Nonprofit Organizations Committee Fast Facts
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Article Writers Wanted
The Newsletter Editorial Board is seeking articles on nonprofit law subject matter to include in future newsletters.
There is no length requirement. If you are interested in submitting an article, please contact:
Newsletter Editorial Board
- Willard L. Boyd III, Des Moines, IA
- Cari Campbell, Kieler, WI
- Megan A. Christensen, Washington, DC
- David Levitt, San Francisco, CA
- Matthew G. Wright, Waco, TX
Greetings from the Nonprofit Organizations Committee Chair
In every day's news, we see how prominently the Nonprofit Sector figures in the economic and social life of the world around us. The diversity of
nonprofits mirrors the diversity of our society, and echoes the diversity found in the for-profit sector. In the vast for-profit sector, however, from the
perspective of governance, the choice of form of entity and entity activities are driven by a primary purpose of profit maximization.
The many and varied purposes of nonprofit organizations, however, have a far larger role in guiding the governance and operation of nonprofit
organizations. Nonprofits can only do work consistent with their purposes, whereas a business corporation can do a complete make-over to a completely
different product without any change in corporate governance. Nonprofit charities are constrained not only by limited corporate purposes, but also by
longstanding law prohibiting diversion of charitable funds from the intent of the donor. Tax law imposes another layer of governance constraint on
nonprofits, not just through the recently enhanced Form 990, but also through the need to fall cleanly within one of the categories of tax-exemption under
IRS Code section 501(c).
In other words, the diversity in the nonprofit world is mirrored in a diversity of governance structures and restraints that do not apply in the for-profit
world. In the nonprofit world, straying from fidelity to organizational purpose (or mission) has caused many of the scandals in
recent years. A few errant nonprofits have brought forward calls for greater oversight of the entire sector.
Now, new forms of hybrid entities, such as multi-purpose corporations, benefit corporations, and low-income limited liability companies, are coming to be
recognized. These types of entities include profit making as one purpose, but impose other constraints on action through beneficial purposes similar to
those imposed on nonprofits because of their mission-based corporate purposes.
The Nonprofit Organizations Committee has significant experience addressing the ways in which specific purposes affect organizational governance. This
knowledge base has been demonstrated in many programs sponsored by the Nonprofit Organizations Committee, especially those explaining traps for the unwary
in differences between for-profit business law and nonprofit law for the typical business lawyer, emphasizing adherence to stated purposes. Nonprofit
lawyers from the Committee have been at the forefront of working on legislation regarding hybrid entities and designing programs about them, emphasizing
the importance of being guided by stated purposes. For a great introduction and education, Nonprofit Organizations Committee members and any business
lawyer working with nonprofit or hybrid entities should take advantage of the tremendous archive of past program materials available from the Business Law
Section on its website, now including materials from the 2013 Annual Meeting.
Michael E. Malamut
Chair, Nonprofit Organizations Committee
Subcommittee 2013 Annual Report - Religious Organizations
(David Ball and Sandy Greenfield, Co-Chairs)
This has been a learning year, to a significant extent, as David Ball and Sandy Greenfield took on the role of Subcommittee Co-Chairs and Leah Chatinover
became Vice Chair.
This new leadership team planned a substantive presentation on the "religious employer" exception to the Affordable Care Act's contraceptive mandate for
the 2013 Spring meeting. Ms. Greenfield chaired the spring 2013 Subcommittee meeting and led the discussion using a PowerPoint on the topic that had been
developed jointly by Mr. Ball and Ms. Greenfield. Several participants in that meeting requested that the PowerPoint be posted on the Subcommittee's web
page, and it was.
For the Subcommittee's session at this year's annual meeting, the time was divided between a presentation by Mr. Ball on "Legal Issues Arising from Use of
Social Media" by religious organizations (by telephone) and a discussion led by Ms. Greenfield on ways in which the Subcommittee can increasingly serve as
an active virtual resource for its members. Ideas for that effort include increased use of the listserve, with regular case law updates.
The Co-Chairs have appreciated the input of their Vice Chair, Ms. Chatinover, throughout the year, and look forward to shared future leadership efforts.
