This Ready Reference Page was published in 2011. Written by Carol Henn, former Executive Director of the Lehigh Valley Community Foundation.

In the city of Serenity, located about mid-point between the Shenandoah Valley and Silicon Valley, life was generally peaceful and pleasant.  The city had survived the downturn in relative prosperity, and it had no reason to think that it would not continue to flourish in the quiet composure reflected in its name.  It certainly could not imagine that it would be the place where a Great Truth would be revealed.

The changes began inauspiciously enough.  George Radnor, senior partner in Radnor Motors, came back to his office one morning after attending a meeting at the local Red Cross, where he served on the board of directors.  He remarked to his brother, Glenn, that serving on agency boards gave him a solid, deep down sense of satisfaction. His brother agreed, noting his own service on the local museum and symphony boards.

Soon, George convinced himself that the satisfactions and advantages of a volunteer board shouldn’t be confined to nonprofits alone.  If the Red Cross and the museum and the homeless shelter could have boards of directors, why not Radnor Motors?  A dinnertime conversation with his cousins, Liz Radnor, an attorney, and Rick Radnor, editor of the Daily Serenity, convinced him that he was onto something.  “We’ll get new ideas,” George said.  “Having a volunteer board of directors would be like having the Good Housekeeping Seal of Approval for the way we do business.” 
Soon, they were all genuinely excited about the idea of having their own boards of directors to lead them to new heights of visibility, prosperity and effectiveness.  Within a week, they had each recruited a splendid board of well known movers and shakers, distinguished doyennes, up-and-coming entrepreneurs, marketing VPs from local companies, and a few professors, being careful not to duplicate their choices among these exemplary citizens.

Over the course of the next few months, all of their boards met, elected officers, formed committees and set meeting schedules that seemed, to most of the Radnors, to be a bit more energetic than they had expected.  Appropriately, the bloom first began to come off the rose at Radnor Motors, where George Radnor had come up with the board idea in the first place. 

It began when the Sub-committee on Product came to George to tell him that his first problem was limited product line.  Add motorcycles, they said, and boats if possible.  Eventually, mopeds or bicycles would bring an additional demographic.  George tried to explain that the dealership had done very, very well with the automobiles it sold.  Short-sighted approach, they told him.  Transportation means more than cars, they said.  Better diversify now, even if it means borrowing to buy inventory. 

The marketing committee headed by Prof. Simmons reported next.  The name of the dealership is all wrong, he said.  Too staid and old fashioned; not modern or catchy.  George tried to explain that his father and uncle had begun the dealership 50 years ago, and it was now welcoming its third generation of the Radnor family into the business.  People had come to know and trust the Radnors.  Customers came from miles around, and many bought cars there because their parents and grandparents had dealt with the Radnors.  James Jeffers, vice president of marketing at the regional energy company, explained patiently to George that a name was more than a name and had to be kept “fresh.”  “Look at us,” he said. “We used to be Energy-Serenity, then EnSeCo, then EnCo, then Energize and now ElektrikOptionOne.  You need to change the name, change your image, on a regular schedule.  Like Lady Gaga.”  George was too embarrassed to ask who Lady Gaga was. 

When his board began to ask questions about the employees at Radnor Motors, George became defensive.  “We have a great team here,” he assured the board, “and they are responsible for our success.  From the sales staff to the service people, they’re all skilled, dedicated, and effective.  Many have been with Radnor for 20 years or more.” 

“But are they Rotarians?” asked Prof. Simmons.  “Your people have to be visible in the community.  They have to be the public embodiment of your image, of your marketing strategy.” 

“I need them be what they are—great mechanics, technicians, bookkeepers, sales people,” protested George, but by then the board had moved on to a discussion of trendy logo colors.

