Nonprofit Law Made Easy

Bruce R. Hopkins

• Publisher: Wiley
• Year: 2015
• ISBN:
  9781119215424
• Edition: 1
• Topic: Commerce
• Subtopic: Organismes sans but lucratif et organismes de bienfaisance

The ins and outs of law in the nonprofit sector--made easy! Written by renowned author Bruce R. Hopkins, Nonprofit Law Made Easy is a must-read guide for executives, board members, officers, accountants, fundraisers, and others who handle legal issues that affect the way nonprofit organizations are formed and operated. Nonprofit Law Made Easy presents in-depth discussions on such hot topics as acquiring and maintaining tax-exempt status, reporting requirements, charitable giving, disclosure requirements, unrelated business activities, fundraising, corporate governance principles, and board member liability. It also includes crucial information on avoiding nonprofit law traps and navigating governance and liability issues. Packed with practical tips and hard-to-find, authoritative advice, Nonprofit Law Made Easy demystifies complex legal issues with plain-language explanations of laws and regulations for non-legal professionals.

CHAPTER 1
Forming a Nonprofit Organization

The purpose of this chapter is to provide basic information about the law concerning the formation of nonprofit organizations. This will serve as a basis for understanding much of the law summarized in the subsequent chapters. Specifically, this chapter will:

• Provide a nonprofit organizations philosophical framework
• Define the term nonprofit organization
• Address the matter of the organization’s purposes
• Explain the selection of the form of the organization
• Explain where to locate the organization
• Focus on the composition of the organization’s governing body
• Address the matter of the organization’s officers and key employees

A PHILOSOPHICAL FRAMEWORK

Before delving into the law of nonprofit organizations, one may ask: Why are there nonprofit organizations in the United States?

The answer is that the United States was founded on several principles, with one of the chief ones being distrust of the state—that is, government. Consequently, there has been heavy reliance on nonprofit organizations in our society since the birth of the nation. From the beginning, the U.S nonprofit sector has served as an alternative to the governmental sector as a means for addressing society’s problems.

This, then, is a matter of political philosophy. The emergence and role of nonprofit organizations was not stimulated by the tax law. The key concept underlying this philosophy is pluralism; more specifically, the pluralism of institutions, which features competition among various institutions in the three sectors of U.S. society (nonprofit entities, governmental agencies, and for-profit businesses). In this context, the competition is between the nonprofit and governmental sectors. This philosophy is embodied in the writings of philosophers such as John Stuart Mill and Alexis de Tocqueville. The latter wrote that Americans were constantly forming associations and societies, rather than turning to government for solutions to problems.

Much literature exists on this subject. This philosophy is well articulated in, for example, the Report of the Commission on Private Philanthropy and Public Needs (1975). The Secretary of the Treasury told the House Committee on Ways and Means that charities are an “important influence for diversity and a bulwark against overreliance on big government” (1973). John Gardner wrote that the “private pursuit of public purpose is an honored tradition in American life” (1979). Max Lerner wrote that the “associative impulse is strong in American life.” Richard C. Cornuelle wrote that “[w]e have been unique because another sector, clearly distinct from the other two, has, in the past, borne a heavy load of public responsibility.” John D. Rockefeller III wrote that the “third sector is … the seedbed for organized efforts to deal with social problems.”

This conflict and tension among the sectors—a sorting out of the appropriate role of government and nonprofit organizations—is, in a healthy society, a never-ending process, ebbing and flowing with the sentiments and politics of the day. Indeed, it is because of this tension that there is a healthy society to begin with—which is to say, a free society.

The federal income tax exemption for nonprofit organizations thus is a reflection of and is in furtherance of the American way of life. The exemption is a manifestation of a free society. It is based on the previously expressed view that many of society’s problems can be solved by means other than the intervention of governmental agencies. Individuals can rarely act alone in this regard; they must function collectively, which means either through nonprofit organizations or governmental bodies. The American bias, based on distrust of government, is to favor the former.

