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May director of social club serve on foundation’s board?

Your Legal Questions Answered

May director of social club serve on foundation’s board?

I am on the board of a new foundation that has applied for, but not yet received, approval of charitable tax-exempt status from the IRS. The Foundation's mission is to preserve the historic buildings, grounds, archives and art collection of an historic 501(c)(7) social club that was founded in the 1800s. Can a board member of the club also be an officer and director of the foundation, or is that a conflict of interest?

This is not an either/or question.  A person with a conflict of interest may nevertheless serve on the board of an organization.  The individual just has to manage the conflict. 

With a foundation created to preserve the facilities of the club, the club is likely to want to control the foundation and put its own representatives on the foundation board. The club would (should) be reluctant to raise money for an “independent” foundation that could, when it got sufficient assets to be attractive, split off and decide to use the funds to preserve some other club or pursue some other purpose. There are a lot of related entities on whose boards there is significant overlap and theoretical conflict, particularly when they are formed for related purposes.

The key thing to remember is that while serving on the foundation board, the individual’s fiduciary duty is to the foundation and not to the club. And while serving on the club board, the fiduciary duty is to the club and not the foundation. It isn’t often in a situation like this that there is a serious direct and irreconcilable conflict, but it can happen.

The IRS is inherently skeptical of arrangements like this, where charitable money will be used to promote the private benefits of the social club members. There is a lot less concern if both of the entities are charities. If the IRS grants charitable exemption to the foundation in this situation, it will undoubtedly want commitments that the charitable funds will be used for things that benefit the general public, not just the club members. It will want funds spent to preserve the facades of the buildings visible to all, not to fix up the pool room or the squash court seen and used only by the members. The archives and the art collection will have to be open to the public at least some of the time, perhaps even upon request, and not just once or twice a year when the members can plan to stay away.

A lot of clubs have developed charitable foundations to help preserve their historic facilities and artifacts. The directors of the foundation have a fiduciary duty to protect and preserve the charitable exemption of the foundation and pursue its more public purposes, even though some of the requirements may be nettlesome to their interests as members of the club. It is possible, and not infrequent, for an individual to serve on both boards. They just have to be careful and understand which hat they are wearing when taking action.

Tuesday, February 16, 2021

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