The Dirty Dozen: Twelve Documents Every Attorney Should Review Before Serving on the Board of a Tax-exempt Organization
You sit on the board of directors for a tax-exempt organization that provides a community theater to the neighborhood. The theater has been around for three decades, and you have been a board member for the last five years. The board meets three times a year. The most recent board meeting was pretty typical: After approval of the prior meeting’s minutes, the chief executive officer presented his report, and the treasurer presented the financial report. Listening to the presentation of the financial report is rarely the high point of a board meeting. It is not uncommon to see people checking their iPhones or reviewing other handouts while secretly hoping that the financial report will end soon. Imagine your surprise a month later when you are served with a complaint for financial mismanagement of the theater seeking to hold you personally liable for allowing the treasurer to take off with $1,000,000 in assets. The immediate response is normally, “the audited financial statements did not reflect a problem.”
As a board member, you are responsible for monitoring the reports to avoid a situation like this from occurring. A proper reading of the organization’s bylaws would have made you aware that a finance committee and a separate audit committee must exist, and that each of those committees must meet quarterly. Unfortunately for you, neither the finance committee nor the audit committee was staffed, and neither had met for the last 10 years. How unlikely is this scenario? Fortunately, such lawsuits are rare,1 and very few cases have occurred in Florida. Almost all of the published case law from Florida deals with homeowner or condominium associations,2 which are a type of tax-exempt organization.3
Most tax-exempt organizations are governed by a board of directors that is empowered to carry out the exempt purpose of the organization. The board is the policymaker for the entity and is ultimately responsible for the operations and activities of the organization. Any CEO of a tax-exempt organization will tell you that he or she is always looking for attorneys to serve on the board of his or her organization. Attorneys often agree to serve on these boards without considering the responsibilities and consequences of such service.
The federal government, through the Internal Revenue Service, and the state of Florida, through the Florida Department of Agriculture and Consumer Services (FDAC), along with the Florida attorney general, provide much regulatory supervision of tax-exempt organizations.
F.S. §617.0830 states that a director of a Florida not-for-profit corporation is not liable if he or she acted, or failed to act, provided his or her duties were performed in good faith and in the best interest of the entity, using the level of care an ordinary person in a similar position would exercise in similar circumstances. This statute shields board members against liability, except for those cases involving self-dealing or bad faith.
F.S. §617.0834 grants immunity from civil liability to board members and officers who serve without compensation on a Florida not-for-profit organization that is organized under I.R.C. §§501(c)(3) through 501(c)(6).
Pursuant to F.S. §607.0850, most tax-exempt organizations, other than condominium associations, cooperative associations, homeowners’ associations, and timeshare management groups, are permitted to indemnify any person who is serving as a director. Under F.S. §607.0850, an organization has the power to indemnify any person who was a director against liability incurred in connection with any proceeding,4 provided the person acted in good faith and in a manner he or she reasonably believed to be in the best interests of the organization, and provided the person had no reasonable cause to believe his or her conduct was unlawful or criminal.5 If this protection is afforded through insurance, the type of insurance is often called a directors & officers (D&O) insurance policy.6 If an organization has D&O insurance, be sure to inquire as to the policy limits and coverage to ensure that you, as a board member, are covered.
Some of the larger private foundations, hospitals, and other charities may indemnify directors without the benefit of a D&O insurance policy. This assumes that the entity has sufficient assets to self-insure. An individual with deep pockets should be wary of serving on the board of an organization that chooses to self-insure. D&O insurance policies offer varying degrees of protection, depending upon how much coverage the organization can afford. Most policies will pay either directly to the directors or to the organization itself. Many D&O policies do not include reimbursement of legal fees, and almost all such policies exclude from coverage any liability for acts of self-dealing, unauthorized payments, defamation, pension law violations, and fraud.
