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.

Operating with revoked exemption
What are the consequences, if any, for using a revoked tax exempt status? To whom in government should we report this illegal activity? --From the Website.

It would not be illegal to continue business activity merely because a tax-exempt status is revoked. There are millions of non-exempt entities conducting business every day.

If the federal tax exempt status has been revoked, the IRS will expect to receive a business tax return and may pursue the organization if it doesn’t receive one. Filing a Form 990 would probably trigger an investigation if exemption has been revoked. If the organization had a 501(c)(3) exemption and continues to seek contributions, it may be in violation of the Tax Code if it does not notify donors that the gifts are not deductible. It may also have a problem with the Attorney General if it misrepresents its status in seeking contributions.

If its state exempt status is based on the federal exemption, state taxing authorities would be interested in the revocation. States will probably receive notice from the IRS if an exemption is revoked, but local taxing authorities may not.

If the state revokes the exemption, the state Department of Revenue will be aware and will normally take appropriate action, but the word might not get to local taxing authorities automatically.

Removal of Directors
The president and another member of the Board of our nonprofit have started another organization that may be in direct competition with us. Neither disclosed their actions voluntarily. Is this cause for removal?
--From the Website.

Check the bylaws of your organization. Our standard form of bylaws provides that the Board may remove any director, with or without legal cause, so long as the director to be removed has notice of the meeting and an opportunity to be heard. (See Ready Reference Page: “Bylaws Function as Constitution of Nonprofit Corporations.”) This flexibility avoids a lot of questions about proper cause or any general rights to remove that may be provided by the state nonprofit corporation law. It is not clear from what you have said whether this conduct would amount to a legal cause for action seriously detrimental to the corporation or might be a usurpation of a corporate opportunity that might be a breach of fiduciary duty. If a sufficient majority of the Board is seriously disturbed and the two “offenders” are unable to satisfy you that their actions are not damaging to your organization or are unwilling to resign, you may want to amend your bylaws to give you the right to remove them if it is not otherwise clear.

Suing the Board
Can one member of the Board of a nonprofit bring litigation against the total Board? --From the Website.

This is a question of state law. It may depend on the issue involved in the litigation. A director may have the right to institute a “derivative” action on behalf of the corporation against some or all of the other directors in certain circumstances where the directors have arguably harmed the corporation and may have the right to sue individually if the damages have been suffered by the suing individual. There is no single yes-or-no answer to this question.

Have a question you would like to submit? Send it along.