Academic Advisor Report as of August 9, 2013
By Professor Dana Brakman Reiser
There are now more scholars writing about nonprofit law subjects than ever before. Early in the development of the field of nonprofit law scholarship, many
who worked in the area also had expertise in tax law or the law of trusts. Over time, the backgrounds and interests of those in the field have become more
While tax and trusts remain areas with which all nonprofit law scholars must be familiar, many also teach, research and write about business law. This
trend is bolstered by the development of a literature around the law and social enterprise. I have been very involved in writing in this area, along with a
growing number of other (especially junior) scholars. A number of symposia have been sponsored around social enterprise issues in each of the past few
years. Signals are mixed on whether specialized forms will continue to be the topic of the greatest interest to legal scholars - as it has since 2008.
Delaware's public benefit corporation social enterprise form came on line last week, which could signal that these forms are really coming into their own.
On the other hand, few entities have formed under these laws in other states, and only a couple of dozen from my information in Delaware, so scholarly
interest in social enterprise may begin to pursue other topics. My own view is that social enterprise finance is the most fruitful place for exploration,
and my own work is directed there. But, time will tell.
Scholars have continued to write a great deal about nonprofit political activities and healthcare, which I raised in my last report. The time line for
academic work means that we have not yet seen many scholarly works addressing the 501(c)(4) scandal, but I assume that will start filtering out very soon.
In addition, as tax reform continues to be debated, including discussions about the future of the charitable tax deduction, many scholars are writing about
Congressional and proposals and offering their own. Papers often also highlight and discuss tax abuses involving nonprofits, especially in the area of
conservation easements. With the importance of these issues in the political arena, these topics are not going anywhere.
Helping Your Client Create and Grow a Successful Nonprofit Organization: A Checklist for the "Non" Nonprofit Attorney
By Dana M. Malkus
The following feature is an abridged version of "Helping Your Client Create and Grow a Successful Nonprofit Organization," an article which appeared in
volume 67 of the Journal of The Missouri Bar in October 2011. The purpose of the original article was to provide Missouri attorneys with information
and tools designed to enable them to offer pro bono legal assistance to start-up and established nonprofit organizations.
We are frequently reminded of our privilege and obligation to provide pro bono legal services. While there seem to be endless volunteer opportunities for
those attorneys who focus their practices in litigation, the volunteer opportunities for transactional attorneys have sometimes seemed less obvious. One
area in which transactional attorneys can provide much-needed assistance is to start-up and established nonprofit organizations (each, a "NPO"). NPOs need
legal assistance at both the start-up stage and as they grow, generating ample pro bono opportunities. For example, the client may need assistance with
incorporation, filing for recognition of its tax-exempt status, amending its bylaws, hiring an employee, creating policies and procedures, or engaging in
There are several different formation options and federal tax-exemption choices available to start-up NPOs. While it is important to understand these
options and choices, the scope of this article does not include all such options and choices. Instead, this article focuses on the most common formation
option (the non-profit corporation) and tax-exemption choice (501(c)(3); public charity status). This article is intended to provide information and advice
to potential volunteer attorneys concerning the legal needs of both start-up and established NPOs.
Dana M. Malkus is an attorney and assistant clinical professor at St. Louis University School of Law where her duties include supervising students in the
Community & Economic Development Clinic and teaching a transactional drafting course. Prior to her current position, she worked as an associate at
Lewis, Rice & Fingersh and as a law clerk for the Honorable E. Richard Webber in the United States District Court for the Eastern District of Missouri.
Portions of this article benefitted from contributions by several former students, including Elisa Clark, John Fritz, Jennifer Kawicki, Elizabeth Kroll,
Nathaniel Mack, Ryan McGinty, Katie Manning, Alexa Strong, Katie Strutz, and Austin Vowels.
