LEGAL ISSUES FOR APHA AFFILIATES An Introduction for the - - PowerPoint PPT Presentation

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LEGAL ISSUES FOR APHA AFFILIATES– An Introduction for the Presidents-Elect

May 23, 2013

American Public Health Association

Jacqueline A. Henson, Esq. jahenson@ober.com (202) 326-5040

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SOURCES OF APPLICABLE LAW

• STATE NONPROFIT CORPORATE LAW

(GOVERNANCE)

• FEDERAL TAX LAW (INTERNAL REVENUE

CODE)

• OTHER

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HIERARCHY OF STATE LAW AUTHORITIES

• STATE NONPROFIT CORPORATION LAW
• ARTICLES OF INCORPORATION
• CONSTITUTION
• BYLAWS
• BOARD RESOLUTIONS
• STANDING RULES
• POLICIES AND PROCEDURES

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STATE NONPROFIT LAW: FIDUCIARY DUTIES

By virtue of state statute or the common law,

• fficers and directors are subject to two

primary, fiduciary obligations, a duty of care and a duty of loyalty, as they carry out their responsibilities to the nonprofit organization.

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THE DUTY OF CARE (Common Law)

• The duty of care requires the director and officer to

act in a reasonable and informed way in the corporate decision-making process, and in the management and oversight of the charitable

• rganization.
• A director and officer must discharge his or her

duties in good faith, with the care that an ordinarily prudent person in a like position would reasonably believe appropriate under the circumstances.

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ATTRIBUTES OF THE DUTY OF CARE FOR DIRECTORS

• Attend meetings
• Be informed and act accordingly
• Exercise independent judgment on behalf of

the whole, not a segment of the whole

• Vote (each director is treated as an equal,

enjoys an equal vote in the corporation’s direction)

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THE DUTY OF LOYALTY (Common Law) The duty of loyalty requires directors and officers to exercise their powers in good faith and in the best interests of the corporation, rather than in their own interests or the interests of another entity or person. In other words, a director or an officer shall not use a corporate position for individual personal advantage.

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CONFLICTS OF INTEREST

Directors and officers of charitable corporations often have interests that conflict with those of the charity. The duty of loyalty requires that a director and an officer be aware of the potential for such conflicts and act with candor and care in dealing with such

• situations. It is the manner in which the

director, the officer and the board deal with a disclosed or hidden conflict that determines the propriety of the transaction.

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CONFLICT OF INTEREST A conflict of interest is present whenever a director or an officer has a material personal interest in a proposed contract or transaction to which the charitable corporation may be a party.

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HOW TO HANDLE A CONFLICT OF INTEREST

• 1. Disclose the conflict to the proper persons.
• 2. Refrain from participating in the decision-

making process (Recusal).

• 3. Document the Disclosure, Recusal and

Voting Process and Decision.

• 4. Comparables

APHA Conflict of Interest Policy

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DUTY OF LOYALTY: CONFIDENTIALITY

• A director or an officer should not, in the regular

course of business, disclose information about the charitable corporation’s activities unless they are already known by the public or are of public record.

• In the normal course of business, a director or an
• fficer should treat as confidential all matters

involving the charitable corporation unless there has been general public disclosure or unless the information is a matter of public record or common knowledge.

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DUTY OF LOYALTY: CONFIDENTIALITY The individual director or officer is not a spokesperson for the charitable corporation. Disclosure to the public of corporate activity should be made only through the charitable corporation’s designated or authorized spokesperson.

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THE ROLE OF THE BOARD OF DIRECTORS The Board has the ultimate responsibility and accountability for the management of the charitable corporation. All authority resides with the Board and is delegated by the Board.

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OTHER FEATURES OF STATE CORPORATE LAW

• The Conduct of Board Meetings (notice, quorum, voting,

unanimous consents)

• The Conduct of Member Meetings (notice, quorum, voting,

removal rights)

• Responsibilities and Authority of Officers
• Indemnification of Directors , Officers and Others
• Rights of Members
• Extraordinary Actions (dissolution, merger, sale of all or

substantially all assets, amendment of the Articles of Incorporation)

• Annual Reporting to the State

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FEDERAL LAW: THE INTERNAL REVENUE CODE OF 1986

• Governs the requirements for obtaining and maintaining

federal income tax exemption for certain organizations, including charitable organizations

• Benefits of Section 501(c)(3) status: Federal income tax

exemption, ability to attract tax deductible charitable donations, ability to receive grants, possible exemption from state and local income, franchise, sales, use and property taxes

• IRS must “recognize” the organization as a charitable
• rganization (through an application process), as evidenced

by a determination letter issued by the IRS to the charitable

• rganization

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FEDERAL REQUIREMENTS

• 1. Requirements for Maintaining Section

501(c)(3) Status

• 2. Reporting: The IRS Form 990
• 3. Other IRS Reporting Requirements

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Section 501(c)(3) of the Internal Revenue Code

• 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 …, 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

• therwise 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.

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REQUIREMENTS TO MAINTAIN SECTION 501(c)(3) STATUS

1.

Activities (Operational Test): Primary activity must be charitable, educational, literary or scientific.

2.

