![Tax Exempt Status ,[object Object],[object Object]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
Recommended
Recommended
More Related Content
What's hot
What's hot (20)
Viewers also liked
Viewers also liked (20)
Similar to Habitat Corp Governance
Similar to Habitat Corp Governance (20)
Habitat Corp Governance
- 1. Corporate Governance Issues for Nonprofit Organizations
Editor's Notes
- The first part of the UBI test is to determine if your activity is a trade or business. If your organization is selling goods or services to generate income, even if it is conducting the activity within a larger group of activities related to its exempt purpose, the activity is a trade or business. So, while your 501(c)(3) is carrying on its daily exempt function, it could also be carrying on activities that are taxable. Example: A tax-exempt organization solicits, sells, and publishes advertisements for commercial vendors in its publication. Even though the publication contains content related to the organization’s exempt purpose, the publishing of advertising is still an unrelated trade or business. Part 2: Is your activity regularly carried on? If you’ve determined that your activity is a trade or business, the next part of the UBI test is to decide if the activity is “regularly carried on.” In most cases, if the activity shows frequency and continuity and is conducted the same way that a non-exempt organization would run a similar business, it is regularly carried on. Example: A hospital auxiliary operates a health food stand for one week at a preventative health education conference. Because the activity is a one-time occurrence and is unlikely to compete with for-profit health food stores that operate year-round, the activity is not “regularly carried on.” However, if the hospital auxiliary operates a health-food stand daily at the hospital, that is likely the regular conduct of a trade or business.
- These provisions are from the Model Non Profit Act.
- In order to ensure that the foregoing responsibilities are fulfilled, directors and officers have a fiduciary duty of care to the non-profit. There has been recent debate over whether non-profits’ directors and officers should be held to the standard of care applied to directors and officers of for-profit corporations, or whether the more stringent standard applied to “trustees” is appropriate. 16 The trend in the law, however, has been to apply the corporate standard to non-profits’ directors and officers, which requires that a director or officer act with the care that a reasonably prudent person in a similar position would exercise under the same circumstances. 17 Specifically, the Model Non-Profit Act defines the director’s duty of care as follows:
- May include rules mandated by accreditation agencies, or required by the organization’s articles of incorporation and bylaws.
- Directors and officers, however, are permitted to rely upon information and reports provided by: (1) officers or employees of the non-profit “whom the director reasonably believes to be reliable and competent in the matters presented”; (2) professionals and other persons retained by the organization “as to matters the director reasonably believes are within the person’s professional or expert competence”; and (3) a committee of the board “as to matters within its jurisdiction, if the director reasonably believes the committee merits confidence.” 20 A director, however, is not acting “in good faith” if he or she relies upon information where the director’s own personal knowledge renders such reliance unwarranted. 21 Further, in delegating the responsibilities of the organization’s management to others, the directors must implement appropriate policies and procedures that provide for the oversight of personnel.
- A conflict of interest arises when a director or officer has a direct or indirect personal interest in a transaction involving the organization. Conflicts of interest are not, however, per se prohibited. Indeed, many individuals are recruited to serve on the boards of non-profits because of their professional or business affiliations and activities. There may be situations in which, as a result of a director’s or officer’s connection or affiliation with other persons or entities, the non-profit is able to engage in a transaction on terms more favorable than it could have obtained on its own. Liability, therefore, is not imposed on a director or officer for the mere approval of a transaction in which he or she may have a conflict of interest. Instead, the focus is on the process by which the transaction was reviewed and approved by the board. Under the Model Non-Profit Act, and the laws of many states, the existence of a conflict of interest will not be deemed a breach of fiduciary duty if the transaction was approved under certain conditions. First, the director with the conflict should disclose the material facts regarding the conflict to the other board members and refrain from participating in the deliberations and vote on the matter. Second, it must be shown that the disinterested directors approved the transaction in good faith and reasonably believed it was fair to the organization. In some cases, the directors may insulate themselves from liability by obtaining the approval of the state attorney general or a court either before or after consummation of the transaction. 25 Some transactions, however, may be prohibited entirely by state non-profit laws. For example, the Model Non-Profit Act bars a non-profit corporation from lending money to or guaranteeing the obligation of a director or officer of the corporation. The corporate opportunity doctrine involves any situation where a director or officer is presented with a business opportunity, whether or not she learned of it through her position with the organization, which she reasonably should know may be of interest to the non-profit’s present or future activities. In such circumstances, most states require that the director or officer disclose the transaction to the board so that its disinterested members may determine whether the organization should act or decline to act with respect to the opportunity. Only after the board has declined the opportunity on the record should the director or officer take advantage of the opportunity. Directors and officers are under a duty to treat as confidential the organization’s internal activities, unless there has been general public disclosure or the information is a matter of public record or public knowledge.
- Disclosure If there is any kind of potential financial benefit to a DQ, the insider involved should disclose to the Board the nature of the interest as well as any other relevant facts about the transaction that the board should know in making its decision. Management must make sure that parties to transactions, and board members, disclose all such connections so that a conflicting interest that may give rise to "excess benefit" is detected ahead of time. Regular disclosure requests are a must. 2. Recusal. The insider with a conflict of interest should not be present during the deliberations or the vote. Think of this as the "leave the room" requirement. (Answering questions is permitted.) This also applies to any vote regarding whether there is, or is not, a conflict of interest in the first place. The decision-makers must be composed entirely of (not just controlled by) individuals who do not have a conflict of interest. 3. The Board should be sure to obtain enough documented data as to comparability, including competitive bids or some other thorough price comparison, before it decides to contract with the interested party. Whenever possible, at least three bids should be required (this is the safe harbor for organizations with gross receipts of less than $1 million annually). The IRS is especially skeptical about arrangements that have revenue-sharing, percentage-type compensation. "Reasonableness" isn't determined until the compensation becomes fixed. When entering into a deal with a flexible compensation arrangement, include a cap that the IRS can find reasonable. 4. The transaction must be approved in advance NOT RETROACTIVELY by an "authorized" body, usually the full board or a committee with authority to act. By implication, this means that the Board must be more cautious about delegating decisions on transactions to officers, although "committee" may include a committee of one. The approval should include a finding that the transaction is fair to the organization and if the transaction involves accepting a higher bid from a DQ than offered by an unrelated party, should explain the reasons for the decision. 5. The 10% penalty that can be imposed on management for "knowing" participation in an excess benefit transaction can be defended in part if "after full disclosure of the factual situation to an appropriate professional, the organization manager relies on a reasoned written opinion of that professional with respect to elements of the transaction within the professional's expertise." Note, however, that a professional opinion is no defense on the question of whether or not the transaction actually is an excess benefit transaction, only a defense against the 10% penalty on management. The minutes should document all of the preceding, and should be circulated no later than the next meeting (or within sixty days, if later), and approved "within a reasonable time," presumably by the following meeting. Board members concerned about their own liability should be particularly anxious to go on record as having voted against the transaction.
- Nonprofits that do not comply with federal, state and local laws may be subject to government enforcement actions .