The policy rationale for tax exemption is thus rested on this political philosophy, rather than tax policy. When a constitutional income tax came into existence in 1913, Congress created tax exemption for charitable organizations but did not leave any legislative history on the subject. It is generally assumed that Congress, back then, viewed tax exemption for charitable organizations as the only way to consistently correlate tax policy to political theory on the point, and saw the exemption of charities as an extension of comparable practice throughout the whole of history. One observer stated that the “history of mankind reflects that our early legislators were not setting precedent by exempting religious or charitable organizations” from income tax.

The charitable contribution deductions (in the income, gift, and estate tax law) are likewise part of the federal tax law because of the belief of Congress that the services provided by charitable organizations are valuable to U.S. society and that the existence of these organizations is inherently a significant part of the American social order. These deductions are in the law to stimulate contributions to charitable organizations. The charitable deduction is based on the same philosophical premise as the tax exemption. The Supreme Court wrote, in 1983, that, in enacting both the exemption and deduction provisions, “Congress sought to provide tax benefits to charitable organizations, to encourage the development of private institutions that serve a useful public purpose or supplement or take the place of public institutions of the same kind.”

One of the issues of the day is whether tax exemption and the charitable deductions amount to government subsidies. Those who argue that they are assert that tax exemption is merely a subsidy provided by government to the nonprofit sector. Likewise, this view has it that the charitable deduction is a subsidy of a donor that is provided either by the government or by all other taxpayers. This view is based on the fact that, absent the workings of the deduction, more funds would flow to the U.S. treasury. The contrary view is that the subsidy rationale is misguided because it is based on the assumption (almost always unstated) that the subsidy is of funds to which the government is initially entitled. Yet, the rationale for the exemption and deduction make it clear that tax exemptions are beneficial to the social order, to promote pluralism.

The government generally leaves the nonprofit sector alone when it comes to taxation. The money flowing to the sector does not belong to the government to begin with; thus, there cannot be a subsidy. The practical problem, obviously, is that, like any tax preference, tax exemptions and deductions shrink the tax base involved, so that one can (superficially) argue that they constitute subsidies. But, in the realm of charity, this approach takes the exemptions and deductions out of context, and—in an example of an analytical approach that the Supreme Court on occasion has labeled wooden, unthinking, and crabbed—ignores the philosophical construct. To paraphrase the Supreme Court, to treat exemptions and deductions as government subsidies is to “tear them from their roots.”

In one of its first pronouncements on the point, the U.S. Supreme Court (albeit somewhat hesitantly) concluded, soon after enactment of the constitutional income tax in 1913, that the foregoing rationalization was the basis for the federal tax exemption for charitable entities. The Court wrote in 1924 that “[e]vidently the exemption is made in recognition of the benefit which the public derives from corporate activities of the class named, and is intended to aid them when not conducted for private gain.” In 1970, the Court wrote that the state “has an affirmative policy that considers these groups [that is, tax-exempt charities] as beneficial and stabilizing influences in community life and finds this classification useful, desirable, and in the public interest.”

In 1983, the Court wrote (this time without hesitancy) that “[c]haritable exemptions are justified on the basis that the exempt entity confers a public benefit—a benefit which the society or the community may not itself choose or be able to provide, or which supplements and advances the work of public institutions already supported by tax revenues.” In this opinion, the Court added that tax exemptions “for certain institutions thought beneficial to the social order of the country as a whole, or to a particular community, are deeply rooted in our history, as in that of England. The origins of such exemptions lie in the special privileges that have long been extended to charitable trusts.” The Court reviewed case law and concluded that “[t]hese statements clearly reveal the legal background against which Congress enacted the first charitable exemption statute in 1894: charities were to be given preferential treatment because they provide a benefit to society.”

The Court has viewed tax exemption and the charitable contribution deductions as subsidies provided by government. It first indicated its view in this regard in 1983, when it observed: “When the Government grants exemptions or allows deductions all taxpayers are affected; the very fact of the exemption or deduction for the donor means that other taxpayers can be said to be indire...