Category Archives: nonprofit

When Will a Nonprofit Corporation That Works with a For Profit Corporation Lose the Charitable Property Tax Exemption?

A nonprofit company should generally maintain a solid boundary between its activities and those of a related for profit company. A recent decision of the New Jersey Supreme Court highlighted why this is so important.

In that case, the Court held that nonprofit companies could lose their property tax exemptions if they commingle their affairs with affiliated entities that operate for profit. International Schools Services v. West Windsor Township, 207 N.J. 3 (N.J. 2011).

The plaintiff, International Schools Services, Inc. (ISS), was a nonprofit corporation that ensured that American children living overseas receive a quality education. In 1999, ISS created Independent Schools Group, Inc. (ISG), a for profit corporation that provided insurance and investment services to the educational community abroad. In 2002, ISS created ISS Financial and Insurance Network Inc. (ISSFIN), a for profit corporation that provided insurance services to ISS clients. The headquarters of both ISG and ISSFIN was located on ISS-owned property in West Windsor, New Jersey. Both ISG and ISSFIN paid below-market rates for their lease of the office space and ISS issued an unsecured loan to ISG. Additionally, ISS’ president was a member of the board of directors for both for profit entities.

West Windsor granted ISS a property tax exemption from 1990 through 2001 under New Jersey Statute 54:4-3.6. However, after reviewing the entity’s activities, the town revoked the exemption based on ISS’ close relationship with ISG and ISSFIN. The Tax Court rejected the plaintiff’s appeal and the Appellate Division partially agreed.

In 1984, the New Jersey Supreme Court set out three criteria for a nonprofit corporation to meet in order to secure a tax exemption for its real property:

  1. It must be organized exclusively for the moral and mental improvement of men, women and children.
  2. Its property must be actually and exclusively used for the tax-exempt purpose.
  3. Its operation and use of its property must not be conducted for profit.

Paper Mill Playhouse v. Millburn Township, 95 N.J. 503, 506 (N.J. 1984).

The Legislature has since amended the second prong of the test, removing the requirement of exclusivity and instead permitting an exemption for property that is “actually used” in connection with tax-exempt functions. The Court considered this change and asked “whether the Legislature’s elimination of the exclusivity requirement allows a nonprofit entity to conduct for profit activities in a commingled fashion on its owned and occupied property.” International Schools Services at 6.

The Court determined that the Legislature did not intend for such a result, because doing so would allow a nonprofit entity “to claim a property tax exemption when it has become inseparably entangled with for profit entities” and thus “would allow indirect taxpayer subsidization of those entities.” Id. at 42. The Court upheld West Windsor’s denial of the tax exemption “because the commingling of effort and entanglement of activities and operations by ISS and its profit-making affiliates was significant and substantial, with the benefit in the form of direct and indirect subsidies flowing only one way – from ISS to the for profit entities.” Id. at 4.

This decision is important for nonprofit companies that have close corporate relations with for profit companies that might jeopardize their ability to receive tax exemptions. It suggests that allowing a nonprofit entity to get too close – financially or otherwise – with a for profit entity could leave the nonprofit without the tax exemptions they value so greatly.


© 2011 Nissenbaum Law Group, LLC

Addressing a Conflict of Interest Confronting a Nonprofit Board of Trustees

There are a host of materials available for download on the topic of (a) what constitutes a conflict of interest for a member of the Board of Trustees of a nonprofit and (b) what penalties may arise as a result. However, the purpose of this post is to address (c) what procedure to put in place to vet it in the first instance.

It is obvious that an overt conflict of interest should be dealt with by simply prohibiting the activity. Yet, most conflicts of interest are not that overt. They are usually subtle, close calls; what lawyers refer to as mere potential conflicts of interest. In many  cases, assuming there is an appropriate written policy, these can be waived by a vote of the Board of Trustees after full disclosure and non-participation in the vote by the affected person(s).

