In states without a specific provision addressing this issue, various court cases have examined the intent of directors who wish to leave a meeting, thereby disrupting a quorum. These cases have recognized that a quorum is not meant to be used as a tool for directors who wish to prevent the board from taking certain actions.  When a director’s intent is to destroy a quorum for improper purposes, courts have held that the meeting may continue even though a quorum no longer exists.  However, when no such ill intent exists, courts have held that the only additional business that may take place is the adjournment of the meeting.

Q:  How can we obtain a copy of our charity's "Articles" or "Certificate" of Incorporation"?

A.  Obtaining a copy usually entails only a phone call and submitting a payment for copying fees: 

•  CT:  Either submit a written request clearly stating the documents you want copied or fill out  the form "Request for Certificates or Copies", available on the CT Secretary of State website.  The cost is $40 for a plain copy, or $55 for a certified copy. There is also an additional charge of $50 to expedite the service (within 24 hours).
   

• In NJ:  Call the State of NJ, Department of Treasury, Commercial Records: Tel.  609-633-6855.   You can fax your request or do it by phone.  Supply the number of a major credit card and its expiration date. There is a cost of $15 to expedite sending a copy of the articles, with an additional cost of $1.00 per page.
   

•  In NY: Send letter stating your request to:  Department of State. Attn: Corporations,  41 State St. Albany 12231.  The articles of incorporation of a charity  are accessible to any member of the public for a $10 fee.  There is an additional $25 charge to expedite (within 24 hours).  Call the Corporations Department at (518)473-2492 for more information.

Q.  Can our charity  make a donation to another charitable organization?   What about when someone close to our charity dies…can the charity send flowers to the funeral?

A.  These concerns should cause the trustees to ask:  "Is it in the best interest of our charitable organization to use the charity's assets in this fashion?"  The answer could be 'yes' to both the questions above, depending on the facts and details of the donation/payments. 

• It is permissible for a charity to give a grant to another charitable organization, as long as the contribution will further the donating charity's mission and purposes.  Such contributions are generally disclosed on a charity's Annual Return to the IRS, Form 990, as a  "grant" to another organization.
   

• Similarly,  when someone close to the organization dies, it may be appropriate to use the assets of the organization to send the charity's condolences, assuming that the amount paid by the charity is reasonable.

Q.  If our organization wants to go "dormant" for a while, what are the responsibilities of the board of trustees?

A.  A nonprofit that is inactive must still maintain a skeleton board of trustees (at least 3 directors) who are responsible for corporate filings during the inactive period.  The organization must continue to abide by all state requirements, (for example, maintaining a registered office and agent in the state where it is incorporated, and if required, filing annual reports with the state)   Organizations that have at least 25K in revenue must continue to file an IRS Form 990 for three years.  There are no penalties for not formally dissolving, but there are penalties for failing to file a 990. 

Q.  When can board members be personally liable?

A.  Generally the limited liability structure of a corporation will shield the board member from liability.  However, when lawsuits are filed against a nonprofit it is not unusual for board members to also be named as individual defendants in the lawsuit.  For this reason "D&O" (Directors & Officers) liability insurance is recommended.  The most common reason for a board member to be personally liable is when the organization fails to file withholding taxes for its employees.  In such cases the IRS has the authority to seek tax withholding payments and penalties directly from the trustees/board members.  Another significant area of potential personal liability for trustees/board members is in cases of "private inurement," which is when a trustee or a member of a trustee's family receives an excessive amount of compensation from the charity.  In such cases, all the other trustees who approved the transaction, as well the person who received the excessive compensation, can be subject to penalties from the IRS in the form of excise taxes.  For IRS guidance on transactions that the IRS considers to be "automatic" excess benefit transactions, Click Here.  See also the article on the Partnership's website:  "How Officers and Directors of Nonprofits Can Stay Out of Trouble Under the Excess Benefit Rules." Copyright 2002 by Lisa Nachmais Davies.

Q. Can a volunteer board member be held personally liable for a nonprofit’s failure to either withhold and remit payroll taxes or pay employees?

 A. Yes, in some circumstances.  Board members and managers, including those who are volunteers, who have sufficient control over the financial affairs of a nonprofit can be held personally liable for the organization’s failure to (1) withhold and remit payroll taxes to the appropriate state and federal taxing authorities and/or (2) pay employees.  

 Internal Revenue Code §6672(a) imposes a penalty on any “responsible person” who willfully evades or fails to collect, pay, or account for payroll taxes.  Similar rules of liability exist under the laws of Connecticut, New Jersey, and New York.

 For example, if a board member was responsible for approving monthly finance reports, those reports showed tax liabilities that were unpaid, and the board member did not act to ensure that those liabilities were paid by the organization, then the board member could be held personally liable for the unpaid taxes.  The board member need not have been the only person responsible for the payment of the taxes to be liable, and delegation of the authority to a staff employee to remit the payroll taxes will not necessarily relieve the board member from personal liability.

 Thus, a board member who is aware of a tax problem (or reasonably should be aware from reading periodic financials) and does nothing, is potentially liable.  In contrast, the board member who addresses the tax problem in a timely fashion and makes sure the IRS (or state taxation authority) is paid before all other creditors generally will not be liable.  If the board decides not to resolve the tax arrearage in a timely manner, any dissenting board members should consider resigning from the board.

 Likewise, board members and managers who have sufficient control over the financial affairs of a corporation can also be held personally liable to employees for the organization’s failure to pay wages on a timely basis.

 A board member who joins a nonprofit that has a legacy of withholdings due the IRS (or state taxation authority) generally will not be individually liable if the board member, upon learning of the arrearages, takes steps to ensure that (1) current withholding taxes are being timely remitted and (2) the nonprofit pays the past monies owed (which may involve entering into a payment schedule with the IRS).