Lobbying Limitation: Lobbying permitted only to an insubstantial extent.

3.

Political Activity Prohibition.

4.

Inurement/Private Benefit Prohibition: Dedication of assets to charitable purposes.

5.

Dissolution Constraint.

6.

Reporting Requirements.

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SECTION 501(c)(3) ORGANIZATIONS AND LOBBYING

One of the criteria for IRS recognition of an

• rganization as a public charitable
• rganization is that “no substantial part” of

the activities of the organization may consist

• f “carrying on propaganda, or otherwise

attempting to influence legislation.”

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BASIC LOBBYING DEFINITIONS

• Lobbying = Attempt to Influence Legislation
• Lobbying = Direct Lobbying (attempts to

influence legislators) + Indirect or grass roots lobbying (attempts to influence the public who, in turn, will try to influence legislators)

• “Substantial Part” -- ?????

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EXPENDITURE TEST FORMULA

Organizations may spend up to the following amounts for lobbying (both direct and grassroots): i. 20% of the first $500,000 of the organization’s exempt purposes expenditures; plus ii. 15% of the next $500,000 of exempt purpose expenditures; plus

• iii. 10% of the next $500,000 of exempt purpose

expenditures; plus

• iv. 5% of any remaining exempt purposes expenditures.

However, the total amount spent for all lobbying may not exceed $1,000,000.

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EXPENDITURE TEST FORMULA (cont’d)

Organizations may spend up to 25% of the total amount allowed for lobbying on grassroots lobbying

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ELECTION REQUIRED FOR EXPENDITURE TEST

• Must file IRS Form 5768, if organization

wants to be governed by the expenditure test rules.

• Election is effective for the year in which it is

filed and thereafter until the organization revokes it.

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IRS FORM 990

• Form 990 is an annual reporting return that charitable
• rganizations must file with the IRS. It provides information
• n the filing organization's mission, governance, directors and
• fficers, programs, and finances.
• Form 990-N ("ePostcard") is an eight-question, electronic

return that a charity must file if its income was <$50,000 for the tax year.

• Form 990-EZ is a two-page return that a charity must file if its

income was<$200,000 and its assets were <$500,000.

• Form 990 is the "long form" that all other charities must file if

its income were at least $200,000 or its assets were at least $500,000.

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501(c)(3) vs. 501(c)(6)

501(c)(3) 501(c)(6)

• - Charitable, educational, -- Trade associations,

scientific organizations chambers of commerce

• - Contributions/dues may -- Contributions/dues may be

be deducted as charitable deducted as business

• r business expenses

expenses

• - Lobbying restricted
• - No restrictions on lobbying
• - Political activity prohibited -- Political activity allowed so

long as not primary purpose

• - Inurement applies
• - Inurement applies
• - Form 990 required
• - Form 990 required
• - Assets must be distributed -- No dissolution restraints

to another 501(c)(3) upon dissolution

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RISK MITIGATION

• Informed Officers and Directors
• Officers and Directors alert to conflicts of interest
• Business Judgment Rule
• Volunteer Protection Statutes (federal and state)
• Indemnification
• Insurance
• Internal Controls

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VOLUNTEER PROTECTION STATUTES

• Federal Volunteer Protection Act of 1997 –

exempts volunteers (including unpaid directors and officers) from liability (except willful or criminal misconduct, gross negligence, etc.)

• State volunteer protection statutes

(protections varies greatly from state to state)

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INDEMNIFICATION

• Bylaws (“Organization may indemnify anyone

. . . to the fullest extent permitted by [add your state here] law”)

• Common Requirements – must have acted in

good faith, in a manner reasonably believed to be in the best interests of the corporation, had no reason to believe conduct was unlawful

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Insurance

Different types of insurance

• Directors and Officers Liability Insurance
• Comprehensive General Liability Insurance
• Event Interruption Insurance
• Specialty Insurance Coverages (Auto,

Internet, etc.) What is Right for Your Organization? What are the Primary Risks Facing Your Organization?

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D&O Insurance

• Policy limits
• Who is Covered by the Policy?
• Are defense costs covered? Within or outside

the limits?

• Notification of carrier
• Exclusions (knowledge exclusion, personal

profit/fraud exclusion, etc.)

• Claims made vs. occurrence policies

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OTHER FEDERAL FILINGS AND ISSUES

• Form 1099 and W-2s
• Independent Contractor versus an Employee
• Compensation
• Audits

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THE FUTURE

• The IRS/Exempt Organization Division Under

Scrutiny

• Review of IRS Form 990 Disclosures
• Review of IRS Governance Audit Information
• Growth of the Charitable Sector
• Federal/State Budgetary/Cliff Constraints
• The Court of Public Opinion and the Press

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Additional Resources

• The Internal Revenue Service Website

www.irs.gov/charities

• Your state’s Secretary of State website
• BoardSource www.boardsource.org
• Guidestar www.guidestar.org
• Independent Sector www.independentsector.org
• Board Café www.blueavocado.org/category/topic/board-cafe
• Charity Channel www.charitychannel.org
• The Foundation Center www.foundationcenter.org
• Nonprofit Risk Management Center www.nonprofitrisk.org

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QUESTIONS