Over at the Daily Serenity, Rick Radnor was having his own problems.  His board, too, had formed committees and said it wanted to give Rick hands-on help.  He was expecting his board to endorse and applaud his idea for a seasonal sports insert featuring the local high school and college teams.  But the board’s first project was to re-arrange the sections of the newspaper, recommending that sports (“limited interest”) be placed behind the classifieds, and reducing the space for obituaries (“negative, negative, negative.”)  Muffy McGuire, president of the Serenity Society League, persuaded the board that social news deserved a much more prominent space, such as the first page of the second section, because all Serenity families would sooner or later be in those pages and they’d know most of the other people mentioned in that section.  They can get world news every night on TV or on Twitter, she reasoned, but only the Daily Serenity can tell them that the Harrisons were in Hawaii for their 25th anniversary.  That made sense to the board, although it made no sense to Rick Radnor.  And the board made it clear that it wasn’t suggesting, it was instructing. 

“Don’t be afraid of change, my boy,” said Dr. Chimorra, a respected proctologist.  “When I chaired the United Way campaign last year I re-organized the whole thing.  The last chairman had structured it according to geography – towns, boroughs, etc., but I told them that we had to do it according to business type – retailers, manufacturers, professionals, healthcare, education, and so on.  I think it would have worked well if they’d given it a few years’ run.  But I understand that this year’s chairman has asked the staff to re-arrange all the accounts according to size – large companies, mid-size employers, etc.” 

The board at Liz Radnor’s law office had formed only two committees, business development and social justice.  While she had done her share of pro bono work and was involved with several nonprofits, Liz had never intended to carve out a specialty.  Hers was a basic, general practice, and she enjoyed the variety of clients and issues with which she dealt.  The board told her that her personal investments should be moved to social conscience funds.  Immediately.

Edwin Graves, retired chairman of Graves Knitting Mills, was the first person to tell Liz that her business needed more of an edge.  “Billboards that make it clear that you’ll find deadbeat dads, get millions for accident victims, and get results.  Maybe a graphic with a three-dimensional fist coming out of the billboard,” mused Graves.  Liz reminded them that her practice was largely estate planning and real estate, with a few divorces and DUIs thrown in.  “Hardly cutting edge,” taunted Graves.  Just as Liz was starting to wonder what kind of billboards she would put up, she reverted to the more basic question of  how she had found herself in her own conference room taking instruction from people who knew nothing about the law, her clients, or her.

The next two years were rough on the assorted Radnors.  They discovered that, once formed, boards of directors took on a life of their own.  They formed nominating committees and drew up by-laws, assuring their tenures and ongoing influence.

But sales at Radnor Motors dropped instead of increasing.  Circulation of the Daily Serenity plummeted after the board ordered the removal of the Sunday comics (“sexist, violent, and political”).  The United Way staff spent more than 1,000 hours changing campaign records and data from geographic to industry type, without increasing contributions.  Liz was blessedly too busy to really alter her practice or move her investments but she was constantly being compared to every lawyer her board members had seen on TV. 

Just before he was about to order the motorcycles, George Radnor called a friend with an auto dealership in Raleigh.  He wanted to ask if his friend had added anything to his inventory beyond cars.  When he explained his board’s recommendations, his friend asked, in measured tones, “Do you mean you asked a group of people who know almost nothing about your business to come in and tell you how to run it and give you instructions to follow?  And you have to keep doing all of your work, accommodate their changes, and report to them at the same time?”  Though he hated to hear it in those words, George had to admit that, yes, that’s exactly what he had done.

“But George,” said his friend, “only nonprofits are crazy enough to do that.”

A Great Truth of Governance 
Nonprofit Boards of Directors…. 
…assure the trustworthy management of resources – human, financial and program 
…support the organization and help to gather support from others 
…define mission and policies to fulfill mission
...and ‘do no harm.’

