[00:00:03] Speaker 00: Good morning, and thank you, Your Honor. [00:00:04] Speaker 00: May it please the Court, Stephen Gombos for Grand Canyon University. [00:00:08] Speaker 00: I'd like to reserve three minutes of rebuttal with the permission of the Court. [00:00:12] Speaker 00: There are good reasons to doubt Congress authorized the Department of Education to decide non-profit status, but to the extent it did, Congress only authorized the Department to look at private enrollment. [00:00:26] Speaker 00: That makes sense. [00:00:27] Speaker 00: The core [00:00:30] Speaker 00: The defining feature of a non-profit institution as opposed to a for-profit institution is private enrollment. [00:00:38] Speaker 00: GCU complies with the restriction and the department has not argued otherwise. [00:00:43] Speaker 00: In fact, in the briefing of this case, [00:00:44] Speaker 00: fairly stipulated, there's no finding of private or normal. [00:00:47] Speaker 02: Do you think the regulation is wrong in cross-referencing whether or not the IRS has designated the entity as a non-profit for purposes of 501C3? [00:01:01] Speaker 00: No, I don't think it's wrong, Your Honor. [00:01:03] Speaker 00: You could argue that the express language of the statute does not allow the Department to analyze [00:01:11] Speaker 00: the operational test that's referred to in subsection three of 600.2. [00:01:17] Speaker 00: But what the regulation says, and it does not help my adversary, is that if you're recognized as a 501C3 by the IRS, you satisfy that [00:01:27] Speaker 00: Likewise, with regard to subsection two, if you satisfy the state requirement, in this case Arizona, which merely says you have to organize for a lawful purpose, you satisfy that requirement. [00:01:38] Speaker 00: I do not believe that regulation says, in its plain meaning, that the department is going to decide private endearment in addition to the IRS, which is in effect what it would say if they reserve that right. [00:01:51] Speaker 00: And more importantly in the foundational argument we have today is that the Higher Education Act in 20 USC 1003 subsection 13, they're limited to determining private endearment. [00:02:03] Speaker 00: Congress knew the 501C3 test and had it intended for the department to do that, it would have said so. [00:02:10] Speaker 00: We believe the cleanest way for the court to resolve this case [00:02:13] Speaker 00: without getting to whether the department, your honor, as your question raises, without getting to whether they were allowed to require IRS recognition, is simply to resolve it because there's been no finding of private endearment. [00:02:27] Speaker 00: It's what we argue below and we think that controls. [00:02:30] Speaker 00: The department denied GCU's nonprofit status because it did not agree it was operated exclusively for a tax-exempt purpose, going to the very heart of the 501C3 test. [00:02:40] Speaker 00: And if you look at the plain language of the higher education's borrowing, it adopted the private annuitment test, except for four words, which begs the question that you've asked, which is what do those words may not lawfully [00:02:57] Speaker 00: We've subscribed meaning to that, Your Honor, below by saying that language stands for the proposition that if you are a recognized 501C3, your earnings can't lawfully and near to the benefit of another party. [00:03:11] Speaker 00: And we believe that that cabins this to not only to private enrollment, but more so, says that if you're recognized as a 501C3, it's already [00:03:20] Speaker 02: Why do you think those extra words are in here that are not in the comparable language in 501C3? [00:03:27] Speaker 00: Your Honor, to be candid, we haven't found a direct answer to that, but it is in the disjunctive. [00:03:33] Speaker 00: The fact that there's an or, or may not lawfully in there, we believe supports the argument that if you're a recognized 501C3 at the time of your application to the department, [00:03:44] Speaker 00: The department doesn't have to look behind it. [00:03:47] Speaker 00: Now we know by action for decades the department accepted that. [00:03:51] Speaker 00: If you are a recognized 501C3, the department accepted that and moved on. [00:03:56] Speaker 00: The C change came in 2016 and the offensive problem with that is that no one has been advised what that meant. [00:04:04] Speaker 00: When they made the change, there was no guidance. [00:04:07] Speaker 00: As we stand here today, having received two decisions, [00:04:10] Speaker 00: It's a standardless process by which they go. [00:04:15] Speaker 00: The briefing in this case makes clear they have concerns, for example, about the 60% revenue share. [00:04:20] Speaker 00: But they've never said what an appropriate share is. [00:04:23] Speaker 00: And so you're devoid of any kind of standard or guidance as to how the agency was going to make that resolution. [00:04:30] Speaker 03: So I want to make sure I'm understanding your argument. [00:04:33] Speaker 03: From what you're saying, it seems that your position is if the IRS has made a decision under 5013C, then [00:04:41] Speaker 03: there is no work to be done under the Higher Education Act, because the answer to the 5013C question answers the question under the Higher Education Act, provision 1003. [00:04:52] Speaker 03: Is that your argument? [00:04:55] Speaker 00: Well, we made that argument below, Your Honor. [00:04:57] Speaker 00: In our briefing, though, we have given the court an opportunity to make this decision, and frankly, to rule in our favor, by saying, if the department found private enrollment, as it outlines in its first subsection of 600.2, [00:05:12] Speaker 00: We might have a problem. [00:05:13] Speaker 00: That hypothetical, though, Your Honor, Judge Forrest, is not existent here because the department stipulated there's been no private endearment. [00:05:21] Speaker 00: And private endearment is distinguished from the operational test because it looks at whether an insider is getting net profit. [00:05:29] Speaker 00: And it hasn't in this case. [00:05:31] Speaker 01: So just to put a fine point on it, you would like us to say once the IRS has decided it's over, but in the alternative, you would [00:05:41] Speaker 01: Assuming the department has the authority to determine its own interpretation of private annulment or to apply it as it sees fit, you would say they just haven't done that properly here. [00:05:53] Speaker 00: Well, we wouldn't say they haven't done it improperly. [00:05:55] Speaker 00: What we would say is they stipulate. [00:05:57] Speaker 00: They agree there's been no private annulment in this case. [00:06:00] Speaker 02: Your Honor, though, if you'll... What record did they stipulate to that? [00:06:03] Speaker 00: Well, Your Honor, it's conceded