes, which include religious, charitable, and educational purposes. Further, “no part of the net earnings” of the organization may “inure to the benefit of any private shareholder or individual”. In this context, “inure” means, as Merriam-Webster defines it, “to become of advantage.”
Thus, more specifically for our purposes, an entity organized and operated exclusively for charitable, religious, or educational purposes generally cannot use its assets for the advantage of individuals. There are important exceptions to this rule where, for example, a charitable organization formed to relieve poverty provides benefits to the poor and where an organization pays “reasonable compensation.”
The articles linked raise questions regarding various conflicts of interest and private inurement/private benefit issues at Liberty. Please see the white papers recently written by Bonnie Wyllie, the chair of our Tax Exemption Working Group, for an overview of private inurement/private benefit issues, which can prove fatal to a tax-exempt organization.
Without any further ado, now to my three observations.
Observation #1: 501(c)(3) Organizations are not family businesses
As noted in the Politico article, Falwell’s younger son, Jonathan, succeeded the founder as pastor of TRBC and his older son and namesake, Jerry Jr., succeeded his father as president of Liberty. According to Jerry Jr.’s bio, he worked as general counsel of Liberty in addition to working as a local lawyer and real estate developer in Lynchburg, Virginia (the home of TRBC and Liberty), developing commercial real estate adjacent to the Liberty campus.
Liberty is a Virginia Nonprofit Corporation – neither the Falwells nor any other individuals own the university. Some quick research hasn’t identified any specific prohibitions on family members succeeding other family members as directors or officers of a nonprofit corporation under Virginia nonprofit law (though, in my experience, this kind of succession planning is generally more common with so-called “family foundations” qualified as “private foundations” under Section 509(a) of the Internal Revenue Code than with public charities such as Liberty University). There is, however, a general statute governing the conduct of nonprofit directors in Virginia (and most states have similar statutes with certain variations). Section 13.1-870(A) of the Virginia Code requires that a director “discharge his duties as a director […] in accordance with his good faith business judgment of the best interests of the corporation.”
Given the well-documented financial success that Liberty University has had since Rev. Falwell’s death, it may be the case that the selection of Jerry Jr. was in Liberty University’s best interests – I have no opinion one way or the other on this question. However, the mere fact that son succeeded father in the senior leadership role of an institution that already had net assets of nearly $150 million could give the appearance, if nothing else, that this nonprofit, tax-exempt, public charity is being operated like a family-owned business.
Such an impression can, in some circumstances, cause significant harm to an organization’s fundraising efforts and to morale (among both constituencies served and staff). To avoid this impression, boards should take care to exercise their independent fiduciary judgment as to the best course of action for the organization in question, so that a family-based succession plan is not considered a fait accompli. If a board is ultimately going to select the child or another close family member of a founder or prior president to succeed to an organization’s top leadership post, the board should be able to clearly articulate why such succession is best for the organization, rather than being best for the family or the founder’s own legacy.
I was not able to locate publicly available information through internet searches regarding the process by which the succession plan was developed. The “History of Liberty” on its website merely states: “With the passing of the founder in 2007, his son, Jerry Falwell Jr., became chancellor and president of the university. At the 2007 Commencement ceremony, just days after his father’s passing, the now President Falwell proclaimed, ‘We have prepared for this transition for 15 years or more. All is well at Liberty.’”
For most public charities of Liberty’s size and stature at the time of Rev. Falwell’s death, a documented national search for the next president would be appropriate. If the board were to determine after such search that a close family member is the best successor, then the board can feel more confident in its choice and better resist charges of nepotism or favoritism because of the process that was undertaken.
Observation #2: All senior leadership of religious organizations are responsible for its religious identity
The Politico article quotes a two-part message posted by Jerry Falwell, Jr. on his Twitter feed:
“I have never been a minister. UVA-trained lawyer and commercial real estate developer for 20 yrs. Univ president for last 12 years-student body tripled to 100000+/endowment from 0 to $2 billion and $1.6B new construction in those 12 years. The faculty, students and campus pastor @davidnasser of @LibertyU are the ones who keep LU strong spiritually as the best Christian univ in the world. While I am proud to be a conservative Christian, my job is to keep LU successful academically, financially and in athletics.”
This artificial delineation of spheres of responsibility into spiritual matters and academic, financial, and athletic matters may make sense (note the use of the term “may”) if one is the Campus Minister, the Provost, the CFO, or the Athletic Director, but this seems like an inappropriate position for the President of a Christian university to take, given his responsibility for guiding the University’s mission fulfillment and, more practically, his supervisory role over all Liberty employees, whether clergy, academics, athletic coaches, or administrative staff.
Liberty’s “Philosophy of Education” describes the University as “a Christian academic community”. Further, its “Statement of Mission and Purpose” states in part, “Maintaining the vision of the founder, Dr. Jerry Falwell, Liberty University develops Christ-centered men and women with the values, knowledge, and skills essential to impact the world.” In addition, Liberty’s website includes a 12-point “Doctrinal Statement” . In a typical organization, the president, as general manager of the organization should have ultimate responsibility for the organization’s fidelity to its identity as stated in its Philosophy, Mission, and Doctrinal Statement.
Especially in a post-Hosanna-Tabor world, care should be taken by religious organizations in the preparation of job descriptions and articulation of job responsibilities. Most importantly, it should be clearly stated for all senior leadership that they do in fact have responsibility for the organization’s fidelity to its religious identity. A religious organization is only as strong as its commitment to its religious identity, so all job postings, descriptions, etc. for senior leadership should expressly state their responsibility for maintaining and protecting this identity.
Observation #3: If you take controversial positions, be prepared for attacks.
Like his father and predecessor as University president, Jerry Falwell, Jr. has not shied away from controversy. For example, he has been an outspoken supporter of President Trump. For many organizations, the controversial position will not be support of a particular politician, but rather advocacy for some controversial moral position.
Whether via the 990s or other public sources, an enterprising party can obtain quite a bit of information about an organization’s internal practices and policies. Religious organizations should be prepared for the possibility that those who disagree with their message or policy positions would be interested in at least discrediting, if not actually preventing, the ongoing operation of such organizations.
For this reason, the organization should take care to ensure that potentially problematic transactions, such as compensation determinations and approval of conflict of interest transactions are carefully documented according to applicable state and federal legal requirements. Better yet – where possible, just avoid the conflict of interest transactions in the first place. If the transactions don’t take place, the organization’s opponents will need to find some other basis for attack, as such transactions won’t be available for scrutiny.
John Peiffer serves as President and General Counsel of NLI. He is also CEO of the Busch Firm. John advises for-profit and nonprofit clients on business transactions, entity structures, and corporate formation and governance. He has advised Catholic dioceses, religious orders, private religious schools, and other religious organizations on mission-focused corporate structuring and governance, tax compliance issues, and charitable planning structures. John obtained a B.A. in Classical Studies and English from Santa Clara University, an A.M. in Religious Studies from the University of Chicago Divinity School, and a J.D. from the University of Notre Dame Law School.