2012 Nonprofit Seminar


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This is the presentation from our 2012 Nonprofit Seminar focused on Legal Issues All Nonprofits Should be Ready for.

Topics Included in this presenation:
Nuts and Bolts of Hiring and Disciplinary Actions for Nonprofits
Charitable Solicitations and Registration
What Board Members Should Know and Do/Form 990

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2012 Nonprofit Seminar

  1. 1. What Every NonprofitOctober 25, 2012 Should Know: Key Legal Developments and Issues Chambliss, Bahner & Stophel, P.C. 1000 Tallan Building Two Union Square Chattanooga, TN 37402 (423) 756-3000 cbslawfirm.com © 2012 Chambliss, Bahner & Stophel, P.C. All Rights Reserved.
  2. 2. Nuts and Bolts of Hiringand Disciplinary Actions for Nonprofits Justin L. Furrow
  3. 3. The Alphabet Soup of Employment Law
  4. 4. Employment Law Basics• Whether employment laws apply generally depends on the number of employees – Tennessee Employment Security Law: 1 employee – Tennessee Human Rights Act: 8 employees• Can also depend on volume of sales – Fair Labor Standards Act: $500,000 in sales or receipts
  5. 5. Employment Law: Why Does it Matter?• Provide rights to employees – Anti-discrimination, anti-harassment, and anti-retaliation laws – Required minimum wage and overtime payments• Impose obligations on employers – Voting leave – Workers compensation insurance – Jury duty leave
  6. 6. Hiring Process: How to Legally Hire Employees• Disability-related issues – Medical examinations and related inquiries• Social Media – Look at all of this information on Facebook• Job Descriptions and Qualifications – Job-related and consistent with business necessity• Background Checks
  7. 7. What About Non- Employees?• We pay them by 1099, isnt that ok?• Independent contractors – Right to control is paramount• Volunteers
  8. 8. Discipline: What to do When theEmployee Does Wrong
  9. 9. Discipline: What to do When the Employee Does Wrong• Well-documented employee personnel file that is complete, thorough, accurate and up-to-date• Legitimate business decisions will be evident from the file – This will be the basis on which you defend your action to an administrative agency or court when the organization is sued
  10. 10. Discipline: What to do When the Employee Does Wrong• Be accurate – All documentation should contain information that you know to be true and which can be objectively substantiated• Stick with the facts – The documents should contain a description of the offense or problem, along with names, dates, times, place of events and/or warnings, and the duration and frequency of the problem or offense
  11. 11. Discipline: What to do When the Employee Does Wrong• Be informative – Tell precisely what rule or policy was violated or what performance, attendance, or behavioral problem exists and explain what the employee must do to correct the problem – List previous steps taken to resolve the problem and the consequences if the problem continues
  12. 12. Discipline: What to do When the Employee Does Wrong• Be clear and precise in the Corrective Action Report – Dont use the words "never" or "always" Dont say: "You are not doing your job" or "You are always late." Do say: "You did not finish the XYZ project by the June 1 deadline"• Be timely – Write down the information while it is still fresh
  13. 13. Discipline: What to do When the Employee Does Wrong• Take care to keep – Keep in employees personnel file any papers that show mistakes, e.g., memos, phone messages, purchase orders, as well as all prior warnings or memos concerning the employee• Have employee sign – It is important to show that the employee actually received a Corrective Action Report or other write up. If the employee refuses to sign, talk with Human Resources
  14. 14. Employee TerminationsHow to End the Relationship
  15. 15. Employee TerminationsHow to End the Relationship• Tennessee is an at-will employment state! – But what does that mean?• Know what laws do (or might) apply – Has person recently filed or made a discrimination/harassment claim or been part of investigation? – Has she recently had a workers comp injury or is he in middle of a claim? – Has he engaged in whistleblowing?
  16. 16. Employee TerminationsHow to End the Relationship• Consult Human Resources!• Review the personnel file• Make sure the punishment fits the crime – Consistent with past disciplinary actions – No differential treatment of employees
  17. 17. Employee TerminationsHow to End the Relationship• Meet with the employee to convey the decision – ALWAYS have a witness!• Be truthful and accurate in describing the reason for discharge – BUT be concise!• Separation Notice
  18. 18. Questions?
