Grand Canyon University should be allowed to return to nonprofit status, a federal appeals court in California has ruled, ruling the U.S. Department of Education exceeded its authority in denying the country's largest Christian college the status it said it needed to maintain academic and athletic opportunities and continue growing.
On Nov. 8, a three-judge panel of the U.S. Ninth Circuit Court of Appeals sided with the school, delivering a key victory for the college in its years-long court fight with federal regulators.
"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," the school said in a statement released immediately following the appellate court's ruling.
The case landed in federal court in 2021, when the Phoenix-based GCU filed suit against the Education Department for denying its petition for nonprofit status in 2019.
GCU had operated as a nonprofit educational institution until 2004, when financial difficulties prompted the school's administration to turn the school over to a group of investors. They then operated GCU as a for-profit institution.
Under the new management, enrollment at the school skyrocketed, rescuing GCU from the threat of bankruptcy and making the school one of the largest private Christian colleges in the country, rivaling such large schools as Baylor University in Texas and Liberty University in Virginia.
In 2018, however, GCU decided to return the school to its former not-for-profit iteration.
According to the narrative in the Ninth Circuit's decision, this was centered on seeking to remedy "perceived academic and athletic competitive disadvantages of a for-profit school."
Elsewhere, the school has noted it sought to escape the "stigma" associated with being a for-profit college.
To facilitate the transition, GCU created a new nonprofit corporation, called Gazelle, and then allowed Gazelle to purchase GCU. Following the transaction, Gazelle changed its name to Grand Canyon University.
According to court documents, the transaction was disclosed and detailed to the Internal Revenue Service, which granted Gazelle 501(c)3 tax exemption as a recognized charitable non-profit organization.
However, GCU's bid to return to being non-profit was blocked by the U.S. Department of Education.
Citing the federal Higher Education Act (HEA), the Education Department said it did not believe GCU met the HEA's requirement that "it be 'owned and operated by one or more nonprofit corporations or associations, no part of the net earnings of which benefits any private shareholder or individual."
Even though GCU had already met the IRS' standards to qualify as a nonprofit, the Education Department said it needed to also verify that the school qualified.
GCU then filed suit to win court orders requiring the federal agencies to sign off on their nonprofit status. The school said it had met the obligations under the law, passed the relevant legal tests, and the Education Department had overstepped its authority under the HEA.
GCU has noted the action by the Education Department came around the same time it also faced regulatory actions from the Federal Trade Commission and a separate investigation and enforcement action from the Education Department, seeking to fine the school a record $37.7 million for allegedly misleading students about the cost of its doctoral programs.
GCU has said it does not believe it is a coincidence that the federal agencies have chosen to specifically target one of the largest evangelical Christian schools in the country, while allegedly overlooking misconduct at other colleges and universities.
They have also said they believed the unrelated regulatory actions from the Biden administration came as part of a "coordinated" effort within the administration to punish the school for suing the Education Department over its nonprofit status.
In court on the nonprofit case, U.S. District Judge Susan Bolton sided with the Education Department, finding the decisions were not contrary to the HEA. Bolton was appointed to the court by former President Bill Clinton.
The appellate judges, however, said Bolton's decision was incorrect and the Education Department - first under then-President Donald Trump and later under President Joe Biden - had misapplied the HEA to this case.
The appellate decision was authored by Ninth Circuit Judge Daniel Collins. Judges Danielle J. Forrest and Jennifer Sung concurred in the ruling.
Collins and Forrest were appointed by Trump. Sung was appointed by Biden.
In their ruling, the appellate judges said they did not believe the HEA law itself set standards for nonprofit status. Rather, they said, that determination is left to the IRS.
The HEA only requires schools granted nonprofit status must "meet the educational operation requirements" spelled out in the law and "that it must be 'owned and operated by one or more nonprofit corporations or associations.'"
"The (Education) Department thus invoked the wrong legal standards by relying on IRS regulations that impose requirements that go well beyond the HEA’s requirements and that instead implement a portion of 501(c)(3) that has no counterpart in HEA," Collins wrote.
Because the Education Department applied the wrong standards in reviewing GCU's nonprofit status application, the judges said their resulting decision must also be set aside.
The appellate court reversed the lower court's decision and sent the case back to Judge Bolton for further proceedings in line with the appellate ruling.
Following the decision, GCU said the Ninth Circuit nonprofit status ruling also follows an initially favorable ruling from an Arizona federal judge dismissing the FTC's action against the school, finding the FTC "lacks authority to enforce the FTC Act over entities that are not organized for their own profit or that of their members."
They noted the FTC has amended their complaint, and the case remains pending, but "GCU is hopeful the court will again dismiss the FTC's claims."
"When GCU’s Board of Trustees decided to return the university to its historical status as a nonprofit institution in 2018, it did not envision years of hard-fought litigation against federal agencies," GCU wrote in its statement.
"GCU had operated as a nonprofit for most of its history, and the Trustees’ decision to return the university to its nonprofit roots was meant to ensure GCU’s long-term future as Arizona’s preeminent private, affordable Christian university."