Not All Charities Created Equal
By Roy J. Rodney, Jr. and Veronica J. Lam
The 21st Century has seen increasing pressures on non-profit organizations. Following an unprecedented year-long investigation, the
Tampa Bay Times and the Center for Investigative Reporting compiled a
list of the "50 Worst Charities." The scope of the investigation included publicly
available federal and state tax filings spanning a period of ten years. The list was based on the ratio between the amount a charity raises through
fundraising and the amount paid to benefit the individuals whom the charity claims to benefit. An overarching pattern among the fifty charities is the
exorbitant percentages paid to for-profit solicitors compared to the extremely low percentages paid to those in need. Six of the listed charities gave
nothing at all in direct cash aid to the individuals they claim to benefit. Many of the worst charities' names are very similar to well-known, trusted
charities. To disguise the small amount of money actually paid to those in need, others use accounting tricks and inflate the value of cheap items donated
to those in need.
In New York, a state court judge recently found
that a sham charity, named Coalition Against Breast Cancer, was paying Campaign Center, Inc., a professional solicitor. $3.9 million out of the $4.9
million the company raised over a period of six years. Judge Emily Pines
ordered Campaign Center and its principal to pay restitution in the amount of $3.1 million. Coalition Against Breast Cancer was shut down in April, and its
former directors have agreed to pay $1.6 million in restitution and to never run a charity in the state again.
Every charity has costs related to salaries, overhead and fundraising. So what is the mark of a trustworthy or well-run charity? As a rule of thumb,
several watchdog organizations suggest that charities spend no more than 35% of the money they raise on fundraising costs. Recent changes in the IRS Form
990 have made it easier to review fundraising costs. Those looking for a charity's fundraising expenses can look at Line 15 of Form 990. Several
organizations have published best practices for non-profit organizations in a rapidly changing legal and regulatory environment.
The Association of Fundraising Professionals,
the professional organization for fundraisers, recently challenged the 50 worst charities list in saying the list missed several key points that donors
Rodney & Etter, LLC believes in strengthening nonprofits by applying sound business principles including commercial merger and acquisition techniques.
Roy J. Rodney, Jr. serves as Chair of the National Bar Association's
Ad Hoc Committee on Nonprofits and as an active member of the
ABA Business Law Section Subcommittee on Nonprofits
and the Texas Association of Non-profits.
Megan A. Christensen, Blank Rome LLP, Washington, DC
IRS Issues Regulations With Respect to Excise Taxes Related to the Community Health Needs Assessment Requirement for Charitable Hospitals.
Effective August 15, 2013, the IRS issued temporary and final regulations (T.D. 9629) and proposed rules (REG-115300-13) providing guidance to charitable
hospital organizations that fail to meet the community health needs assessment (CHNA) requirements for any taxable year. Corrections to those final,
temporary, and proposed regulations were issued on September 25, 2013. A hospital organization seeking to maintain tax-exempt status under Section
501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code") must comply with Section 501(r) of the Code, including the requirement to conduct a
CHNA at least once every three years and adopt an implementation strategy to meet the needs identified. Section 4959 of the Code imposes a $50,000 tax on a
charitable hospital organization that fails to meet these requirements for any taxable year. Under the regulations, a charitable hospital organization that
is liable for these taxes must file a return on Form 4720 by the 15th day of the fifth month after the end of the organizations taxable year
during which the liability was incurred.
Subcommittee on Oversight of the Committee on Ways and Means Hearing September 18, 2013.
On September 18, 2013 the Subcommittee on Oversight of the Committee on Ways and Means held a hearing on the progress of the IRS' Exempt Organizations
Division's operations and implementation of recommendations by Treasury Inspector General for Tax Administration and Acting Commissioner of the IRS, Dan
Werfel, since the revelation that the IRS targeted certain organizations on the basis of their political views. The only witness was Werfel who reported
that the IRS had closed 91 of the 132 applications for Section 501(c)(4) determination in "priority backlog" (i.e., those that had been pending for more
than 120 days as of late May). Of the 91 cases closed, 70 applications were approved, 8 were withdrawn, and 13 were not approved, because the organization
failed to respond to correspondence. Werfel also reported that the IRS is developing ways to reduce the "growing inventory" of Section 501(c)(3)
applications. Congressman Charles Boustany (R-LA), Chairman of the Subcommittee reportedly inquired about the "complete (c)(3)/(c)(4)" backlog" and was
informed that it was 65,213 applications as of August 23, 2013. The IRS website currently indicates that it assigning for further development applications
received in May 2012.
