1 / 28

Legal Environment of Nonprofit Organizations

Legal Environment of Nonprofit Organizations. Introductory Outline: Law 603 Professor Howard Bunsis .

vesta
Download Presentation

Legal Environment of Nonprofit Organizations

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Legal Environment of Nonprofit Organizations Introductory Outline: Law 603 Professor Howard Bunsis

  2. “Americans of all ages, all conditions, and all dispositions constantly form associations . . . religious, moral, serious, futile, general or restricted, enormous or diminutive . . . if it is proposed to inculcate some truth or to foster some feeling by the encouragement of a great example, they form a society." Alexis de Tocqueville, Democracy in America, 1840

  3. The American nonprofit sector is “integral to the national economy and a valued part of [our] social fabric ... . It embodies the philanthropic goodness, conviviality, cultural excitement, and democratic spirit of the American people ... . and has provided a valued social location in which groups can operate without pecuniary obsessions and with measures of success that are not necessarily related to financial profitability.” Norman Silber in Nonprofit Sector and the New State Activism, 2002

  4. The Word Non-Profit • Profit = Revenues – Expenses • Nonprofit organizations are not prohibited from earning a profit (many or most do so) • Nonprofit refers to what must be done with the profits: • These profits cannot “inure” to the benefits of those running the organization • Nonprofit organizations are generally exempt from paying federal corporate income taxes on their profits (Goldman Sachs has to pay taxes on their profits) • The phrase not-for-profit is not a correct description of charitable organizations

  5. Nonprofit versus For-Profit Organizations • For-profit organizations • Owners that have an equity interest in the organization, such as stockholders of a corporation • Operated for the benefits of its owners • Profits passed through to the owners, either through the payment of dividends or shares of stock • This pass-through is called private inurement • Nonprofit organizations • There are no owners • Not permitted to distribute its profits to those who control it (directors and officers) – no private inurement • Disputes: Is Blue Cross a nonprofit organization? What about a nonprofit hospital that turns away patients?

  6. Nonprofit Sector: Place in our Society • Five Reasons for the existence of the nonprofit sector, (Dimensions of the Nonprofit Sector 203 Lester M. Salomon 1999) • Historical • Market Failure (free rider problem) • Government Failure (speaks for itself) • Pluralism/freedom (nourishment of diversity) • Solidarity (quotes de Tocqueville about promoting solidarity among individuals) • See the Organizational Forms chart

  7. Nonprofit Organizations are Corporations • Separate legal entity with liability generally confined to the organization and not to those who manage it. Big advantage • Corporations are creatures of the State (Michigan, Ohio, etc.). State law will govern questions such as: • Number of directors and officers; Executive Committee of the Board? • How often does the Board have to meet? Must the meeting be in person? • Member rights?

  8. Disadvantages of Being a Corporation • The State grants the NPO corporate status, but requires certain things • Filing and annual fees • Forms to fill out • Annual reports • Follow rules • Articles of Incorporation • Bylaws (next outline)

  9. Types of Nonprofit Organizations • 501(c)(3) public charities include most nonprofit organizations involved in the arts, education, health care, human services, and community service, as well as many others. Funding from the public and grants. • 501(c)(3) private foundations are primarily (but not exclusively) grant-making organizations like the Ford Foundation or the Pew Charitable Trusts that make grants to other nonprofit organizations. Funding from rich individuals or corporations. • Other exempt organizations registered with the IRS include trade unions, business leagues, social and recreational clubs, and veterans associations classified under varying sections of the IRS code (501(c)(4) to (25)) • 501c4 examples: NAACP, NRA, Superpacs • Contributions to a c4 are not tax deductible

  10. From IRS Section 501c3 • An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes: • Charitable. • Religious. • Educational. • Scientific. • Literary. • Testing for public safety. • Fostering national or international amateur sports competition • The prevention of cruelty to children or animals. • To qualify, the organization must be a corporation, community chest, fund, or foundation. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify. • http://www.fourmilab.ch/ustax/www/t26-A-1-F-I-501.html

  11. Sec. 501. Exemption from tax on corporations, certain trusts, etc. • (c)   List of exempt organizations • (3)   Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

  12. Tax Filing with the IRS • Organizations that report gross receipts of more than $25,000 in a fiscal year are generally required to file a Form 990 with the IRS unless they are religious congregations, denominations, or controlled by a congregation or denomination. • Approximately two-thirds of the organizations that are registered with the IRS do NOT file a Form 990 with the IRS in any given year. Congregations and some other religious organizations as well as organizations with less than $25,000 in gross receipts are in this category.

