LEGAL ISSUES FOR APHA AFFILIATES– An Introduction for the Presidents-Elect May 23, 2013 American Public Health Association Jacqueline A. Henson, Esq. jahenson@ober.com (202) 326-5040 www.ober.com
SOURCES OF APPLICABLE LAW STATE NONPROFIT CORPORATE LAW (GOVERNANCE) FEDERAL TAX LAW (INTERNAL REVENUE CODE) OTHER www.ober.com
HIERARCHY OF STATE LAW AUTHORITIES STATE NONPROFIT CORPORATION LAW ARTICLES OF INCORPORATION CONSTITUTION BYLAWS BOARD RESOLUTIONS STANDING RULES POLICIES AND PROCEDURES www.ober.com
STATE NONPROFIT LAW: FIDUCIARY DUTIES By virtue of state statute or the common law, officers and directors are subject to two primary, fiduciary obligations, a duty of care and a duty of loyalty, as they carry out their responsibilities to the nonprofit organization. www.ober.com
THE DUTY OF CARE (Common Law) The duty of care requires the director and officer to act in a reasonable and informed way in the corporate decision-making process, and in the management and oversight of the charitable organization. A director and officer must discharge his or her duties in good faith, with the care that an ordinarily prudent person in a like position would reasonably believe appropriate under the circumstances. www.ober.com
ATTRIBUTES OF THE DUTY OF CARE FOR DIRECTORS Attend meetings Be informed and act accordingly Exercise independent judgment on behalf of the whole, not a segment of the whole Vote (each director is treated as an equal, enjoys an equal vote in the corporation’s direction) www.ober.com
THE DUTY OF LOYALTY (Common Law) The duty of loyalty requires directors and officers to exercise their powers in good faith and in the best interests of the corporation, rather than in their own interests or the interests of another entity or person. In other words, a director or an officer shall not use a corporate position for individual personal advantage. www.ober.com
CONFLICTS OF INTEREST Directors and officers of charitable corporations often have interests that conflict with those of the charity. The duty of loyalty requires that a director and an officer be aware of the potential for such conflicts and act with candor and care in dealing with such situations. It is the manner in which the director, the officer and the board deal with a disclosed or hidden conflict that determines the propriety of the transaction. www.ober.com
CONFLICT OF INTEREST A conflict of interest is present whenever a director or an officer has a material personal interest in a proposed contract or transaction to which the charitable corporation may be a party. www.ober.com
HOW TO HANDLE A CONFLICT OF INTEREST 1. Disclose the conflict to the proper persons. 2. Refrain from participating in the decision- making process (Recusal). 3. Document the Disclosure, Recusal and Voting Process and Decision. 4. Comparables APHA Conflict of Interest Policy www.ober.com
DUTY OF LOYALTY: CONFIDENTIALITY A director or an officer should not, in the regular course of business, disclose information about the charitable corporation’s activities unless they are already known by the public or are of public record. In the normal course of business, a director or an officer should treat as confidential all matters involving the charitable corporation unless there has been general public disclosure or unless the information is a matter of public record or common knowledge. www.ober.com
DUTY OF LOYALTY: CONFIDENTIALITY The individual director or officer is not a spokesperson for the charitable corporation. Disclosure to the public of corporate activity should be made only through the charitable corporation’s designated or authorized spokesperson. www.ober.com
THE ROLE OF THE BOARD OF DIRECTORS The Board has the ultimate responsibility and accountability for the management of the charitable corporation. All authority resides with the Board and is delegated by the Board. www.ober.com
OTHER FEATURES OF STATE CORPORATE LAW The Conduct of Board Meetings (notice, quorum, voting, unanimous consents) The Conduct of Member Meetings (notice, quorum, voting, removal rights) Responsibilities and Authority of Officers Indemnification of Directors , Officers and Others Rights of Members Extraordinary Actions (dissolution, merger, sale of all or substantially all assets, amendment of the Articles of Incorporation) Annual Reporting to the State www.ober.com