Emily Chan, Adler & Colvin, San Francisco, CA
On June 20, 2013, Governor Jan Brewer signed into law HB 2457. Among other changes, HB 2457 repeals the annual solicitation registration requirement with
the Secretary of State for charitable organizations starting September 2013.
On May 29, 2013, the California Senate passed SB 323, the "Youth Equality Act." The Youth Equality Act will amend Section 23701d of the California Revenue
and Taxation Code to deny or revoke state tax exemption for youth organizations that discriminate on the basis of gender identity, race, sexual orientation,
nationality, religion, or religious affiliation. The bill is currently in the state Assembly.
On June 21, 2013, Governor Paul LePage signed into law L.D. 1277, "An Act To Streamline the Charitable Solicitations Act." The Act eliminates the
commercial co-venturer registration requirement for for-profit companies. It also exempts charitable organizations from the charitable solicitation
registration requirement if the organization (i) solicits primarily within its membership, irrespective of whether the solicitation activities are
conducted by members, or (ii) raises $35,000 or less in a calendar year or receives contributions from 35 or fewer persons in a calendar year, irrespective
of whether the fundraising activities are carried on by volunteers. The law becomes effective October 9, 2013.
On May 28, 2013, Governor Brian Sandoval signed into law AB 60 which establishes the charitable solicitation registration requirements with the Secretary of
State for every nonprofit corporation that will solicit tax-deductible charitable contributions within the state. The law becomes effective January 1, 2014.
On June 5, 2013, Attorney General Eric T. Schneiderman adopted new charity disclosure regulations requiring certain organizations exempt under
section 501(c) (except 501(c)(3) organizations) to report to the Attorney General the percentage of their expenditures that go to federal, state and local
electioneering. Additionally, organizations that spend at least $10,000 to influence state and local elections in New York will be required to file
publicly available itemized schedules of expenses and contributions. The new rules became effective June 5, 2013.
On July 10, 2013, Attorney General Eric T. Schneiderman announced his office obtained a $950,000 settlement from the former President of the
National Arts Club, Aldon James, and his brother, John James, and their colleague, Steven Leitner. The settlement resolved a lawsuit filed by Attorney
General Schneiderman in September 2012, following an 18-month investigation, against Aldon James for breach of fiduciary duty, waste of the organization's
assets and false filings with the office's Charities Bureau. Under the settlement, the James brothers are also prohibited from serving as an officer,
director or fiduciary of any nonprofit in New York State.
On June 21, 2013, the New York State Legislature passed the New York Revitalization Act (introduced on May 10, 2013) which is intended to (1)
enhance nonprofit governance and oversight to prevent fraud and improve public trust; and (2) reduce unnecessary and outdated burdens on nonprofits. It is
expected to be signed into law by Governor Andrew Cuomo. If signed into law, most provisions of the Act will become effective July 1, 2014.
On June 4, 2013, Oregon State Governor John Kitzhaber signed into law HB 2060 which disallows a state income tax-deduction for donations made to an
organization that failed to spend at least 30 percent of the organization's total annual functional expenses on program services, averaged over a three
year period. HB 2060 requires a disqualified organization to disclose its disqualified status in solicitations or otherwise be subject to misleading
representation penalties. The new law becomes effective three months after the close of the current legislative session.
On May 8, 2013, Attorney General Kathleen G. Kane announced her office and the Milton Hersey School and Hershey Trust Company had entered into an agreement
for implementing certain governance reforms following a two-year investigation by the Attorney General's office. The reforms include new rules to address
overlapping board members between the organizations; reduced board compensation levels; and a new conflict of interest policy that cannot be amended
without the Attorney General's approval.
On May 25, 2013, Governor Rick Perry vetoed SB 346 which would have required certain nonprofit organizations that spend more than $25,000 on political
expenditures in a calendar year to disclose donors who contributed more than $1,000.