Best of the Nonprofit Law Blog 2014

Best of 2014 - The year in reviewHere are some selected highlights from NEO Law Group over the past year that we hope you’ll find helpful. 2014 was also highlighted by an addition to Erin’s family and Michele’s graduation and passage of the bar exam! Amazing year for all of us.

Blog Posts


What Issues Should a Nonprofit Board Consider Annually?

Executive Succession: 10 Tips for Boards

Executive Committees: Why You Should Limit Their Authority


Nonprofit Advocacy is More Than Lobbying

Charities and Issue Advocacy: Doing it Right – Part One

5 Things Nonprofits Should Know About Ballot Measure Advocacy in California

Fiscal Sponsorship

Fiscal Sponsor Due Diligence

Fiscal Sponsorship: A Valuable Option for Grantmakers and Grantees

Arts Projects: Charitable or Not?

Proposed Laws

12 Things Nonprofits Should Know About Proposed Tax Reform

California Bill to Strengthen Enforcement of Charity Registration and Reporting

Proposed Rules Affecting California Charities – Comment Period Ends Today!

UBIT / Social Enterprises

UBIT: Advertisements vs. Qualified Sponsorship Payments

Nonprofit Limited Liability Company

Nonprofit Crowdfunding Risks


Nonprofit Laws for Human Resources Managers to Be Aware Of

Retroactive Reinstatement Procedures: Simplified

Dissolution and Transfer of Remaining Assets: An Alternative to Merger


Fair or Foul: A Review of Federal Tax Laws Governing Unfair Competition, The Nonprofit Quarterly (2014)

12 Reasons Why You Should Gracefully Resign from a Nonprofit Board, The Nonprofit Quarterly (2014)

10 Issues To Address In Your Nonprofit’s Social Media Policy, The Nonprofit Times (2014)


Tips on Starting a Nonprofit: Initial Board of Directors

Tips on Starting a Nonprofit: Fundraising Before Exemption

Tips on Starting a Nonprofit: Initial Bylaws

Nonprofit Radio

Advocacy, Net Neutrality, & The Bright Lines Project

Your Board’s Role in Executive Hiring


Speaking Engagements


Profit for Good: How Social Enterprise Policy Affects You, Independent Sector Public Policy Action Institute

Hot Topics in Nonprofit Law, CalNonprofits Policy Convention

Small Charities – Problems and Solutions, American Bar Association, Tax Section Mid-Year Meeting


Earned Income 101 for Nonprofits, Lawline

Understanding UBIT: What Does It Mean for Your Shared Space? Nonprofit Centers Network

Navigating Legal and Ethical Issues, New Grantmakers Institute, Northern California Grantmakers


What Issues Should a Nonprofit Board Consider Annually?


As the end of a year approaches, a nonprofit’s board of directors should begin to reflect on a number of issues involving governance and management of the organization to encourage its growth and success. Among the areas that boards will want to review include corporate formalities, financial oversight, programs and planning, and legal compliance.

Typically, a board of directors holds an annual meeting to elect directors for the coming year. However, there are several other matters for a board to review and act upon annually. These reviews and actions should not all be performed at the annual meeting (that would be overwhelming!), and they also need not be timed with the end of the calendar or fiscal year. Regardless, they should be scheduled every year.

Below is a list of areas that the board of directors should consider examining as the year comes to an end. Boards should look to each of these areas by first reflecting on the past, and then anticipating or looking forward to potential issues for the future.

