The Bar association/Bar foundation relationship: Mars, Venus, and the IRS

Volume 29 Number 6

By

If you are a regular reader of Bar Leader and/or a frequent attendee at NABE/NCBP/NCBF meetings, you’ve probably heard some variation of the cliché that “bar associations are from Mars, while bar foundations are from Venus.” That cliché has its roots in the fact that while both are “nonprofits,” bar associations typically (though not always) are membership entities organized under section 501(c)(6) of the Internal Revenue Code, while bar foundations generally are charitable entities incorporated under section 501(c)(3) of the Code.

With these differing legal bases come separate legal duties and responsibilities for bar associations and bar foundations, and potentially serious consequences for both organizations if the two entities do not act consistently with their distinct legal charters when they interact.

But at the same time, the fact that bar foundations traditionally are set up to be the charitable arms of their bar associations virtually requires that the two entities have a close working partnership while carrying out distinct and complementary missions, and the law recognizes that reality. Indeed, one would be hard-pressed to find an example where a bar foundation has been successful over the long term when it did not have a close and productive working relationship with its bar association.

With that in mind, there are some fundamental rules that govern the relationship between associations and their related foundations. Notwithstanding some commonly heard myths about the laws regarding this relationship, the reality is that a bar association can (and indeed should) work closely together with its bar foundation so long as (1) the foundation’s activities are always consistent with its charitable mission, and (2) the two entities understand and respect the basic legal ground rules and carefully document their compliance with these rules.

As Joe Kroll, tax-exempt/government entities manager for the Northern California region of the IRS noted at a recent NABE/NCBP/NCBF program, the fact that donors can deduct their contributions to the bar foundation makes it critical to the IRS that the donated money is used for its intended purpose, i.e., to support the foundation’s charitable mission. (See “ ‘You can’t have too much documentation’: Tax advice for bar leaders,” Bar Leader, November-December 2003, page 19.)

The purpose of this two-part article is to give readers a primer on the general legal parameters to keep in mind for situations where bar associations and bar foundations commonly interact. This article is not intended to be a comprehensive treatise on the legal relations between the two entities, and should be considered as informational only, not as legal advice. Please also note that applicable state laws may differ.

In part one of this article, we briefly review the basic legal duties that bar foundation board members should keep in mind if they are also members of the bar association’s governing body or staff. In part two, in a future Bar Leader issue, we’ll look at IRS sanction regulations and how they apply in the bar association/bar foundation context, and we also will consider how these ground rules apply in common scenarios where a bar association interacts with its bar foundation.

The bar foundation board and the bar association: How close can they be?

A bar foundation’s core relationship with its bar association is normally spelled out in the foundation’s articles of incorporation and bylaws. Two common questions that arise in the association/foundation relationship are (1) whether the bar association can be involved in choosing the board of directors of the bar foundation, and if so, (2) whether there are any legal guidelines that the association and foundation should observe. The answer to both of these questions is yes.

The bar association not only can approve the board of directors of the foundation, it can also actively appoint some of the association’s officers and directors to the foundation’s board (though, for the reasons noted below, it is advisable for the majority of the foundation’s board not to overlap with the association’s board). But regardless of how one becomes an officer or director of the foundation, there are three critical legal principles that the person must keep in mind: the duty of loyalty, the duty of care, and the duty of confidentiality.

The duty of loyalty

The duty of loyalty is one of the core duties of being a director of a nonprofit corporation, and “requires directors 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” (Guidebook for Directors of Nonprofit Corporations, Second Edition, ABA Section of Business Law, 2002, page 19). In the context of the bar association/bar foundation relationship, this principle is critical to keep in mind.

A bar foundation director who is also a member of the association’s governing body or staff must carefully observe the foundation’s conflict of interest policy. All bar foundations should have a conflict of interest policy in place that covers any instance where an officer or director may benefit or has affiliations with an organization that may benefit from a particular action by the foundation, and that includes bar association affiliations for foundation matters involving the association.

Thus, a bar foundation director who is also a sitting officer, director, or staff member of the association should not vote on matters involving the association and should not participate in the deliberations on those matters unless called upon to speak after disclosure of the conflict. The fact, however, that a bar foundation director is a member of the bar association does not automatically create a conflict of interest for that director.

A conflict normally arises only where the foundation director is in a position to participate in management decisions for the association (i.e., a current officer, director, or key staff member of the association) or a subsidiary of the association involved in that particular transaction, or otherwise believes he or she cannot be fair and impartial with respect to a transaction involving the association.

The duty of care

Another core duty that foundation board members always must keep in mind in this context is the duty of care. In a general sense, “the duty of care requires that first, a director be informed; and second, a director 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 similar circumstances” (Guidebook for Directors of Nonprofit Corporations, page 19).