 In difficult financial times, executive directors and boards wrestle with questions of which bills to pay first in a particular month.  Nonpayment to creditors, including the IRS, could result in costly interest, late fees, liens, service shut-offs, and other legal exposure to the organization.  A nonprofit facing a cash flow shortage should not ignore any bill from any source, and is advised to contact each creditor to work out necessary extensions or payment schedules to avoid default and to avoid the resulting negative consequences to the organization and individual board members.  Note that it is generally not permissible to delay paying employees, even if the employees agree to the delay.  

 Note that claims for unpaid taxes and wages might not be covered by insurance, including directors and officers (D&O) insurance.

 Bottom line: Timely paying withholdings to the tax collector first, and wages to employees second, is almost always the best option.

 The IRS and the NJ Division of Taxation have web pages dedicated to the topic of the “responsible person doctrine”.

Q:   What is the board of director/trustee's liability for accounting mistakes?

A:  A nonprofit corporation can be liable for penalties for inaccurate record keeping or accounting errors, or for filing its annual returns (Form 990s) late.  Each board member has a legal responsibility to ensure that the nonprofit avoids such penalties.  Board members must exercise "due care" in the performance of their duties, which includes overseeing/approving the financial and accounting practices of the nonprofit and ensuring accurate and timely IRS filings.   Trustees will generally not be liable if they have relied, in good faith, on advice provided by competent professional advisors, such as accountants and lawyers.  Therefore, hiring reliable professionals, asking pertinent questions, and familiarizing themselves with the nonprofit's financial statements, internal controls, and accounting practices, are important ways that nonprofit trustees can protect themselves from liability for a failure to exercise "due care."

Q:   Do we have to open our board meetings to the public?

A.    No.  Private nonprofit corporations generally are not subject to state open meeting and record laws, typically known as "sunshine laws," that apply to governmental or quasi-governmental bodies, such as school boards.  Such laws do not cover nonprofit corporations that are public charities and not controlled by a government entity.


Q: There was a question at our board meeting the other day as to whether or not we are bound by the Sunshine Law?

A: Only public agencies (established by local, state or federal government) are required by law to open their meetings, and minutes, to the public. Generally only the trustees and invited staff attend board meetings, so the minutes should note when other "guests" are in attendance. Minutes of board meetings are the business records of the corporation and should not be shared with anyone who is not a trustee of the organization, or a staff member or volunteer with a need to know the contents of the communication. Often there is confidential information contained in minutes re: clients or families served by the nonprofit, or personnel. Consequently, unless there are public disclosure requirements tied to funding from government sources, the nonprofit should not as a rule, make minutes available to the public. There are other public disclosure requirements, however, that all nonprofits should be aware of: When requested, tax-exempt organizations must provide a copy of the organization's application for tax-exemption, including the IRS Form 1023 and any related correspondence with the IRS, and the organization's annual returns, IRS Form 990, for 3 previous years.

For more detailed directions on when and how disclosure is required, you can view the IRS' responses to Frequently Asked Questions concerning an organization's obligation to disclose certain documents to the public:


Q: Can we have a board meeting by telephone or email?

A:  The answer depends on state law.  In NY, CT and NJ it is permissible to hold a board meeting via a telephone conference call (or video conference) as long as every participant can hear one another, and as long as all the other formalities of board meetings are complied with, such as  notice of meeting (or waiver of notice), quorum and voting procedures.  Both Board Chairs and nonprofit managers should ensure that board meetings by telephone comply with requisite legal formalities.  While meetings via electronic gadgets are permissible if state law is followed, no state law permits "meetings" via email or internet chat room. This is because a basic tenant of board meetings is that trustees benefit from the expressed thoughts of their colleagues through meaningful discussions.  Therefore legislatures have been reluctant to permit electronic meetings unless there is a device permitting all trustees to hear one another and engage in discussion. 

Q:  Our organization would like to change its name.  What's involved?

A:  A nonprofit corporation that wishes to change its official corporate name must amend the "Articles" or "Certificate" of Incorporation through a corporate resolution approving the name change.  The amendment must then be filed with the state where the nonprofit is incorporated.  Each state has its own procedures for amending and its own filing fees. After the amendment has been filed with the state, the nonprofit should then send a copy of the filed amendment to the IRS with notification of the name change.  In some cases the nonprofit may wish to request that the IRS issue a replacement Determination Letter that refers to the nonprofit by its new name.  The only fee involved would be the filing fee for the amendment at the state level.  In some cases a nonprofit might consider filing an "alternate name" for business use, rather than officially amending the corporation's name.  Feel free to contact the Pro Bono Partnership for guidance on this issue.

Q:  Our organization is set up as a membership organization with members entitled to vote.  However, we are actually operating as a non-membership organization, run entirely by our board of directors with no membership votes. What should we do?

Generally speaking, nonprofit organizations are organized as membership or non-membership organizations. Membership organizations have members who are entitled to vote on certain organizational issues (similar to shareholders of a for-profit corporation) such as the slate of board of directors.  Non-membership organizations have “self-perpetuating” boards of directors that vote for themselves.  (Keep in mind that non-membership organizations may have people they call members, but these are not members in the “legal” sense, as they don’t have any voting rights).  Depending on your state of incorporation, the organization’s certificate of incorporation and/or bylaws generally will note whether you are a membership or non-membership organization.  If you are a membership organization, your bylaws should set forth the requirements of membership, including the definition of a voting member; quorum and meeting requirements; notice requirements; and the specific voting rights of members (note for NY Nonprofits: the NY Not-for-Profit Corporation Law requires certain nonprofit organizations to have voting members; check with the Partnership or your organization's legal counsel for more information). A common issue for some nonprofits organized as membership organizations is that they are really operating as non-membership organizations - they do not have an exact list of their members, and/or they are not holding member meetings and/or votes.  There are two ways to address this issue: (1) the organization needs to change the way it governs to conform to its own corporate documents – that is, make sure it holds membership meetings and member votes as stated in the certificate of incorporation and bylaws; or (2) change the corporate structure from a membership to a non-membership organization (as noted above, certain NY nonprofits may not have such an option).  That would require a vote of the members to essentially “abolish” their rights to vote, and then a change to the organization’s certificate of incorporation and/or bylaws. If this is an issue for your organization, contact Partnership or your organization’s legal counsel.

