Being a Director on a non-profit Board can and should be a wonderful experience. People serve on Boards for many reasons: they believe in the causes for which the non-profit stands, they have been personally involved with the non-profit as a volunteer or member, they want to volunteer for a worthy community cause, they are flattered they were asked, they believe that they will make contacts that will be helpful in developing their business and projecting to the community a good image of their business, and so forth. Being a Director can also be hard work and time-consuming. If you want to lend your name and your pocketbook to a cause, but not too much of your time, you may prefer to serve on an Advisory Board, if there is one, instead of on the Board of Directors.

To ensure that your tenure on a Board will be enjoyable and successful, you need to be prepared. The focus of this presentation is on what steps you can take in order to be prepared legally for Board service so that you are not taken unawares by the unique and esoteric laws that apply to non-profits. By being prepared, you will better enjoy your service. While many observations in this presentation apply to all non-profits, there is an emphasis on charities, the 501(c)(3)’s of the non-profit world. (This presentation does not address the additional duties and liabilities of officers of the non-profit, just of Directors.) Also, this presentation provides a simple overview of areas you need to be aware of as you take on a new role, that of a Director or Trustee for a charity. The overview cannot, because of space limitations, be exhaustive; it can aid you in thinking about the charity and what areas you as a Board member should ask questions about and help implement good processes to deal with.

I. OVERVIEW – STORIES OF WHY YOU CAN’T JUST SIT ON A BOARD AND NOT DO YOUR
HOMEWORK

• Family Connections – Executive Director plunders charity, closes its doors, and defrauds Board with fake independent audits. The Chief/Executive Director hired and presented the audits; the Board did not hire the auditor and the CPA auditor never came to any meetings with the Board. That’s because there was no real auditor and the Executive Director faked the audit reports presented to the Board and to outside funders. The CEO plead guilty to stealing more than $1M for 3 charities and was sentenced to 25 years, in May 2011: Hyde Park Christian Church, Texas Association of Child Care Resource and Referral Agencies, and Family Connections.
  
  
• Congressional Charities like Joe Baca Foundation (Cong. Los Angeles) – NY Times found 2 dozen charities that lawmakers or family helped create or run that routinely accept donations from businesses that seek to influence them, like AT&T, Chevron, Coca-Cola, General Dynamics, Morgan Stanley, Eli Lilly – is this a “pay to play” culture?
  
  
• After the scandal with Tom DeLay and lobbyist Jack Abramoff, Congress adopted rules so that corporations which have lobbyists must report donations to charities established by a Congressman or Senator. Corporations are not following the rules.
  
  
• Three Cups of Tea, Central Asia Institute, founded by Greg Mortensen, monies are supposed to go to schools in Afghanistan and Pakistan, not to promoting books and helping get lucrative speaking fees. 60 Minutes exposé showed considerable “domestic outreach” expenses for charities were really for book promotions and travel – 2009: $1.4M in travel, $1.7M in book-related – no revenue from activities went to the charity.
  
  
• Greenlights for Nonprofit Success just published the inaugural Central Texas Board Report (April 2011) – 281 responses:
  
  
• Only 85% seats on Board are filled – this extrapolates to 7,000 empty seats; average, 12 per Board.
• 78% Board members are white (Nationally, 90%).
• People under 30, 4% (Nationally, >1%).
• Only 39% of Boards require members to give, but 68% do. Every Board member should be required to give, even if small.
• Only 24% have conducted formal performance evaluation in last 3 years (60% Nationally).
• Only 59% have an independent, external financial audit (92% nationally, with 50% of full Boards meet to discuss and 27% use a stand-alone committee).
• 75% have D&O (95% Nationally).
  
  
• And, this year the IRS de-certified 275,000 nonprofits for not filing returns or disappearing (not just charities). There are a lot of Austin charities on this list – Rotary Club of Austin Westlake Foundation, for example.