  • Elections. Are there any officer or director positions which must be elected? The board should review the organization’s bylaws to ensure that elections (including re-elections) are being held consistent with the requirements stated in their bylaws.
  • Budget. Before a new fiscal year, the board should review and approve a budget for the upcoming year. A budget is an important planning tool that encompasses an organization’s programs, mission, and strategic plan. The organization’s staff will likely be charged with preparing the budget, but the board should review and approve the budget with care.
  • Executive’s Performance. The board is charged with reviewing the executive’s performance and generally should provide the executive with some form of annual performance review. An executive’s job description may occasionally change as the organization grows and evolves, and thus, it is also important to review and revise the executive’s job description, duties, and compensation, as necessary. Keep in mind that rewarding an executive with a bonus for past activities may be problematic under charitable trust law principles, particularly if there is no provision for such added compensation in the employment documentation or policies. Such matters should be discussed with a knowledgeable attorney.
  • Mission. The board should review the organization’s purpose statement and mission against the activities it conducted over the year. Has the mission strayed from the purpose statement in the articles of incorporation or bylaws? Are activities being conducted outside of the organization’s exempt purposes? Generally, the board must approve any changes to an organization’s mission. The board should also consider the Charitable Trust Doctrine and any need to amend the organization’s articles and bylaws when a mission changes or shifts.
  • Programs. It is also a good idea for the board to review the organization’s strategic plan and receive a program update from the organization’s staff regarding the past year. From time to time, the board should monitor the organization’s progress on its strategic plan, or at a minimum, set a date to engage the plan. The board will want to make sure that programs and plans are on target, and make modifications as necessary.
  • Form 990. Most tax-exempt organizations other than churches must file either the Form 990, 990-EZ, 990-N (e-postcard) or the 990-PF. The filing must take place by the 15th day of the 5th month after the fiscal year is over. The board, or at least an authorized committee of the board, should review this form before submission to the IRS. We recommend that most organizations adopt and observe a Form 990 Review Policy.
  • Board. The board should review its own composition and performance and determine, based in part on such review, its recruitment, training/development, meeting, oversight, policy-development, and planning strategies.
  • Committees. The board should examine its committee structures and performance of each committee. The board should distinguish between board committees and other committees, selectively appoint committee members, ensure proper delegation to and oversight of the committees, and shed unused or ineffective committees.
  • Legal Compliance. With staff input, and the assistance of legal counsel, as appropriate, the board should review the organization’s past legal issues and identify and assess its current and future issues. The board should ensure compliance is a priority and set the proper tone at the top. Charities should consider applicable laws regarding qualifications to conduct activities, required licenses and permits, nonprofit and 501(c)(3) compliance (e.g., operational test, private inurement, private benefit, excess benefit transactions, self-dealing, lobbying, electioneering, annual reports, public disclosures), facilities and real property, intellectual property, employment practices, and internal policy compliance.
  • Risk Management. With staff input, the board should identify and assess the organization’s risk areas, ensure the development and implementation of appropriate risk management policies (including proper training of staff and volunteers), and review the adequacy of the organization’s insurance coverage.

In addition to the reviews and actions described above, the board may want to schedule time at each meeting to consider one or more generative questions about how to make the organization more successful in the future. These questions may encourage board members to close out the year with a critical and nurturing eye to the larger picture and organizational climate. Such questions include:

  • What is happening in the environment that will affect our mission or organization? In this context, directors should think not only about assets and programs, but also about how to directly respond to the organization’s mission and objectives. For example, if an organization’s goal is to eradicate homelessness in a city, and programmatic activities include running various soup kitchens, the organization may want to consider other ideas that could address homelessness. Should the organization get involved with advocacy? Are there other possible actions that may directly speak to the organization’s intended outcome?
  • How do we continue to recruit board members? How do we advance the desired composition of our board? Do we have diversity goals? Are we meeting them?
  • Are there questions we should be asking ourselves that are reflective of our specific circumstances?

Meeting a board member’s legal or fiduciary duties is a much greater task than simply staying out of trouble. It’s about protecting, overseeing, and directing the organization with reasonable care to toward its mission. Preserving the status quo is often not the most valuable strategy for doing so. In our minds, reserving time to discuss various possibilities, including those not easily accessible, is an essential part of fulfilling the board members’ legal duties.


