1

Legal Issues of Not-for-Profit OrganizationsRobert L. WaldmanVenable LLP410-244-7499rlwaldman@venable.com

2

Organizational Issues

• Corporate Documents• Articles of Incorporation• Bylaws• Minutes

• Application for Tax-Exempt Status (Form 1023)

- Make Sure Determination Letter is Current

3

Information Found in Corporate Documents

• Name of Corporation• Corporate Purposes• Board Number and Selection Process

• Self-Perpetuating• Member Selected• Term Limits

• Resident Agent and Address• Committee Structure• Officers• Indemnification Procedure• Public Charity Status (IRS Determination Letter)

4

Board Meetings

• Quorum• Approve Minutes• Committee Reports• Accurate Minutes

• Record Dissents (By Name or Number)• Record Votes• No unnecessary or irrelevant information

5

Rights and Responsibilities of Board Members

• Two Duties• Duty of Care• Duty of Loyalty

6

Duty of Care

• Informed, good faith decisions • Regular attendance at board and committee

meetings• Can rely on reports and consultants, if reliable• Delegation is permissible• Monitor investments

7

Duty of Loyalty

• Undivided allegiance• Disclosure of

conflicts/Conflict of Interest Policy

• Intermediate Sanctions

8

The 17 Questions

• What are the stated purposes of the organization?• Does the transaction advance the stated

purposes?• Does the transaction benefit a private individual?• Were any promises made when the funds were

raised?• Were any conditions placed on the donated

funds?

9

17 Questions (cont.)

• Does the director attend the meetings?• Are meetings held regularly?• Does the director have all the relevant facts?• Is there any reason not to trust the information

being furnished?• Are taxes being paid?• Is there a conflict of interest or self-dealing?

10

More Questions

• Is the transaction fair to the organization?• How would an ordinarily reasonable and prudent person

decide the matter?• Are there other laws that affect the particular situation?• How accurate are the records?• Is the director acting honestly, in good faith and with total

integrity?• Is this transaction in the best interests of the organization?

11

Operational Issues

• Conflicts of Interest• Private Inurement• Private Benefit• Intermediate Sanctions

– Applies to Excess Benefit Transactions(including compensation arrangements)

– 25% Tax on the Self-Dealer (200% if not corrected)– 10% Tax on the Board (up to $10,000)

• Conflict of Interest Policy• Sarbanes-Oxley• Best Practices

– New York Situation

12

Lobbying

• Two Types of Lobbying:• Direct Lobbying• Grassroots Lobbying

13

Direct Lobbying

• Communication with a legislator, legislative staff, or other government official (state, federal or local)

• Refers to specific legislation or legislative proposal• Takes a position

14

Grassroots Lobbying

• Communication with the general public• Refers to and takes a position on specific

legislation• Includes a “call to action”

15

Exceptions to Lobbying

• Nonpartisan Analysis and Research• Self Defense• Technical Assistance in Response to a Written

Request• Discussion of Broad Social Issues

16

Impermissible Lobbying

• Two tests• Insubstantial Part• 501(h) election

– Expenditure Test (20%)• 501(c)(4) Alternative

17

Political Activity

• Cannot participate or intervene in any political campaign on behalf of any candidate for public office

• Watch out for “indirect” campaign activity (biased voter guides, issue advocacy tied to a candidate, etc.)

• Voter education and candidate forums may be ok.

18

Unrelated Business Income Tax (“UBIT”)

• Three elements• Trade or Business• Regularly Carried On• Unrelated to Exempt

Purposes

19

Exceptions to UBIT

• Passive Income (Rents, Royalties, Interest, Capital Gain)

• Services provided by Volunteers• Most fundraisers• Bingo

20

Special UBIT Conerns

• Corporate Sponsorships (Acknowledgement vs. Advertising)

• Debt Financed Property• Mailing Lists• Royalties vs. Compensation• Affinity Credit Cards

21

Other Hot Legal Areas

• Contracts (Employment Contracts)• Environmental• Intellectual Property

• Trademarks• Patents• Copyrights

22

Liability Protection

• Insurance (D&O, property, E&O)• Corporate Protection• Volunteer Protection Acts (State and Federal)• Indemnification

23

Fundraising Issues

• Registration Requirements• Raffles and Auctions• Planned Giving Tools

• Sample Will Language• Naming Opportunities• Donor Advised Funds• Charitable Gift Annuities• Charitable Remainder Trusts• Pooled Income Funds

24

Structure Issues

• Use of Subsidiaries (for profit and nonprofit)• LLC’s• Title Holding Companies• Supporting Organizations• Joint Ventures

25

Filing and Disclosure Issues

• Form 990• Personal Property Tax Returns• Charitable Solicitation• Make available 990’s, 1023• Charitable Substantiation Rules (Receipts)

• What Portion is Deductible