—Carol Henn
Executive Director
Lehigh Valley Community Foundation
Allentown, PA

By Cheshire Law Group

The Pennsylvania Legislature has amended and updated the state’s Nonprofit Corporation Law to clarify standards of fiduciary duty for officers and directors, create a new annual filing requirement with the possibility of administrative dissolution for noncompliance, and generally update and clarify the rules for nonprofit operations.  The Amendments are included in a general overhaul of the Associations Code (Title 15 of Pennsylvania Consolidated Statutes) covering many types of business entities.  (Act 122 of 2022, stemming from H.B. 2057)

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The explosive growth of Damar Hamlin’s charity following the Buffalo Bills safety’s cardiac arrest and resuscitation in the Bills-Bengals Monday Night Football game January 2 provides a vivid example of the intricate, inadequate, patchwork and archaic nature of charity regulation in the U.S. 

Hamlin’s organization, the Chasing M’s Foundation, which before the injury was seeking $2500 in crowdfunding to pay for toys for kids in his mother’s day care center, raised more than $8.5 million in contributions from more than 200,000 donors in the week following his injury.  But it is not now federally recognized as a “charity,” which means that the contributions are not tax deductible.  And although it has solicited for charitable contributions, it has not registered to solicit charitable contributions in its home state of Pennsylvania or apparently in any of the other 38 states and the District of Columbia that require registration prior to solicitation of charitable contributions within their jurisdictions

The legal issues and the possibilities of righting the situation have been comprehensively described in two articles by Daniel Libit, a reporter for Sportico, an online newsletter covering the business of sports, in articles published Thursday and Saturday after the injury.

The Chasing M’s Foundation is a Pennsylvania nonprofit corporation formed in May, 2020 to provide scholarships and promote education for high school and college athletes.  (The M in the name stands for “millions” according to the Sportico article.) Although it is a nonprofit corporation, it is not recognized as a charity by the Internal Revenue Service.  (See Ready Reference Page: “What Do We Mean When We Say ‘Nonprofit’?”)

According to the language of the articles of incorporation that was read to me, the articles of incorporation do not include the type of “magic language” requiring exclusively charitable activity which is required by the IRS to recognize charitable exempt status under section 501(c)(3) of the Tax Code. (See Ready Reference Page: “Articles of Incorporation Establish Basic Form of Nonprofit Corporations”)

Retroactive Exemption

An organization seeking recognition of charitable exemption by filing Form 1023 can get such recognition retroactively to the date of its creation if it files its application within 27 months of the end of the month in which the organization was legally formed.  Although that date has passed for the Chasing M’s Foundation, the IRS has the authority to waive the requirement if the organization had reasonable cause for the delay.

Interestingly, an organization claiming to be a public charity that anticipates annual gross revenues of $5000 or less is not required to file an application for recognition of exemption. (This is provided in section 508(c)(1)(B) of the Tax Code, the same section 508 that authorizes churches not to file for recognition of exemption in 501(c)(1)(A).) The foundation would be required to file an annual Form 990-N to report its continued existence, however, or it would lose the exemption it claimed after a failure to file for three years.  The IRS is known to have rejected Form 990-N from organizations for which it has no recognition of exemption on file.

The original articles of incorporation state that it is a non-member corporation and name Hamlin as the sole incorporator.  No one was listed as a member of the board of directors (which is permitted but not required under Pennsylvania law), and the Sportico reporting says that a board will be formed in order to proceed with the work of the foundation.  Presumably the charitable purposes will be expanded in view of the amount of money available to it.   

Even if Chasing M’s Foundation does not claim the less than $5000 revenue reason for the delay, it can claim simply that it was a small, volunteer, unsophisticated organization that didn’t realize it should have filed.  The IRS routinely withholds recognition from organizations whose governing documents do not meet the legal requirements and grants recognition retroactively when the documents are satisfactorily amended.  It seems unlikely that the IRS would deny a retroactive recognition in this situation.