Nonprofit Tweets of the Week – December 12, 2014

Medical Doctor holding a world gobe in her hands

This week, Time magazine released its Person of the Year – the Ebola Fighters (a great many of whom are working with nonprofits like Doctors without Borders) – and, on a darker note, the Senate released the so-called Torture Report. Have a listen to Africa Stop Ebola performed by some of Africa’s top musical artists while perusing our curated nonprofit tweets of the week:

  • Gene: Must read: @p2173’s Philanthropy & the Social Economy: Blueprint 2015 annual industry forecast
  • Philanthropy: Internet of things, A/B testing, smart cities, and 7 other buzzwords to watch in 2015:
  • Nell Eddington: From the sharing economy, to crowdfunding, to the Overhead Myth & more, 5 Nonprofit Trends To Watch in 2015:
  • Nonprofit Quarterly: Two legal problems to look out for when #nonprofits and for-profits compete in the same fields [Ed. Tony Wang and I wrote this for the Quarterly’s print publication last fall.]
  • Gene: Philanthropy — the backbone of American capitalism SF Gate
  • Rob Reich: The financialization of charity, another hard-hitting look at Donor-Advised Funds, in Pro Publica by @eisingerj
  • Council of Nonprofits: How to explain #collectiveimpact in 2 minutes – new motion graphic from @CIForumtweets
  • CompassPoint: Cheers to @janmasaoka and our friends at BlueAvocado celebrating 100 issues today! #nonprofit
  • Vikki Sprull: In the Future, Companies Will Survive Only if They Help Solve Big Social Problems via @Forbes
  • Richard Leblanc: 2015 Corporate Governance Trends | Richard Leblanc
  • Anne Wallestad: “Strong organizations need strong boards” says new report from @HaasJrFund
  • BBC Capital: Why we shouldn’t always get along. Disharmony can be a good thing, writes @LucyMarcus:
  • Gene: Beyond profits: Millennials embrace investing for social good LA Times … #socent #impactinvesting

Pearson Charitable Foundation to Dissolve

group of school kids writing test in classroom

A few weeks ago, the Board of Directors of Pearson Charitable Foundation, the Section 501(c)(3) organization affiliated with the educational publishing company Pearson PLC, announced that it will be closing the Foundation at the end of the year after a decade of operations.  According to the Foundation’s website, the decision to close the Foundation comes after a decision by Pearson PLC to “integrate all of its corporate responsibility activities and functions into its business as a way to maximi[z]e social impact and to no longer fund the Foundation as the primary vehicle for its philanthropic and community activities.”

The announcement comes after several years of controversy surrounding the Foundation, including an investigation by the New York Attorney General.  According the Attorney General, the Foundation was being operated in a manner that was for the benefit of Pearson PLC.  Specifically, the Attorney General found that the Foundation had engaged in activities relating to the development of educational products, including course materials, related to the Common Core State Standards (a set of academic standards that has been adopted by most states) to be sold by Pearson PLC.  The Attorney General also found that the Foundation had helped to attract clients to Pearson PLC by paying for them to attend education conferences sponsored by the Foundation and at which Pearson PLC executives were present.  Both the Foundation and Pearson PLC have denied any wrongdoing, but the Foundation agreed to pay $7.7 million to settle the Attorney General’s investigation.  $7.5 million of the settlement amount was to be paid into a fund to support the work of 100Kin10, a network of organizations focused on placing science and math teachers in U.S. schools.

The investigation, and resulting dissolution, of the Foundation serve as an important reminder of the requirement that Section 501(c)(3) exempt organizations operate to serve a public, rather than a private, interest.  This remains true even when an exempt organization is affiliated with a for-profit entity.  Such affiliated nonprofits (and all nonprofits generally) hold their assets in charitable trust for use in furtherance of their exempt purposes and are prohibited from using such assets to benefit their for-profit affiliates.

501(c)(3) exempt organizations are also prohibited from providing prohibited private benefits, permitting private inurement, or entering into excess benefit transactions.  Private foundations are also subject to strict self-dealing rules under Internal Revenue Code Section 4941 which generally prohibit foundations from engaging in transactions with certain defined disqualified persons.  See our prior posts on these topics for more information.