II. KNOW THE ORGANIZATION AND UNDERSTAND IT

Texas State law in identifying a corporation as being “non-profit” does not make a distinction among non-profit corporations that are charities, public charities, private charities or foundations, private operating foundations, community foundations, labor organizations, chambers of commerce, and so forth. Many people (and this includes attorneys and accountants and even your State legislators) use “non-profit” interchangeably with “charity,” but these words are not synonymous. There are 25 different non-profit organizations listed in the Internal Revenue Code that do not have to pay taxes on income generated by activities related to their non-profit purposes. Only one of these categories represents the “charity” - Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (“I.R.C.”). A “political organization” is also exempt from income taxes under I.R.C. § 527.

A § 501(c)(3) charity is a non-profit organization, recognized as such by the IRS in a “Determination Letter.” A § 501(c)(3) charity does not have to pay taxes on income it makes from activities related to its charitable activities. When you give money or property to the charity, you may take a charitable income tax deduction under I.R.C. § 170(c) if you itemize and your estate will receive a charitable deduction for gifts upon your death. I.R.C. § 2055.

A § 501(c)(3) charity must meet the following criteria, or it will not be a charity:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provisions of athletic facilities or equipment), or for the prevention of cruelty to children or animals, 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 distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

Does the Austin Chamber of Commerce meet the above criteria? No, but the Chamber is a non-profit organization that is probably exempt from income taxes under I.R.C. § 501(c)(6). However, you will not get a charitable deduction for money you transfer to the Chamber, although the payment may qualify as a business deduction.

There are various types of I.R.C. § 501(c)(3) charities, but for now the author will address service only on a public charity, that is either a charity that is automatically recognized as being public, such as a church, or that is publicly supported and so recognized by the IRS.

A. Not all Non-Profit Corporations are Charities


Some people who agree to serve as Directors or Trustees may assume that they are Directors of a non-profit corporation and thus are immune from personal liability if the entity is sued (for example, if an employee is injured). You have probably heard of the “corporate veil.” However, if the organization has not been incorporated and is an unincorporated association or a wholly charitable trust, there is no corporate veil of protection. For a quick read, go to www.irs.gov and see if it is a charity.

There is, however, Chapter 252 of the Texas Business Organizations Code that deals with unincorporated nonprofit associations, and the authority of the nonprofit association to acquire, hold and transfer property in its own name; the authority to sue and be sued as a separate legal entity; and the contract and tort liability of an association's officers and its members. One of the purposes of the Act from which this Chapter came (the Texas Uniform Unincorporated Non-Profit Association Act) was to make it clear that an unincorporated association is a legal organization separate from its members and is separately treated when looking at liabilities, duties, and rights with respect to contractual and tort issues; Section 252.006 of the Texas Business Organizations Code. Nevertheless, the liability of directors and officers is unclear and it is also unclear whether an unincorporated association may conduct certain activities. Being incorporated is still the preferred method.

B. Make Sure the Organization is Properly Incorporated and has Bylaws


What does this charity do? Are its purposes clearly set forth in the Articles/Certificate of Formation and Bylaws? Does it have a mission statement, a long-range plan? What specific programs and services does it offer? Who does it serve? In what manner? How long has it been in existence? Is it chartered by a national organization (for example, Girl Scouts of America)? Do any other local organizations offer similar services? How many paid staff are there? To what extent does the organization rely on volunteers? What immediate issues will the organization need to deal with and what plans have been formulated to deal with these issues?

C. Understand how the Charitable Mission is Implemented

How many regular meetings are there each year? Are the month-to-month and day-to-day work done by an Executive Committee and the Executive Director, or is this a “working” Board? Will you need to serve on a committee? Are you expected to do fund-raising? How (sell tickets, solicit friends, colleagues)? As a Director are you expected to make a large contribution each year? How large? Why are you being asked to join? Can you contribute your time, your money, both?

D. Understand the Financial Health of the Charity

Look at the budget and current financial statement. Is the organization independently audited on a regular basis? By whom? Read the audit. How is the organization funded?

Being “non-profit” does not mean you cannot make a profit. You need working capital. You may need to have an endowment. Think about doing multi-year fundraising. You can, and should, have excess revenue over expenses. “Non-profit” refers solely to the motivation for making money and providing services, focusing on the lack of self-interest and goal of benefiting the public in the operations of the charity. “Non-profit” does not mean that you can ignore fiscal responsibility.

