U.S. erred in denying Grand Canyon nonprofit status

The U.S. Education Department used the wrong legal standard in denying Grand Canyon University’s bid for nonprofit status in 2019, a federal appeals court ruled Friday.

The unanimous decision by a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit overturned a lower court’s 2022 ruling that the Education Department acted lawfully in rejecting the Arizona Christian university’s application to be considered a private nonprofit institution under Title IV of the Higher Education Act.

Grand Canyon had converted to a for-profit institution in 2004 amid financial troubles, and it grew significantly and thrived financially as a for-profit with a huge online presence. But in the wake of years of heightened regulation by the Obama administration, it sought to return to its nonprofit roots, and the Internal Revenue Service and the university’s accreditor signed off on its reversion.

But the Education Department concluded in 2019 that the university’s earnings would benefit the for-profit company that formerly owned Grand Canyon. That 2019 decision by the Trump administration, which was generally much more supportive of for-profit higher education, also prohibited the university from marketing itself to the public as a nonprofit.

Grand Canyon sued the Education Department in 2021 and subsequently undertook an aggressive public campaign lambasting the Biden administration for what it said was an orchestrated campaign against it.

A lower court judge ruled in November 2022 that the Education Department had “authority to determine whether an institution qualifies as a nonprofit under Title IV,” and that Grand Canyon had not shown that the agency’s officials acted in an “arbitrary and capricious” manner.

But the three judges on the Ninth Circuit panel—two of whom were appointed by President Trump and one by President Biden—reached a different conclusion. They determined that instead of relying on the Higher Education Act’s requirements for assessing nonprofit institutions, as it should have, the Education Department used more restrictive Internal Revenue Service regulations about the benefits that can accrue to private individuals or shareholders.

“The department … failed to apply [the Higher Education Act’s]
private inurement requirement,” the Ninth Circuit panel said in its decision. “Instead, the department applied the IRS’s ‘operational test,’ under which it examined, not whether ‘net earnings’ inured to private
benefit, but whether ‘the primary activities of the organization and its stream of revenue’ primarily benefit private parties. Because the department failed to apply the correct legal standards, its decisions must be set aside.”

In a statement late Friday, Grand Canyon cheered the appeals court’s ruling.

“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, and we are hopeful for a quick affirmation of the university as a nonprofit institution,” Grand Canyon officials said in a news release.

Education Department officials could not be reached for comment Friday.