Nonprofit Tweets of the Week

You Matter Concept

The past week was marked by Giving Tuesday and another grand jury decision not to indict a white police officer who caused an unarmed black man’s death. Have a listen to Amy Grant’s version of Grown-Up Christmas List while perusing our curated nonprofit tweets of the week:

  • Mashable: These are the charitable causes Americans care about most: #GivingTuesday
  • Philanthropy: We’re collecting some of the best #GivingTuesday posts on social media today. Check it out:
  • Grist: Meet the BART-stopping woman behind “Black Lives Matter”
  • Haas, Jr. Fund: Read this insight brief on board development: how can we build better non-profit boards?
  • Nell Eddington: November was a very interesting month in the world of social change: #philanthropy #nonprofit
  • Sandra Feinsmith: Restoring Trust In IRS Is A National Imperative via @forbes
  • CalNonprofits: Did you know that as of January 1, 2015, a new law prohibits non-voting ex officio board members? Find out here
  • Nonprofit Centers: Miss our webinar on UBIT? Erin Bradrick blogged about it here:
  • Gene: Cosby’s #philanthropy also affected by rape claims
  • Stanford Social Innovation Review: Second curve #philanthropy: the gap between organized philanthropy and grassroots #activism: @iftf @mgorbis
  • Forbes: 2014 Special #Philanthropy Issue
  • Law Cite Sleuth: How To Torpedo Your Tax Exemption: The Fifth Way via @forpurposelaw
  • Victoria: Interesting Nonprofit Collaboration Infographic | GrantSpace

Nonprofit Radio: Managing Dissent on Your Boards

Angry businesswomen harassing their guilty business partner

The University of Virginia’s governing body found itself under some heat earlier this year when its proposal to silence board members from publicly voicing their dissent from board actions was made public. Ultimately, the proposed policy was abandoned and with good reason. But the broader issue of how to manage dissent on a board is worthy of discussion.

I’ll be on Nonprofit Radio discussing this issue with host Tony Martignetti on Friday, December 5, at 10 am ET / 1 pm PT. I hope you’ll join us for the live broadcast or catch us later on iTunes.

nonprofit radio


7 Tips:

  1. Promote a board culture that encourages independent critical thinking and open dissent.
  2. Recruit individuals with consideration of who will thrive in such a culture.
  3. Develop the practice of productive discussion of issues (if appropriate, start with a non-controversial topic and a facilitator).
  4. Provide opportunities for a dissenting board member to make arguments against the board decision (if there’s insufficient time at a meeting for such board member to state all her or his arguments, allow for a written statement to be circulated to the board).
  5. Record dissents in the board minutes (but do not necessarily name the dissenting board members if they do not ask to make their individual dissent part of the record).
  6. Do not disallow public dissent but make sure board members weigh their freedom of speech against their duties of loyalty and confidentiality and acting in the best interests of the organization.
  7. Board members who dissent in public about a particular board decision or organizational direction should qualify such dissent by stating that it is their own viewpoint and, if true, that the board decision was made following proper procedures.



University of Virginia shouldn’t limit public dissent between board members - The Washington Post: The Post’s View

Proposal to quash dissent on University of Virginia’s governing board is abandoned – The Washington Post

Why Board Members Need to Dissent – The Center for Association Leadership

What to Do When You Really, Really Disagree with a Board Decision – Blue Avocado

Carver Policy Governance Model FAQs including about speaking with one voice when members disagree (see Qs 7-9)

Why we shouldn’t always get along – BBC Capital




Giving Tuesday: Legal Tips

Giving Tuesday philanthropy day message.

Here are a few quick legal tips for Giving Tuesday:

  1. If you intend to take a charitable contribution deduction, make sure you are giving to a qualified 501(c)(3) organization. You can check out the organization on the IRS Exempt Organizations Select Check. Limit search to organizations that are eligible to receive tax-deductible charitable contributions.
  2. If you want to learn more about the organization before making a contribution, consider reviewing its website along with its Form 990 annual information returns on Guidestar. You may also find the following resource helpful – Evaluating Charities Not Currently Rated by Charity Navigator – but we hope you’ll prioritize impact over overhead ratios (see Overhead Myth: Thoughts from a Nonprofit Attorney).
  3. If you are solicited by a commercial fundraiser, make sure the commercial fundraiser is properly registered where registration is required (e.g., California) and find out what percentage of your contribution will go to the charity vs. the fundraiser.
  4. If you want to restrict your contribution to a specific program or region, make sure you communicate that restriction in writing at the same time as making the contribution.
  5. If you want your contribution to go to a foreign charitable organization (NGO), note that if you make a contribution directly to the NGO, the contribution will not qualify for a charitable contribution deduction. However, if you make a contribution to a U.S. charity that exercises its own discretion and control to regrant your contribution to the NGO, the contribution may qualify for the deduction so long as you don’t explicitly direct that the contribution be regranted to the NGO. It may be appropriate to restrict the contribution to advancing the purposes of the NGO in that particular foreign country. See What is an American “Friends of” Organization? by Ellis Carter on the Charity Lawyer Blog.
  6. If you make a charitable contribution, make sure you have sufficient documentation to support taking a charitable contribution deduction. For contributions of $250 or more, it’s the donor’s legal obligation to obtain a written acknowledgement (not the charity’s legal obligation to provide one) with the required information.

Nonprofit Tweets of the Week – November 27, 2014

Thanksgiving in the palm of your hand
The truest indication of gratitude is to return what you are grateful for. -Richard Paul Evans

We have so much to be thankful for. But Thanksgiving also reminds us of the courageous efforts of those who worked and fought to give us so many of those things for which we are grateful and often take for granted. Let’s honor and build on their work today and everyday.

Have a listen to Meghan Trainor perform New Thanksgiving Classic Songs while perusing our curated nonprofit tweets of the week:

  • ColorOfChange: A reminder from @ColorOfChange that #MikeBrown and all #BlackYouthMatter.
  • John Lewis: I know this hard. I know this is difficult. Do not succumb to the temptations of violence. There is a more powerful way. #FergusonDecision
  • TIME: “Why Ferguson should matter to Asian-Americans”
  • Gene: Dep’t of Justice: 182,000 charities in CA operating without proper registration – what happens if they’re shut down? JD Supra [Ed. See our post on the proposed regs that may signal the AG’s initiative to do this and hold board members personally liable if those charities continue operating.]
  • Gene: Preventing and Investigating Fraud, Embezzlement, and Charitable Asset Diversion: What’s A Nonprofit Board To Do? Public Counsel
  • CEP: Seven Trends in Philanthropy to Be Thankful For via @InsidePhilanthr
  • Alliance Magazine: Be Afraid: The Five Scariest Trends in Philanthropy @InsidePhilanthr
  • Independent Sector: Great editorial by IS board member Sonya Campion in @seattletimes. Echoing sentiments from @Diaviv speech at #ISConf
  • AFJ Bolder Advocacy: 5 lessons for #nonprofit orgs from the 2014 election
  • BDO Nonprofit: Don’t miss these 10 nonprofit employment mistakes from @NonProfitTImes
  • Gene: The commandments of Economics vs the commandments of the Earth | Nonprofit Quarterly – #socent



AAPI Capacity Building and Grant Seeking Event

White House Initiative on AAPI

Last week, I had the privilege of attending an event hosted by the White House Initiative on Asian Americans and Pacific Islanders, Region 9 Interagency Working Group. The central purpose of the Initiative is to increase AAPI community access to federal resources. This event focused on best practices and strategies for finding and applying for grants. Here are some highlights:

  • Leafa Taumoepeau, from Taulama for Tongans, stressed the importance of bridging the gap in understanding between a funding source and the target community. Without cultural appreciation and acknowledgement of how a community may be best served, there is a greater risk that money may be spent on activities that miss the mark.
  • Chic Dabby, from the Asian Pacific Institute on Gender-Based Violence, noted the unfortunate emphasis on what we don’t want in our communities, versus what we do. As an example, she suggested we transform the dialogue from “ridding our communities of violence against women,” and instead, discuss how we may implement a gender democracy.
  • The panelists offered a number of helpful approaches to applying for various funding opportunities.  When writing a grant proposal, starting with a budget, as opposed to brainstorming potential activities, is key. Creating a budget as an initial step helps to demonstrate your actual capacity, inform program planning, and eliminate over-promising.
  • Whether a grant proposal is accepted or rejected, organizations should request comments from the grant reviewer who worked with their application. The most informative tool in applying for grants is determining which aspects of an organization’s application were effective, and which may be improved upon.

