General Practice, Solo, and Small Firm Division The Compleat Lawyer
Winter 1997, Volume 14, No. 1 copyright American Bar Association. All rights reserved.
Charitable and Nonprofit Organization Law
BY S. TAMAR HAJIAN
S. Tamar Hajian is vice president and general counsel of Brandeis University in Waltham, Massachusetts.
General practice is a tough life. We can't even attend the season's best cocktail party--a charity fundraiser--without being called upon to diagnose every legal malady that passes our way. They are all here: donors, volunteers, board directors, and professional leadership; each constituency needs expert legal advice just this once.
Take, for example, the perennial problem of the long-time lawyer/director of a charitable organization who has not been the most attentive board member and seems to be totally unaware of today's regulatory climate. Or the unsuspecting lawyer/philanthropist who has fallen into the bad habit of writing off the total cost of tickets to gala events. Or the kindly volunteer who thinks it's still okay, if ever it was, to use the local nonprofit's mailing list to solicit votes for her favorite candidate; to say nothing of her husband, who cannot resist the temptation to offer insurance programs via nonprofit mailings to his wife's 200 closest associates.
Conflicts of interest, fiduciary requirements of disclosure, charitable gift substantiation, and political activities prohibitions are just a few of the garden variety esoterica that cross a general practitioner's path as frequently as hors d'oeuvres at social events.
Being a Director
When members of the bar take on the duties of a charitable board membership without compensation, they assume fiduciary duties defined under state and federal law, as well as the mission and guidelines of the particular nonprofit organization. They need to become engaged; learn the job by asking questions; participate actively in hiring, setting compensation for, and periodically evaluating the CEO; follow the finances of the organization; and monitor transactions that might present potential conflicts of interest.
But, interjects my host, what if I really want that organization as a client? I reflect on the sage advice of Foster Ockerman, Jr., Chair of the ABA General Practice, Solo and Small Firm Section's Non-Profit Organizations Committee, who, with Kentucky gentility and grace, terms this the "give it, get it or get off" rule: our gracious host must choose between being a director and getting the business.
And what happens if the good Samaritan director is sued, asks our hostess, very much concerned not only with the potential loss of a client but with added exposure to liability? Check to be sure that the organization has indemnification language in its bylaws and has obtained sufficient amounts of directors and officers insurance.
The GP has a ready prescription to offer those who inquire about charitable directors' rights and responsibilities by whipping out a copy of a concise booklet entitled, Massachusetts Attorney General's Guide for Board Members of Charitable Organizations (available from the Division of Public Charities, Office of the Attorney General, One Ashburton Place, Room 1413, Boston, MA 02108 or by calling 617/727-2200 (x2101)). While this booklet is specific to Massachusetts state law, it is an excellent resource for everyone, and provides a concise statement of the universal principles on this subject.
Conflicts of Interest
But serving on nonprofit boards is not the only topic hovering over the social scene this year: we're likely to be inundated with talk of political activities prohibitions and conflicts of interest while munching on crudites. I am prepared to discuss this topic, thanks to NAACP General Counsel Dennis C. Hayes's cogent presentation at the 1996 ABA Annual Meeting.
Between bites of salmon mousse on lavash rounds, what GP could resist delving into speculations on intermediate sanctions for unseemly remuneration or other acts with the appearance of abuse? This feature of the 1996 tax legislation, which penalizes nonprofit organizations for overpaying executives and other improper dealings, is a hot topic. Perhaps we need CPA cum attorney expertise: Silvia Ibanez of Orlando, Florida, and, I might add, U.S. Supreme Court fame, should be here to enlighten the confident young man on my left about the pitfalls of ignoring the growing sea of regulations governing disclosure requirements placed on tax-exempt organizations!
The chair of the evening's event approaches me with a scowl, muttering something about my being the only guest who questioned the universally held notion that the entire "donation" for access to the evening's fete is tax deductible. Didn't I realize that I was feasting on nearly $200 worth of rarified delicacies, libations, and first-rate entertainment in the interest of our common cause, for which I had contributed the paltry though seemingly deductible sum of $500?
Miss Manners would have been proud of my tactfully turning the conversation to the politically correct "quid pro quo" language of the receipt, which, I was sure, would be appended to the next morning's thank you notes. Naturally, I complimented our leader's astuteness in discussing the requirements of a receipt (a contemporaneous written substantiation for charitable contributions over $250, stating the fair market value of tangible items received by the donor and subtracting same to state the tax-deductible amount). To be sure, this is a confusing and unnecessarily complex area of the law, akin to the notion that there is no free lunch, but that's what lawyers are for.
Of course, had the event's spread been spartan, and had I gone away with only a de minimis or token mug, t-shirt, or doodad with charitable logo attached, I might have had a full deduction. But I do like fois gras and the joys of networking sometimes.
A sweet, elderly lady approaches me as I consume my umpteenth carrot stick (dipped in truffle sauce, of course) and asks if I think it wise for her to establish a scholarship at the local university to cover her grandchildren's tuition in the year 2000. I gently remind her that this is not an act of (tax-deductible) charity but rather a generous, grandmotherly gesture. She is not happy with me and doesn't even ask for my card!
Payments in Lieu of Taxes
Pity the poor guy over there who is trying to understand PILOT programs (payments in lieu of taxes). His municipality has just discovered a new source of revenue and is hounding his nonprofit research center to be a good citizen and pay 25 percent of what would have been assessed as taxes to cover police, fire, water, etc.! Shall we tell him about some New England states that reimburse local taxing authorities for these payments? Perhaps it is better not to even dignify this "first step" toward eroding the whole notion of tax exemption.
My ego wounded but my honor preserved, I sip champagne while reciting the Canons (of the ABA Model Code of Professional Responsibility, of course) and take a closer look at the wonderful artwork of the magnificent mansion in which this event is taking place. A quiet, thirtysomething MBA asks me if it makes better sense to donate the family Renoir to the local museum or to think of a CRAT (charitable remainder annuity trust) or CLT (charitable lead trust) instead.
I opine that it all depends on the donor's goals, needs, and intentions. We agree to do some homework ( Conrad Teitell's Taxwise Giving is a good place to start; write to Taxwise Giving, 13 Arcadia Road, Old Greenwich, CT 06570, or call 203/637-4553) and to continue this discussion when we meet at the next charitable soiree of the season. My new friend voices the frequently heard refrain that the IRS will make libertarians of us all.
Regulations on Educational Organizations
Speaking of trusts, and public trust for that matter, a small group of our leading citizens has gathered around the president of our local college to inquire about the cost of higher education. Madam President charms her audience with vignettes of cost-cutting measures, coupled with targeted fundraising, which result in an efficiently run, cutting-edge educational treasure right in our midst. She also mentions that her legal advisors have helped her to make her institution a model of regulatory wonder. I am jealous and try to take in her every word, dreaming of bringing the same sense of smug confidence to my own environment.
Alas, she has the same problems we all do--overregulation, pervasive reporting requirements, bureaucratic red tape, understaffing, and rampant litigiousness of what used to be resolved civilly (that is to say, out of court). She then whispers her disdain for lawyers and billable hours, and I know it's time to move on to the petit fours and espresso before I give into temptation and suggest to her the practicality of alternative dispute resolution in the nonprofit environment.