Q: Must a nonprofit corporation register and file annual reports in another state in which it conduct business?
 

• In Connecticut:  A nonprofit corporation desiring to transact business in Connecticut needs to file an Application for Certificate of Authority with the Connecticut Office of the Secretary of the State.  An original certificate of the corporation’s legal existence from the state where it was incorporated and a filing fee of $20 must accompany the Application.  The corporation must make sure that its name contains a word or words of corporate designation in its title (such as “Incorporated” or “Corp.”), and is distinguishable from the name of another active business on the records of the Secretary of the State (if the name is not distinguishable, there are procedures for the corporation to adopt a “fictitious” name for use in Connecticut).  Once a corporation has a Certificate of Authority, each year it must file an annual report with the Secretary of the State.  The Application and more detailed instructions are available online at http://www.sots.ct.gov/CommercialRecording/forms/forecorp/authorit.pdf.
   

• In New Jersey:  The State requires that foreign nonprofit and for-profit corporations file a Corporate Business Tax Return, or Form CBT-100, for each fiscal year, beginning on the date the corporation acquired taxable status in New Jersey, regardless of whether it had any assets or conducted any business activities.  Foreign corporations must annually file Form CBT-100 if they fall into one of the following six categories: (1) holds a general certificate of authority to do business in New Jersey issued by the New Jersey Division of Revenue; or (2) holds a certificate, license or other authorization issued by any other department or agency of New Jersey, authorizing the company to engage in corporate activity within New Jersey; or (3) derives income from New Jersey; or (4) employs or owns capital within New Jersey; or (5) employs or owns property in New Jersey; or (6) maintains an office in New Jersey.

Please note that if a foreign corporation transacts business in New Jersey without a certificate of authority, it may be fined up to $1,000 for each calendar year it transacted business, up to five years.

For more information about foreign corporation filing requirements in New Jersey, and to download Form CBT-100 and a Certificate of Authority, please go to www.state.nj.us/treasury/taxation.

Please also note that all foreign nonprofit corporations that conduct fundraising activities in New Jersey must register with the New Jersey Division of Consumer Affairs, Charitable Registration Section.  So long as these initial registration requirements are met, New Jersey will accept the “multi-state” filers form, or Uniform Registration Statement, thereafter.

• In New York:  A not-for-profit corporation can obtain authority to do business in New York by filing an Application for Authority with the New York State Department of State, Division of Corporations.  A Certificate of Existence (known as a Certificate of Good Standing in many states) must be attached to the Application, along with a filing fee of $135.  Similar to the requirements in Connecticut, the name of the corporation must contain a required word or abbreviation indicating corporate character (or if it does not have one, must agree to add one for use in New York), and must be distinguishable from other entities listed in various indexes of the Department of State (if it is not distinguishable, there are procedures for a fictitious name to be adopted.
  
   As set forth in Section 301 of the New York Not-for-Profit Corporation Law (available at http://public.leginfo.state.ny.us/menugetf.cgi), the name of the corporation may not include a word or phrase restricted by another statute unless the statute has been complied with, and certain words or phrases require the consent or approval from another New York state agency prior to filing the Application.  In addition, a not-for-profit corporation conducting certain activities (e.g., operating a day care center) must get the consent or approval of another New York state agency.  Required consents or approvals should be attached to the Application.  Questions about whether consent or approval is required can be directed to the Division of Corporations, the relevant state agency, or an attorney who can assist with interpreting Section 404 of the New York Not-for-Profit Corporation Law (available at http://public.leginfo.state.ny.us/menugetf.cgi).  For more information, please see www.dos.state.ny.us/corp/nfpcorp.html.  For the Application, please see www.dos.state.ny.us/corp/pdfs/dos1555.pdf.

Questions Relating to Board Members:

Q:  How can a member of the Board of Directors of a non-profit organization be removed?

A:  In New York, a director may be removed for cause by vote of the members or by vote of the directors (provided there is a quorum of at least a majority of directors at the meeting).  If the organization’s by-laws or certificate of incorporation so provide, a director may also be removed without cause by vote of the members.

In Connecticut, members entitled to vote, or the directors if there are no voting members, may remove a director with or without cause unless the certificate of incorporation limits removal to only for cause.

In New Jersey, if the organization’s by-laws or certificate of incorporation provides for election of a director by the members, then the members may remove a director for cause, unless the by-laws or certificate of incorporation allow removal without cause.  If the directors are elected by the board,
the director may only be removed for cause

The relevant statutes in all three of the states do not define “cause.”  Therefore, what constitutes cause is very fact specific and the circumstances of a given situation should be analyzed carefully.

Q:  What sort of situation can give rise to a conflict of interest for a board member? 

A:  There are many scenarios where the interests of a particular board member may run counter to the best interests of the nonprofit, or where it will be difficult for a board member to make an objective decision. 

Q.  One of our board members has proposed that he provide his accounting services to the nonprofit for a reduced rate.  How should we handle this?

A.  This is an example of how helpful it is to have a written conflict of interest policy for board members.  Board members need to be sensitive to their obligations to disclose conflicts and to their legal duty of loyalty to enter into transactions and make decisions in the best interest of the nonprofit.  In situations of conflict, the "interested party" -- in this case the board member -- must inform the rest of the board what financial gain, if any, he (or his immediate family members) will realize from providing services to the nonprofit.  Then, the rest of the board must make an informed, independent judgment as to whether it is in the best interest of the nonprofit to hire the board member to provide the services (and whether the compensation/cost of such services is appropriate).  In many cases, it will still be in the best interest of a nonprofit to receive services from an interested party, especially if the services are offered at below-market rates. Beware of conflicts that are not so obvious.  "Insiders" (including people or entities that exercise control over the nonprofit, including trustees and major donors) may not be making a financial gain themselves, but their immediate family members may.  In any of these conflict of interest situations, the key is for disclosure to occur and for the board to discuss the situation. The Board must make an informed, independent judgment that the transaction will be in the best interest of the nonprofit and document the basis for this decision in the  minutes of the meeting.  Not having written conflict of interest procedures makes a nonprofit vulnerable to violations that may subject the nonprofit, and board members who approve conflict transactions, to IRS penalties.  Check with the Partnership whenever you have questions about conflict of interest or if you'd like to see a sample Conflict of Interest policy for board members.