Income Tax Deductibility

The principal benefit of retroactive exemption would be to provide deductibility for the contributors, although many of them would not be in position to take advantage of the deduction even if it becomes available.  Reportedly more than 90% of taxpayers now utilize the standard deduction and get no separate economic benefit for deducting charitable contribution.  Congress was asked to extend the $300 deduction that had been available to all taxpayers during 2020 and 2021 because of Covid, but did not extend the benefit in the omnibus spending bill recently passed for the 2023 fiscal year.  It is possible, though probably unlikely, that Congress will reinstate some form of “universal deduction” for 2022 and 2023 at some later time.

For those who do itemize and want to claim the deduction, those who claim $250 or more will require a contemporaneous written acknowledgment that says whether any goods or services were received in return for the gift.  (See Ready Reference Page: “IRS Requires Substantiation of Contributions”).  Since the GoFundMe platform on which the contributions were made apparently did not solicit the contributions as tax-deductible charitable contributions, the receipts that were given may not satisfy the technical requirements.

The Tax Code has another requirement for organizations that solicit contributions that are not tax-deductible.  Section 6113 of the Tax Code requires a specific notification of the non-deductibility as charitable contributions if the total of such contributions to the organization normally exceeds $100,000 in any year.  Will Chasing M’s be required to give that notice to all of its contributors?

Charitable Solicitation Registration

An organization solicitating money for a charitable purpose does not have to be recognized as a charitable organization to trigger the registration requirement.  Registration is required by anyone soliciting in whole or in part for a charitable purpose, which Pennsylvania law defines to include “any benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic or other eleemosynary objective.”  The requirement to register is not dependent on whether the solicitor is a recognized charity, or whether the gifts would be deductible for federal tax purposes.  There are many crowd fundraisers to provide funds to help specific individuals who face difficult times, even though, as gifts for specific individuals, they would not be deductible for federal income tax purposes.

There is an exception to the registration requirement in Pennsylvania, and in many other states, where a solicitor has received only a small amount of contributions.  In Pennsylvania, registration is not required if less than $25,000 is received and if no one is compensated for conducting such solicitations.  Once an organization receives more than that amount, it must register within 30 days after the contributions are received.

Pennsylvania has a relatively active Attorney General and is used to dealing with solicitations by unregistered solicitors.  It is also used to dealing with crowd funding for non-deductible purposes.  The AG’s primary effort in such cases is to assure that the funds raised are used for the purposes for which they are solicited and not for the personal benefit of the solicitors. 

The Pennsylvania Deputy Attorney General for charities told Sportico that the GoFundMe solicitation for Chasing M’s is subject to the provisions of the state’s charitable solicitation registration act and that the office was aware of the situation.  The state attorney general also has separate general jurisdiction to oversee the activities of any nonprofit corporation, whether charitable or not, and whether it is soliciting charitable contributions or not.  According to Sportico, the Hamlin family has assured the public that none of the funds will be used for Hamlin’s personal care or benefit.

Some states have taken the position that merely having a “donate now” button on a website constitutes charitable solicitation within their jurisdiction and have required registration whether or not anyone from their state actually gives to the organization.  Some states are more willing than others to waive fines and penalties for organizations that register before being “caught” by states in which they are not registered. 

Assuming that Chasing M’s seeks to register belatedly in all of the registration states, will the registration offices seek to impose penalties?  Probably most states will not be so hard-hearted, but it will require a state-by-state series of requests.

To show a little more of the regulatory conundrum, the GoFundMe platform on which Chasing M’s sought to raise the money was supposed to be regulated under California’s new crowdfunding regulation statute as of January 1, 2023.  (See Nonprofit Issues®, Vol. XXXI, No.3)  California has postponed the effective date of the statute for a year, however, because it can’t agree on its proposed regulations.  How soon California gets it together to exercise its jurisdiction, and how long it takes until other states follow suit remains to be seen.

An Alternative Path

In its follow-up reporting, Sportico reports that Chasing M’s Foundation has “partnered” with The Giving Back Fund, a national charity “umbrella organization,” to “facilitate all of the contributions, activities and allocations from Jan 2, 2023, and going forward.”