The duty of care encompasses a number of elements for any director of a nonprofit, including staying informed about the nonprofit’s affairs and regular attendance at meetings. For foundation matters involving the association, however, the key element of the duty of care to keep in mind is the requirement that each foundation director exercise his or her own independent and informed judgment.

The foundation director’s independent judgment can be informed by that director’s experiences and affiliations (including the bar association that appointed him or her), but the director’s decision must be based solely on the foundation’s best interest. “Each director must judge what is in the [foundation’s] best interest, irrespective of other entities with which the director is affiliated or sympathetic, or to which the director owes his or her board appointment” (Guidebook for Directors of Nonprofit Corporations, page 21).

A good relationship with the bar association generally is an asset to the bar foundation, and that fact may be taken into account when the foundation considers a transaction with the association, but it cannot be the primary consideration.

The duty of confidentiality

The duty of confidentiality requires that a bar foundation director treat a matter coming before the foundation as confidential unless and until that matter has been disclosed to the public (Guidebook for Directors of Nonprofit Corporations, page 34). Thus, in matters involving the foundation and the association, the foundation director who also serves on the association’s board should maintain the confidentiality of information regarding the foundation’s deliberations unless the foundation has decided to make that information public.

In some situations, such an individual may need to avoid participating in certain deliberations of one entity or the other, so as to avoid receiving confidential information that may affect the individual’s duties to the other entity.

Proactive steps to consider

The above duties do not prevent a bar foundation from engaging in transactions or sharing some resources with its related bar association, as will be discussed in more detail in the second part of this article. However, in light of these duties, we recommend that at a minimum:

1. the majority of the bar foundation’s board of directors not be members of the bar association’s governing body or staff (if the bar association and bar foundation have completely overlapping boards, there will not be any independent foundation directors to consider matters involving the association);

2. the bar foundation address these duties as part of its orientation of new board members and have a solid conflict of interest policy in place; and

3. the bar foundation thoroughly evaluate any transaction involving the bar association in light of these duties and carefully document that these duties were fully considered.

—By Bob Glaves and Janice Rodgers

Bob Glaves has been executive director of the Chicago Bar Foundation since 1999, prior to which he practiced law at a midsized firm in Chicago for nine years. He is an active member of the Chicago Bar Association as well. Janice Rodgers is a partner at Quarles & Brady LLP, where her practice is concentrated in the representation of tax-exempt organizations. She serves as counsel to a number of foundations, including the Chicago Bar Foundation, and other nonprofit entities, and is also an active member of the Chicago Bar Association.

 

Additional resources for associations and foundations

As noted at the outset, this article is intended only as an overview of the governing law in this area. When in doubt, we recommend that the foundation and association obtain independent professional advice, and for more significant transactions, we recommend that each entity engage its own independent counsel. In addition, we recommend the following resources for further information on these issues:

| Guidebook for Directors of Nonprofit Corporations, Second Edition, American Bar Association Section of Business Law (2002), www.ababooks.org | Nonprofit Governance and Management, American Bar Association Section of Business Law and American Society of Corporate Secretaries (2002), www.ababooks.org | IRS Web site: www.irs.gov | IRS hotline: (877) 829-5500 | Quarles & Brady LLP Web site: www.quarles.com

—BG and JR

 

Top 5 things to keep in mind for bar association/bar foundation transactions

As noted in more detail in the body of this article, the law approves of a bar foundation working closely with its related bar association. Where the two entities engage in any transactions or joint activities that involve the expenditure of foundation funds or use of foundation resources, however, it is imperative that the legal guidelines be observed. Below are five basic things foundations and associations always should keep in mind in this context:

1. If possible, the majority of the bar foundation’s directors should not be members of the bar association’s governing body or staff.
2. The bar foundation should have a solid conflict of interest policy in place and always adhere to it when considering business involving the association.
3. The bar foundation’s board member orientation should include specific information about interactions with the bar association (including board member duties, conflicts of interest, and intermediate sanctions rules), with reminders before consideration of any transactions involving the bar association.
4. The bar foundation always should carefully evaluate any grant, transaction, project, or program involving the bar association to ensure that it clearly fits within the foundation’s charitable mission and is fair and reasonable for the foundation. For more significant transactions (e.g., purchase or lease of a building), the foundation should ensure that it meets the criteria for establishing a rebuttable presumption under the intermediate sanctions regulations. We will discuss rebuttable presumptions further in the second part of this article.
5. The bar foundation always should carefully document compliance with the above principles, and when in doubt, the foundation should seek independent professional advice.

—BG and JR

Advertisement

  • About Bar Leader

Twitter Bar Leader
  • Contact Us

NABE NCBP NCBF Houston 2015

 

For more information, visit NABE, NCBP, & NCBF  

Bar Leadership Institute Meeting: March 11 - 13 2015

  

President's Page: Resources