Nonprofit Governance

Law, Practices, and Trends

Bruce R. Hopkins, Virginia C. Gross

• Publisher: Wiley
• Year: 2009
• ISBN:
  9780470486191
• Edition: 1
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

Nonprofit Governance

Law, Practices & Trends

Governance seems to be the subject that is perched atop every nonprofit lawyer's worry/wish list, despite the fact that there is not much law on the point, particularly at the federal level. This ascension in importance is largely due to the various organizations propounding best practices and principles for public charities and other forms of nonprofit organizations, the IRS's redesigned Form 990, the agency's aggressive push of certain good governance principles in the tax-exempt organizations' setting, and scandals brought to light by the Senate Finance Committee staff.

Stemming from the authors' endless hours of meditating over the new Form 990 and sifting through the many (and often inconsistent) best practices principles, Nonprofit Governance fills the need for some cohesion in the realm of nonprofit governance by providing in-depth coverage and explanations of the laws, practices, and trends in this volatile area.

An invaluable resource for nonprofit executives, officers, directors, nonprofit lawyers, accountants, members of boards of directors, and consultants, legal experts Bruce R. Hopkins and Virginia Gross's Nonprofit Governance brims with detailed documentation and references to regulations, rulings, cases, and tax literature (which includes current articles and tax law review notes). Here, readers will find a wealth of clarifying information on:

• Federal and state law fundamentals
• Board member responsibilities and liability
• Nonprofit governance principles
• Nonprofit governance issues
• Application of the private benefit doctrine
• Governance and the redesigned Form 990
• Recommended polices and procedures
• Governance case studies
• Governance legal audit
• A law primer for nonprofit board members
• And much more

The book includes an exhaustive index, Internal Revenue Code citations and numerous case studies, tips, forms, and checklists to round out the authoritative coverage. Nonprofit Governance is an indispensable guide to, and through, all of the governance policymaking that is unfolding, to improve the management of nonprofit organizations as well as to help organizations be in compliance with nonprofit governance law.

CHAPTER ONE
Federal and State Law Fundamentals

For decades, the law in the United States concerning governance of nonprofit organizations was almost solely confined to state (and, to some extent, local) law. While this state of affairs is rapidly changing, with the matter of nonprofit organizations’ governance becoming a province of federal (mostly tax) law, many of the underlying fundamental principles remain those formulated (and once seemingly resolved) at the state law level.

§ 1.1 STATE LAW OVERVIEW

There are essentially seven bodies of state law concerning the organization and operations of nonprofit organizations’. Most of the state law principles pertaining to nonprofit organizations governance are found in the nonprofit corporation acts¹ and the charitable solicitation acts.²

(a) Types of Nonprofit Organizations

Most nonprofit organizations are formed as one of three types: corporation,³ trust,⁴ or unincorporated association.⁵ It is possible to have a tax-exempt, nonprofit limited liability company.⁶ Occasionally, the U.S. Congress “charters” (that is, creates by legislation) a nonprofit organization.⁷

The application for recognition of tax exemption filed by most organizations seeking to be tax-exempt charitable entities⁸ (Form 1023) graphically depicts these types. It asks if the filing organization is one of the four types, then, in bold print, directs the entity to not file the application if it is not.⁹

Nonprofit, tax-exempt organizations, as part of the process of their establishment, prepare (and sometimes file with a state) articles of organization.¹⁰ The nature of these articles will depend, in large part, on the type of nonprofit organization. If the nonprofit organization wants to be tax-exempt under the federal tax law, it usually will be required to meet an organizational test.¹¹

(b) Nonprofit Corporation Acts

Nearly every state has a nonprofit corporation act. The few states that do not have such a statute require nonprofit corporations to fare as best they can by using what is applicable in the statutory law applicable to for-profit business corporations. Most of the states with a nonprofit corporation act have based their law on a model nonprofit corporation act.¹²

(c) Nonprofit Trust Statutes

Nearly every state has a body of statutory law applicable to charitable trusts. Many private foundations, for example, are trusts. These laws frequently impose fiduciary standards and practices that are more stringent than those for nonprofit corporations and entail an annual filing requirement. A nonprofit organization that is a trust is formed by the execution of a trust agreement or a declaration of trust.