in plaintiff's brief at six and in various places in his brief. [00:06:08] Speaker 00: The department's decisions on their face don't even speak of private endowment at all. [00:06:13] Speaker 00: They basically focus solely on the operational tests which derives from private. [00:06:17] Speaker 02: You found that they had, as you're contending, applied the wrong standard. [00:06:21] Speaker 02: Wouldn't we send it back to the agency to apply the correct standard? [00:06:26] Speaker 00: Well, Your Honor, you would in a normal case, but on this record, [00:06:30] Speaker 00: The department has indicated there is no private endearment, and indeed you can see that from the briefing. [00:06:34] Speaker 00: In fact, if you look at the government's brief, the government's brief indicates there's no argument about private endearment. [00:06:41] Speaker 00: We got here, the department argues now that we fail the operation test, private benefit. [00:06:48] Speaker 01: I'm not sure I read the briefing the same way, but assume for the moment that what the department just did was [00:06:56] Speaker 01: there's an absence of a finding of private interment, as opposed to a finding that there is affirmably not private interment. [00:07:04] Speaker 01: If it's just an absence of a finding of private interment, what is the appropriate course of action? [00:07:10] Speaker 00: The Court would have discretion to amend it, to have that considered. [00:07:13] Speaker 00: However, again, on this record, [00:07:15] Speaker 00: I don't believe there's any basis to conclude that there's private enrollment. [00:07:18] Speaker 00: There is absolutely no showing on the facts of this transaction that an insider was paid net profit in this circumstance. [00:07:27] Speaker 00: Indeed, two studies were commissioned to analyze this at fair market value, and the consideration flows to [00:07:35] Speaker 00: GCE in this case, for short, because it's providing services as a simple service provider. [00:07:42] Speaker 00: So there's no distribution to anyone. [00:07:44] Speaker 00: But very distinguished from cases like Church by Mail, where you have principals, insiders running the for-profit entity, providing the service, and deriving direct benefit from that service. [00:07:54] Speaker 00: This is highly distinguishable from there. [00:07:56] Speaker 00: Indeed, Church by Mail, while I'm on the subject, is a case in which the for-profit entity was created by the two members that controlled the nonprofit, [00:08:05] Speaker 00: That's not existent in this case. [00:08:07] Speaker 00: They provided no service. [00:08:09] Speaker 00: They simply contracted out with a third party and did a 15% markup on those services. [00:08:14] Speaker 00: Indeed, the court accurately says the charitable entity could have contracted directly for the printing and mailing services that were provided. [00:08:21] Speaker 00: So there is private annuitment there, and there's private benefit in that case. [00:08:25] Speaker 00: This case is highly distinguishable from that. [00:08:27] Speaker 00: So my answer to remand is there's nothing in the record that would warrant the remand. [00:08:32] Speaker 00: The agency would effectively [00:08:34] Speaker 00: be doing what it already had an opportunity to do, and it indicated there was no private enrollment as we read their decisions. [00:08:42] Speaker 00: One thing I'd like to emphasize today is that GCE's independent board of trustees structured this transaction to ensure the university to return to nonprofit status on sound financial footing. [00:08:53] Speaker 00: And I think that's important given the way the transaction's been portrayed by the department and the government. [00:08:59] Speaker 00: That did three things. [00:09:01] Speaker 00: For example, GCU acquired assets valued at $1.2 billion for only $877 million. [00:09:08] Speaker 00: It entered an interest-only loan that allowed the university to establish sound financial footing during the early stages. [00:09:16] Speaker 00: And one thing I think is important when you look at a case like this, this charity was created, it was started based on the transaction. [00:09:24] Speaker 00: It was critical, and the independent board knew that. [00:09:27] Speaker 00: that it had all the services and that it was cash positive. [00:09:31] Speaker 00: And that's required by Title IV and is the very type of thing that the department should properly focus on. [00:09:38] Speaker 00: And GCU demonstrated actual performance [00:09:42] Speaker 00: By the time it received the decision in November of 19, some 16 months after the transaction, having not received any pre-acquisition review from the department, it met with the department. [00:09:54] Speaker 00: It showed them a PowerPoint. [00:09:55] Speaker 00: I believe in the record it's 2275. [00:09:57] Speaker 00: And if the court looks at that, it's a very thorough document. [00:10:00] Speaker 00: It shows solid financial success. [00:10:04] Speaker 00: A hundred million plus dollars in cash flow that went back to the university's charitable mission. [00:10:10] Speaker 00: That's important as well. [00:10:11] Speaker 00: There is no argument in this case that the services provided by GCE are not exclusively to serve the charitable mission of GCU. [00:10:20] Speaker 00: They provide those services, and the services 100% relate to that charitable mission. [00:10:25] Speaker 00: Now, having established a very successful financial stability and ability to reinvest in its students, the consequences of that were also shown in that 2275 PowerPoint that was given to the department. [00:10:40] Speaker 00: GCU students became more diverse because they were allowed to keep their tuition frozen for 12 straight years. [00:10:47] Speaker 00: As we sit here today, [00:10:49] Speaker 00: Tuition has not been risen. [00:10:51] Speaker 00: And that's critical given what's going on in the country, student debt. [00:10:55] Speaker 00: GCU students graduate with less student debt than most universities. [00:11:02] Speaker 00: And when you look at the tuition increases I referenced, that document shows that compared to the higher education sector, their increases are substantially, substantially below market. [00:11:14] Speaker 00: At a time when student debt is one of the major issues facing this country, GCU's transaction with GCE allowed them to tackle that issue head on. [00:11:25] Speaker 00: And it's benefited their students substantially throughout the process. [00:11:30] Speaker 00: Finally, throughout the process, the department shifted regulatory goalposts without explanation. [00:11:38] Speaker 00: What do I mean by that? [00:11:39] Speaker 00: Let me put that in practical terms, since I'm fairly into my argument. [00:11:43] Speaker 00: The department in January after