However, that process can be particularly unwieldy for large Boards. For example, if there is a decision on a potential conflict of interest that is time sensitive, such as to allow or not allow a transaction to go forward between two Board members, the idea of placing it on the agenda for the next month’s meeting to be decided by two dozen people who are pressed for time is not the most efficient approach.

Instead, a better solution would be to create a standing committee of the Board that would review potential conflicts of interest. It would be empowered to consider the matter between normal meetings of the Board of Trustees. It would also be authorized to make decisions to (a) waive the conflict of interest; (b) take some provisional action until the matter can be heard by the entire Board; or (c) disapprove of the conflict and not allow it to continue. The standing committee would be required to keep minutes and report to the Board as a whole, which would also have the right to overrule the committee’s decision. In other words, the Board would remain ultimately responsible.

This is not a complete solution, and there are circumstances in which this approach simply would not work given the nature of the conflict and surrounding circumstances. However, it is an approach that is workable if applied in good faith and moderation.


© 2011 Nissenbaum Law Group, LLC

What Are the First Steps to Starting a Nonprofit Company?

There are many aspects to starting a nonprofit company. However, perhaps the most important question is what to do first. I would submit that having a great idea and knowing people who are interested in implementing it are not enough. The first thing that needs to be done is to prepare a formal business plan.

The business plan should be in writing and prepared in the standard format. There are software packages that guide one through this process. However, I would suggest that a good reference website or book on the topic is probably enough to give one a basic idea of how to prepare it. Indeed, the IRS application for 501(c)(3) status basically requires much (though not all) of the same information as a business plan.

A non-profit business plan includes the standard items one might expect: a list of proposed revenue sources (donations; grants; etc.); expenses; personnel; and so forth. However, it also requires a market analysis of the “competition.” In the case of a non-profit, the competition is competing for donations and grants. It is important that one see if others have already formed a charity that tends to the same needs. If so, is that charity going to be seeking contributions from the same donor base? These sorts of questions need to be answered at the outset.

In sum, although it might seem overly formalistic, it is a particularly good idea to have a business analysis of the proposed non-profit company set out in writing before proceeding. An extensive business plan is a particularly effective way of doing this.


© 2011 Nissenbaum Law Group, LLC

Does a non-profit advocating for animal rights have standing to sue New York for violation of animal rights laws?

In 2009, Judge Shafer of the Supreme Court, New York County ruled in favor of the non-profit corporation, Stray from the Heart, Inc. (“Stray”), in its Article 78 application – an action brought to challenge the activities of an administrative agency in court – to compel the City of New York to comply with the statutory requirement that it provide full service animal shelters in all five boroughs of New York City.  Matter of Stray from the Heart, Inc. v. Department of Health & Mental Hygiene of the City of New York, 2009 N.Y. Slip Op. 52092(U), 25 Misc.3d 1214(A).

In 2000, New York City’s Committee on Health determined that the overpopulation of stray dogs posed a serious threat to the public’s health, safety and welfare.  As a result, the City passed Local Law 26 of 2000, the Animal Shelters and Sterilization Act (the “Act”) and incorporated it into New York City’s Administrative Code at §§17-801 through 17-809.  The Act required the City to ensure that a “full-service animal shelter” be maintained in each of the five New York City boroughs, twenty-four hours per day, seven days per week.  The Act defined “full-service animal shelter” as “a facility … that houses lost, stray or homeless animals and (1) accepts dogs and cats [24 hours per day, 7 days per week]; (2) has an adoption program open [24 hours a day, 7 days per week]; and (3) provides sterilization services for dogs and cats.”  See §§17-802(c); 17-809.  The Act also required that all animals be sterilized before leaving the shelter, except in certain specified situations.

The City was required to be in full compliance with the Act by January, 2005.  When the statutory deadline passed, the City still had no shelters that were open twenty-four hours per day and there were no shelters at all within the Bronx or Queens.