  19. 19. State Regulation of CharitableSolicitations: Managing the Morass Leslie Stophel Maclellan
  20. 20. Charitable Giving• As of August 2012, more than 1.5 million nonprofit organizations were registered with the IRS• In 2011, individuals, foundations and corporations gave over $298 billion as charitable contributions – Religious organizations received 32% of total – Educational institutions received 13% of total – Human service organizations accounted for 12% of total(Source: National Center for Charitable Statistics)
  21. 21. Goals of State Regulation• Increase goodwill and confidence of donors• Protect citizens from fraudulent solicitations• Help donors make informed decisions• Prevent wasting charitable assets• Allow states to know who is receiving donations• Assist authorities to resolve complaints, educate the public and nonprofits, and effectively investigate to ensure compliance(Source: National Association of State Charities Officials)
  22. 22. Why Register?• State Charitable Solicitation Acts: 40 states (and the District of Columbia) require nonprofits to register before raising funds• Form 990 and 990EZ• Oversight by industry organizations• Use of professional fundraiser and/or solicitor
  23. 23. State Charitable Solicitation Acts• Consequences – Civil fines • Georgia – Maximum fine $25,000 • Arizona – Maximum fine $2,500 • Pennsylvania – Maximum fine $10,000 • Washington – Maximum fine $5,000 – Criminal fines and jail, depending on the state and egregiousness of the acts • Up to a 3rd degree felony in some states
  24. 24. State Charitable Solicitation Acts• Consequences – Media coverage/damage to reputation – Oversight of operations – Audit – Court ordered return of donations – Donor lawsuits
  25. 25. Increased State Enforcement• Each year – Approximately 100 enforcement cases – 2 to 3 organizations are shut down – Tennessee Deputy Attorney General "definitely is increased focus"
  26. 26. Increased State Enforcement• Florida, 2005 – The Terri Schindler-Shiavo Foundation – $1000 fine• Georgia, 2009 – Foundation formed by Atlanta councilman – $25,000 fine – Personal liability – Aggravating circumstances
  27. 27. Increased State Enforcement• Florida, 2009 – A Tampa Bay charity for slain police officers families – Failure to renew – $1000 fine (legal fees?) – "$75 registration fee turned into nightmare"
  28. 28. Increased State Enforcement• New Jersey, 2010 – Unregistered charity operating in New Jersey from 2005 through 2009 – Fined $17,500 and barred for five years – Former volunteer committed fraud – Charity victim, but still punished
  29. 29. Form 990 and Form 990 EZ• Part VI, Line 17 – List all states in which a copy of Form 990 is required to be filed• Schedule G – List all states in which the organization is licensed to solicit contributions or has been notified it is exempt from registration
  30. 30. Oversight by Industry Organizations• Evangelical Council for Financial Accountability• National Association of State Charities Officers – Fall conference – heavy focus on charity registrations
  31. 31. Professional Solicitor/Fundraiser• Most states require professionals to register• Contracts filed with states• Contract should include representation as to registration and compliance with applicable laws
  32. 32. Registration Process• Determine states in which you solicit (not receive) contributions• Analyze exemptions• Complete Uniform Registration Statement
  33. 33. Soliciting Contributions• State specific definitions• Oral - TV, radio, commercial• Written - mail, email, public posting, or communicated by any media, including press• Offer or sale of goods at fair market – Books, tapes, membership – Conference invites if fee paid – Car washes, bake sales
  34. 34. Includes "Charitable SalesPromotions" or "Charitable Appeal"• Commercial co-venturer• Benefit concerts• Stores donating portion of sales to charity• Bingo, "Game Night," vehicle donation programs
  35. 35. To request (directly or indirectly) money,credit, property, financial assistance, or anyother thing of value on the plea orrepresentation that this will be used for acharitable purpose or will benefit acharitable organization.(Source: NAAG/NASCO Conference, October 2011)
  36. 36. Exemptions• Churches (exempt for federal tax purposes)• Higher educational institution• State chartered school• "Religious organization"• Less than $25K gross revenue• Less than 10 donorsRemember: State specific!
  37. 37. The Uniform Registration Statement
  38. 38. The Uniform Registration Statement• NOT uniform – State specific addendums• General information (non-inclusive) – Description of mission – Bylaws, charter, exemption letter – List of officers/directors – Description of fundraising activities• State specific – Form 990 – Audited financials – Professional fundraiser contracts
  39. 39. Cost of Registering• Fees vary from $0 to $400, depending on the state• Must be renewed annually• Some fees are determined based on a sliding scale• Hidden costs - Some organizations have determined that 30% to 50% of a full- time employees workload can be spent complying with the registration process
  40. 40. Trends - More State Oversight• State legislators, concerned about the financial integrity of charities, continually propose new legislation to increase regulatory oversight• Recent attempts were made in several states to mimic the Sarbanes-Oxley Act to impose tighter restrictions on use of contributions• Federally, some members of Congress make regulating charities and charitable gifts a priority – Most notably, Senator Chuck Grassley (R-Iowa)
  41. 41. Trends – Internet Solicitations• In over 10 states, officials view the "Donate Now" link on your website as a solicitation
  42. 42. Trends – Internet Solicitations• Charleston Principles – Applies state registration statutes to internet solicitations – Adopted by some states including Tennessee – States enforce the law against nonprofits that mislead or defraud persons in the state
  43. 43. Trends – Internet Solicitations• Charleston Principles: An out-of-state entity must register if: – Its non-internet activities would require registration – The entity solicits contributions through an interactive website and either • Targets a person in the state, or • Receives contributions from citizens of that state on a repeated an ongoing basis (or a substantial basis through its website); or • The entity solicits contributions through a site that is not interactive, but either specifically invites further offline activity or establishes other contacts with the state (such as sending an email promoting the website) and – Targets a person in the state, or – Receives contributions from citizens of that state on a repeated an ongoing basis (or a substantial basis through its website)
  44. 44. Trends – Responding to Social Media• Social media permits nonprofits to raise money in different ways than charity-run websites and poses significant problems that charity regulators are trying to resolve• Questions that arise – How to monitor "daily-deal" websites that encourage online donations – How websites that charge fees for collecting donations should disclose those fees – How to respond to "friends" soliciting via Facebook – How to prevent bogus charities from social network abuse
  45. 45. Trends – Uniform Disclosure Statements• Many states also regulate solicitations by requiring nonprofits to disclose certain information in conjunction with the solicitation• Uniform Disclosure Statements are created to address these requirements• Many organizations include them with all public communications
  46. 46. What Board MembersShould Know and Do FORM 990 James L. Catanzaro, Jr.