(d) Unincorporated Associations

To the uninitiated, a nonprofit corporation and a nonprofit unincorporated association look alike. An unincorporated association is formed by the preparation and adoption of a constitution. The contents of a constitution are much the same as those of articles of incorporation. Likewise, the bylaws of an unincorporated association are usually the same as those of a nonprofit corporation.

(e) Charitable Solicitation Acts

A majority of the states have adopted comprehensive charitable solicitation acts for the purpose of regulating fundraising for charitable purposes¹³ in their jurisdictions. A few states have not enacted any form of charitable solicitation act. The remaining states (including the District of Columbia) have elected to regulate charitable fundraising by means of differing approaches.

The various state charitable solicitation acts are (to substantially understate the situation) diverse. The content of these laws is so disparate that any implication that it is possible to neatly generalize about their assorted terms, requirements, limitations, exceptions, and prohibitions would be misleading. Of even greater variance are the requirements imposed by the many regulations, rules, and forms promulgated to accompany and amplify the state statutes.¹⁴ Nonetheless, some basic commonalities can be found in the comprehensive charitable solicitation acts.

The fundamental features of many of these charitable fundraising regulation laws are a series of definitions of various terms; registration or similar requirements for charitable organizations; annual reporting requirements for charitable organizations; exemption of certain charitable organizations from all or a portion of the statutory requirements, registration and reporting requirements for professional fundraisers; registration and reporting requirements for professional solicitors; requirements with respect to the conduct of charitable sales promotions; record-keeping and public disclosure requirements; requirements regarding the contents of contracts involving fundraising charitable organizations; a wide range of prohibited acts; registered agent requirements; rules pertaining to reciprocal agreements; investigatory and injunctive authority vested in enforcement officials; civil and criminal penalties; and other sanctions.¹⁵

(f) Tax Exemption Laws

State law typically provides for tax exemption, from income or ad valorum tax, for a variety of nonprofit entities in the jurisdiction. Usually, the criteria for this exemption are identical to the federal law requirements; some states impose qualifications in addition to the federal ones. Tax exemption may also be available in connection with sales,¹⁶ use, tangible personal property, intangible personal property, and real estate taxes.

(g) Charitable Deduction Laws

Most states’ laws provide for a charitable contribution deduction for the making of gifts of money or property to charitable organizations.¹⁷ Usually, the criteria for this deduction are identical to the federal law requirements; some states impose qualifications in addition to the federal ones.

(h) Other Statutory Law

In addition to the panoply of the foregoing bodies of law, nonprofit organizations may have to face other state statutory or other regulatory requirements. These include:

• A state’s nonprofit corporation act, which has registration and annual reporting requirements for foreign (out-of-state) corporations that are doing business within the state.¹⁸ For example, it is not clear whether, as a matter of general law, the solicitation of charitable contributions in a foreign state constitutes doing business in the state.¹⁹ Some states provide, by statute, that fundraising is the conduct of business activities in their jurisdictions. If the solicitation of charitable contributions were declared, as a matter of general law, to be a business transaction in each of the states, the compliance consequences would be enormous, considering the fact that nearly every state has a nonprofit corporation act. This type of a requirement would cause a charitable organization that is soliciting contributions in every state to register and report more than 90 times each year, not taking into account federal and local law requirements!
• A state’s insurance law, which may embody a requirement that a charitable organization writing charitable gift annuity contracts²⁰ obtain a permit to do so and subsequently file annual statements.
• A state’s blue sky statute regulating securities offerings, which may be applicable to offers to sell and to sales of interests in, and the operation of, pooled income funds.²¹ These laws may also apply with respect to charitable remainder annuity trusts and unitrusts.²²
• A state’s law prohibiting fraudulent advertising or other fraudulent or deceptive practices.²³
• A state’s version of the Uniform Supervision of Trustees for Charitable Purposes Act, which requires a charitable trust to file, with the state attorney general, a copy of its governing instrument, an inventory of the charitable assets, and an annual report. Of similar scope and effect are the state laws that invest the state attorney general with plenary investigative power over charitable organizations.²⁴

§ 1.2 FORMATION OF ORGANIZATION

The nature of governance of a nonprofit, tax-exempt organization is dependent in part on the type of the entity.²⁵ (For tax exemption to be available, there ...