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NAEYC Affiliate Leadership Day Association Tax and Legal Primer NAEYC Office of General Counsel November 2015 Lakshmi Sarma Ramani, General Counsel Introduction • NAEYC’s General Counsel since January 2014 • Advise on all Association matters, including accreditation and governance • Overview of relevant matters, not intended to be legal advice • Hope to provide additional resources for Affiliates What we’ll cover today: • • • • Legal Overview Governance Overview Tax Overview Governance Best Practices Legal Overview • What is a 501(c)(3) public charity • What is a non-profit corporation • What is the difference between the two? Legal Overview • A 501(c)(3) public charity is a designation granted by the Internal Revenue Service. Refers to federal income tax exemption. Various forms of exemption ((c)(3), (4), (5), (6), etc)) • A corporation receives a nonprofit designation from the state in which it is incorporated. • Nonprofit corporations don’t need to be tax-exempt for federal tax purposes. Legal Overview • Public Charity, determined by IRS. • Nonprofit corporation and fiduciary duties, determined by state of incorporation. • Overlaps seen on tax forms and corporate filings Fiduciary Duties • Generally apply to Board members and Officers of a corporation • Developed through common law and case law • Each state has specific rules that guide these duties, following is an overview only Fiduciary duties: Duty of Care Exercise ordinary and reasonable care in the performance of duties, exhibiting honesty and good faith. Act in a manner which you believe to be in the best interests of the association, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. Obligation to protect confidential information Fiduciary duties: Duty of Loyalty Duty of faithfulness to the association. Undivided allegiance to the association when making decisions affecting the association No conflicts of interest—the interests of the association come before personal interest No competition with the Association Fiduciary duties: Duty of Obedience Board members must act in accordance with the mission, articles of incorporation, bylaws and other governing documents, as well as all applicable laws and regulations. No willful ignorance or intentional wrongdoing Tax Overview 501(c)(3) public charities are held to different standard than other tax-exempt organizations private foundations 501(c)(6) trade associations Tax Overview Tax exemption can be at risk for various reasons: Mission implementation/drift Private inurement: conflicts/excess compensation Private Benefit/excess unrelated business income Improper political campaign activity Tax Overview Private Inurement No use of charitable assets for personal gain Look at relationships and position of influence Financial relationships with Board members strictly scrutinized Tax Overview Private Benefit No windfall to for-profit/individual Minimize income from unrelated activities Tax Overview Attempting to influence legislation No “substantial part” of 501(c)(3) activities used carrying on of propaganda or otherwise attempting to influence legislation 501(h) elector Grassroots v. Direct Lobbying Tax Overview Political campaign activity Absolute prohibition: no political campaigning allowed by 501(c)(3) public charities Political campaigning, generally giving of support for the election or defeat of a candidate for office “candidate” is broadly defined Governance Best Practices Sarbanes-Oxley Whistleblower Protection Records retention and destruction Other provisions incorporated into IRS 990 tax return Conflicts policy Audit Committee Financial Disclosures Certified/Audited Financials Governance best practices State laws State charity and consumer protection laws Apply to fundraising, which is a regulated activity State tax requirements, different from federal Corporate requirements Questions? Thank you! Reference/Source materials Spacone, Andrew C. & Stolzman, Robert I., “Implementing Practical Risk Management: A Guide for 501(c)(3) Nonprofits, Rhode Island Bar Journal, Vol. 62, No. 4, (March/April 2014). Venable, LLP, “Legal Duties of Association Board Members.” www.venable.com. Mosher & Wagenmaker, LLC, “Not-for-Profit Directors’ and Officers’ Liabilities.” www.mosherlaw.com.