Q.  Do trustees have the right to review all corporate records?

A.  Generally, yes.  Every trustee or director is a fiduciary with the obligation to make decisions in the best interest of the organization and to prudently perform (or ensure the performance of) functions involving the reporting, filing and management of corporate documents.  It would be inappropriate for the staff of a nonprofit to prevent the board from reviewing corporate documents, particularly because the board has the legal obligation to review all information necessary for the trustee to reach an informed, independent judgment and analyze issues prior to casting any vote.  On the other hand, there are always some documents that are typically not shared with trustees, either because they relate to employees or to anonymous funders or other private issues, that individual board members should only review if they recognize their sensitivity and treat them confidentially.  Board members who do not respect the confidentiality of sensitive corporate documents, including board agenda packets or board minutes, should be counseled by the board chairperson or another appropriate colleague on the board and informed about the necessity of maintaining the confidentiality of certain corporate records.  In some situations it might be necessary to remind a board member that trustees have a legal duty not to use information from corporate records for personal gain, or the gain of any outside interest, other than the nonprofit.

Q: Can our Organization make a loan to a board member?

A.  Generally speaking, loans to board members are not recommended (in New York, such loans are prohibited). The assets of a tax exempt organization are supposed to be used to further the exempt public purpose of the Organization, and not as a "private bank" for board members. Such loans also need to be carefully structured so as not to run afoul of the IRS "Intermediate Sanctions" rules that govern transactions between tax exempt organizations and "disqualified persons" (such as board members). Therefore, and by way of example, such loans should never be at a below-market interest rate.

Having said that, whether such loans are even permissible depends on the state. In New Jersey (N.J.S.A. 15A:6-11), loans to Trustees (board members) are not permitted unless the loan is authorized by the Certificate of Incorporation or bylaws and then only when authorized by a 2/3 vote of the board (not counting the interested trustee). In Connecticut (Conn. Gen. St. Section 33-1106), loans to board members are permitted; however, directors who vote for or assent to the making of a loan to an officer or a director or a corporation are jointly and severally liable to the nonstock organization for the amount of the loan until it is repaid. As noted above, in New York (NY NPCL Section 716), loans to board members are prohibited.

Q: I serve as a volunteer board member for a nonprofit organization. Will my own homeowner's insurance policy, or my personal umbrella liability policy, provide protection to me from any liability for my service as a volunteer board member?

A.  Only very limited protection.  Some umbrella policies and/or homeowner’s policies have a clause covering you as an unpaid board member, but only against claims for personal injury or property damage (for example, car accidents or suits from a slip and fall). And in those cases, you would likely be sued individually and not in your capacity as a board member.  Your umbrella or homeowners policy will not cover claims for other wrongful acts as a board member, such as breach of fiduciary duty, misappropriation of funds, wrongful termination, or harassment - that is, most of the things you’d likely be sued for as a board member.  Check your own policy to see if it has a clause covering you as an unpaid board member, and of course check with your insurance agent.  Also, make sure your nonprofit organization has Director’s and Officer’s (D & O) insurance, and/or Employment Practices Coverage.

Q. Is the Executive Director of our organization allowed to sit on the board of directors?

A.   There is nothing per se illegal or impermissible about an executive director also serving as a member of a not-for-profit’s board of directors.  Under such circumstances, however, it is highly advisable that the organization have a conflict of interest policy to ensure that the no director (including the executive director) will participate in any votes on issues where she, her relatives or related entities stand to benefit.  Many organizations choose to avoid the issue all together by having a policy prohibiting the executive director from serving as a voting board member.  Under these circumstances, the executive director is usually invited to attend all board meetings in her staff capacity and to keep the board apprised of all important programmatic, financial and administrative developments but has no right to vote and can be excluded when the board goes into executive session.

Questions Relating to Child Care Centers in New York (Excluding NYC)

●  is the course curriculum specifically related to one or more of the required training topics?

      ●  Is the material presented accurate and relevant?

      ●  Is the trainer skilled in the topic?

      ●  What is the trainer’s experience and/or education on the topic?

      ●  What is the trainer’s training experience?

      ●  What are the trainer’s credentials?

      ●  Does the trainer have professional references?
 

Questions Relating to Fundraising:

Q.  When can a donor claim a charitable contribution?

A.  While the claiming of a deduction for a charitable contribution is the responsibility of the donor, nonprofit organizations should be aware of the IRS rules governing the tax year in which the contribution can be deducted, particularly when issuing receipts for charitable contributions.

According to the IRS, a donor can deduct a charitable contribution only in the year it was actually made (or in a succeeding carryover year under certain circumstances).  This rule applies regardless of whether the donor uses the cash or accrual method of accounting.

Normally, a contribution is deemed made at the time of its unconditional delivery.  Here are some illustrations of what this means.

Checks.   A check mailed to a charity is considered delivered on the date it is mailed. 

Credit card.  Contributions charged on bank credit cards are deductible in the year the charge is made.

 Pay-by-phone account.  If a donor uses a pay-by-phone account, the contribution is deemed to have been made on the date the financial institution pays the amount, as reflected on the statement the financial institution sends the donor. 

Stock certificate.  The gift of a properly endorsed stock certificate is completed on the date of mailing or other delivery to the charity or to the charity’s agent.  However, if a donor gives a stock certificate to the donor’s agent or to the issuing corporation for transfer to the name of the charity, the gift is not completed until the date the stock is transferred to the charity on the books of the corporation. 