How many regular meetings are there each year? Are the month-to-month and day-to-day work done by an Executive Committee and the Executive Director, or is this a “working” Board? Will you need to serve on a committee? Are you expected to do fund-raising? How (sell tickets, solicit friends, colleagues)? As a Director are you expected to make a large contribution each year? How large? Why are you being asked to join? Can you contribute your time, your money, both?

E. Understand What Will be Expected of You as a Board Director

Who is on the current Board? What occupational, ethnic, educational, and geographical backgrounds are represented on the Board? Who are the officers? How many Directors are there? How long is your term? How many terms can you serve? What is your mission as a Director? What donation is expected of you? What fundraising responsibilities will you have?

F. Check out the Board

Are you interested in or committed to the goals of this charity? Do you have time to serve? Do your skills fit in with what the charity needs?

G. Consider What Your Expectations Are

1. Current annual report and minutes (make sure that corporate formalities are observed and that you have been elected as a Director in accordance with the Bylaws – reportedly, some charities allow the Executive Director to select new Directors and do not vote for them properly);
   
   
2. Program brochures;
   
   
3. Organizational chart, including committees;
   
   
4. Board and staff rosters;
   
   
5. Budget and financial statements;
   
   
6. Descriptions of expectations of Directors; and
   
   
7. IRS application for recognition of tax-exempt status (IRS Form 1023) – allows you to determine the purposes and structure that resulted in tax-exempt status.
   
   
8. IRS Form 990, a reporting form filed with the IRS if the charity has enough receipts ($200,000 annual gross receipts) and assets ($500,000). Charities with less than $200,000 in gross annual receipt and less than $500,000 can choose IRS Form 990 or 990-EZ. If the charity has not been filing 990s, determine why and if there is an exception that allows it to avoid filing. Small charities whose annual gross receipts less than $50,000 may still need to file the annual electronic notice, a e-Postcard, IRS Form 990-N, with the following information: legal name of charity; any other names charity uses; mailing address; website address (if there is one), EIN/TIN – the taxpayer identification number which is like a social security number, but for a corporation, not an individual; name and address of principal officer, i.e., President or Chair; annual tax year; and answer to questions: are your gross receipts still normally $50,000 or less and has your charity terminated or gone out of business?

III. UNDERSTAND YOUR DUTIES AS A BUSINESS/NON-PROFIT FIDUCIARY

The Directors are charged with managing the affairs of the corporation. Section 22.001 of the Texas Business Organizations Code. Directors of a corporation are business fiduciaries of the corporation, Paddock v. Siemoneit, 147 Tex. 571, 218 S.W.2d 428 (1949), but are not to be judged by the standards relating to trustees. Section 22.223 of the Texas Business Organizations Code.

In all states, including Texas, Directors have basically three duties: obedience, loyalty, and care. These standards have been incorporated into the Texas Business Organizations Code, in Section 22,221(b), in an interesting way. Unless a person can prove one of the following, the Director will have no liability; that the Director did not act: (1) in good faith; (2) with ordinary care; and (3) in a manner the Director reasonably believed to be in the best interest of the corporation.

Pay attention to your job – it is not an honorarium. Here’s an example. You do not want to or cannot attend an important meeting. Can you give your proxy to another board member?

Texas allows a non-profit to choose whether or not a Director may vote by proxy. (Section 22.214 of the Texas Business Organizations Code). Do not automatically assume that you may use a proxy. Check the Certificate of Formation/Articles of Incorporation or Bylaws to see if it is allowed. Most states do not allow Directors to vote by proxy, the theory being that Directors must discuss and deliberate in person on issues in order to reach their decisions, not just vote. Should a Director vote by proxy without proper authorization, that entire action can be challenged and voided. SeeIn re Audubon Quartet, Inc., 275 B.R. 783 (W.D. Va. 2002) upholding the rule that (absent statutory and bylaws’ authority), Directors may not vote by proxy.