While applying for and securing funding is imperative for many charitable organizations, remaining anchored to the organization’s mission and vision is equally important. Organizations should apply for grants that are consistent with their exempt purposes and core values and be careful not to chase funds by ​straying from ​such purposes and values simply to appease grant makers. Lastly, founders of a new charitable project thinking of forming a nonprofit should carefully assess their funding strategy prior to formation. Funding is almost never a guarantee, and founders should take reasonable steps to assure that charitable funds do not go to waste for a lack of planning.


2014 Western Conference on Tax-Exempt Organizations

université de UCLA, university of california los angeles

Erin and I attended the 18th Annual Western Conference on Tax-Exempt Organizations (WCTEO) co-sponsored by Loyola Law School and the UCLA School of Law, Lowell Milken Institute for Business Law and Policy on November 20 and 21. Here are highlights of some of the great sessions:

Washington Update. Ruth Madrigal, U.S. Treasury, walked us through the past year’a accomplishments and the current year’s priority guidance plan, which was updated earlier this month. Regarding the current year’s plan, of particular note: proposed regulations under §501(c) relating to political campaign intervention, additional guidance on §509(a)(3) supporting organizations, final regulations under §§4942 and 4945 on reliance standards for making good faith determinations (see proposed regs), and final regulations under §4944 on program-related investments and other related guidance (see proposed regs). Tammy Ripperda, Internal Revenue Services – Exempt Organizations, emphasized what she said were excellent improvements in internal processes and customer service since May 2013 controversy. She noted in particular the new Form 1023-EZ, which has an estimated 90 days response time (and anecdotally, we are hearing has closer to a 2-3 week response time to date). While noting some controversy about the Form 1023-EZ, she defended its development and use, stating that, statistically, small nonprofits are historically compliant. She also mentioned that a sample of 1023-EZ applications would be subject to additional questions in a pre-determination process. And there would also be a post-determination process checking up on some of the 1023-EZ applicants). Finally, Ripperda identified the 5 key focus areas of the Exempt Organizations Unit regarding compliance: (1) exemption issues; (2) protection of assets (including diversions); (3). tax (UBIT and employment); (4) international activities (terrorist, FBAR filings); and (5) emerging issues.

Mergers, Acquisitions, Dissolution and Alliances of Exempt Organizations. Attorneys Arthur Rieman and Lisa A. Runquist walked us through a hypothetical involving a nonprofit considering various options for its future:

  • Creating a new revenue-generating program will first require that the board make sure that the program is consistent with its exempt purposes. While it may be possible to expand the organization’s exempt purposes by amending the articles of incorporation, the organization must make sure that the “investment” of charitable assets to build the program doesn’t violate charitable trust principles (i.e., you can’t use funds raised in support of the old mission to pursue an unrelated new part of the mission).
  • Creating a nonprofit joint venture with a for-profit requires analysis of whether the joint venture is furthering the exempt purposes of the nonprofit, whether the joint venture is going to be a nonprofit or for-profit, and what type of control mechanism is required to protect the nonprofit’s interest. If the nonprofit joint venture is unrelated to the nonprofit’s exempt purpose, the nonprofit must also consider whether its investment in the joint venture is consistent with prudent investment requirements. Additionally, the nonprofit must consider any disqualified person and interested person conflict of interest, self-dealing, and excess benefit transaction issues and how to manage them in compliance with applicable laws.
  • Converting a nonprofit to a for-profit where board members of the nonprofit are going to become the owners of the for-profit will require care to ensure that self-dealing, excess benefit transaction, and private inurement rules are not violated. Fair market value must be paid by the owners (get an independent appraisal) and such monies should be distributed to another nonprofit with a consistent exempt purpose.
  • Selling the assets to the nonprofit’s chair of the board may be a possibility if done correctly (including getting approval of the majority of the board without counting the vote of any interested directors) and ensuring fair market value is paid to the nonprofit. Valuations are tricky and the nonprofit will want to make sure they are truly independent and that the valuation reflects the actual transaction. If, for example, post-valuation, the buyer states they are unwilling to take on any of the liabilities that were included in the valuation, the nonprofit may need a new valuation.
  • Dissolving the nonprofit will require certain steps be taken, including obtaining a dissolution waiver of objections from the Attorney General. See General Guide for Dissolving A California Nonprofit Corporation. The nonprofit will need to determine what other nonprofit would be a desirable and acceptable recipient of its remaining assets among many other things.
  • Merging the nonprofit will require certain steps to be taken, and there may be additional steps necessary where the nonprofit is merging with a nonprofit in another state or the nonprofit is merging into a for-profit.