Promissory note.  If a donor issues a promissory note to a charity as a contribution, there is no charitable contribution until the note payments are actually made.

 Option.  If a donor grants an option to buy real property at a bargain price to a charitable nonprofit, no charitable deduction can be taken until the nonprofit exercises the option.

 Borrowed funds.  If a donor makes a contribution with borrowed funds, the donor can deduct the contribution in the year it is made, regardless of when the loan is repaid.

 Conditional gifts.  If a contribution depends on a future act or event that may not take place, the donor cannot take a charitable deduction.  However, if there is only a negligible chance that the act or event will not take place, the donor can take a deduction. 

For more information on charitable contributions, including examples, see the following IRS Publications:

IRS Publication 526, Charitable Contributions. 
IRS Publication 1771, Charitable Contributions - Substantiation and Disclosure Requirements.
IRS Publication 561, Determining the Value of Donated Property.

The original law which was created in 1972 is called the Uniform Management of Institutional Funds Act (UMIFA). It only allows the expenditure of amounts in excess of the “historic dollar value” of a fund which is the aggregate value of all gifts made by a donor into the fund. This does not include income and appreciation which may be spent.

The uniform law was redrafted in 2006 to allow more flexibility in spending and investing charitable funds.  The newer version which is called the Uniform Prudent Management of Institutional Funds Act (UPMIFA) does not automatically limit expenditures to amounts in excess of the historic dollar value. Rather it lists several factors that a governing body must consider before determining expenditures. Note that one of these factors is the intended duration of the endowment.

Some version of the new act has been passed in about half of the states; the old model act remains in effect in most others. Under both versions of the law the governing body of the corporation has an overriding duty to act prudently when making spending decisions. The uniform law website provides background on these acts and the status of the law in each state.  See www.upmifa.org.

 NEW YORK

New York adopted UMIFA into its Not-For-Profit Corporation law in 1978. Consequently New York law prohibits the expenditure of amounts below the historic dollar value of endowment funds unless the donor instrument provides otherwise. Where funds have dipped below their historic dollar value because of current economic conditions, two questions have arisen.  Can a non-profit permissibly expend funds that were previously appropriated and is the corporation required to restore the fund to its historic dollar value?

The New York Attorney General has issued advice for not-for-profit corporations stating that when a fund is underwater a non-profit may continue to spend income including dividends, interest, rents and royalties.  In addition, the governing body may spend net appreciation if it was appropriated prior to the fund going underwater and is still a prudent expenditure. New York has a feature peculiar to its UMIFA that prohibits expenditure of unrealized appreciation on assets that are not readily marketable.  All other appreciation may be spent subject to the overall prudence standard.

The Attorney General has also opined that the governing body has a duty to restore the historic dollar value of the endowment if it has dipped below that amount due to a spending rate policy. If the dip is due to market depreciation there is no duty to restore the fund.

Legislation is currently being drafted which would replace UMIFA with UPMIFA in New York. It is expected that a bill will be introduced shortly.

 NEW JERSEY

 CONNECTICUT

Connecticut has also enacted UPMIFA.  Thus the decision to spend endowment fund monies is not limited to amounts in excess of the historic dollar value but rather rests upon an evaluation of the seven factors set forth above. In making its determination the governing body is required to act in good faith with the care “an ordinarily prudent person in a like position would exercise under the circumstance.”  The institution should carefully document its prudence and its evaluation of the seven factors set forth in the law before spending endowment funds.
 

 Q.  If a person is owed money by a charity and s/he subsequently forgives the debt, can the amount forgiven be claimed as a charitable contribution?

A.  The answer will depend upon the circumstances.  For example, assume the person made a loan to the charity, in good faith and with the expectation of being repaid, but then later decided that the organization did not have to repay the loan.  In that situation, the lender would be entitled to claim a charitable contribution because s/he originally expected to be repaid, but forgave the loan because of  generosity ( “charitable intent”).   As a matter of good practice, both the loan and the forgiveness should be evidenced by written documentation.

In contrast, if the charity were insolvent and unable to repay the loan, then a charitable deduction might be disallowed on the basis that the lender would not have been able to collect anyway and, therefore, lacked the necessary charitable intent.  In such a case, the taxpayer may be better off considering a bad debt deduction.

Q.  If an individual purchases items he/she plans to donate for a tax-exempt organization’s fundraising event, may the donor use the organization’s NY sales tax exemption certificate to avoid paying sales tax on the items?

A.  The NY sales tax exemption certificate is issued in the name of the tax-exempt organization and expressly states that the organization must be the “direct purchaser and payor of record.” Thus, an individual purchasing items to be donated to the organization could not use the organization’s NY sales tax exemption certificate.  Although the individual could not avoid paying sales tax on the donated items, the individual could take a tax deduction for the items as in-kind donations, assuming the organization provides the proper acknowledgement and the donor keeps records of the purchases and values them appropriately.

Q.  Must a public charity spend a minimum amount of funds it raises in a particular year?  

A.  There is no requirement that a public charity spend the funds in the year in which they were raised so long as the public charity made no representations in its fundraising materials and the like that it would do so.

It should be noted that a public charity is required to use the funds for the purposes it indicated it would be using them for in all of its solicitations.  For example, a public charity that raises funds for a particular natural disaster may not divert funds for future disasters.

Q.  Do you recommend that we use written pledge agreements in connection with all pledges made to our organization?

A.  To increase the chances that a donor will honor a pledge, and to ensure that there is a meeting of the minds as to the terms of a pledge, the Pro Bono Partnership strongly advises charities to enter into a written pledge agreement with donors.

Q.  What percentage of a donor’s adjusted gross income is deductible for charitable gifts made in 2005?

A.  As a result of Hurricanes Katrina and Rita, the Katrina Emergency Relief Act was passed which permits individual donors to deduct up to 100% of the donor’s adjusted gross income for charitable gifts made to most charities in 2005. The law applies only to donations made between August 28th and December 31,  2005.  Starting again in 2006, charitable gifts of up to 50% of adjusted gross income will be deductible.  Click here for a special report on the tax provisions contained in the Katrina Emergency Relief Act. 

