Non-Profit FAQ

This set of Non-Profit FAQ is provided as a service to our clients and friends.  While the information provided in this publication is believed to be accurate, it is general in nature and should not be construed as legal advice.  Please consult with a competent professional before relying on any written commentary.  The material herein is not written to solicit any engagements where to do so might offend or violate the professional standards of any other state, country or bar.

1. Can a Texas non-profit corporation distribute any of its income to its members?

Texas law defines a non-profit corporation as a corporation whose income may not be distributed to its members, directors, or officers in the form of dividends or otherwise.  Of course, reasonable salaries, reimbursements, and bonuses may be paid commensurate with duties, performance and out-of-pocket expenses.


2.  In Texas, what is the state law governing a non-profit corporation?

If a non-profit corporation was in existence prior to January 1, 2006, it will continue to be governed by the Texas Non-Profit Corporation Act until January 1, 2010, unless it has opted into the Texas Business Organizations Code.  Nonprofit corporations formed after January 1, 2006 are governed by the provisions of the Texas Business Organizations Code.


3.  What is the fiduciary duty that an officer owes to the non-profit organization he serves?  If he breaches his fiduciary duty, and a claim is filed, what elements will the claimant have to prove to show a breach of fiduciary duty?

In this relationship, the fiduciary duty is a duty to act for the non-profit organization's benefit, while subordinating his personal interests to that of the organization.  The claimant must show: (1) the existence of a duty; (2) a breach of that duty; and (3) injury to the organization or a benefit to the officer.


4.  If a non-profit organization plans to develop a fundraising program, what type of policy helps the directors discharge their duties of care and loyalty?

For non-profit organizations engaging in fundraising, it's important for directors to establish and execute a gift acceptance policy.  This requires due diligence at the time the donor relationship is established and when evaluating the donor's motive for making the gift.  Some of the considerations for board review are:

     (1)   Will the gift promote or diminish the non-profit's mission?
     (2)   Are there conditions attached to the gift that will prevent constructive use of the
     (3)   If the gift is accepted, will it create any negative publicity for the non-profit?
     (4)   If the gift is real estate, will the acceptance of it be conditioned upon an 
            inspection and environmental evaluation?

In no event should the staff or board directors of the non-profit organization benefit personally from any fees associated with the gifts received, or engage in any activity that may create a conflict of interest.


5. The concept of "good governance practices" is in the news because of recent corporate scandals in both the for-profit and non-profit sectors.  What are some of these practices that are recognized by the IRS and relevant in completing the revised Federal Tax Form 990 for non-profits?

Practices normally associated with the governance of for-profit corporations, such as developing a code of ethics, creating a conflict of interest policy, whistleblower policy, document retention and destruction policies, and using an audit committee, are evolving into the policies and procedures adopted by more non-profit corporations to protect against director and officer liability.


6. What is the difference between a private non-operating foundation and a private operating foundation?

Private Non-Operating Foundation:

     (1)   Does not directly perform charitable programs or services;
     (2)   Generally receives funding from one individual, family or corporation;
     (3)   Not active in raising funds or seeking grants;
     (4)   Required to distribute approximately 5% of its assets to public charities each 
     (5)   Its donors' charitable income tax deductions are more limited than the
            deductions available to donors of public charities.

Private Operating Foundation:

    (1)   Carries out its own programs with a stated charitable purpose;
    (2)   Seeks grants and generally doesn't award grants to other charitable 
    (3)   Must expend substantially all of its net investment income directly and for the
           purposes of its charitable activities;
    (4)   Donors receive more favorable public charity income tax deduction 


 7. What is a supporting organization?  Is it like a private foundation?

In Section 509(a)(3) of the Internal Revenue Code, a supporting foundation is described as a sub-category of a public charity.  It does not operate as a private foundation, but is related either structurally or operationally to one or more publicly-supported organizations, institutions, or certain noncharitable organizations such as social welfare organizations, labor organizations or business leagues.  A supporting organization must operate at all times in an active relationship that is accountable to a qualified supported entity.  


8. If the non-profit is a 501(c)(3) tax-exempt organization, isn't it free from all federal income taxes?

A category of income that is taxable to 501(c)(3) organizations is "Unrelated Business Taxable Income" ("UBTI").  It arises in two situations:  1) when the charitable organization receives income from an unrelated trade or business, or 2) when it receives income with respect to a debt-financed property. For the tax to be due, a three-part test must be satisfied.  That is, the organization's activity must constitute a trade or business, be regularly carried on, and not be substantially related to the tax-exempt purposes of the organization. 


9. If you set up an organization that does not operate as a for-profit organization, is the organization automatically tax-exempt?

Exemption is not automatic.  When organizations meet the requirements of the Internal Reveue Code provisions that provide for exempt status, they can become tax-exempt.  The U.S. Congress defines the organizations who are eligible for tax exemption, but there is no constitutional right to a tax exemption. When an organization applies to the IRS for a determination of its tax-exempt status, it's asking the IRS to recognize a tax exemption that has already been granted by Congress.  It's not asking the IRS to grant it the tax exemption.  Which non-profits must file with the IRS for recognition of their exemption?  In general, charitable organizations, certain credit counseling entities, and certain employee benefit organizations must file a form entitled "Application for Recognition of Exemption." 


10. In the context of a tax-exempt organization, what is meant by the concept of an "excess benefit transaction" by a "disqualified person"?

A transaction is considered to be an excess benefit, if the applicable tax-exempt organization provides an economic benefit, directly or indirectly, to or for the use of a disqualified person, and the value in providing the economic benefit exceeds the value of consideration or benefit received by the organization.  A disqualified person generally is one who is in a position to exercise substantial influence over the activities of the organization, such as a trustee, director, officer, or some other type of insider.  It may also include members of the family of a disqualified person.  If a disqualified person benefits from an excess benefit transaction, he may be subject to an initial tax equal to 25% of the amount of the excess benefit. 

Copyright 2009 The Fjordbak Law Firm