  47. 47. I. Understanding the Deal Your Tax Exempt Organization (TE) Has Made with the IRS
  48. 48. • The TE obtained exempt status by submitting an application (Form 1023) making certain representations concerning the public interest it would serve and its governing structure to achieve these results
  49. 49. • The IRS determined that the TE would, as governed, provide beneficial services to the public, which the government would otherwise have to furnish, and granted an exemption
  50. 50. • In granting exempt status, the IRS relied upon the documentation and representations made by the TE!
  51. 51. • The IRS, therefore, has a continuing interest in monitoring whether the TE continues to govern as described in the application and any changes that might have occurred. It does this through Form 990.
  52. 52. II. What You Need to Take from Form 990 It is not just a form for your CPA to file!
  53. 53. • Form 990 is a detailed annual return that queries the TE about governance practices• The IRS has stated that it ties good governance with tax compliance!
  54. 54. • The board, as the body primarily responsible for ensuring that assets are properly used and the purpose of the organization is pursued, must see that critical governance practices are implemented
  55. 55. • Although a TE is not "required" to adopt each practice asked about, the TE must implement and demonstrate a thoughtful approach to the pursuit of its operations and mission
  56. 56. How is ThoughtfulGovernanceDemonstrated?The work is done before a Form 990is completed and involves:
  57. 57. 1. Periodically reviewing the mission to ensure that it continues to be that which is set out in the articles and bylaws and as described in the application • Where fundamental changes have occurred, notifying the IRS
  58. 58. Risk if Fail to Do: • In Part I, Line 1 and Part III, Line 1, Form 990 requests a current statement of the TEs purposes. If fundamentally inconsistent with the original purpose of the TE, there may be a risk of a redetermination of exempt status
  59. 59. 2. Implementing the use of responsible controls, including:
  60. 60. A. Appropriate conflict of interest policies and procedures to include: • Annual disclosures • Processes for identifying and sequestering conflicted board members • Standards by which matters involving conflicts may be properly approved
  61. 61. Risk if Fail to Do:• In Part VI, Lines 12 (a), (b) and (c) ask whether the TE had a sufficient written conflict of interest policy• If the answer is "No," the lack of any real process may raise concern about the TEs use of assets
  62. 62. B. Demonstrating that compensation paid to officers and directors is "fair value" and set by an appropriate procedure
  63. 63. Risk if Fail to Do: • In Part VI, Line 15 and Part VII, the TE is asked how it sets compensation and how much compensation it pays to officers and directors • If the TE does not utilize compensation processes, there may be an inference that it is overpaying • Overpaying could result in a private benefit/inurement finding or risk intermediate sanctions – See also Part VI, Line 5!