the initial decision, January of 20, wrote a letter to GCE after the meeting I referenced and the presentation of the success of this transaction, which is undisputed, by the way. [00:11:57] Speaker 00: One thing I would add, you see no discussion from the department in the second decision focusing on GCU's charitable purpose, GCU's reasons for entering the contract, [00:12:08] Speaker 00: and the consequences that I pointed out, some of which I pointed out to court, which are really fully briefed in our briefs. [00:12:15] Speaker 00: And why is that important? [00:12:17] Speaker 00: If you apply the IRS test, so if we assume they were allowed to apply the operational and purpose test, the major focus of that test is on the charitable entity, not the contractor. [00:12:28] Speaker 00: You look at the decisions from the department, particularly the second one, it's all focused on the contractor's benefit. [00:12:35] Speaker 00: And it's an unusual situation where the seller's forecast is used as a sword against the buyer that didn't even see that forecast before the transaction. [00:12:44] Speaker 00: Now, it was provided to the government and copied to counsel for GCU in that process. [00:12:51] Speaker 00: But my client, and it's well reflected in the record, was highly transparent with the department going back to 2014. [00:12:59] Speaker 00: They told the department they wanted to do this. [00:13:03] Speaker 00: They had positive interaction initially. [00:13:06] Speaker 00: They continued that process. [00:13:07] Speaker 00: They went to their accreditor. [00:13:09] Speaker 00: They went to the state, as they're supposed to. [00:13:11] Speaker 00: And they were completely transparent. [00:13:13] Speaker 00: They invited the department to come to the campus. [00:13:18] Speaker 00: They invited the department to interview people from Deloitte or BKD. [00:13:22] Speaker 00: And the department had that right. [00:13:24] Speaker 00: The department didn't exercise it. [00:13:26] Speaker 00: So when I say the regulatory goalposts were moved, my concern is that you're told after a meeting, [00:13:32] Speaker 00: that you can go forward with your amended transaction. [00:13:35] Speaker 00: And I was involved in the amendment. [00:13:37] Speaker 00: I was counseled by that time. [00:13:39] Speaker 00: And you're told, provide an updated transfer pricing study from Deloitte, get an independent expert to validate that, and submit the information with your proposal. [00:13:51] Speaker 00: It's done. [00:13:52] Speaker 00: Then you get the decision, and the decision says, transfer pricing isn't the correct report. [00:13:58] Speaker 00: Which is wrong. [00:13:59] Speaker 00: Transfer pricing was the correct report. [00:14:02] Speaker 00: It's the state-of-the-art document, if you will, for IRS purposes when you're splitting services from an existing entity to two subsequent entities. [00:14:12] Speaker 00: And those reports unanimously confirm that the services are being provided at fair market value. [00:14:18] Speaker 00: The other thing the court should note at this point in my argument, hundreds of institutions of higher education [00:14:25] Speaker 00: participate in exactly these kind of arrangements. [00:14:29] Speaker 00: Most importantly, Purdue Global. [00:14:31] Speaker 01: So I just, I don't mean to interrupt, but I just want to go back to your position that the department affirmatively found that there was not private endearment. [00:14:44] Speaker 01: And if you can just point me to parts of the decision or the review decision where you think show an affirmative finding of a lack of private endearment. [00:15:09] Speaker 00: I don't have the brief references here. [00:15:11] Speaker 00: That hand. [00:15:16] Speaker 03: And I guess to follow up on that, I'm curious about this same question. [00:15:19] Speaker 03: And it seems to me that what we need is a reference in the record, not in the briefing. [00:15:23] Speaker 03: Not in the briefing, correct. [00:15:25] Speaker 00: Well, I can't say the department's decisions say that they did not find private endearment. [00:15:31] Speaker 00: What I've argued, Judge Sung, and I apologize for the delay and also not making this clear when you asked me the first time. [00:15:37] Speaker 00: The decisions on their face make no reference to private and internal whatsoever. [00:15:42] Speaker 00: The briefing in this case, though, says the department agrees we satisfy two and three. [00:15:48] Speaker 00: The department agrees that there's no issue of private and internal. [00:15:50] Speaker 00: I believe that's in the government briefs, and I will give you those sites when I stand up here on rebuttal. [00:15:55] Speaker 00: But when you look at the analysis that the department did, it is limited purely to the operational test and charitable purpose test that the IRS applies under 501C3. [00:16:08] Speaker 00: And in terms of that argument, I'll make it very simple. [00:16:13] Speaker 00: That's my lead argument on the HEA. [00:16:17] Speaker 00: Congress knew what 501C3 said, and it incorporated only the private endearment test. [00:16:22] Speaker 00: Had it intended to give the department the right to apply the operational and purpose test, it would have included that in the statute. [00:16:31] Speaker 00: It's in the same legislation from which they borrowed the private endearment test. [00:16:35] Speaker 00: So I don't think there's a basis for the department to argue that they have that right, and their regulation can't expand that right. [00:16:43] Speaker 00: There was an awkward discussion in the court below about that and making something in the regulation subpluralist. [00:16:49] Speaker 00: I think the analysis is backwards. [00:16:52] Speaker 00: If you begin with the statute and then you go to the regulation. [00:16:56] Speaker 00: If the department overreached in the regulation, that's a problem for the department. [00:17:00] Speaker 00: But the Congress told the department what they were allowed to do in this interest, and they chose not to include private endearment. [00:17:06] Speaker 01: There's also this— My understanding, though, is there's not a square challenge presented to the validity of the regulation, as far as I can tell, from the arguments below and on appeal. [00:17:17] Speaker 01: I didn't see anything saying that the regulation itself [00:17:22] Speaker 01: is invalid. [00:17:25] Speaker 00: We have not made that argument, Your Honor. [00:17:27] Speaker 00: It's existed so long. [00:17:28] Speaker 00: I see I'm down to two minutes of my time. [00:17:30] Speaker 00: With the Court's permission, I'll reserve that for the rebuttal. [00:17:33] Speaker 00: Thank you. [00:17:34] Speaker 02: Thank you, Counsel. [00:17:35] Speaker 02: We'll hear now from Mr. Ross. [00:18:01] Speaker 