Stray is a non-profit volunteer organization that rescues, rehabilitates and places homeless dogs.  Stray, as the Petitioner, sued the City of New York alleging that the City’s failure to comply with the Act “created a dangerous public health threat and overburdens citizens and private rescue organizations, such as the petitioner, which are forced to bear costs of rescuing, sheltering, treating and sterilizing unwanted animals.  Petitioner seeks restitution to recover its expenses.”  Id. at *1.

The court held that Stray had standing to bring the action to compel the City to comply with the Act.  An Article 78 proceeding was the appropriate means for Stray to seek to compel the City to perform a statutory duty that is ministerial in nature and does not require the exercise of judgment or discretion by a City officer.  Stray’s standing was based upon the ground that it provided services to homeless animals which the City failed to provide as required by the Act.

The court held that the City, “blatantly failed to comply with the mandatory requirements of the Act, which unambiguously requires shelters in each borough, not in 3 out of 5, open 24 hours per day, not 12 or ‘as needed.’  While it is true that the creation of a shelter involves discretionary decision-making, the process by which an imposed duty is implemented is irrelevant.”  Id. at *2.

The court continued, “[C]ompliance with almost any statutory directive will involve some measure of discretion exercised by those implementing its terms, but this will not render nonjusticiable a claim which asks the courts to compel compliance with a statute that is otherwise mandatory on its face.”  Id.  In other words, courts may “compel acts that officials are duty-bound to perform, regardless of whether they may exercise their discretion in doing so.”  Id.

The court granted Stray’s Petition and directed the City of New York to “submit a plan for the immediate implementation of their compliance with the statutory directives of the Animal Shelters and Sterilization Act, Local Law 26 of 2000 within 60 days.”  Id. at *3.  The court also awarded Stray its costs for providing the services the City failed to provide as incidental damages – reasonable expenses incurred by one party as a result of another party’s failure to do what they were supposed to do – and referred the case to a Special Referee for calculation of those incidental damages.


© 2011 Nissenbaum Law Group, LLC

Can the State Require Financial Disclosure of How the Money is Distributed When You Donate Items to a Charity?

Texas recently passed a law that applied to professional resellers that collect clothing and household goods in the name of charities. The law imposed certain disclosure requirements on those resellers. The disclosures were meant to apply in three situations:
     (1) if none of the money will be paid to a charitable organization;

     (2) if only a percentage of the money will be paid to a charitable organization; and

     (3) if a flat fee for use of the charitable organization’s name will be paid by the reseller.

In each of those scenarios, the law required the information to be disclosed to the public.

A number of charitable organizations in Texas brought a lawsuit to overturn this law. They based their challenge largely on the grounds that it violated the First Amendment to the United States Constitution, as applied to the states through the Fourteenth Amendment. The First Amendment prevents the government from restricting free speech, which has been interpreted to apply to certain restrictions on fundraising by non-profit charities.

The United States District Court for the Northern District of Texas, Dallas Division decided the lawsuit, National Fed. of the Blind of Texas, Inc. v. Abbott, 682 F.Supp.2d 700 (N.D. Tx. 2010), on February 1, 2010.  In analyzing the issues, the District Court relied upon United States Supreme Court precedent in which the Supreme Court determined that disclosure requirements would interfere with fundraising by resellers on behalf of charities.  The District Court also held that the requirements discriminated against small charities that must use resellers out of necessity.  Larger charities that could absorb the costs and did not use resellers were able to avoid the disclosure requirements.  The Supreme Court also suggested alternatives to the disclosure requirements, such as: 1) requiring professional solicitors to disclose fundraising costs to the public; 2) vigorously enforcing anti-fraud laws; or 3) requiring resellers to disclose their identity and status as professional solicitors.

