Not-for-profit organizations fulfill a vital role in our society. Many provide much needed services to under-served or at risk communities. Others focus on a mission, eradicating a dreaded disease for example, or raising awareness for an important issue. Such organizations are part of the fabric of our country, and Americans—among the most generous people in the world—gave a total of $358 billion to charities and not-for-profits in 2014, 2% of the nation's GDP, according to Charity Navigator.
We often get questions from clients that arise from their volunteer efforts in not-for-profit organizations like churches/synagogues, schools, clubs, condo and co-op residential buildings, and contributions to charities of all kinds. The range of questions run from serious governance, employment and liability issues to simpler things like "How do I know if this charity calling me every night is for real" and "What does my block association have to do if we want to run a raffle?" To that end, we are happy to provide the following general guidance.
New York law on the subject was "modernized" by legislative action in recent years and has become an important area of Attorney General Eric Schneiderman's concern. In several recent actions the Attorney General has taken an expansive position on his jurisdiction; he has also allocated more staff and resources to the Charities Bureau which is responsible for activity in this space.
Governance: The NY rules for managing nonprofits have been brought closer to the manner in which for-profit corporations are governed. Board members have always been held to a fiduciary's standard of care and loyalty; more guidance has now been provided as to how that duty is to be exercised. One early proposal--to mirror the Sarbanes-Oxley requirements that board members assume greater personal liability–was ultimately left out of the new legislation after an outcry from a wide cross-section of diverse board members that as volunteers, they were willing to devote their time and efforts to good causes but unwilling to assume financial risk.
Likewise, Internal Revenue Service regulations and policies affecting tax-exempt entities have been modified, particularly regarding required reporting, legislative activity, and oversight of compensation.
The NY Not-For-Profit Corporation Law ("N-PCL") should always be consulted when serious issues arise. There is now provision for individual board members and the Attorney General to pursue remedies when boards or officers act improperly. One principal area of concern at the Charities Bureau is the reasonableness of benefits conferred on parties in transactions involving the sale or transfer of substantial property.
At a time when NYC real estate values are continuing to move upward, parties must take into account that such transactions are subject to prior approval by NY Supreme Court justices with the advice of the Charities Bureau. This is a complex process and one which warrants careful attention and review. In a recent matter, for example, our firm was engaged by a large charity to opine on the propriety of substantial fees that were to be paid to individuals who arranged the sale, but were not real estate brokers.
Charity: Each year, the Attorney General issues a report on the practices of almost all charities registered to solicit funds in New York. We find this report very helpful in assisting the firm's trust & estates clients in identifying appropriate designees for bequests and gifts. The most recent report (for 2014) includes data on the percentage of gifts received that is spent on overhead vs. actual support for the charity's purpose and can be viewed here.
Charities and other non-profits are also obligated to submit an annual report (IRS form 990) that indicates salaries paid to officers and other expenditures, receipts, reserves, and activities consistent with the mission listed on the organization's original application for tax-exempt status pursuant to IRC 501c3. While we always urge clients to consult their accounting professionals for guidance in these matters, we are available to provide supporting advice where necessary.