Q:  What records do we need to retain in connection with fundraising activities?

A:  Some states have laws that require nonprofits to retain records of fundraising activities.  In New Jersey, the Charitable Registration and Investigation Act, N.J.S.A. 45:17A-33, requires charities to maintain all records having to do with contributions for at least three years. Consequently, charities must retain records that document the names and addresses of each contributor, the date and amount of donations, (fair market value of goods received) and the name, location and account number of each bank or other financial institution in which the contributions are deposited.   In Connecticut, the Connecticut Solicitation of Charitable Funds Act, C.G.S. 21a-175 et seq., requires charitable organizations to keep "true fiscal records" for three years.  Additionally, this Act also requires paid solicitors and commercial co-venturers to maintain certain financial records.    In New York, all charities that register with the Attorney General must keep and maintain records, books and reports pertaining to their registrations, for at least three (3) years after the end of the period of registration.  Article 7-A of the Executive Law (2002) section 172 (b)(6).

Q: Do we have to disclose the names of donors when we give out our Form 990 tax return in
 response to a request for public inspection?

A: Not unless your organization is a private foundation. Nonprofits are required to give the organization's Form 990 "annual information return" to anyone who asks, but IRS regulations specifically provide that public charities do not have to disclose the name and address of any contributor to the organization.  In contrast, private foundations must disclose the names of donors on Schedule B of the 990-PF.  

Q:  We don't have our 501(c)(3) yet.  How can we raise funds for our start-up operations?

A:  You can still "raise funds" as long as your organization is incorporated as a nonprofit corporation and registered for charitable solicitation in the appropriate state(s), however, you should explain to donors that your organization has not been designated as tax-exempt by the IRS.  If your application for tax-exemption is pending, there is a strong possibility that a donor's gift will be deemed tax-deductible eventually, since in most cases the designation of tax-exemption is retroactive to the organization's date of incorporation. Some donors will choose not to contribute in such circumstances, so you might consider whether a "fiscal sponsorship" relationship would work for your organization.  A fiscal sponsor is another charitable organization that has tax-exempt status from the federal government, and is willing to accept donations on your organization's behalf while you are waiting for tax-exempt status.  Fiscal sponsorship relationships should be governed by a written agreement.  For guidance or to learn more about fiscal sponsorships, contact the Partnership's staff attorneys.

Q.  Is the cost of a raffle ticket deductible?

A.  No, because the person buying the ticket has an expectation that he or she may be a winner and receive something of value for the ticket.  Therefore, the cost of buying a raffle tickets is not deductible.  Federal laws prohibit sending lottery tickets, raffle tickets, or games of chance through the US mail.  (18 USC Section 1302).  Consequently, to avoid penalties for violation of US mail regulations, DO NOT mail raffle tickets.

Q.  We've applied for 501(c)(3) status but have not yet received formal recognition from the IRS.  Are donations deductible?  What type of acknowledgment should we provide our donors?

A: If a donor chooses to donate directly to your organization while your tax exempt application is pending, you can acknowledge the gift with the following language: "The Organization has applied for federal tax exemption as a 501(c)(3) public charity, and if this designation is granted, then the full amount of your contribution will be deductible for federal income tax purposes." This way, you are not promising that their gift will be deductible; rather, you’re correctly stating that it will be deductible only in the event that your application as a 501(c)(3) organization is successful. 

Questions Relating to Employees, Compensation and  Benefits:

Q. Are we Required to provide benefits to part-time staff?

A.  There is generally no requirement that employers provide fringe benefits such as paid holidays, vacation, sick time, or personal days to part-time staff.  The issue will be governed by the organization's own personnel policies and practices, including collective bargaining agreements in the case of union employees. 

Generally, no state law mandates that part-time workers receive health benefits.  However, in New Jersey, if an employer participates in the NJ Small Employer Health Benefits Program, then all employees who regularly work at least 25 hours a week must be allowed to enroll in the program.

Pension plans are a different story however, so consultation with legal counsel is advised.  

[This FAQ last revised May 2009]

Q.  Under what circumstances may a nonprofit organization employ minors (anyone who has not reached the age of 18)?

A.  In general:

• You cannot promise a minor (or anyone) non-monetary compensation in exchange for their work and then call them a volunteer.  A bona fide volunteer has no expectation of compensation and is volunteering his/her time freely.    

• Each state has specific requirements about the hours a minor employee may work.  Check the Department of Labor website for your state. 

• Under federal law, summer camp employees are exempt from minimum wage requirements.

• Under a few other limited circumstances, a minor employee may be exempt from minimum wage laws.   The U.S. Department of Labor has allowed sub-minimum wages or stipends to be paid to workers as part of a bona fide training program or as part of a bona fide student intern program.   However, programs must meet several strict criteria in order to qualify and the employer cannot derive any advantages from the employees’ work.  Call the Partnership with specific questions.

In New York:

• All minors must obtain a general employment certificate (known as “working papers”) from their school district. 

• Minors who are 14 and 15 need to obtain a Student Non-Factory Employment Certificate.

• Minors who are 16 and 17 and in school need to obtain a Student General Employment Certificate.

• Minors who are 16 and 17 and have left school need to obtain a Full-Time Employment Certificate. 

• In general, minors not yet 14 cannot be employed.  There are a few exceptions to this rule (newspaper carriers, some light farm work, performers) but most occupations are prohibited.

For more information, consult the Child Labor section of the New York State Department of Labor website at http://www.labor.state.ny.us/workerprotection/laborstandards/workprot/minors.shtm.   