Following Supreme Court precedent, the District Court in Texas held that the disclosure requirements were not constitutional.  The requirement to disclose how they paid the charities and that donated items would be re-sold for profit was not constitutional because the requirements only applied to charities that used resellers.  However, the more limited aspect of the law requiring resellers to disclose their name and status as a for-profit entity was sufficiently narrowly tailored and, therefore, was constitutional.  The District Court stated:

Although charitable organizations are not for-profit entities, they are certainly selling the donations for and at a profit.  As passed, the Act’s disclosure requirements are unconstitutionally underinclusive because they discriminate against charitable organizations who hire professional resellers to solicit and sell donations in favor of charitable organizations who conduct the solicitation and resale in-house.  Texas is constitutionally permitted to put its citizens on notice that the clothing and household goods donated are going to be resold instead of being reused or donated.  But if Texas chooses to do so, it must require all organizations engaging in this resale activity to inform the public of this fact, not jut some of these organizations.

National Fed. of the Blind of Texas, Inc., 682 F.Supp.2d at 714-15.

The District Court also held that disclosure was not constitutional where only a percentage of the money would be paid to a charitable organization, nor where a flat fee for use of the charitable organization’s name would be paid by the reseller.  There were many reasons that this violated the Constitution. Two examples were that such requirements (a) were content-based restrictions of free speech which violated the First Amendment and (b) likely would be enforced against different classes of people unequally, thus violating the Equal Protection Clause of the Constitution.


© 2010 Nissenbaum Law Group, LLC

If You Control A Charity From Behind The Scenes And Without A Specific Title, Do You Have A Duty Of Care Toward It?

In a case of first impression in the Commonwealth of Pennsylvania, a Court was asked to determine whether an individual that exercised “control” over a charity, but was neither an officer nor director, could be held liable for breach of fiduciary duties to that charity. In other words, if you control a charity from behind the scenes and without a specific title, do you still have a duty of care?

In Com. ex rel Corbett v. Citizens Alliance for Better Neighborhoods, Inc., 983 A.2d 1274 (Pa. Commw. Ct. 2009), Pennsylvania’s Attorney General (“Attorney General”) alleged that former senator Vincent Fumo, the founder of Citizens Alliance for Better Neighborhoods, Inc. (“Citizens”), exercised dominion and control over the non-profit corporation even though he was neither an officer nor director of that corporation.  Specifically, the Attorney General alleged that Fumo used Citizens to:

unlawfully advance his personal convenience, enrichment and political advantage through various expenditures that benefited Fumo, including providing vehicles and office space and funding political activities totaling approximately $1,900,000.  It is also alleged that he directed Citizens to invest $9,000,000 with a financial advisor causing a loss of $1,400,000.

Initially, the Court determined that the Attorney General had standing to bring suit through its parens patriae powers, i.e. the court’s duty to protect the health, comfort, and welfare of the people within its jurisdiction. In this case, it held that it was the duty of the Attorney General to protect the well-being of its populace by ensuring that the purpose of a charity remain charitable.

When deciding the main issue — whether Fumo could be held liable for breaching fiduciary duties to Citizens despite being neither an officer nor director of Citizens — the Court relied mainly upon the decisions of New York federal courts in similar cases.  The New York federal courts developed this standard to determine the duties owed by people who control a non-profit, but are not technically its directors and officers.

The cases called the de facto directors and officers “control persons” and found that they owed “exacting fiduciary duties to the controlled corporation.  Control persons are not limited to officers and directors of the corporation but, rather, are those persons who exercise de facto control of the corporation during the relevant times.”  See Banco De Desarrollo Agropecuario, S.A. v. Gibbs, 709 F. Supp. 1302, 1306 (S.D.N.Y. 1989).

The test for de facto control is if that person controls the entity’s “day-to-day financial, personnel and business operations.”  See In re Grummon Olson Indus., Inc., 329 B.R. 411, 428 (Bkrtcy. S.D.N.Y. 2005).  This requires “a strong showing that the [control person] assumed actual, participatory, total control of the [controlled corporation].  Merely taking an active part in the management of the [controlled] corporation does not automatically constitute control.”  See Nat’l Westminster Bank USA v. Century Healthcare, 885 F.Supp. 601, 603 (S.D.N.Y. 1995).