04: Thank you, Your Honor. [00:18:01] Speaker 04: May it please the court, Kasen Ross for the Department of Education. [00:18:05] Speaker 04: I think it's helpful to maybe take a step back and reorient this case a bit. [00:18:09] Speaker 04: After Plaintiff Grand Canyon University was sold and spun off by its former corporate owner, most of Plaintiff's revenues continued to flow to that corporation under the terms of a services agreement under which most of Plaintiff's revenues, or Plaintiff is a captive client of that corporation for several years and potentially in perpetuity. [00:18:28] Speaker 04: Moreover, most of plaintiff's executive leadership are employees of that corporation. [00:18:34] Speaker 01: And... Counsel, I want to sort of get to what I think the heart of my concern is. [00:18:40] Speaker 01: It seems to me, reading the decisions, that the department applied the IRS's tests for tax exempt status, including the IRS's test [00:18:55] Speaker 01: which would show private endearment and the test that would show an unlawful purpose for the purposes of the tax code. [00:19:03] Speaker 01: But there is no corresponding statutory provision or regulatory provision that prohibits certain purposes. [00:19:12] Speaker 01: So that's the argument that GCU made in its opening brief that I don't really see addressed in the answering brief. [00:19:20] Speaker 01: So if you could, what is your best argument that there is a statutory authority for applying the, I think what's sometimes called the private activities test or the private benefits test, which seems grounded in different statutory language? [00:19:35] Speaker 04: Right, so I think it's actually helpful to compare the text of the Higher Education Act and 501C3 of the Internal Revenue Code [00:19:41] Speaker 04: I think for purposes of this case, the relevant standard is the same. [00:19:46] Speaker 04: And because the Department of Education recognized that the standard is effectively the same, even, you know, there might be some difference in the language, the Department of Education looked to the IRS's regulations, which construe 501C3. [00:19:58] Speaker 02: But if you put the two definitions side by side, [00:20:03] Speaker 02: There's four elements to the definition in 501C3. [00:20:08] Speaker 02: It's the organized or operated exclusively, the no part for the benefit, no substantial part of the activities of propaganda, and no participation in political campaigns. [00:20:20] Speaker 02: And then you go to 1003C3. [00:20:24] Speaker 02: per N13, and it has to be owned or operated by one or more non-profit corporations or associations, and then no part of the net earnings show in order to benefit. [00:20:37] Speaker 02: So they take one of the clauses out of 501C3, the second one, and they don't incorporate the first one. [00:20:46] Speaker 02: And yet, your whole decision is based on an interpretation of the first clause of 501C3, which was not carried over into this definition. [00:20:55] Speaker 04: I think that the Higher Education Act is meant to encapsulate Congress's understanding that the institutions of higher education will be operated for an educational purpose, Your Honor. [00:21:06] Speaker 01: What's your basis for that? [00:21:09] Speaker 01: That the ATA incorporates purposes [00:21:14] Speaker 01: requirement that they have to show that it's for the money is being spent for the purpose of education, that that effectively, what's your textual basis for the ATA somehow incorporating the equivalent of a requirement that they be operated exclusively for a certain purpose. [00:21:34] Speaker 04: I think it's the premise of the act itself, with apologies for being somewhat vague, but the Congress enacted the Higher Education Act in order to permit the Department of Education to scrutinize exactly these kinds of arrangements. [00:21:48] Speaker 03: Well, that may be, but it's not incorporated into the definition of figuring out whether something is profit or nonprofit. [00:21:54] Speaker 03: And, of course, the HEA recognizes that you can have institutions that are in either category. [00:21:59] Speaker 03: So we come back to the whole analysis is it's nonprofit status and whether this operational test under the IRS provision. [00:22:09] Speaker 03: whether that aspect of the IRS's test needs to be thought of in figuring out whether an entity is nonprofit under the ATA. [00:22:17] Speaker 03: And so I'm still sort of lost. [00:22:19] Speaker 03: I get that the ATA applies to schools, right? [00:22:22] Speaker 03: Like that's what it applies to. [00:22:24] Speaker 03: And so there is a purpose folded into there, but it's not specific to the nonprofit versus profit status. [00:22:29] Speaker 04: So the operational test I think is encapsulated in section 1,313 when it says the institution is owned and operated. [00:22:35] Speaker 04: by one or more non-profit corporations or associations. [00:22:41] Speaker 04: So the operational test, similar to 501C3, is drawn from that or operated by language in the statute. [00:22:48] Speaker 01: But the review decision expressly says they're not going to rely on or review the owner-operated discussion in the first decision. [00:22:57] Speaker 01: So it seems to me that the department backed away from that discussion. [00:23:00] Speaker 04: I don't think that's quite right, Your Honor, with apologies for my disagreement. [00:23:04] Speaker 04: But I think the department's decision, specifically pages 904 to 907 of the record, specifically outline why the operational test in the Internal Revenue Code. [00:23:15] Speaker 01: I read that part in the original decision. [00:23:17] Speaker 01: But then in the review decision, it comes to near the end. [00:23:21] Speaker 01: And it says, because of the foregoing discussion, [00:23:26] Speaker 01: you know, where you don't see any need to revisit or review our decision about owned or operated by. [00:23:33] Speaker 01: I'm paraphrasing here, but essentially it seemed to me that the department was saying we don't need to rely on that alternative finding because we've already found these other issues. [00:23:44] Speaker 04: I think the department's decision on reconsideration was a result of looking at [00:23:49] Speaker 04: And they simply came to the sensible conclusion that there wasn't any meaningful change to the underlying arrangement. [00:23:58] Speaker 04: And so they were resting on their original legal conclusions. [00:24:02] Speaker 04: And there's no evidence in this record that those conclusions are not supported by substantial evidence. [00:24:06] Speaker 04: You know, I'll reiterate that the services agreement here keeps the original legal conclusions. [00:24:10] Speaker 04: the university as a captive client to a corporation. [00:24:14] Speaker 02: I want to keep going