NAEYC Affiliate Leadership Day

Association Tax and Legal Primer

NAEYC Office of General CounselNAEYC Office of General CounselNovember 2015November 2015Lakshmi 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

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 Care

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 Loyalty

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

Fiduciary duties: Duty of Obedience

Tax Overview501(c)(3) public charities are held to different standard

than other tax-exempt organizations private foundations501(c)(6) trade associations

Tax OverviewTax exemption can be at risk for various reasons:

Mission implementation/driftPrivate inurement: conflicts/excess compensationPrivate Benefit/excess unrelated business incomeImproper political campaign activity

Tax OverviewPrivate Inurement

No use of charitable assets for personal gainLook at relationships and position of influenceFinancial relationships with Board members

strictly scrutinized

Tax OverviewPrivate Benefit

No windfall to for-profit/individualMinimize income from unrelated activities

Tax OverviewAttempting 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 OverviewPolitical 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 PracticesSarbanes-Oxley

Whistleblower ProtectionRecords retention and destructionOther provisions incorporated into IRS 990 tax

returnConflicts policyAudit CommitteeFinancial Disclosures Certified/Audited Financials

Governance best practices

State lawsState charity and consumer protection laws

Apply to fundraising, which is a regulated activity

State tax requirements, different from federalCorporate 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.