Before agreeing to serve on a board of directors, an attorney should request and review the following documents:
1) Articles of Incorporation — These are the documents that created the organization. Be sure to check if an articles of amendment is filed, which indicates a change was made after incorporation. Common changes would be a name change or a change in distribution of assets upon termination. Alternatively, look for a trust agreement or, if the entity was formed as a limited liability company, an articles of organization. In many jurisdictions, a limited liability company (but only those treated as a corporation for federal tax purposes), a trust, or a trust created by will can create a tax-exempt organization.7 The organizing document can be filed in any state. These documents will let you know the corporate name, which could be very different from the name the general public sees. As an example in Florida, the American Lung Association in Florida is incorporated under the name American Lung Association of the Southeast, Inc. The articles of incorporation must contain certain information as described by Florida law.8 The articles will establish the initial board of directors and may contain the procedure for electing or appointing new board members and states, perhaps very generically, the purpose of the organization. For a tax-exempt organization, the articles must also contain the procedure to follow for disposing of corporate assets upon the dissolution of the organization. Articles created under Florida law tend to be short and sweet because they are not easy to amend, and there is a cost associated to filing amendments. The Florida Division of Corporations charges a fee for the filing of articles of amendment (currently $35).9
2) Bylaws — These are the rules adopted to regulate and manage the affairs of the tax-exempt organization.10 The bylaws are normally adopted by the board and should be reviewed at least once every three years. The bylaws may contain any provision that does not conflict with the articles and may not contain anything that would violate local, state, or federal law. If it is not contained in the articles, the bylaws may also establish how directors are qualified, elected, and removed and the length of term. Terms for members of the board may be staggered. The purpose of staggered directors is to provide for continuity of the board.11 Within the bylaws, you should take note of the quorum requirements, the meeting notice requirements, and whether meetings can be conducted by telephone or online. You should also check to see whether the organization focuses attention on lobbying. Most tax-exempt organizations are prohibited or severely restricted from conducting lobbying activities.12
3) IRS Form 990 for the Last Completed Fiscal Year — Form 990 is an informational income tax return that must be filed with the IRS on annual basis by most tax-exempt organizations. Versions of this form include 990-EZ, 990-PF, 990-T, and 990-N (also commonly known as “the e-postcard,” which can only be filed electronically). The form is due by the 15th day of the fifth month after the close of the organization’s tax year (also commonly known as the fiscal year).13 The amount of income and type of exempt organization determines which form is appropriate. This form must be filed annually. Many tax-exempt organizations use a tax year for their accounting period as opposed to a calendar year. This means that the organization uses a 12-month tax period that does not start on January 1 and end on December 31. In Florida, tax-exempt organizations commonly use July 1 to June 30 as the organization’s tax year; however, it can be any 12-month period the organization desires. Form 990, including schedules and attachments, must be made available for public inspection during the organization’s regular business hours at the organization’s principal office.14 When reviewing the Form 990, you should pay special attention to total assets and total liabilities, which can be found at the end of part one. This will give you a good idea of the financial health of the organization.
4) Copy of the Exemption Letter from the IRS (the IRS Determination Letter) — This is a letter from the IRS that states the organization is exempt from federal taxes. Once an organization receives a favorable determination letter, the letter is valid as long as there are no substantial changes in the purpose or operation of the organization.15 In order to revoke the tax-exempt status, the IRS must publish a notice that the organization has lost its exempt status.16 This letter is not required for most religious organizations.
5) Most Recently Filed Corporate Annual Report from State of Incorporation — A Florida-based, tax-exempt organization must file an annual report with the Florida Department of State, Division of Corporations, just like a for-profit organization.17 The report is due by May 1 of each year beyond the year of incorporation.18 The purpose of the annual report is to keep the state of Florida apprised of the organization’s basic information. No financial information is contained in an annual report. Failure to timely file the annual report will result in the organization becoming inactive and legally unable to transact business within Florida. Filing fees for an annual report for a tax-exempt organization are less than for-profit entities at $61.25; however, the late payment penalty does not apply to tax-exempt organizations.19 If the organization is incorporated under the laws of another state, check that state’s law to review filing requirements.