back to this issue. [00:24:17] Speaker 02: I don't understand your argument because you said that the 501c3 definition is [00:24:25] Speaker 02: incorporated into this statute based on the owned or operated by one or more non-profit corporations. [00:24:32] Speaker 02: But if non-profit, if just the use of the phrase non-profit corporations meant 501c3, why would they then have one of the elements of the 501c3 test then recited specifically? [00:24:46] Speaker 02: It would be superfluous if that were true. [00:24:50] Speaker 04: I think the Department of Education in implementing Section 1003 simply had a belt and suspenders approach, such that, you know, one of the requirements is for the IRS to determine tax-exempt status. [00:25:01] Speaker 04: Another is for the Department of Education to independently confirm. [00:25:05] Speaker 02: Where does it say here that the nonprofit has to be tax-exempt? [00:25:10] Speaker 04: I'm sorry. [00:25:11] Speaker 02: Where in the statute does it say that in the HAA? [00:25:14] Speaker 02: It says nonprofit. [00:25:16] Speaker 02: Where does it reference 501C3? [00:25:18] Speaker 04: Oh, I was referring to the department's implementation of that statutory language. [00:25:22] Speaker 04: And again, as I believe Judge Sung noted in the first, in my opposing counsel's argument, there's no challenge to the validity of the regulation. [00:25:30] Speaker 02: All the regulation does is say you have to have a 501C3 determination from the IRS. [00:25:35] Speaker 02: Correct. [00:25:35] Speaker 02: The regulation doesn't help you at all. [00:25:38] Speaker 02: because you've conceded and the decision says that the other two elements are met. [00:25:43] Speaker 02: The state element is met, the IRS element is met, and we're down to the first element, which just repeats the words of the statute. [00:25:50] Speaker 02: So the regulation doesn't help you with your statutory argument. [00:25:55] Speaker 02: in the posture of the case as it comes to us. [00:25:58] Speaker 04: I think that the first subsection of the regulation provides that or makes clear that the Department of Education will independently scrutinize an organization's status and how its element just says is owned and operated by one or more nonprofit corporations or associations no part of the net earnings of which benefits any private shareholder individual which is [00:26:23] Speaker 02: you know, it's a slight shorthand of the statutory language, but otherwise mirrors the statutory language. [00:26:31] Speaker 02: And the other two elements are not at issue by either side. [00:26:35] Speaker 02: And so we're just down to what this statute means. [00:26:39] Speaker 02: So I still don't understand how you understand the definition in paragraph 13 of non-profit to carry over the entirety and [00:26:50] Speaker 02: hand to the Department of Education the entirety of the definition of 501c3 so that you will be checking the IRS's homework. [00:26:58] Speaker 04: So the Department of Education did not check the IRS's homework, Your Honor. [00:27:02] Speaker 02: It certainly did. [00:27:03] Speaker 02: You took their test, and you applied it, and you then said that they reached the wrong conclusion because they didn't have the full record and didn't do the right analysis. [00:27:13] Speaker 02: That's what your decision says. [00:27:15] Speaker 04: No, Your Honor. [00:27:15] Speaker 04: It says that they expressed no opinion on the IRS's determination, and that's for good reason. [00:27:20] Speaker 02: Even though you're applying the exact same standards in the IRS test, [00:27:24] Speaker 02: That's, you're saying, we're applying the same standards, we're going to look to the regulations, we're going to look to their decisions, we're applying it, and here's our answer, which is the opposite of theirs, but we're not saying they're wrong. [00:27:35] Speaker 04: Because I think there's a key difference between what the Department of Education is doing and what the IRS is doing. [00:27:41] Speaker 04: As the IRS has stated publicly, their initial review of whether an organization satisfies 501c3 [00:27:48] Speaker 04: is simply self-representational, and they take without question those representations. [00:27:52] Speaker 04: And subsequently, the IRS might conduct some kind of an audit to confirm that an entity satisfies the 501c3 test. [00:28:01] Speaker 04: But the Department of Education is essentially doing that audit on the front end. [00:28:05] Speaker 03: Based on what authority? [00:28:06] Speaker 03: I mean, isn't that the IRS's job? [00:28:08] Speaker 03: That's under the IRS code. [00:28:10] Speaker 03: to do that audit if it needs to be done, not for the Department of Education to do that. [00:28:14] Speaker 03: And so it seems to me as a matter of sort of good government that we've got two different departments of the government. [00:28:21] Speaker 03: Apparently, as Judge Collins pointed out, answering the same question, but coming to different answers. [00:28:25] Speaker 03: And we can have that state of affairs if the IRS never does the further audit. [00:28:30] Speaker 04: That's simply how the IRS has chosen to conduct its operations. [00:28:32] Speaker 04: But Congress, in 20 U.S.C. [00:28:34] Speaker 04: 1099C, made clear, under a change in ownership or a change in control, that the Department of Education needs to conduct exactly this kind of review. [00:28:43] Speaker 02: But under your theory, if I understand it correctly, you could also revisit the Arizona law standards, because that's one of the elements in the regulations. [00:28:54] Speaker 02: It's a nonprofit. [00:28:56] Speaker 02: Everyone, you even said in your brief, nonprofit is a concept of state law. [00:29:00] Speaker 02: And if you get to do the IRS's standard, I guess you're saying you could also do the Arizona law standard. [00:29:06] Speaker 02: And Congress assigned you that task, too. [00:29:09] Speaker 04: I don't think that the agency's taken that position in this case, Your Honor. [00:29:12] Speaker 03: What would be the basis for making a distinction between whether you have the authority to do one or the other? [00:29:18] Speaker 03: If you have the authority to do one, I mean, I agree with Judge Collins on that point. [00:29:22] Speaker 03: If you have the authority to do one, you must have the authority to do both. [00:29:24] Speaker 04: Because as the decision makes clear, the Department of Education is not second-guessing Grand Canyon University's tax-exempt status. [00:29:32] Speaker 03: Maybe not in this case. [00:29:34] Speaker 03: But again, we're sort of looking at the law and trying to figure out how this statute works for all cases. [00:29:41] Speaker 03: And logically, I don't follow the distinction you're trying to draw there. [00:29:46] Speaker 04: So