NCInnovation, a nonprofit that has received hundreds of millions in taxpayer funds to spur commercialization of public university research, amended a key tax document after failing to indicate a previously made IRS election on its 2023 Form 990, one that could shield it from potential lobbying violations. The omission raises new legal and oversight questions about the organization’s lobbying expenditures.
A tense exchange over NCInnovation’s tax filing was the first order of business Wednesday during its public board of directors meeting. Also this week, a North Carolina House appropriations committee proposed reclaiming the $500 million in taxpayer funding allocated to the nonprofit in the 2023 state budget. The House’s version of the 2025-2027 budget is expected Monday. The Senate version, passed last month, claws back most of the money, leaving NCI with $100 million in four annual installments.
On Wednesday, the lack of a 2023 IRS H-election prompted fresh scrutiny from a board member as leadership informed them that an amended IRS Form 990 for fiscal year 2023 was filed on Tuesday afternoon, the day before the meeting. The amendment addressed a missing description on Schedule C — a section dealing with political and lobbying activity — but was filed without prior consultation with the full board.
“I raised the issue to all the committee members and board members about the need to recommend that the tax return for the year ending June 30 be revised by BDO back on Nov. 1,” said board of directors member Art Pope. “And now [I’m] hearing for the first time, it was filed yesterday.”
Pope expressed concern not only about the amendment’s timing, but also about the broader implications of NCI’s 2020 H-election. Under IRS rules, once an H-election is made, it remains in effect unless formally revoked. NCInnovation’s 2023 filing made no mention of the election, something staff acknowledged was only recently discovered during a review with BDO, the organization’s independent auditing firm.
“Well, I mean, quite honestly, now we’re protected under that H-election,” said NCInnovation CFO Linda Hall. “We have the ability to amend the 2023 return and appropriately prepare it based on the H-election. H-election would help us in many ways as an organization; one, with protection of the H-election we don’t have a scrutiny of how the return is actually prepared and filed, as of today, which opens up potential for IRS examination or audit.”
As leadership attempted to end his line of questioning, Pope voiced frustration that the audit committee had not convened since November, despite his mounting compliance concerns. He said he had repeatedly requested meetings with BDO and staff to review the tax filings and ask questions but was denied.
“My only opportunity to address these issues is at the full board,” he said, calling for a dedicated audit meeting to assess whether the organization may have exceeded allowable lobbying thresholds and to evaluate the risk of future IRS scrutiny.
The board also discussed the classification of consulting versus lobbying. Pope questioned whether a 2021 contract with board member Kelly Fuller, who helped shape NCInnovation’s legislative strategy, constituted lobbying. Fuller strongly denied it, stating: “I was not a registered lobbyist and did not lobby at all.” She insisted less than 1% of her work involved direct education of legislators and was mostly focused on policy planning.
What is the H-election?
According to a Carolina Journal investigation, NCInnovation spent nearly $1 million on lobbying over the last four years, with $420,000 in 2023, the year it received its first $250 million allocation from the North Carolina General Assembly. Spending that year included payments to lobbying firms and internal staff bonuses.
Yet when NCInnovation filed its 2023 Form 990, it failed to take the IRS 501(h) safe harbor provision — commonly called the “H election” — which allows 501(c)(3) nonprofits to legally conduct limited lobbying under clearly defined thresholds. Without it, organizations are subject to the IRS’s more subjective “substantial part” test, which does not specify spending limits and puts nonprofits at greater risk of penalties or loss of tax-exempt status.
IRS rules limit the amount of lobbying a nonprofit can do as a percentage of total expenditures. For NCInnovation, that cap calculates to $257,668 for the fiscal year ending June 2023. The organization reported spending $267,184 — exceeding the limit by $9,516. According to IRS guidance, an organization that exceeds the cap by less than $10,000 must pay a 25% excise tax on the excess, which would total $2,379 in this case. However, if a nonprofit exceeds lobbying limits for four consecutive years, the IRS can revoke its tax-exempt status entirely.