Advising Versus Earmarking. Attorneys Jennifer L. Franklin and Ingrid Mittermaier discussed the differences between “advising” and “earmarking” in various tax law contexts, including donor-advised funds (DAFs), fiscal sponsorships (Model C or pre-approved grant relationship), and “friends of” organizations affiliated with foreign charities. The emphasis was on the sponsoring organization, fiscal sponsor, and friends of organization maintaining discretion and control of any charitable contributions including the legal authority to grant such contributions to a grantee other than the one identified as the contemplated ultimate charitable recipient. Jennifer and Ingrid also discussed the issues related to common board members when differentiating between advising and earmarking and the issues related to a ultimate grantee that was not a U.S. public charity.

Hosted Lunch. Former Chief of Staff of the Joint Committee on Taxation, George K. Yin, provided a scathing criticism of the Form 1023-EZ, calling it essentially a self-certifying method of getting 501(c)(3) status.

Charitable Diversions (and Not the Good Kind): Dealing with Embezzlement. Attorneys Ofer Lion and Suzanne Ross McDowell discussed the too-common problem of charitable diversions (embezzlement) and introduced a 12-step response framework: internal nondisclosure agreements for board members, internal investigations (with thoughtful determination of who conducts the investigation), public relations plans, insurance, indemnification requirements, board liability issues, employee release / settlement agreements, governmental notice requirements (local, AG, IRS), tax-exempt status issues, succession plans.

Current Developments. Attorney Bruce Hopkins walked us through his comprehensive list of annual developments in laws affecting nonprofits. Among the trends and rulings Hopkins noted: (1) an exempt activity focused on “consulting” is very likely to raise commerciality concerns; (2) an organization was denied tax exemption as public charity because a substantial portion of its activities, in pursuit of social justice, could only be accomplished by legislative action (PLR 201408030); (3) an organization was denied exemption in part because its activities were unduly integrated with its affiliated social welfare organization (PLR 201408030); and (4) the IRS, in course of processing an exemption application, took into consideration remarks made by the applicant’s founder in social media, resulting in denial of the application (PLR 201417017).

Attorney General Update. Sonja Berndt, California Deputy Attorney General, provided a very helpful update of the AG’s regulation of charities. See an older version of the slide deck here. Charities operating in California should be very familiar with the AG’s regulations as there are transactions that may require giving notice to the AG or obtaining the AG’s approval and the AG is the state enforcement agency to ensure charities and their leaders are operating and taking actions appropriately. Berndt emphasized (1) the dangers of false reporting, which can result in individual liability for breach of fiduciary duty, aiding and abetting a fiduciary’s breach of fiduciary duty, and unfair business practice; and (2) common problems with executive compensation. She also listed the top 9 Ways to Get Investigated (which we’ll cover in a separate blog post). Sean Delany of the Lawyers Alliance for New York led us through the Nonprofit Revitalization Act and comparisons between New York and California laws in several key areas.

Social Enterprise Entities. Attorney David A. Levitt discussed the “hybrid” entities, including the benefit corporation, the flexible/social purpose corporation, the Delaware public benefit corporation, and the low-profit limited liability company. What the hybrid entities have in common: (1) they blend business purpose with social or charitable purpose; (2) their directors can and/or must take non-economic issues into considerations when making business decisions; and (3) they are taxed like other for-profit entities. He also cited part of the opinion in EBay vs. Newmark that served as in impetus for the hybrid social enterprise movement: “Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.” See Using New Hybrid Legal Forms.