I do want to reiterate that the Department of Education made clear that it was not second guessing the IRS determination and it's also worth noting that [00:29:53] Speaker 04: That determination by the IRS was made in 2015 before all of the documents had been finally executed and finalized. [00:30:00] Speaker 04: And the Department of Education was carefully scrutinizing the nature of that agreement, under which most of the university's revenue are flowing to a corporation rather than to benefiting students. [00:30:12] Speaker 04: And so the department reasonably concluded that this would continue to be a proprietary institution of higher education. [00:30:19] Speaker 01: Counsel, if your argument was limited to [00:30:23] Speaker 01: The department has authority to interpret and apply the definition in section 1003, print 13, right? [00:30:33] Speaker 01: And that it can make its own investigation and, you know, of whether an entity is getting net earnings to the private endowment in violation of [00:30:47] Speaker 01: you know, the nonprofit definition in the HEA, even if the IRS founded, you know, there was no private environment for purposes of the tax code, you know, and, you know, that they, the department could determine whether they're being organized in, or sorry, owned or operated by a nonprofit for purposes of the HEA, regardless of what the IRS found for purpose of the tax code. [00:31:13] Speaker 01: I'd be more persuaded that the department has the independent authority to make its own determination in effect case by case basis. [00:31:23] Speaker 01: What I have trouble with is the clause of 501C3 that essentially imposes a different statutory requirement that we can't find in the ATA, which is that for the purposes of the tax code to be tax exempt, the entity also has to be [00:31:43] Speaker 01: operated exclusively for certain purposes. [00:31:47] Speaker 01: That text or an equivalent is not in the HEA. [00:31:54] Speaker 01: And what I have trouble with is you saying the department can also essentially make its own determination about whether an entity is serving a lawful purpose when I don't see that requirement in the HEA. [00:32:06] Speaker 01: And that's where I see the department is essentially acting like [00:32:11] Speaker 01: the IRS and applying the tax code divorced from the statutory authority it has in the ATA. [00:32:20] Speaker 01: Does that make sense? [00:32:21] Speaker 04: I think so, Your Honors. [00:32:22] Speaker 04: So maybe it might be helpful to point to the final language of 1,313, which specifies that net earnings do not incur to the benefit of any private shareholder or individual. [00:32:34] Speaker 04: And I think what's meant by that language is that by [00:32:37] Speaker 01: resources of an educational institution flowing to a private shareholder or individual would not be for educational purposes. [00:32:53] Speaker 01: There could be an argument that the department is entitled to interpret private and your meant differently from the IRS. [00:33:02] Speaker 01: I didn't see that argument either in the decision or the briefing. [00:33:06] Speaker 01: What I see is the department saying we're [00:33:08] Speaker 01: we're relying on the IRS's interpretation and application of their private endearment clause and the other clauses in the IRS which then don't actually exist in the HEA. [00:33:21] Speaker 01: So I don't, if this was a case where the pregnant said, you know what, we looked at the IRS's interpretation and application of private endearment and we just disagree with how they do that in the context of the HEA. [00:33:31] Speaker 01: We think we should interpret private endearment differently or this language about maleophilia neuro means something else. [00:33:37] Speaker 01: And that would be a different case, but I don't see any of that reasoning in either of the decisions or your briefing. [00:33:45] Speaker 04: So I think that one of the premises of the IRS regulations in the organizational and operational tests is that the organization that's being scrutinized is actually being operated for a nonprofit purpose. [00:33:58] Speaker 04: Department of Education, that question of a nonprofit purpose is whether the organization is being operated for students, essentially, for an educational purpose. [00:34:08] Speaker 04: And I think that is an understanding that flows throughout the Higher Education Act and is, in fact, why Congress afforded the agency authority to scrutinize exactly these kinds of transactions to ensure that a university's resources are flowing to benefit students and the university's educational mission itself, not [00:34:27] Speaker 04: to private shareholders and a for-profit corporation. [00:34:31] Speaker 01: Part of the trouble here is that we're bound to review the decisions as they're written. [00:34:36] Speaker 01: Can you point me to anything in the decisions that say we're examining the purposes for which this money is being spent based on our interpretation of the ATA as limiting the purposes? [00:34:50] Speaker 01: that you know I mean that that's the basis for the application of the private activities test absolutely I think pages 904 to 907 of the agencies reasoning make this clear [00:35:02] Speaker 04: when they consider the impact of the master services agreement, the nature under which most of the university's executive leadership are in fact employees of the corporation, the CEO of the corporation and the plaintiff's president are the same person, so that they are looking through effectively all of these arrangements to see. [00:35:21] Speaker 01: I understand, sorry. [00:35:23] Speaker 01: I understand why they found a violation of the private activities test. [00:35:29] Speaker 01: I'm not trying to second-guess that at this moment. [00:35:33] Speaker 01: What I'm trying to understand is the statutory basis for applying that test to begin with. [00:35:39] Speaker 04: And there, I think, pages 903 to 904 of the record specifies why the Department of Education is looking to the IRS's regulations in this respect, because there is relatively little regulatory interpretation of the relevant... But what 903 says, [00:35:58] Speaker 02: is that it distinguishes between private benefit and private and norman. [00:36:03] Speaker 02: It acknowledges that private and norman involves insiders. [00:36:08] Speaker 02: It says that private benefit is different and goes beyond that. [00:36:13] Speaker 02: And then the whole weight of this rests on the private benefit and not private and norman. [00:36:20] Speaker 02: And so that's the [00:36:21] Speaker 02: The problem is, what's in the statute is private and normant. [00:36:24] Speaker 02: They don't have the private benefit. [00:36:26] Speaker 02: The language that the IRS bases private benefit on wasn't copied