Chasing M’s spokesperson is quoted as saying that “the family is now advancing the process to complete the nonprofit status for the original entity.”  The nonprofit status was completed when the corporation was formed.  The charitable status has not been recognized.

It clearly makes sense to work with a nationally recognized charity which is also nationally registered to seek charitable contributions where required and experienced in the legal and administrative requirements for large-scale charitable activities.  Giving Back Fund and GoFundMe were reportedly working to move the campaign to new charitable auspices and to a new processing portal.  How much of this transfer can be accomplished retroactively, and how much Chasing M’s will still have to do to overcome its earlier issues is not entirely clear at the moment.

YOU NEED TO KNOW
While this is an extraordinarily unusual mess, it does suggest the importance of thinking about how to structure a charitable activity before it starts, and why it is important to consider what might be required if it becomes successful beyond the founder’s wildest dreams.  For a grantmaking activity, it often suggests opening a donor advised fund at an experienced community foundation or one of the commercial donor advised fund groups. The DAF sponsors can pay for the legal and tax work while charging generally small fees for administration of the fund.  As easy as it may seem to an outsider, running a charitable organization delivering direct charitable services is not an easy thing to do.

In addition to protecting against embarrassment and loss of contributions, policies can provide protection against possible excess benefits tax violations. For charities dependent upon public contributions for their success, a conflict of interest scandal can be devastating. It can erode public confidence in their organization and jeopardize the entire program.

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Minutes of nonprofit Board meetings can vary widely in format, and in the level of detail they capture. In some regards, this is fine; there is no one correct style. Each Board should adopt a style of record-keeping that suits its own particular needs.

However, minutes serve several vital managerial and legal functions. It’s important to understand those functions, in order to understand the types of material that should be recorded.

Minutes are a Board’s collective journal. They provide all members of the Board, including brand new ones, with a common baseline of information about what the Board has seen and done. They are a critical tool for efficient, continuing, sound governance.

Minutes are also the primary record of a corporation’s actions. Approvals of transactions, adoption of policies in compliance with regulatory requirements, and allocations of corporate assets are just a few examples of corporate actions that various parties inside and outside of the organization may need to see recorded in writing.

Finally, minutes are a vital tool when disputes arise as to a Board’s actions or responsibilities.

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With nonprofits gearing up for the elections, it is important to know what they can — and cannot — do with respect to the elections.  Section 501(c)(3) charities can lose their tax-exemption if they participate in an election indicating support for or opposition to any candidate for public office at any level of government. 

Section 501(c)(4) social welfare organizations, often formed for the purpose of electioneering, (c)(5) trade unions, and (c)(6) trade associations do not face such limitations.  These and other types of nonprofits (See Ready Reference Page: “What Do We Mean When We Say Nonprofit?”) will not lose their exemption so long as electioneering is not their primary activity.

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Increasing board diversity is as imperative for nonprofit organizations as it is for for-profit corporations. The biggest for-profits have faced pressures to diversify their boards from major shareholders, advocacy groups, some government entities, and the media, based on years of research and reporting on the benefits of diversity.

The Internal Revenue Service has published final Regulations to determine whether sponsorship payments for charity fund raisers are considered charitable contributions or unrelated, and possibly taxable, income.

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Donor advised funds (“DAFs”) are often considered the small donor’s private foundation. They may be more quickly established, are often less expensively administered, and are more tax advantageous.

But for donors who want absolute control over administration, investment policies, and grantmaking -- and who want to be paid for doing it -- a private foundation may be the only answer. The charitable reform provisions of the Pension Protection Act of 2006 have made it more likely that donors seeking control, and particularly those seeking compensation, will opt for a private foundation.

This Ready Reference Page contains a comprehensive list of comparisons between a donor advised fund and a private foundation so that potential donors can determine which may be more appropriate in their situation.

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