  13. Nonprofit Facts • Read THE NONPROFIT SECTOR IN BRIEF Public Charities, Giving, and Volunteering, 2011 • http://nccs.urban.org/statistics/quickfacts.cfm

  14. Annual Exempt Organization Return: Who Must File Every organization exempt from federal income tax under Internal Revenue Code section 501(a) must file an annual information returnexcept: • A church, an interchurch organization of local units of a church, a convention or association of churches, • An integrated auxiliary of a church, • A church-affiliated organization that is exclusively engaged in managing funds or maintaining retirement programs, • A school below college level affiliated with a church or operated by a religious order, Church-affiliated mission societies if more than half of their activities are conducted in, or are directed at persons in, foreign countries, • An exclusively religious activity of any religious order, • A state institution, the income of which is excluded from gross income under section 115, • A corporation described in section 501(c)(1) that is organized under an Act of Congress, an instrumentality of the United States, and is exempt from Federal income taxes,

  15. More on Who Must File • A black lung benefit trust described in section 501(c)(21) (required to file Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons), • A stock bonus, pension, or profit-sharing trust that qualifies under section 401(required to file Form 5500, Annual Return/Report of Employee Benefit Plan), • A religious or apostolic organization described in section 501(d) (required to file Form 1065, U.S. Return of Partnership Income), • A foreign organization, including an organization located in a U.S. possession, that normally does not have more than $25,000 in annual gross receipts from sources within the United States, • A governmental unit or an affiliate of a governmental unit that meets the requirements of Revenue Procedure 95-48, 1995-2 C.B. 418, • A private foundation described in section 501(c)(3) and exempt under section 501(a) (required to file Form 990-PF, Return of Private Foundation), • A political organization that is a state or local committee of a political party, a political committee of a state or local candidate, a caucus or association of state or local officials, or required to report under the Federal Election Campaign Act of 1971 as a political committee. • An exempt organization (other than a private foundation) having gross receipts in each tax year that normally are not more than $25,000). Note, however, that these organizations may be required to file an annual electronic notice - e-Postcard (Form 990-N), for tax periods beginning after December 31, 2006.

  16. History of Nonprofits • The concept and special tax treatment of charities devolves from English law relative to charitable trusts (dating from the enactment of the Statute of Charitable Uses in 1601) in which Queen Elizabeth I authorized the establishment of private perpetual funds to support specific religious and charitable institutions. • Colonial America was hospitable to charitable associations from its inception • The nonprofit sector in this country developed under corporate law, as distinguished from the sector's progenitor in England which developed under trust law. The states continued the colonial practice of conferring property tax exemptions on the core charitable organizations: churches, hospitals and schools. • The federal government initially enacted a statute exempting charitable associations from taxation in 1894 when it passed the first corporate income tax law. The law expressly exempted organizations and trusts formed and operated "for charitable, religious or educational purposes.

  17. More History • In the 19th century, state legislatures retained power over the American charitable sector through the power to charter nonprofit corporations. State legislatures "gave judges in some states and bureaucrats in others the primary authority to stand guard at the main entrance to the sector and to monitor organizational changes to existing groups" . • From 1850s until the 1950s was marked in judge-dominant states, by a "vigorous expansion" of judicial power. Judges approved only nonprofit applications with "lawful" purposes. which required applicants further to demonstrate that their conduct would be socially beneficial, from the judge's perspective.” • Example: The amended certificate of the Lithuanian Worker's Literature Society, which was made up of Socialist Party members and sought to publish socialist materials, was disapproved because it would publish "propaganda, which our Penal Law makes criminal and even felonious."

  18. Federal Tax Rules • The Second Revenue Act of 1917 first allowed taxpayers to deduct contributions made to certain charitable organizations. • The Act limited deductions to fifteen percent of the taxpayer's taxable income until 1952 when the limitation increased to twenty percent. • In 1954, taxpayers obtained the ability to deduct an additional ten percent for contributions to churches, schools, and hospitals. • The Revenue Act of 1950 prohibited nonprofit organizations from "unreasonably" accumulating assets. • Tax Reform Act of 1969 • Major departure from the laissez faire attitude from the Federal government • 501c3 rules established. • Prohibitions on Self-dealing (Section 4941) • Minimum Distribution Requirements (Section 4942)