In New Jersey:

All minors must obtain an employment certificate or “working papers” from their school district.  New Jersey is one of the few states that require a minor, until his/her 18^th birthday, to secure an employment certificate for each employer, rather than a single permit for all employers as in New York and Connecticut.  The certificate is only valid for the employment stated on it.  A minor cannot get working papers until he/she has a promise of employment signed by the prospective employer that sets out the specific nature of the work, the hours, and the pay.

 A minor’s age determines the type of work he or she may do: 

• At 12 years of age, minors may do the following jobs: residential newspaper delivery, yard work, farm work, theatrical productions.

• At 14 years of age, minors may do the jobs listed above, plus most standard office or clerical work, cashiering and sales, delivery other than with a motor vehicle, hospital and health agency jobs, restaurant work, professional assistants, golf caddying, and camp counseling.  They may not work in jobs where they are required to use power machinery or are exposed to other hazardous conditions.

• At 16 years of age, minors may do the jobs listed above, plus some jobs involving machinery (consult the Partnership for advice on what constitutes appropriate mechanical employment).

Minors are prohibited from working in construction or other dangerous occupations, but there are two exceptions to this rule:

• Minors who are 14 through 17 years of age may volunteer to work for nonprofit organizations engaged in the construction of affordable housing as determined by the State Commissioner of Labor.  However, they may not come in contact with power-driven machinery; nor work on any excavation, scaffolding, or roofing; nor be exposed to hazardous substances.  Moreover, the nonprofit must secure liability insurance to compensate for all injuries and illnesses sustained by minors as a result of their participation in the construction. 

• Minors who are 12 through 17 years of age are permitted to work as volunteers at community operated noncommercial recycling centers, provided that they do not come in contact with hazardous machines or substances. 

• Under New Jersey state law, certain workplaces are not required to pay minimum wage. Some examples are nursing homes, professional offices, and libraries. 

For more information, consult the New Jersey Department of Labor Child Labor website at http://www.nj.gov/labor/lsse/lschild.html

In Connecticut

• All minors must obtain a Statement of Age Form (also known as an employment certificate or “working papers”) from their local school district.  Minors need a written promise of employment from their employers in order to get their working papers. 

• Minors who are 14 and 15 years old may work as baby-sitters or in professional offices, licensed summer camps, retail (non-school weeks only), or hospitals or rest homes (they can’t perform food service or laundry duties).  They may not work in restaurants or food service, mechanical or manufacturing facilities, retail establishments during school weeks, or in any environment where they would be exposed to hazardous substances or conditions. 

• Minors who are 16 and 17 years old may not work in any hazardous occupations, including, but not limited to, excavation, roofing, or any job which includes driving.  They also may not work in manufacturing or mechanical facilities.

• Minors who have graduated from high school but are not yet 18 years old may work in the same industries and the same hours as adults.  This includes hazardous work. 

For more information, consult the Connecticut Department of Labor website at http://www.ctdol.state.ct.us/youth/t-employment.htm.


Q.   If a non-profit organization provides technology to its non-exempt employees that allows them to perform work outside of normal business hours (e.g., a Blackberry, home access to the employer database), is the nonprofit employer at risk for having to pay overtime for work performed under these circumstances? 

A.: Yes, the employer may be at risk.  The first consideration is whether the employer has a written overtime policy in its employment manual.  If an organization’s employment handbook explicitly states that all overtime must be expressly pre-authorized by the employer and the employee fails to obtain such express pre-authorization, the employee may have difficulty successfully arguing that she is entitled to overtime pay for using an employer-provided Blackberry after normal business hours.  Another scenario is one in which there is no written policy addressing pre-authorization for overtime pay, and the employer has provided out-of-office access to its employees so they can perform work after hours.  If an employee uses a Blackberry to accumulate overtime pay under these circumstances, the employer may refuse on the basis that the employee failed to obtain express pre-authorization for the overtime.  Nonetheless, the employee may argue that she had implied pre-authorization from her employer based upon the provision of the Blackberry.  Regardless of whether there exists a written overtime policy, the employer will be obligated to pay overtime if it has actual knowledge that an employee is using employer-provided technology to accumulate work hours in excess of 40 hours per week. The best way to clarify any confusion is for the employer to have a written overtime policy included in its employment handbook, as well as there to be a timely discussion between an employee and her manager to confirm a mutual understanding on the accepted uses of such technology.
 

The Act immunizes donors, gleaners, and nonprofit organizations from liability arising from the nature, age, packaging, or condition of apparently wholesome food or fit grocery products received as donations.  The only exception is for injury or death to an ultimate user resulting from gross negligence (which the statute defines as conduct which a person knew at the time was likely to be harmful to the health or well-being of another person) or intentional misconduct.

Q.  Do we need a consent form or release when we use photos of clients in our materials or on our website?

A.  It is sound practice for a charity to obtain a signed consent from anyone prior to using their photo, whether in print or on a website.    When the photo is of a minor child,  or someone who is mentally incompetent, the parent or guardian must sign the consent for it to be enforceable.  The consent can also address ownership of the photo/image, stressing that the charity owns the photo and has the right to use it in the charity’s marketing materials or other specified uses.  Finally, the consent form can give parents the option to suppress the child’s identifying information.

Q: Is it common policy to require staff to provide a copy of their driver's license and proof of personal insurance if they use a personal vehicle on our nonprofit's behalf? 

A: It's increasingly common to require paid and volunteer staff who drive for a nonprofit to provide proof of driver's license and vehicle insurance.

1. It's a good idea to check that any staff who drive on the nonprofit's business have a current driver's license. You don't want to be in the position of having to explain why you authorized someone with a suspended license to drive on your behalf if they are involved in an accident while driving for you! This could be both embarrassing and result in a finding that your nonprofit was negligent.

2.  You also want to know whether staff driving on your behalf have current coverage on their vehicles, because this coverage will respond first in the event the staff member's personal vehicle is involved in an accident. Your agency's non-owned vehicle coverage applies on an excess basis.

The responses to this question are courtesy of the Nonprofit Risk Management Center, Washington D.C.  To ask NORMAC a question on the topic of transportation risk or insurance for owned and non-owned vehicles, go to www.nonprofitrisk.org and click on Advice, or call the Center at (202) 785-3891.