Avoid co-opting for yourself a business opportunity being considered by the Board; for example, buying a building. You cannot use your position to make a personal profit or grain or co-opt an opportunity that you have learned about by serving on this Board.


Even if you “win” a lawsuit filed against you in your role as a director, who’s going to pay the costs of litigating until the lawsuit is settled or a Judge enters an order? That’s why you want D&O Insurance. Many times, the author has heard that the monies spent on such insurance could provide programs to those who need services. While that is a true statement, it neglects to address what will happen to all the programs IF there is a lawsuit and directors resign and management fails because there is not a process for paying for legal fees and defending them.

IV. MAKE CERTAIN THAT THE ARTICLES OF INCORPORATION/NOW CALLED “CERTIFICATE OF FORMATION,” OR THE BYLAWS PROVIDE THAT DIRECTORS SHALL BE INDEMNIFIED FOR LEGAL EXPENSES, OR BE AWARE,VERY AWARE, IF THEY DON’T

Indemnification permits the costs of litigation to be borne by the corporation rather than the individual Director, if the Director can establish his or her good faith or lack of responsibility. Article 8 of the Texas Business Organizations Code grants broad powers of indemnification to a corporation. The statute provides that a corporation may indemnify a person for legal expenses if the person was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a Director, if that person is NOT liable for:

1. willful or intentional misconduct in the performance of the person's duty to the enterprise;
   
   
2. breach of the person's duty of loyalty owed to the enterprise; or
   
   
3. an act or omission not committed in good faith that constitutes a breach of a duty owed by the person to the enterprise.

For the prospective Director, the best protection against personal loss is a commitment (in the Articles/Certificate of Formation, Bylaws, or by resolution, agreement, or otherwise) that indemnification shall be made to the fullest extent allowed by law.

Also, some homeowners’ policies cover you when you are acting as a volunteer Director. Check. If the coverage is not enough in your view, consider an umbrella policy.


Most organizations do not have such specific language in the Articles/Certificate of Formation or Bylaws or a separate agreement, so indemnification is decided on a case-by-case basis if and then as the need for it arises. Consider purchasing D&O (Directors’ & Officers’) liability insurance. Note, even though the non-profit is authorized by law to indemnify for penalties, insurance companies will generally not insure for penalties, for they consider that as being against “public policy.”

V. CONSIDER WHETHER YOUR LIABILITY WILL BE LIMITED IN SITUATIONS WHERE YOU EXERCISED YOUR BUSINESS JUDGMENT IN GOOD FAITH: “BUSINESS JUDGMENT RULE”

In 1987, the Texas Legislature adopted a statute to counter the erosion of the common law Business Judgment Rule that appeared to have occurred in other states, the willingness of those courts to impose substantial monetary damages against Directors, and the resulting difficulty in obtaining D&O liability insurance in Texas. Texas Miscellaneous Corporation Laws Act, Art. 1302-7.06B followed a comparable Delaware statute which responded to similar problems for corporations organized under Delaware law. Now, the provision is contained in Section 7.001 of the Texas Business Organizations Code.

Note: The statutory Business Judgment Rule provides that a governing person of the organization is not liable, or is liable only to the extent provided by the certificate of formation or similar instrument, to the organization or its owners or members for monetary damages for an act or omission by the person in the person's capacity as a governing person.

Liability of a governing person cannot be limited or eliminated to the extent the person is found liable under applicable law for:

1. a breach of the person's duty of loyalty, if any, to the organization or its owners or members;
   
   
2. an act or omission not in good faith that:
   
   
1. constitutes a breach of duty of the person to the organization; or
2. involves intentional misconduct or a knowing violation of law;
   
   
3. a transaction from which the person received an improper benefit, regardless of whether the benefit resulted from an action taken within the scope of the person's duties; or
   
   
4. an act or omission for which the liability of a governing person is expressly provided by an applicable statute.

The extent of protection afforded to Directors of corporations that have limited their liability is not presently well-defined. Even though Directors and officers of non-profit corporations have, in general, not been held liable except for egregious actions, the limitation of liability to the Business Judgment Rule provides an umbrella of protection that you know will be there if the proper language appears in the Articles/Certificate of Formation.