into the statute. [00:36:33] Speaker 04: So I think, actually, that the private benefit and the private and normants test, as the department's decision reflects, overlap in many respects. [00:36:40] Speaker 04: And that's why, as I said. [00:36:42] Speaker 02: Correct. [00:36:42] Speaker 02: I mean, if you have private and normant to insiders, it's probably not going to be a private benefit. [00:36:47] Speaker 02: But your own decision, close to language, says it doesn't work in reverse. [00:36:52] Speaker 02: If you look at sort of the concentric circles... You will frequently have violations of private benefit that are in private and normant violations. [00:36:58] Speaker 04: Right. [00:36:59] Speaker 04: Right. [00:36:59] Speaker 04: They're not exactly concentric circles, but there is significant overlap between a private and normant and private benefit. [00:37:05] Speaker 04: And there is private benefit that is not private and normant. [00:37:07] Speaker 04: That's all sort of beside the point. [00:37:09] Speaker 03: Do you agree that the origin of those private benefit and private and normant analyses comes from different language in the statute? [00:37:15] Speaker 03: Do you agree with that? [00:37:16] Speaker 04: No, Your Honor, and that's why I said at the outset that for all relevant purposes here, the language of the IRS statute and of the Higher Education Act are effectively the same and the Department of Education. [00:37:28] Speaker 03: But I'm saying within the IRS provision, within 501c3, do you agree that the private benefit and the private analysis come from different statutory language within 501c3? [00:37:39] Speaker 04: I don't think so, Your Honor. [00:37:40] Speaker 04: The IRS is looking at a broader inquiry because there are other kinds of nonprofit purposes that an entity could be eligible for tax-exempt status under the Internal Revenue Code, namely public safety, literary, or fostering amateur sports. [00:37:57] Speaker 04: And the Department of Education is looking exclusively to educational purposes, and so that is where the [00:38:06] Speaker 04: The more general purpose inquiry in 501c3 does not apply to the Higher Education Act. [00:38:11] Speaker 04: But the substantive standard in the two statutes is essentially the same. [00:38:15] Speaker 04: And the Department of Education has confirmed as much in subsequent rulemaking where they've clarified the definitions under section 600.2 in the Code of Federal Regulations. [00:38:26] Speaker 04: They've since made clear that the kinds of ownership operations such as those at issue here [00:38:32] Speaker 04: would very likely not be nonprofit institutions of higher education. [00:38:36] Speaker 04: And the Department of Education clarifies its reasoning that the substantive standard of the Internal Revenue Code and the substantive standard under the Higher Education Act are essentially looking at the same thing. [00:38:48] Speaker 04: And that's why the Department of Education looks to regulations construing the Internal Revenue Code because there's a larger corpus of law defining the relevant standards. [00:38:58] Speaker 04: And so that's exactly what they did here. [00:39:01] Speaker 01: I just want to make sure I understand your argument in that the ATA effectively or impliedly requires an entity that's going to benefit from any of the funding that's at issue in this case. [00:39:18] Speaker 01: whether for-profit or non-profit, has to be operated exclusively for an educational purpose? [00:39:27] Speaker 01: That's how the department interprets the code as a whole, that it impliedly imposes a requirement that the entity be operated exclusively for educational purposes. [00:39:42] Speaker 04: I think that's right, Your Honor, and this court's decision in church by mail. [00:39:45] Speaker 01: Anything, okay, saying that that's how, do you have any authority, regulatory, case-wise saying that that's a reasonable interpretation of the HEA or where the department has actually said that's our interpretation of the HEA? [00:40:06] Speaker 04: So the subsequent rulemaking that I was adverting to earlier says this specifically, that is of course not at issue here. [00:40:13] Speaker 04: because it was subsequently issued in 2022, and I'm happy to provide the court with that citation if you would find it helpful, but the Department of Education in this decision explained why it was incorporating standards from the Internal Revenue Code and the IRS's construction of those because there's relatively little authority construing the Higher Education Act and those implementing regulations. [00:40:36] Speaker 04: And so because the standards are essentially the same, as I explained to Judge Forrest, [00:40:41] Speaker 04: agency was explaining why it was drawing from these other sources of authority, which is very similar to other bodies of law. [00:40:48] Speaker 04: When you have a similar standard applicable to various different doctrines, you're going to look to different doctrines to incorporate the relevant legal analysis. [00:40:57] Speaker 04: And that's what the Department of Education did here. [00:40:59] Speaker 02: Let me ask you one question which we asked your opponent, which is if we [00:41:07] Speaker 02: concluded that enormous was the key standard here. [00:41:12] Speaker 02: Did you concede or did the department concede that enormous was not met here or would we need to remand back to the agency to apply the enormous test? [00:41:23] Speaker 04: So I don't think there was a specific finding on private enormous but the agency because the agency's decision is [00:41:29] Speaker 04: explains why the private benefit and private annuament tests overlap. [00:41:33] Speaker 04: And so I think that the best reading of the agency's decision is that there's some finding as to both. [00:41:41] Speaker 04: If the court disagrees in that respect, then I think the appropriate procedure would be to remand if you believe that the agency needs to make a concrete conclusion as to private annuament. [00:41:51] Speaker 04: But I think the relevant regulation actually doesn't include any annuament language. [00:41:56] Speaker 04: It's simply explaining that [00:41:57] Speaker 04: net earnings which benefit the private shareholder or individual. [00:42:01] Speaker 02: Oh, but you don't get to change the statute. [00:42:04] Speaker 02: I mean, the statute says a norman. [00:42:06] Speaker 02: Yes, but— But— You know, saying that, well, we put in the regulation benefit and took out a norman. [00:42:14] Speaker 02: No, you don't get to do that. [00:42:15] Speaker 04: I understand, Your Honor, and I don't suggest as much. [00:42:18] Speaker 04: I think rather [00:42:19] Speaker 04: that the long-standing interpretation of both 501c3 in the Internal Revenue Code and the similar language