Operation of Not-For-Profit/Tax-Exempt Organization

Operation of Not-For-Profit/Tax-Exempt Organization

LaDale K. George
Foley & Lardner
(312) 755-2524
lgeorge@foleylaw.com

1. Overview
    a. Operational Matters
    b. Special Legal Concerns
    c. Case Studies of Troubled Organizations
    d. New Opportunities

2. Operational Matters
    a. Goals and Objective:
        i. Guiding Principle: "You are what you say you are"
        ii. Records must match guiding principle
        iii. The goals and objectives provide evidence that the organization is carrying out its stated purpose.
        iv. The records and reputation of the organization are the evidence.
        v. In the absence of reputation, the records are the only source to determine whether the organization is operating in accordance with the goals and objectives.
    b. Organizational Documents
        i. Purpose and Objective Documents
            (1) Constitution, Articles of Organization (See Exhibit A).
        ii. Operating Direction Documents
            (1) Bylaws, Operating Agreement (See Exhibit B).
    c. Organization Functional Records
        i. Programs: The Programs of the organization are the established agenda. The Programs indicate how the organization has decided to carryout or implement the organization's purpose.
            (1) Member/Board Resolutions (See Exhibit C)
        ii. Activities: The Activities of the Organization are the task to be undertaken by the executives to implement the Programs. The Activity documents set forth the rules and procedures the Organization will use.
            (1) Executive Memorandum, Policies & Procedures.
        iii. Transactions: The Transactions of the Organization are the day-to-day tasks to be undertaken by the organization to implement the Activities.
            (1) Bills, Expense Vouchers, Donor Acknowledgments, Applications, Brochures, etc.
    d. Required Records and Reports
        i. The organization must keep complete and accurate books and records. The books of account must contain the information needed for the preparation of tax returns and other reports, summarized below.
        ii. In most States a Not-For-Profit corporations must file an annual report with the State Secretary of State or Department of Revenue, listing officers and directors. The report will be mailed by the State to the corporation's registered agent.
        Iii Tax Reports: The following is a brief summary of certain reports required for most Not-For-Profit/Tax-exempt organizations. Each organization needs to consult with tax counsel or an accountant to determine whether it is required to file these reports and whether additional reporting rules apply.
            (1) If the organization has gross receipts in any year of $25,000 or more, it must file Form 990 and Schedule A with the IRS.
            (2) If the organization has gross receipts in any year of $1,000 or more of unrelated business taxable income, it must file Form 990-T with the IRS and Form 4-T with the Wisconsin Department of Revenue.
            (3) If the organization solicits contributions, it must file an annual report with the State Department of Revenue or Attorney General's Office and renew its registration each year. Large organizations must submit audited financial statements.
            (4) If the organization sells taxable items (such as concert tickets or auction items), it may need to obtain a State seller's permit and collect sales tax. Limited exemptions apply. If sales tax is due, the organization must file sales tax returns.
            (5) If the organization has employees, it must file employment tax returns, deposit withheld taxes, pay FICA tax and state and federal unemployment taxes, and obtain worker's compensation insurance.
            (6) If the organization wishes to conduct raffles, it needs a state raffle license. State and federal reports and federal income tax withholding may be required, depending upon the size of the raffle prizes.
            (7) If the organization obtained an advance ruling on private foundation status, it must file financial information with the IRS at the end of its fifth fiscal year.
            (8) Donor Receipts: The organization must comply with IRS rules concerning receipts provided to donors who contribute $250 or more and donors who make a payment in excess $75 for services and as part of a contribution.

3. Special Concerns
    a. Privacy of Not-For-Profit/Tax-exempt Organization Records
        i. Federal tax law regulates the disclosure requirements of tax-exempt organizations. Section 6104 of the Internal Revenue Code
        ii. Membership lists are protected from disclosure, except where the names of members are mentioned on organizational documents or annual tax filings.
        Iii Sources of Contributions are protected from disclosure.
        Iv Names of persons or entities receiving payments or contributions from the organization are not protected from disclosure, and certain information must be reported on annual tax filings.
        v. Names of employees are not protected from disclosure and must be reported on certain annual tax filings.
    b. Fiduciary Responsibility of the Members, Directors and Officers
        i. Members, Directors, and Officers owe certain level of fiduciary responsibility to the Organization, based on their level of involvement and implementation in policies and decisions of the Organization.
        Ii Fiduciary Rights and Responsibilities
            (1) Duty of Loyalty
            (2) Duty of Diligence
            (3) Conflicts of Interest Disclosures
            (4) Statutory indemnification of Officers and Directors
            (5) Director and Officer Liability Insurance ("D&O").
    c. Affiliations Among Related Organizations
        i. Separate Purposes: Each Organization may be created to provide a specific purpose which is related to the overall mission of each Organization.
        Ii Separate Operations: Each Organization should operate separately with a separate Board, Officers and revenue streams.
            (1) The members of the various Boards may be the same persons, but the meeting must be distinguishable in the Records of the Organizations.
            (2) If the Organizations are subsidiaries, certain revenues and resources may be shared.
        Iii Shielding Liability: Each Organization is treated differently for liability exposure, which protects the other Organizations from potential harm resulting from the actions of an Affiliate.
        Iv Certifications: Each Organization should receive a certification from each affiliated Organization that the Organization is operating in compliance with all applicable laws and regulations.
    d. Penalties for Improper Operation
        i. Loss of Corporate certification. In the event the Secretary of State determines that an organization is operating in a manner that is inconsistent with the not-for-profit purpose, the Secretary of State may remove the good standing of the organization and report to the State Attorney General's Office for prosecution.
        Ii Loss of Tax-exempt status. In the event the IRS determines that an organization is operating in a manner that is inconsistent with the tax-exempt purpose, the IRS may remove the organizations exempt status.
        Iii Intermediate Sanctions. In the event the IRS determines that an organization has extended a private benefit to an "insider," the IRS may impose a 25% excise tax on the insider for the first transaction, and a 200% excise tax on subsequent transactions.

4. Case Studies of Troubled Organizations
    a. Stanley Boim v. Quranic Literacy Institute, Holy Land Foundation for Relief and Development
    b. Humanitarian Law Project vs. Janet Reno

5. New Opportunity for Faith-Based Nonprofits
    a. Community Development Corporations
        i. A Community development is a process of improving the quality of like for specific elements of the community for the benefit of the entire community.
        Ii Examples of specific elements include,
            (1) unemployment and job training,
            (2) nutrition
            (3) housing rehabilitation
            (4) childcare and eldercare
            (5) shelters for abused and neglected
            (6) wellness and health-care outreach
            (7) neighborhood planning and development
        iii. Contact Organization: National Congress for Community Development (NCCED) website at www.necced.org and Office of University Partnerships website at www.oup.org .
    b. Whitehouse Office of Faith Based and Community Initiatives
        i. Contact website at www.whitehouse.gov