VI. INVESTING.

Section 22.224 of the Texas Business Organizations Code specifically authorizes Directors to hire investment counsel. Directors are relieved from liability for investment decisions made by such investment counsel as long as the Directors acted in good faith and with ordinary care in selecting the investment counsel. Although not in the statute, the charity should also exercise ordinary care in overseeing the actions of such investment counsel. The charity should not automatically renew its contract each year, but only do so after a review and perhaps even issuing a Request for Bids or Proposals and reviewing other investment counsel’s proposals as well.


VII. BOOKS AND RECORDS AND ANNUAL REPORTS

Sections 22.252 and .253 of the Texas Business Organizations Code set forth the Directors’ obligations to keep up-to-date financial records and make them available to the general public. There are some exceptions (see Section 22.355), but there is a Texas penalty for not complying with the law. But you must look not only at Texas law, but at Federal law.

The IRS also has rules you need to follow. Under I.R.C. § 6104(d), charities (including private foundations) must honor requests from the public to provide copies of their three (3) most recent annual information returns (IRS Form 990) and of their applications for recognition of exempt status (IRS Form 1023). A request in person should be honored immediately; if by mail, the charity has 30 days to provide the information.

Your charity is supposed to write and implement procedures for responding to such requests. The charity is required to mail this information to members of the public who request it, a major change from prior law which only required that the forms be available for inspection at the charity’s offices. The charity can only charge a reasonable fee for reproduction and postage.

If you have a website and want to post information to comply with the regulations there, be sure to consult the regulations for specific requirements. You do not have to provide copies if the requested documents are widely available or the secretary determines the request is part of a harassment campaign and not in the public interest.

Non-private foundations do not have to disclose the names and addresses of contributors. Failure to comply – to make the annual return available, the 1023 application, the determination letter, etc., under I.R.C. § 6104(d) results in a penalty on the person of $20/day up to $10,000 per return or report. There is no maximum penalty on the failure to provide the 1023 application.

Certain documents have been designated in the Treasury Regulations as being available to the public under I.R.C. § 6104. If the current Board is having trouble locating the 1023 application, Determination Letter, and the like, you can always get these (or try to get them) from the IRS (or, at least request them. The IRS sometimes cannot find older 1023s). One way of doing so is to use IRS Form 4506-A, Request for Public Inspection or Copy of Exempt or Political Organization IRS Form. There is a charge for copies and that is set forth on the form. You can also use the form to inspect copies of returns before deciding whether or not to have a copy made.


VIII. MISCELLANEOUS MATTERS OF IMPORTANCE

A. IRS Tax Exemption and Filing Requirements

Make sure the charity has a Determination Letter. Be sure that annual reports get filed with the IRS (IRS Form 990 or perhaps 990-EZ or perhaps the e-postcard one for really small charities) are indeed filed. See Instructions for Form 990 and 990-EZ, Section B, for a complete list of non-profits that do not have to file 990s. I.R.C. 6033(a). The return is due the 15th day of the 5th month after the end of its tax year. The Pension Protection Act of 2006 extended the filing requirements to all charities – no $25,000 limitation any more. In 2007, Congress started to require all nonprofits to update their status. The deadline for complying was in 2010, and the revocation is automatic. If an organization is on the list and has annual revenue less than $25,000, there is a process for reapplying and a fee of $100 to do so.

Failure to file on time (regardless of the fact that no taxes are due) or to show information required by the IRS, results in a penalty on the organization: (i) $20/day, during the failure, up to the lesser of $10,000 or 5% of gross receipts for charities with less than $1M gross receipts per return that year; and (ii) $100/day for organizations over $1M in gross receipts, up to $50,000 per return. There is also a penalty on the manager if the IRS has tried to get the return filed and the manager fails to do so: $10/day up to $5,000 per return to be paid by the manager. I.R.C. 6652(c).