in the Higher Education Act is that that language about where it refers to enormous specifically is meant is understood more broadly to consider both the private benefit and the private enormous tests and the IRS regulations reflect as much with including the same enormous language in 501c3 of the Revenue Code. [00:42:45] Speaker 02: Okay. [00:42:45] Speaker 02: All right. [00:42:47] Speaker 02: Thank you, Counsel. [00:42:47] Speaker 02: We've taken you over, and we appreciate your argument, and we'll hear a rebuttal now from Mr. Gumbus. [00:42:57] Speaker 00: Thank you, Your Honor. [00:42:58] Speaker 00: I'll be brief. [00:43:00] Speaker 00: With respect to the question about the record, I think looking at 5ER 902 to 904, the department's decision specifically talks about private benefit and disregards private endearment. [00:43:11] Speaker 00: There's no finding of facts [00:43:13] Speaker 00: in its decision that an insider was paid in. [00:43:15] Speaker 02: There's no stipulation on those pages. [00:43:18] Speaker 00: You're right. [00:43:19] Speaker 02: That was overstated. [00:43:21] Speaker 00: It was. [00:43:21] Speaker 00: And I said, Your Honor, that it was basically the absence of the argument in response to Judge Song's clarifying question. [00:43:28] Speaker 00: And I apologize for making the argument a little too broad. [00:43:31] Speaker 00: But I would say this. [00:43:32] Speaker 00: We addressed that argument in our opening brief at pages 31 to 33. [00:43:37] Speaker 00: In DOJ's brief, you can zero in on this on page 33. [00:43:40] Speaker 00: There's no reservation. [00:43:42] Speaker 00: that private endearment was considered or wasn't considered as a basis for the department to find it. [00:43:47] Speaker 00: We argued in this case, affirmatively at the district court and at this before this court, that there's no insider being paid net profit and no one has said we can show that. [00:43:58] Speaker 00: What you heard from my adversary was basically an amalgamation of the two tests and a rereading of the HEA's provision which authorizes only private endearment. [00:44:08] Speaker 00: With regard to captive client, and I mention this because the consequences of what my adversary is arguing, this implied or this right to analyze private benefit, could be very significant. [00:44:21] Speaker 00: There's hundreds of institutions that have entered into this very type of transaction. [00:44:26] Speaker 00: We dealt with that. [00:44:27] Speaker 00: Our brief identifies some of the terms that are far more [00:44:32] Speaker 00: are far more favorable, frankly, to the service provider than what GCE is getting in this case. [00:44:37] Speaker 00: And I think one of the points that's lost here, everything that GCE does for GCU [00:44:45] Speaker 00: benefits students at GCU. [00:44:47] Speaker 00: And there is no basis on this record to say that GCE is controlling GCU. [00:44:54] Speaker 00: The government would have you believe that by arguing about revenue analysis and the like, which we've shown is an error, quite frankly, and wasn't adequately explained to satisfy [00:45:04] Speaker 00: the APA's standard of arbitrary and capricious in accordance with law. [00:45:08] Speaker 00: But giving the department that right could create substantial problems here. [00:45:15] Speaker 00: Do they tell USC? [00:45:16] Speaker 00: You're violating the IRS's private benefit statute because you have a contract with a service provider to provide similar service to what GCE provides GCU. [00:45:27] Speaker 00: They haven't yet, but they could. [00:45:29] Speaker 00: The other thing that has been ignored by the department is that Congress specifically said in 20 USC 1232A, you are not allowed to interfere with the university's [00:45:42] Speaker 00: Personnel decisions and administration decisions of the college. [00:45:46] Speaker 00: That's why they didn't the Congress didn't adopt The private benefit test and that's why the IRS and its expertise body of law Controls for purposes of that and the court should be comfortable that GCU today is subject to IRS Oversight if there's a problem, they would tell us I will also mention I had one other case with the department on this very issue [00:46:09] Speaker 00: It's referenced in the pleadings. [00:46:11] Speaker 00: In that case, with regard to the record, we learned that the department wrote to the IRS. [00:46:18] Speaker 00: I don't know if they did in this case because the department refused to tell us if all internal documents are part of this record. [00:46:27] Speaker 00: What they said is, we don't have to give you internal documents. [00:46:30] Speaker 00: We designate what's important. [00:46:32] Speaker 00: And they don't say that all of those documents are deliberative. [00:46:35] Speaker 00: Indeed, as you know from the briefing, the document email we got from FOIA, which indicated the department's team, had decided this issue long before our deadline to close, which was July 1. [00:46:50] Speaker 00: And it's important I put that in some context. [00:46:53] Speaker 00: I argued earlier that my client was transparent. [00:46:57] Speaker 00: I see I'm over. [00:46:58] Speaker 00: Can I have a brief moment to conclude? [00:46:59] Speaker 00: Thank you very much. [00:47:02] Speaker 00: My client was transparent. [00:47:03] Speaker 00: We asked for pre-acquisition review in January of that year, telling them the closing was July 1st. [00:47:11] Speaker 00: The regulation says they're to give us pre-acquisition review if it's requested. [00:47:15] Speaker 00: It was not given. [00:47:16] Speaker 00: The directional guidance from their sub-regulatory guidance is that you do that 45 days before the transaction. [00:47:23] Speaker 00: We did about five times that much. [00:47:25] Speaker 00: Council at that time wrote to the department and they were told nothing about what was going on not even directionally. [00:47:31] Speaker 00: Hey, we have a problem with this President Mueller's dual role. [00:47:36] Speaker 00: That's something referenced in there and they've taken kind of contrary positions on it, which is narrowly It's their decision is prohibited to the extent they relied on that by 1232 a and they but they could have said to Grand Canyon during that five months we have concerns about that and [00:47:54] Speaker 00: Ed only applied, the Department of Education only applied the IRS private benefit test, and they didn't have authority to do it. [00:48:00] Speaker 00: For that reason, we think the decision should be reversed and vacated. [00:48:04] Speaker 00: Thank you. [00:48:05] Speaker 02: All right. [00:48:05] Speaker 02: Thank you, counsel. [00:48:06] Speaker 02: The case just argued will be submitted, and the court will stand in recess. [00:48:28] Speaker 03: It's cord for this.