FEDERAL LAW: THE INTERNAL REVENUE CODE OF 1986 Governs the requirements for obtaining and maintaining federal income tax exemption for certain organizations, including charitable organizations Benefits of Section 501(c)(3) status: Federal income tax exemption, ability to attract tax deductible charitable donations, ability to receive grants, possible exemption from state and local income, franchise, sales, use and property taxes IRS must “recognize” the organization as a charitable organization (through an application process), as evidenced by a determination letter issued by the IRS to the charitable organization www.ober.com
FEDERAL REQUIREMENTS 1. Requirements for Maintaining Section 501(c)(3) Status 2. Reporting: The IRS Form 990 3. Other IRS Reporting Requirements www.ober.com
Section 501(c)(3) of the Internal Revenue Code 3. Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes …, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. www.ober.com
REQUIREMENTS TO MAINTAIN SECTION 501(c)(3) STATUS 1. Activities (Operational Test): Primary activity must be charitable, educational, literary or scientific. 2. Lobbying Limitation: Lobbying permitted only to an insubstantial extent. 3. Political Activity Prohibition. 4. Inurement/Private Benefit Prohibition: Dedication of assets to charitable purposes. 5. Dissolution Constraint. 6. Reporting Requirements. www.ober.com
SECTION 501(c)(3) ORGANIZATIONS AND LOBBYING One of the criteria for IRS recognition of an organization as a public charitable organization is that “no substantial part” of the activities of the organization may consist of “carrying on propaganda, or otherwise attempting to influence legislation.” www.ober.com
BASIC LOBBYING DEFINITIONS Lobbying = Attempt to Influence Legislation Lobbying = Direct Lobbying (attempts to influence legislators) + Indirect or grass roots lobbying (attempts to influence the public who, in turn, will try to influence legislators) “Substantial Part” -- ????? www.ober.com
EXPENDITURE TEST FORMULA Organizations may spend up to the following amounts for lobbying (both direct and grassroots): i. 20% of the first $500,000 of the organization’s exempt purposes expenditures; plus ii. 15% of the next $500,000 of exempt purpose expenditures; plus iii. 10% of the next $500,000 of exempt purpose expenditures; plus iv. 5% of any remaining exempt purposes expenditures. However, the total amount spent for all lobbying may not exceed $1,000,000. www.ober.com
EXPENDITURE TEST FORMULA (cont’d) Organizations may spend up to 25% of the total amount allowed for lobbying on grassroots lobbying www.ober.com
ELECTION REQUIRED FOR EXPENDITURE TEST Must file IRS Form 5768, if organization wants to be governed by the expenditure test rules. Election is effective for the year in which it is filed and thereafter until the organization revokes it. www.ober.com
IRS FORM 990 Form 990 is an annual reporting return that charitable organizations must file with the IRS. It provides information on the filing organization's mission, governance, directors and officers, programs, and finances. Form 990-N ("ePostcard") is an eight-question, electronic return that a charity must file if its income was <$50,000 for the tax year. Form 990-EZ is a two-page return that a charity must file if its income was<$200,000 and its assets were <$500,000. Form 990 is the "long form" that all other charities must file if its income were at least $200,000 or its assets were at least $500,000. www.ober.com
501(c)(3) vs. 501(c)(6) 501(c)(3) 501(c)(6) -- Charitable, educational, -- Trade associations, scientific organizations chambers of commerce -- Contributions/dues may -- Contributions/dues may be be deducted as charitable deducted as business or business expenses expenses -- Lobbying restricted -- No restrictions on lobbying -- Political activity prohibited -- Political activity allowed so long as not primary purpose -- Inurement applies -- Inurement applies -- Form 990 required -- Form 990 required -- Assets must be distributed -- No dissolution restraints to another 501(c)(3) upon dissolution www.ober.com
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