  64. 64. 3. Recording and maintaining contemporaneous minutes of board meetings and actions
  65. 65. Risk if Fail to Do:• In Part VI, Line 8 asks whether contemporaneous documentation occurred• If not, a negative inference may arise about the propriety of actions taken
  66. 66. 4. Evaluating board membership with a preference, where possible, for "independent" directors • An "independent" director has no material financial relationship with the TE
  67. 67. Risk if Fail to Do:• In Part VI, Lines 1(a) and (b) asks about the number of independent directors• Where the board is populated by members who are not independent, the TE may be subject to an inference about use of public assets
  68. 68. 5. Making sure that the TE continues to qualify as a "public charity" if revenue sources materially change
  69. 69. Risk if Fail to Do: • In Parts I, Lines 8-12 and VIII, Form 990 requests specific information about revenues • If the TEs sources of revenue materially change, it will be forced to disclose this and may be subject to reclassification
  70. 70. 6. Managing UBTI• UBTI or Unrelated Business Taxable Income results from revenue created by an activity which is regularly carried on and not in furtherance of the TEs charitable mission, regardless of the use of such revenues
  71. 71. Risk if Fail to Do:• In Part VI, Lines 7(a) and (b) must be disclosed – Could be subject to taxes, interest and penalties if not disclosed• Also, too much UBTI could lead to an audit and questions about the continued tax exempt status of the TE if at any time the unrelated activity becomes "substantial"
  72. 72. What Board MembersShould Know and Do FORM 990 APPENDIX J. Nelson Irvine
  73. 73. Who is Looking at Your 990?Forms 990 are public records. Donors andcreditors as well as regulatory agencies such asthe State Attorney General pick up informationfrom Forms 990. Reporting agencies likeGuidestar use and rely on information in theForm 990. State and local tax assessors may useand rely on statements of mission, purpose andrelated activities.
  74. 74. Required Provisions inYour Organizing Document• Section 501(c)(3) requires that our organizing document state your exempt purpose(s), such as charitable, religious, educational, and/or scientific purposes.• Describe specifically where your organizing document meets this requirement.[From Instruction to Form 1023]
  75. 75. Narrative Description of Your Activities• Describe your past, present and planned activities in a narrative.• If this application is approved, it will be open for public inspection.• Your narrative description of activities should be thorough and accurate.[From Instructions to Form 1023]
  76. 76. Purpose"To the extent that the corporate purposeis described in more than one document, itis important that these descriptions beconsistent. [Guidebook for Directors of NonprofitCorporations, Third Edition, pg. 9].
  77. 77. Purpose and Mission"It is very important that the missionstatement is consistent with anypurposes statement set forth in thearticles of incorporation [the charter] orbylaws." [Guidebook for Directors of NonprofitCorporations, Third Edition, pg. 9]
  78. 78. MissionIf a 501(c)(3) organization does not have agovernance instrument, such as charter andbylaws, the organization should have amission statement. The mission statementshould reflect the organizations purposes,activities and constituencies.
  79. 79. Schedule O Mission Statement ExampleThe organization operates a public garden,dedicated to promoting the beauty and value ofplant material through education, preservation,recreation and research. The garden celebratesan Alaskan sense of place through the aestheticdisplay and interpretation of plant collectionsuniquely suited to the sub-artic environment.
  80. 80. 990 Review Process• Part VI, Governance, Management and Disclosure • Section B. Policies • 11a. Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the Form? • 11b. Describe in Schedule O the process, if any, used by the organization to review this Form 990.
  81. 81. Schedule O 990 Process Statement Example 1• Form 990 is prepared by an independent CPA firm and submitted to the executive director for review.[Form 990, Part VI, Section B, Line 11]
  82. 82. Schedule O 990 Process Statement Example 2• Form 990 is prepared by the independent accounting firm, then reviewed and verified by the chief financial officer and reviewed by the chairman of the finance committee. Copies of the form are then sent to all members of the executive committee for review and comment. Copies are made available to all members of the board of directors. The final version is filed with the Internal Revenue Service.[Form 990, Part VI, Section B, Line 11]
  83. 83. Schedule O 990 Process Statement Example 3• The Form 990 approval process is the same as the audited financial statement review process. The audit committee is presented a draft copy of the Form 990 for detailed review and approval. Upon audit committee approval, the Form 990 is presented to the chairman of the board of directors and president for final approval. Upon final approval, the Form 9990 is submitted to the chief financial officer for signature.[Form 990, Part VI, Section B, Line 11]
  84. 84. General Standard for Directors – Duty of Care(a) A director shall discharge all duties as a director, including duties as a member of a committee: (1) In good faith; (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) In a manner the director reasonably believes to be in the best interests of the corporation.
  85. 85. General Standards for Directors - Reliance(b) In discharging such duties, a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: 1. One (1) or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;
  86. 86. General Standard for Directors - Reliance2. Legal counsel, public accountants or other persons as to matters the director reasonably believes are within the persons professional or expert competence; or3. A committee of the board of directors of which the director is not a member, as to matters within its jurisdiction, if the director reasonably believes the committee merits confidence.
  87. 87. Questions?
  88. 88. DisclaimerThis presentation is provided with the understanding thatthe presenters are not rendering legal advice or services.Laws are constantly changing, and each federal law, statelaw, and regulation should be checked by legal counselfor the most current version. We make no claims,promises, or guarantees about the accuracy,completeness, or adequacy of the information containedin this presentation. Do not act upon this informationwithout seeking the advice of an attorney.This outline is intended to be informational. It does notprovide legal advice. Neither your attendance nor thepresenters answering a specific audience memberquestion creates an attorney-client relationship.