The National Rifle Association has come under unprecedented scrutiny in the wake of a Trace/The New Yorker investigation that described how a small group of the organization’s executives, contractors, and vendors siphoned millions of dollars from the nonprofit’s budget.
Calls to inspect the NRA’s nonprofit status include a probe launched by the attorney general of New York, an inquiry by the members of the Senate Finance Committee, and now a letter from a member of the House Ways and Means Committee. So we decided to break down some of the potential regulatory and legal threats facing the gun group and what they could mean for its future.
What the IRS could do
Revoke federal nonprofit status
Several inquiries, including those from the Senate and House, have focused on whether the NRA violated the terms of its nonprofit status and if it could lose its tax-exemption as a result.
The Internal Revenue Service grants certain corporations nonprofit status on the condition that they work for the public good. In exchange for civic-minded activities, the organizations don’t have to pay taxes on income or assets. But if the organization instead exists to, say, enrich its officers to the neglect of its social mission, then it essentially steals tax revenue from the public. If the IRS decides an organization has betrayed the public good, the agency can revoke the exemption.
For many nonprofit organizations, loss of that tax status could be devastating to fundraising because the tax code incentivizes charitable giving by treating donations as tax deductible. For example, this would be true of the NRA Foundation, a separate legal entity from the primary organization that is classified as a 501(c)3 under the tax code. But the NRA itself is specifically designated as “social welfare organization” — or a 501(c)4 — and donations to such groups are not tax-deductible. In that regard, a change in corporate status would not directly disincentivize contributions.
If the NRA lost its tax exempt status, it would hypothetically have to pay corporate taxes on any profits. But an organization like the NRA doesn’t make profits: It spends all its revenue on programming, operations, and campaigning. If in a given year the NRA realized it was going to take in more money than it planned on spending, it could avoid a tax bill by just ramping up expenditures. As law professor Richard Schmalbeck of Duke University explained, “If they don’t record any profits, they don’t pay any tax,” regardless of federal corporate status.
However, revocation could still seriously hurt the organization, according to Phillip Hackney, a law professor at the University of Pittsburgh who worked on nonprofit tax law and regulations for five years in the IRS’s Office of Chief Counsel. Loss of nonprofit status would underline just how toxic the reputation of the NRA has become, Hackney said. And because the financial support of dues-paying members is so critical for an organization that has routinely failed to attract big donor support, this could prove enormously impactful.
Levy fines for specific individuals
The IRS could also charge hefty fines if it finds the vendors, board members, or executives improperly enriched themselves at the expense of the “social welfare” mission of the organization. For instance, if the IRS determined that board members and executives were paid in improper ways, the tax agency could deem the payments an “excess benefit transaction,” and order restitution to the NRA. The agency could also order a vendor or board member to pay the government a tax equal to 25 percent of that excess benefit on top of compensation to the NRA. If the relevant person or company fails to repay the NRA promptly, the IRS could levy an additional 200 percent tax.
Any of the executives, vendors, or board members who enjoyed the NRA’s excessive largesse could be on the hook for an excess benefit tax, even top figures like Wayne LaPierre or former NRA President Oliver North, who resigned last month after himself alleging financial mismanagement at the organization.
What New York State could do
Despite having its headquarters in Northern Virginia, the NRA has been chartered in New York since 1871. As a result, the state has wide latitude to investigate the organization. The scope of the probe announced last month by New York’s attorney general, Letitia James, is not yet clear, but experts say it has the potential to impact the gun group even more than the IRS.
Remove board members or executive staff
According to the National Council of Nonprofits, directors of a nonprofit have three basic obligations enshrined in state corporation law: duty of care, which is an obligation to ensure the best use of the organization’s assets and staff; duty of loyalty, an obligation to prevent conflicts of interest; and duty of obedience, an obligation to follow laws, obey bylaws, and stay true to the organization’s mission.
If authorities are able to prove the improprieties unearthed by The Trace’s reporting, it would suggest that the board failed to fulfill its fundamental duties, said Michael West, senior attorney for the New York Council of Nonprofits. He pointed to the relationship between the NRA and marketing firm Ackerman McQueen as an example of the kind of potential conflict of interests that could be probed. “Anybody getting paid by Ackerman shouldn’t have even been in the room when payments to the firm were discussed,” West said. “If a director or officer didn’t disclose actual or potential conflicts, and influenced votes having to do with Ackerman, or voted on such matters themselves, all those things would violate New York law.”
Under New York’s Not For Profit Corporation Law, if the state’s attorney general believes directors have violated those basic duties, she can ask a court to remove board members or officers.
Monitor from within
Considering the pervasive nature of the alleged wrongdoing from the NRA board down to the staff level, the New York attorney general could ask a court to appoint a receiver to oversee the group’s operations.
This would subject the NRA’s internal workings and finances to even further scrutiny. It would also severely hamstring longtime NRA leaders. The receiver “would remove decision making ability from board and staff,” West explained.
The attorney general could also ask the court to appoint a forensic auditor to go through all of the NRA’s business records, not just those directly tied to specific business dealings. “The auditor would delve into everything,” West said, providing a much more expansive view of internal finances than is currently available.
New York authorities could also forbid the NRA from working with certain vendors. The NRA’s relationship with Ackerman is at the center of many cases of financial impropriety uncovered by The Trace. “The attorney general could say, ‘There’s an ongoing pattern of abuse and we don’t want any more transactions with Ackerman McQueen,’” said West. Such a ban would have a heavy impact on the NRA as an organization, given how instrumental Ackerman has been in producing NRA programs and messaging efforts.
Dissolve the organization
Otherwise known as the “corporate death penalty,” this is the most radical option on the table.
New York law allows the attorney general to ask a court to “annul the corporate existence or dissolve a corporation that has acted beyond its capacity or power or to restrain it from carrying on unauthorized activities.” Essentially, the attorney general could argue in state court that the only way to stop the abuses at the NRA is to shut the entire group down, revoking its charter and disposing of its assets. This is what many legal and tax experts refer to when they say the NRA’s financial crisis could lead to the demise of the organization.
But New York has rarely employed this power, especially not for nonprofits as large and active as the NRA. The only recent comparable example experts mentioned was the Trump Foundation, which New York began dissolving last December following a series of press reports that the president and his family used the organization primarily as a slush fund, rather than a charitable organization.
Annulment could be a risky legal strategy, said West. The NRA could counter-sue on First Amendment grounds, arguing that a Democratic state attorney general is trying to destroy the organization out of political animus.
And even if a New York court did choose to dissolve the NRA, it would have to decide what to do with the NRA’s valuable assets, like its membership rolls. The standard in New York is to dispense assets like the rolls to a substantially similar organization, West said, a step that could lead to a kind of reconstitution of parts of the NRA in a different institutional form.
Asking a court to dissolve the NRA is the most unlikely option for a reason, West said. “The more you go for a homerun, the likelier it’s gonna be a swing and a miss.”