Fiduciary duties and the federalization of charity law
In my nonprofit law class we've had an overview of state nonprofit law and a brief introduction to federal tax exemption. Traditionally you could distinguish between state and federal law governing nonprofits as two substantially different spheres, with states regulating organizations' formation and governance and the federal government determining which organizations qualify for exemption and deductible gifts.
But the times they are a changin', with federal tax law playing an increasingly more prominent role in standardizing principles of corporate formation and governance.
One example we've already seen: the recommended--as in necessary--standardized language that the IRS advises charities to include in their articles of incorporation in order to qualify for exemption under Section 501(c)(3).
And here's another example: the IRS draft "Good Governance Practices for 501(c)(3) Organizations."
Yes, state law still requires directors of for-profit and nonprofit social enterprises to be mindful of their fiduciary duties, such as the duty of care and the duty of loyalty. But while state law fiduciary standards can be--to use a high falutin' technical term--squishy--the IRS has been hard at work to spell out the principles of good governance in detail. The draft brings together a number of recommended management practices, such as
- preparing a clear mission statement
- adopting a code of ethics and whistle-blower policy
- exercising due diligence consistent with the duty of care
- fulfilling the duty of loyalty, including the adoption of a recommended conflict of interest policy
- making information about mission, activities and finances available to the public (i.e., "transparency")
- adhering to state and federal rules as to fundraising
- preparing accurate financial statements and obtaining an independent audit of accounts
- paying officers and staff no more than reasonable compensation
- adopting a clear policy for retaining and destroying documents
As you can see, serving on a board of directors involves a lot of hard work!
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