In Corbett, the Pennsylvania Commonwealth Court adopted this “control person” standard. It held that a “control person” has a fiduciary duty to a non-profit corporation if he or she dominates the affairs of the corporation.  Citizens was formed on a “non-stock, no member basis” in which all formal control was with the directors themselves.  Accordingly, the Court held

If a party other than the directors has actual, de facto control over such a corporation, that party, being a legal stranger to the corporation, would owe no fiduciary duty to the corporation under the “control person” analysis.  Because it would be anomalous to hold that a person who asserts absolute de facto control over a non-profit charitable corporation owes no fiduciary duty to the corporation just because it is organized on a non-profit, non-stock, no member basis, we extend the “control person” analysis to cover individuals that dominate the affairs of such a corporation and hold that they have a fiduciary duty to the corporation.

The Commonwealth Court also held that the Attorney General’s complaint was insufficient to show how Fumo accomplished control and domination, so it dismissed the complaint and granted the Attorney General leave to amend to plead facts sufficient to make out a cause of action that Fumo exercised control and domination over Citizens.


© 2010 Nissenbaum Law Group, LLC

Can Directors of a Charity be Sued for Wrongfully Terminating One of the Charity’s Employees?

New York law grants immunity from lawsuits to unpaid directors of a not-for-profit corporation.  NY Civil Practice Law & Rules (CPLR) §3211(a)(11) and Not for Profit Corporation Law §720-a. That grant of immunity may be overcome if it can be established that the directors acted with gross negligence or with an intention to cause harm.  Additionally, if the directors are paid, rather than unpaid, they can also lose their immunity. The application of that law was recently analyzed in the unreported decision,  Johnson v. Black Equity Alliance, Inc., No. 09-106797, 2010 WL 424040 (N.Y. Sup. January 21, 2010).

Joyce Johnson was an at-will employee of the Black Equity Alliance, Inc. (the “Alliance”), a charitable organization that was tax-exempt pursuant to section 501(c)(3) of the IRS Code.  In order to maintain that status, the Alliance had a policy of not endorsing any political candidates.

This became an issue when Johnson endorsed Mayor Michael Bloomberg in his bid for a third mayoral term.  She took pains to do so solely in her individual capacity. However, when she attended a press conference in favor of Bloomberg, press accounts identified her endorsement of Bloomberg and her affiliation with the Alliance.

This triggered an emergency meeting of the board of directors in which they requested that Johnson tender her resignation.  She refused and was ultimately terminated.  She then brought suit alleging, among other things, unlawful termination.  She sued Alliance and each of its nine (9) individual directors.

The directors sought to be dismissed from the lawsuit on two grounds. First, they argued that they were justified in terminating her. Johnson’s political endorsement could have negative consequences for the Alliance’s tax-exempt status. They were referring to 501(c)(3) of the Internal Revenue Code which states that a not-for-profit corporation can lose its tax-exempt status if it participates or intervenes in any political campaign on behalf of, or in opposition to, any candidate for public office. Second, they argued that regardless of whether or not they were justified in terminating her, they were nevertheless, immune from suit under New York law. NY Civil Practice Law & Rules (CPLR) §3211(a)(11) and Not for Profit Corporation Law §720-a.

The Court agreed. In dismissing the individual defendants, it held that the benefits received by those directors (e.g., that Alliance paid for their attendance at various events) did not rise to the level of “compensation” such that they forfeited their immunity under New York law.  The Court also held that Johnson failed to establish evidence of a “reasonable probability” that the conduct of the individual defendants was sufficiently wrongful that it reached the level of “gross” negligence (which would eliminate their immunity from suit). 

The Court denied the portion of the motion seeking dismissal of Alliance on the grounds that, at such an early point in the lawsuit, it would be premature to determine whether Alliance had discriminated against the plaintiff.

Comments/Questions:© 2010 Nissenbaum Law Group, LLC