B. State Tax Exemptions: Ad Valorem Property, Sales Taxes, Franchise Taxes

Once the IRS Determination Letter is received, you may want to apply for exemption from (i) ad valorem property taxes - filed with local county appraisal district; (ii) sales taxes - with the State Comptroller; and (iii) franchise taxes - with the State Comptroller. Submit the same information to local authorities and the Comptroller that you have submitted to the IRS, including Articles/Certificate of Formation, Bylaws, and a detailed statement of activities to be conducted, plus the IRS Determination Letter. Tex. Tax Code § 11.18. The Texas Constitution exempts from taxes property used by organizations primarily engaged in public charitable functions.

C. Raffles by Charities

Former Rep. Terral Smith (Rep., Travis County) carried a bill to the 1989 Texas Legislature that was passed as Tex. Rev. Civ. Stat. Ann. § 179f and recodified in 1999 as Chapter 2002 of the Texas Occupations Code, the “Charitable Raffle Enabling Act.” Just because your organization is a charity and just because you remember other charities having raffles to raise money does not mean that raffles may be held legally. You will have to comply with some rather interesting requirements. See http://www.oag.state.tx.us/consumer/raffle.shtml for the Attorney General’s current directions on how to hold a legal raffle. Watch out for including a bottle of wine in a gift basket as you may run afoul of the Texas Alcoholic Beverage Commission.

D. Be Careful to Make Sure There’s a Process in Place so that Federal Employment Taxes are Paid and Paid on Time

Employers must withhold from employees’ wages income and FICA taxes and must remit these to the IRS periodically. If an employer “borrows” these payroll taxes and does not pay them, or does not pay them on time, the cost can be great. Failure to deposit withheld taxes on a timely basis results in a 10 percent deposit delinquency, I.R.C. § 6656(a), which increases to 25 percent if the deposit reported on a quarterly return is greater than the actual deposit. IRS Form 941, the Employer’s Quarterly Federal Tax Return, must be filed within 30 days after the last day of each calendar quarter. Quarterly payroll taxes set forth on a return and not previously paid or deposited must be paid with or before the filing of the return. There are, of course, penalties for failure to comply.

I.R.C. § 6672 imposes personal liability for the full amount of the tax upon any person required to collect, truthfully account for, and pay over any payroll tax who willfully fails to do so. Thus, any Director or officer who exercises corporate fiscal control may be held to be a responsible person. If payroll taxes are not paid on time, and in the proper amounts, you might find yourself being interviewed by the IRS to determine if you are a “responsible person.” (Take my word for it, this can be scary.) Note, that from time to time Congress has considered exempting volunteer, unpaid members of Boards when they are serving only in an honorary capacity and not participating in day-to-day activities, but has not done so.

E. Dinner Dances, Mugs & T-Shirts – What The Charity Must Do

If you sell tickets at $100 apiece to a charity dinner, part of that $100 ticket is for a meal and the individual should not take a full $100 charitable deduction on his or her income tax return. However, unless the charity indicates on the solicitation ticket the value of the service being provided, no charitable deduction will be allowed. Rev. Rul. 67-246, 1967-2 C.B. 104; I.R. 88-120. IRS Pub. 1391, “Deductibility of Payments Made to Charities Conducting Fund-Raising Events” was helpful with regard to the part-deduction, part-benefits, but is no longer on the IRS’ website; for “insubstantial fair market value,” see Rev. Proc. 90-12, 1990-1 C.B. 469, amplified by Rev. Proc. 92-49, 1992-1 C.B. 987, amplified by Rev. Proc. 92-102, 1992-C.D. 579. You must have seen the wording on charitable contributions receipts, like “No goods or services were provided in exchange for this contribution.”

F. Don’t Make Contributions to Political Candidates; Don’t Intervene in Politics

Not only should the charity not make political contributions as a political contribution is not an exempt charitable purpose, but it is a violation of federal law for a corporation to make contributions to a candidate for federal office. 2 U.S.C. § 441b, Federal Election Campaign Act. There is a similar Texas prohibition in Texas Election Code §§ 253.091 and .094 (felony of the third degree).

