Nonprofit Law YOU Want to Know

We regularly feature answers to questions from readers in our “To the Point” column. The full list can be viewed here. Here are some of the questions recently received from readers.

Influencing Supreme Court Selection
Would our efforts to influence the votes of U.S. Senators on the confirmation of a Supreme Court Justice be considered lobbying?

Yes. The IRS has publicly stated that attempts to influence the outcome of Senate advise and consent on the nomination of a Supreme Court justice is considered lobbying because it is an attempt to influence a legislative action by the Senate. The Treasury Regulations specifically cite actions to influence the Senate’s approval of foreign treaties as the type of legislative action that is included within the definition of “legislation.”

The good news is that the IRS has also ruled that the activity is not electioneering, and not an attempt to influence the election of a candidate for public office. A charity may lobby so long as it is not a substantial part of its activities, but may not participate in an election campaign. (See Ready Reference Pages on Lobbying and Electioneering.)

Charging the homeless
I have heard of homeless shelters that say they are 501(c)(3) charging their occupants to stay there. Is that legal? In my opinion, they are just “squeezing water from a rock.”

Section 501(c)(3) charities can charge for their services, as hospitals, schools, museums and other charitable organizations regularly do. The tax issue is whether the fees generate unrelated business income. (See Ready Reference Pages: “Nonprofits Worry About UBIT.”) There may be some public relations issues about charging those who have the most difficulty paying, but there is no general prohibition against doing so.

Foreign officers
Can a non-U.S. citizen hold office in a 501(c)(3) organization?

There is no federal tax prohibition against a foreign citizen holding office. You would have to look at state nonprofit corporation law to see whether there would be a state law prohibition on a foreign citizen serving as an officer of a nonprofit corporation, but I am not aware of any such restrictions.

Discrimination in membership
Can a 501(c)(3) organization deny membership to someone based on gender or race?

The U.S. Supreme Court decided in the Bob Jones University case in 1983 that an organization that adversely discriminates on the basis of race cannot be considered charitable. There is no corollary decision about discrimination on the basis of gender, and, indeed, many private single sex educational institutions continue to retain their exempt status and thrive in their programs. Gender discrimination may violate public accommodations laws, however, if the organization is deemed to be a public accommodation under the applicable statute. (See “Court Orders Eagles to Consider Women,” November 1-15, 2005)

Private foundation funding
If my nonprofit organization anticipates that most of its funds will come from private foundations, does this mean that my organization will be classified as a private foundation itself?

Most charities qualify for public charity status (rather than private foundation status) because of their broad base of support from the public through gifts, grants and contributions or through gifts and fees for services. Private foundation gifts are subject to limits in the extent to which they can be counted toward public support. If, however, you have enough different donors, you are likely to qualify as a public charity. (See Ready Reference Pages: “Calculating Public Support”). The restructured Pew Charitable Trusts was able to qualify with a commitment of funding from only seven organizations. (See: “Pew Trusts to Convert to Public Charity.”)

Paying Board member for services
Can I pay a Board member who is doing research for our charitable library?

Yes. Unless you have a conflict of interest policy that completely prohibits payment to directors or related persons for services rendered or some other peculiar provision in your governing instruments, yo may pay the director. The general rule is that nonprofit organizations may pay directors reasonable compensation for services rendered. Since the director is by definition a “disqualified person,” assuming you are a public charity, you will want to be sure that the compensation is reasonable and even though it may be a small amount you may want to proceed pursuant to the “safe harbor” procedures under the excess benefit transaction rules. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”)

Reviving the dead
Our small community is working to establish an economic development group to assist in our town’s future growth. A group existed several years ago, but was administratively dissolved by the state and its assets were distributed. Should we try to rescind the dissolution or just establish a new organization?

Even if you could reestablish the old organization, you would still have potentially difficult questions about who now serves on the board, potential liabilities from the previous operations, its tax status and other issues arising from the hiatus. It seems to me a whole lot easier to start anew with the people and the structure you want for the current situation.

Organizational certifications
Is there any type of certification by the states for educational nonprofit organizations and do they have to stay in compliance with a yearly update?

There are obviously a variety of accreditation programs for various types of educational institutions which are required to issue degrees or provide elementary or secondary school education. If your organization is not a “school,” however, I am not aware of any governmentally required certifications. (You may be thinking of charitable solicitation registration, which would require annual registration.)

Maryland Nonprofits, the Maryland state association of nonprofit organizations, has developed a set of “Standards of Excellence,” however, and, along with seven other state associations, offers to certify nonprofits that fulfill the requirements. Certification lasts for three years. The other organizations offering the certification are in Georgia, Illinois, Idaho, Louisiana, North Carolina, Ohio, and Pennsylvania.

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