  19. Legal Issues from a Federal Perspective • In 1938, Congress asserted that the exemption was premised on the theory that government would be reimbursed for the loss of revenues occasioned by the exemption, in the form of services that promote the general welfare, and for which the government would otherwise be obliged to provide. In the absence of a more definitive statement of the legislative purposes underlying the tax exemption, the courts have pieced together a loosely constructed analysis. • In a 1970 case, Walz v. Tax Commission, the Court considered whether a religious organization qualified for exemption from state property tax and found that it did. Justice Brennan wrote that "private, nonprofit organizations contribute to the well-being of the community . . . and thereby bear burdens that would otherwise either have to be met by general taxation, or be left undone, to the detriment of the community. • In a 1983 case, Bob Jones v. United States, the Court found that nonprofit schools that enforce racially discriminatory admissions policies are not entitled to tax benefits. The Court declared that the legislative intent of the federal tax exemption laws was to foster those nonprofit organizations "that serve a useful public purpose or supplement or take the place of public institutions of the same kind."

  20. State Law • The paucity of federal regulation has led to the states moving into the vacuum. • Weak self-regulatory mechanisms in the sector • The Internal Revenue Service remains an uneven regulator of the sector, • The IRS is a division of the Department of Treasury, mostly concerned with revenue collection • The IRS audits about 120 private foundations per year. • The weak state of nonprofit regulation sparks exposes of nonprofit deficiencies and reflexive calls to tighten regulation, often beginning with moves to reimpose property taxation • There is strong pressure when high profile NPOs run into problems

  21. Different Approaches to Oversight and Accountability • Through the IRS (not enough resources) • State-level charity commissions (not likely) • Press exposing the failures of the nonprofit sector. • Tends to focus on the sensational rather than systemic problems • Self Regulation (can it be sustained?) • Stronger boards • Codes of conduct • Better disclosure • New State Activism • States are closest to the NPOs • Potential for overreaching • Inconsistency across the states • Politicization of the AG’s role

  22. Senator Charles Grassley and Nonprofit Investigations • Grassley Seeks Accountability from Non-profits Receiving Federal Funds Via Prisoner Rehabilitation Programhttp://www.grassley.senate.gov/news/Article.cfm?customel_dataPageID_1502=36004 • Senator Grassley Proposes New Nonprofit Regs Thanks to Investigation of the Boys and Girls Clubs : http://www.nonprofitquarterly.org/index.php?option=com_content&view=article&id=14406:senator-grassley-proposes-new-nonprofit-regs-thanks-to-investigation-of-the-boys-and-girls-clubs&catid=155:nonprofit-newswire&Itemid=986 • Senator Grassley and the Televangelists http://www.nonprofitquarterly.org/index.php?option=com_content&view=article&id=9031:senator-grassley-and-the-televangelists-&catid=149:rick-cohen&Itemid=991 Elmer Gantry:  And you, Brother.  You can’t go to church on Sunday and cheat at business on Monday.

  23. More From Grassley • Exempt Organizations: Grassley Seeks Estimate of Nonprofit Tax Exemption, Putting Organizations on Edge: “Let me be clear … I am not referring to those charities that are on the ground feeding the hungry, sheltering the homeless,” Grassley said at the hearing. “I’m talking about those charities which there may be no discernible difference between commercial, for-profit entities.” http://www.librarytechnology.org/ltg-displaytext.pl?RC=15552 • The Man (some) Museums Hate http://www.aam-us.org/pubs/mn/grassley.cfm

  24. Finally from Grassley • http://www.cbsnews.com/stories/2007/11/06/cbsnews_investigates/main3456977.shtml - he targets evangelical charities • http://voices.washingtonpost.com/washingtonpostinvestigations/2008/09/sen_grassley_seeks_university.html - Michele Obama and the U-Chicago hospital is his target • http://www.bloomberg.com/apps/news?pid=20601124&sid=a4V6UEpXf_mY&refer=home – drug-makers and universities • http://grassley.senate.gov/news/Article.cfm?customel_dataPageID_1502=11990 – letter to nonprofit education organization • Some NPO’s deserve investigation: Children’s Charity Fund at: http://www.charitynavigator.org/index.cfm?bay=search.summary&orgid=8195

  25. Two Important Websites • www.guidestar.org • www.charitynavigator.org

  26. Ten Common Mistakes of a 501(c)(3) • Poor Initial Research • No Business Plan • Not for a Charitable Purpose • Failure to Register • Failure to Keep Good Records • No Funding Plan • Not Complying with IRS Statutes • Misjudging Time Requirements (it is a full time commitment) • Not Building an Effective Board • Not Investing in Professional Talent

More Related