See IRC §§ 501(c)(3), (h); 504; 4955 relating to campaigning by a charity. In a 1996 Technical Advice Memorandum, TAM 9609007, the National Office of the IRS re-iterated the position of “zero tolerance” of political intervention infractions by 501(c)(3) organizations. In this TAM the 501(c)(3) organization’s charitable activity was to promote and conduct certain educational programs. The organization received support from a for-profit direct mail company that wrote fund-raising letters on behalf of the charity. These letters were designed to appeal to readers at one end of the political spectrum. The for-profit direct mailing company maintained its own mailing list and shared a portion of the fund raising proceeds with the charity. All letters were approved by the charity and were written on the charity’s letterhead.

The National Office of the IRS determined that language in the fund raising letters “favored certain candidates or were in opposition to other candidates for public offices” and violated the campaign activities prohibition of I.R.C. § 501(c)(3). The letters were also timed to coincide with elections and directed recipients (i.e., potential voters) to take specific actions. The National Office stated that there is no minuscule activity exception to the prohibition on political activity.

Planning Point. Avoid political intervention. However, if your organization inadvertently treads in the political arena, do “mea culpas,” have the Board pass a strict resolution against ever doing anything similar in the future, cite the de minimis exception set forth in the 8th Circuit case of St. Louis Union Trust Co. v. United States, 374 F.2d 427 (8th Cir. 1967), and the Statement of Former IRS Commissioner Lawrence B. Gibbs:

If political intervention is involved, the prohibition is absolute; however some consideration may be given to whether, qualitatively or quantitatively, the organization is in the circumstance where the activity is so trivial it is without legal significance and, therefore de minimis.

Statement of Lawrence B. Gibbs, Hearings before the Subcommittee on Oversight, Committee on Ways and Means, House of Representatives, Serial 100-5, 100th Cong., 1st Sess. 96-97 (March 12, 1987).

G. Special Mailing Rates

Religious, educational, scientific, philanthropic, agricultural, labor, and veterans’ and fraternal organizations that are organized not-for-profit and none of whose net income is not used at all to benefit any individual may apply for special mailing rates. Contact the Postal Service for applications (Form 3624, Application to Mail at Nonprofit Standard Mail Prices), go to www.usps.com and follow links to charities. You’ll need to provide your Articles, Bylaws, Determination letter, and other evidence of non-profit status, like a financial statement prepared by an independent auditor.

Some mailings require even more information; like financial statements, current budget, minutes, brochures, etc. It takes about two (2) weeks to be approved. Talk to your postmaster and make arrangement through him or her for the mailings. You after filing the application, do your mailing and then request a refund, Form 3533, Application and Voucher for Refund of Postage, Fees, and Services. Save your postage statements.

Once approved, you must make a non-profit mailing at least once every two (2) years at each Postal Office that you are authorized to use. (Use it or lose it.)

The intent of the postal service appears to me to be to charge more if the activity itself falls within the unrelated business income descriptions in the Internal Revenue Code.

H. Contemporaneous Acknowledgment of Charitable Donations Worth More than $250

Effective January 1, 1994, an individual or corporation cannot take an income tax charitable deduction for $250 or more unless there is “contemporaneous written acknowledgment”. IRC § 170(f)(8)(A). This acknowledgment must contain the following:

1. amount of cash; description of other property (but not a valuation);
   
   
2. whether charity provided any goods or services in return for donation (for example, a dinner);
   
   
3. a description and good faith estimate of the value of goods or services provided by the donee in return for the donation (for example, description of dinner or “intangible religious benefit … provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.” IRC § 170(f)(8)(B).
   
   A canceled check is not adequate substantiation.
   
   
4. For any contribution greater than $75, the charity must inform the donor that the amount of a contribution where the donor receives something back (for example, a coffee mug), is limited to the value of the donation less the value of what is received from the charity. The charity must provide a good faith estimate of the value of the goods or services provided to the donor. IRC §§ 6115. Failure to comply results in penalties of $10 for each contribution, limited to $5,000 per a particular fundraising event or mailing. IRC § 6714(a) and (b).