These risks raised concerns among board members, some of whom were appointed by the General Assembly to ensure proper oversight of the state’s $500 million investment in NCInnovation.
Legislature weighs clawback
Compounding matters, the organization’s investment committee recently voted to delay its endowment portfolio implementation due to market volatility and uncertainty over its long-term funding. One board member noted that any investment decisions would need to preserve the ability to fully withdraw the endowment on short notice, should the legislature rescind the funds.
“He is aware of the possibility that we would have to reclaim the entirety of the endowment on short notice,” NCInnovation CEO Bennet Waters told board members on Wednesday of discussions with the portfolio manager.
At a July hearing before the House Oversight and Reform Committee, lawmakers grilled Waters over the nonprofit’s oversight and spending.
“I have doubts about NCI’s ability to get the projected investment returns,” Rep. Harry Warren, R-Rowan, co-chair of the committee, said during that hearing. “But mostly I have doubts about whether or not this is really the best use of taxpayer dollars in light of state priorities… like transportation, mental health, education, and many other issues.”
In December, then-House Speaker Tim Moore sent a letter rebuking NCInnovation for threatening legal action against legislative staff conducting oversight. NCI had claimed the staff’s actions caused “financial and reputational harm.” In the letter, Moore stressed that the organization is funded by taxpayer dollars and subject to public oversight.
Then, in March, the Office of the State Auditor released a performance audit of NCI that found the nonprofit was following state law, but warned the organization to strengthen oversight and transparency practices.
“In the audit released two months ago, the Office of the State Auditor flagged NCInnovation’s lobbying expenses as a matter for further consideration,” said Donald Bryson, CEO of the John Locke Foundation. “While lobbying compliance wasn’t a formal part of the audit’s scope, the report clearly cautioned NCInnovation to closely monitor IRS lobbying limits — a sign the organization may be flying close to the sun on this issue.”
Amid escalating concerns, lawmakers are now moving to claw back the public funding. In April, the NC Senate passed a budget that would redirect most of NCInnovation’s endowment funding to a new children’s hospital in the Triangle area. House Republicans, including Warren, have also filed legislation to dissolve the state’s relationship with NCInnovation and demand repayment of the public funds.
Board approves 13 million in grants
Also, during Wednesday’s board of directors meeting, NCInnovation approved $13.6 million in research and development grants for 17 projects across 12 of the state’s public universities. The selections followed a multi-phase review process led by the organization’s program committee and evaluated by external subject-matter experts.
The funded research spans a broad array of fields, including agriculture, health care, advanced manufacturing, and artificial intelligence. Projects were required to demonstrate both proof of concept and the potential for future commercial application. Final grant awards are pending administrative steps, such as the execution of grant agreements and formal notifications to state oversight agencies.
Among the selected projects are a robotic microscope for identifying livestock parasites developed at Appalachian State University, a compact wind tunnel for pesticide testing from East Carolina University, and a portable knee assessment device from North Carolina A&T State University. Other research includes an electric wound-healing bandage from NC State, an environmentally safer method for fiber production at UNC Charlotte, and a low-cost mobile ultrasound device developed at UNC Chapel Hill.
According to NCInnovation, only faculty researchers at public universities are eligible for the grants. Institutions receiving awards include UNC Greensboro, UNC Wilmington, UNC Pembroke, Fayetteville State University, and Winston-Salem State University.
What’s at Stake?
As NCInnovation leadership moves forward with the grant-making process, board members were informed Wednesday that the nonprofit’s lobbying activity has been cut to four firms, each assigning one representative to respond to lawmakers’ questions, as the NC House finalizes its version of the 2025–2027 state budget. The final 2023 state budget that allocated the $500 million to NCInnovation in two tranches included language requiring the nonprofit to “comply with the limitations on lobbying set forth in section 501(c)(3) of the Internal Revenue Code” — a condition that could legally justify withholding or clawing back public funds if NCInnovation is found noncompliant.