PASADENA, Calif. (CN) — The Ninth Circuit on Friday morning vacated the U.S. Department of Education’s denial of nonprofit status to a Christian university in Arizona, reversing an earlier summary judgment decision that had affirmed the denial.
Nearly a year after it heard arguments, a three-judge panel found the Department of Education applied the wrong legal standards when it denied nonprofit status to Phoenix-based Grand Canyon University. The school was already classified as a nonprofit by the Internal Revenue Service at the time.
The panel found that even though the university had already passed the IRS test, federal education officials inappropriately applied IRS nonprofit standards rather than the less strict rules set forth in the Higher Education Act of 1965.
Section 501(c)(3), which covers tax exemptions for nonprofits, “requires that the institution be ‘organized and operated exclusively’ for ‘educational’ and other specified ‘purposes,’” U.S. Circuit Judge Daniel Collins wrote in a 21-page opinion. Conversely, the Higher Education Act “requires only that the institution be ‘owned and operated by one or more nonprofit corporations or associations.'”
Therefore, the Donald Trump appointee continued, “the Department thus invoked the wrong legal standards by relying on IRS regulations that impose requirements that go well beyond the HEA’s requirements.”
Since its founding in 1949, the private university has mostly operated as a nonprofit. For universities, a nonprofit classification allows for charitable donations, more financial aid, easier recruitment processes and the avoidance of property taxes. For GCU, those taxes were up to $9 million per year.
Amid financial troubles, the university’s board of trustees in 2004 sold the school to a newly-created, for-profit corporation called Grand Canyon Education. After taking a decade to stabilize, the board created a new entity, known as “New GCU,” to buy back the university and return it to a nonprofit status.
The Department of Education refused to recognize the change, prompting the university to sue in 2021. The following year, a federal judge denied the university’s motion for summary judgment.
“Today’s decision is a long-awaited correction to the department’s unlawful application of a standard that improperly denied GCU of its nonprofit status,” GCU spokesperson Bob Romantic said in a press release. “We are hopeful for a quick affirmation of the university as a nonprofit institution.”
Under a 2015 deal, New GCU pays Grand Canyon Education 60% of its revenue in return for marketing, accounting and other support services. GCU’s president, Brian Mueller, also serves as CEO of Grand Canyon Education.
The IRS officially recognized the university as a nonprofit in 2018. But still the Department of Education did not, reasoning that the university operated for the profit of Grand Canyon Education.
Steven Gombos, attorney for GCU, said at a January hearing that the service agreement between the school and the for-profit corporation is an industry standard. He cited examples of universities with similar deals, like Purdue Global and Arizona State University.
Gombos told the panel that the department never found evidence of private inurement — that is, a business insider receiving any of the organization’s net income or assets for personal gain. If private inurement isn’t present, university lawyers argued, then an entity can be considered a nonprofit.
The Ninth Circuit agreed, remanding the decision back to the department to use private inurement as the standard test. It also vacated the trial judge’s summary judgment ruling, placing further litigation on hold while the department reconsiders the university’s status.
The Department of Education didn’t reply to a request for comment.
The opinion represents the second win for GCU in recent months. In August, a trial judge in Arizona partially dismissed a complaint from the Federal Trade Commission accusing the school of misrepresenting itself as a nonprofit in light of the Department of Education’s denial of that status. The FTC has since amended its complaint.
“The university remains exceedingly proud of what it achieved during its short stint as a for-profit institution,” Romantic said. “Nonprofit status best allows the university to accomplish its goals around research, grant writing, development, being full members of the NCAA,” and other business typical of universities.