Q: We plan to collaborate with another agency on a new program.  What are the risks?

A:  We recommend that any nonprofit that is about to collaborate with another organization review the objectives and plans for the collaboration with legal counsel just to make sure there are not hidden risks -- either to the nonprofit's tax-exempt status, or to the organization's programs or reputation.  Generally it is a good idea to memorialize the responsibilities and obligations of collaborating partners in writing. Just as not every marriage works out, not every collaboration ends up with positive results.  The Partnership's staff and volunteer attorneys can help your nonprofit articulate issues, such as whose insurance is primary, and what should your exit strategy be in the event the collaboration doesn't work out.

Q:  Does our organization really need Directors and Officers Liability Insurance?

A:  Generally D&O insurance is recommended as a prudent risk management strategy, however, each organization must answer this question for themselves.   This topic is addressed in an article entitled "D&O Insurance: Do All Nonprofits Need D&O?," available on the website of the New York Nonprofit Coordinating Committee: www.npccny.org/info/oi2.htm.

Questions Relating to Intellectual Property

Q:  What is better, state or federal trademark protection?

A.  Federal protection is almost always preferable, as you will have nationwide protection. However, federal registration can take some time to secure and is more expensive than state registration. The primary downside to only registering your mark in a state is (1) your protection will generally be limited to only that state; (2) you have more powerful ways to enforce your rights with a federal trademark registration; and (3) because there is little substantive governmental review for most state trademark registrations, the validity of a state trademark registration may be more prone to attack from someone seeking to cancel your registration. Note, if you are not planning to solicit funds outside of a particular state, or if your nonprofit's services do not implicate the "use in commerce" requirement of federal trademark registration, you may only be limited to registering the organization's mark in its state of use. In order to make that assessment, the Partnership's volunteer attorneys would need to know more about the nonprofit's activities, including the ways and areas in which the nonprofit plans to solicit funds.

Q.  How much does a trademark search cost and why is it important?

A.  As a first step in any trademark registration, state or federal, the attorney should conduct a "knock-out" search to see if there are any similar federal trademark registrations.  This is usually done by going to the United States Patent and Trademark Office web site at www.USPTO.gov, and running a search of the proposed mark.  If this free search uncovers a substantially similar mark, for the same class of goods or services for which the proposed mark is intended, another mark should be chosen.  If this "knock-out" search reveals no conflicts, the next step is to commission a trademark search report. Prepared by a company which specializes in such investigations, this report contains a nationwide listing of most of the trademarks, domain names, and company names which are similar to yours. An attorney should then review the report to assess any possible conflicts prior to registration.  This report can be expensive -- costing in the neighborhood of $485, if the search is conducted in the normal turn-around period of 5 days, with higher charges for searches done on an accelerated basis.  Conducting a search is important because searching for pending trademark applications or trademark registrations on the U.S. Patent and Trademark Office website will establish a "good faith" use defense on your part if it turns out that someone else is already using the mark and you were unaware of the prior use.  It will also alert you of the litigation history of federal trademarks which are similar to yours.

Q.  How much does it cost to register a mark with the federal trademark registration office?

A.  The official filing fee for federal registrations is $335.00 for each class of goods or services.  Note, as trademark registration and upkeep is often a back and forth process with the government, additional fees may apply.

The Partnership is grateful to Thomas Crowell, Esq., for the preparation of these responses to trademark registration related FAQs.

Questions Relating to Real Estate

Q.  We recently renegotiated with our landlord about some of the provisions in our lease.  Do we need a new lease?

A.   An amendment to the lease in writing is the best way to preserve your new agreement with your landlord, but the amendment can be contained in a letter that says: "Pursuant to our discussions, this letter will serve to amend the current lease dated [X], so that the monthly rent set forth in [Paragraph/Section X] shall be $4,000 per month for the duration of the Lease [or Lease Term, if that is how it is defined in the lease].  Please sign and date this letter below to demonstrate that [Landlord] has agreed to this change, and return it to us."

Q.  We are a nonprofit organization.  Should we be paying property taxes on our building?

A.   Being a nonprofit corporation does not automatically exempt your organization from the obligation to pay property taxes.  Not all nonprofits and not all property uses are exempt from property taxes, so you should check your state's law to whether your organization's use of the property fits within the exemption.  Most municipalities require nonprofits to apply for exemption annually.  Find out what the procedures and filing deadlines (usually in the fall) are from your local tax assessor's office.  Generally your organization will need to provide a copy of its Determination Letter from the IRS along with other information to prove that its activities are indeed fulfilling a charitable mission.  Each municipality's procedures for applying for tax relief are slightly different -- and each state has different criteria determining which activities and organizations are exempt from property taxes.  Generally it is not possible to obtain retroactive relief, so it is important not to miss the annual deadline for applying for property tax exemption.

Q.  How much liability insurance should a nonprofit have?

A.   Nonprofits, like any other business organization, must have certain types of insurance policies in place.  General Liability Insurance covers claims for bodily injury and property damage arising from accidents.  Directors & Officers Liability Insurance covers claims arising from the decisions and activities made by officers and board members in those capacities.  Once a nonprofit has even one paid employee on staff, it is required to have workers’ compensation insurance in New Jersey, New York and Connecticut.  Workers’ Compensation Insurance covers claims made by employees against their employers for injuries arising from accidents which take place during the course of employment.  Many nonprofits engage in specialized activities, including working with food or with children, which require additional insurance coverage with higher policy limits.  The Partnership strongly urges all nonprofits to consult directly with their insurance agents to obtain professional and specific advice on this important issue.  Be sure to explain all the activities in which your nonprofit engages to your insurance agent, so that your agent has a comprehensive understanding of potential risk.  For more detailed discussion of risk management for nonprofits, please visit the Risk Management Nonprofit Center online at http://nonprofitrisk.org/advice/advice.htm#online