Contributions that are part of a single transaction are aggregated. Get IRS Publication 1771, “Charitable Contributions-Substantiation and Disclosure Requirements.” As of March 2002, the publication was updated to provide that the IRS will accept e-mail acknowledgments as adequate evidence of substantiation. Acknowledgements must be “contemporaneous,” defined as on or before the earlier of the date the taxpayer files his, her, or its return for the year or the date, including extensions, when the return is due.

I. Some State Required Reports

1. Texas Taxpayer Questionnaire. The Comptroller sends to newly-created organizations a Questionnaire. Complete and return it. Keep a copy.
   
   
2. Texas Franchise Tax Public Information Report. Complete, return, and keep a copy, even if no tax is due. This will be sent to you. The Secretary of State and Comptroller both use it.
   
   
3. The Old Art. 1396-9.01A Report. Every four (4) years this report needed to be completed and filed. This is for the Texas Secretary of State. Even if the Secretary of State did not send one to your non-profit, I recommended that you request it yourself. Reports will still be required. Here’s the information from the Secretary of State’s website: “A nonprofit corporation is required by law to file an informational report not more than once every four years upon request by the secretary of state. The report provides information regarding the corporation’s registered agent and registered office, and the names and addresses of its current officers and directors, and is required regardless of the corporation’s tax status. BOC § 22.357. Once requested, the report must be completed and filed with the secretary of state to avoid involuntary termination of a domestic corporation or revocation of the registration of a foreign corporation. BOC § 22.364.”
   
   
4. Texas Employment Commission Status Report. If you have employees, these reports must be filed.

---

Step 1. Obtain and read a copy of IRS Determination Letter; if the entity is a public charity, the Determination Letter will say that the corporation is not a private foundation and is publicly supported.

Step 2. Ask for and read the Articles of Incorporation; now Certificate of Formation, and the Bylaws, as amended and in effect while you’re serving.

Step 3. Ask questions and look at:

1. Current annual report and minutes (make sure that corporate formalities are observed);
2. Program brochures;
3. Organizational chart, including committees;
4. Board and staff rosters;
5. Budget and financial statements;
6. Descriptions of expectations of Directors; and
7. Review the application to the IRS for recognition of exempt status (IRS Form 1023 for charities) and make sure that the current mission is the same as reflected in the application and, if not, take steps to make sure the IRS is informed of any new mission.
8. Review annual information returns filed with IRS (probably IRS Form 990 or 990-EZ).

Ask questions: What is your financial commitment? Do you have a fundraising goal?

The author is indebted to an article by Hedy Helsell, who was President/Executive Director of the Center for Non-profit Management, Dallas, Texas, for over 18 years, and thanks her for many of the ideas and lists set forth in Step 3, above.

Step 4. Understand your duties but make sure Directors’ and Officers’ Liability Insurance (“D&O”) is in place; check Homeowners to see if it covers your volunteering as a Director; consider an Umbrella Policy.

Step 5. Seriously consider whether or not you want to serve as a Director if the non-profit has not made a commitment to indemnify you to the fullest extent allowed by law.

Step 6. Unless the Articles of Incorporation/Certificate of Formation adopt the statutory Business Judgment Rule and thus limit your liability to the non-profit and other Directors, you need to consider carefully whether you want to serve as a Director of the corporation.

Step 7. If the corporation has an endowment or excess funds, consider investing them and using a professional money manager to help the Board in making investment decisions. Use a Request for Bids (“RFB”) to seek proposals and do not simply hire someone you know personally without doing any comparison shopping. Establish a protocol to do an RFB periodically and to review the investment adviser’s performance.

Step 8. Establish a protocol for making information available to the public; think transparency; a website is a good place for all the reports, the IRS Determination Letter, etc.

Step 9. Educate yourself about the laws unique to your non-profit corporation; and use the services of professionals, including lawyers, accountants, and fund-raisers, who are familiar with these unique law.

The current Commissioner of Tax Exempt and Government Entities for the Internal Revenue Service – Sarah Hull Ingram – has linked good governance to good tax compliance. As a result, the IRS will be and is already far more interested in governance than it has been in the past. Be careful out there.