6) List of Board Responsibilities, Including any Required Financial Commitment and Copy of the Conflict of Interest Form — It is important to know what is expected of you before you agree to serve as a board member. Be sure to inquire as to the number of meetings per year, at what time of day and for how long meetings are usually held, and where meetings are usually held. People often agree to serve and are then surprised to find out that a large annual donation is expected from each board member. Many organizations have a “give or get” policy, which requires the board member to make the minimum donation themselves or assist in procuring the minimum donation amount from others. In addition, ask to see the conflict of interest form that the organization asks you to sign. All IRS informational tax returns for nonprofit organizations ask whether the organization uses a conflict of interest form. The IRS application for tax-exempt status goes so far as to request that a copy of the conflict of interest policy be sent in with the application.20
7) List of Existing Officers — The officer positions in a tax-exempt organization must be specified in the articles or the bylaws. The articles or bylaws also provide for the time and manner of election of officers.21 If both the articles and bylaws are silent as to term of office, the term of office is one year.22 The same person may hold multiple offices.23 An officer may resign at any time.24 The duties of a particular office should be described in the bylaws.
8) List of Existing Board Members — Board members must be natural persons who are 18 years of age or older.25 Other requirements for membership on the board may be provided in the articles or bylaws. Reviewing a roster of the board members can reveal much about a given board. Generally, a large board means that it meets infrequently and that they serve more in an honorary role than in a managerial or oversight capacity. A small board sometimes provides an opportunity to become more proactive quickly within the organization. There is no right or wrong answer as to how many board members should be required, but there must be at least three board members under Florida law.26 In addition, the composition of the board can suggest potential problems. For example, a board comprised of all attorneys or all financial planners is usually not a good idea. A board roster will also be helpful in providing you with a list of people to talk with in order to answer questions about the organization itself. Reviewing the board roster will help anticipate conflicts of interest should you have knowledge of, or previous history with, some of the other directors. For more information on conflicts of interest for directors of a Florida not-for-profit corporation, see F.S. §617.0832.
9) Mission Statement — A mission statement or program of work is an important item that every tax-exempt organization should have. A good mission statement is succinct and explains what the organization actually does, aspires to do, and/or what it hopes to achieve. A mission statement may be broad, such as “for literary purposes,” or be more specific, such as “to improve the reading skills of third grade students in Tampa, Florida.” The IRS recognizes eight tax-exempt purposes: religious, scientific, charitable, literary, educational, testing for public safety, fostering national or international amateur sports, and prevention of cruelty to children or animals.27 Florida merely requires that the organization act “for any one or more lawful purposes not for pecuniary profit.”28 Before agreeing to serve on a board, be sure you agree with the mission statement and feel comfortable taking action or raising funds in furtherance of the mission statement. Many tax-exempt organizations have problems when they stray too far from the core mission. As an example, a religious institution should not open a restaurant on the premises unless it is willing to prove how the restaurant furthers its mission and/or exempt purpose.
10) Copy of Most Recent Audit/Budget/Financial Report — Board members must understand the financial condition of an organization in order to serve and protect it. If a board member is not satisfied with his or her ability to understand the audit, budget, or financial report, the member should ask questions until he or she understands. When looking at year-end audited financial statements, look for the auditor to offer an “unqualified” or “clean” opinion. This is the highest level of assurance an auditor can provide.29 If the organization does not have a budget, it is exceedingly difficult to determine whether the organization is meeting its exempt purpose. A proper budget should also show projections versus last year’s results in order to help one assess the success or failure of the organization.
11) Copy of the FDACS Solicitation of Contributions Registration Application or Proof of the Annual Renewal — On January 1, 1992, the Florida Solicitation of Contributions Act went into effect. This law regulates the solicitation of public contributions and requires full public disclosure of certain information from persons or organizations soliciting Florida residents for contributions. The act does not apply to religious or educational institutions, government agencies, certain veterans’ organizations, or political groups who need not file this application.30 The initial application form with FDACS is form DACS-10100E, and there is a filing fee based upon the finances of the organization. FDACS sends an annual renewal form to the organization and there is a late fee for missing the renewal deadline. Information obtained from the application or the renewal thereof is made available to the public at the website for FDACS, www.freshfromflorida.com. The publication is only available online and is known as the Florida Charities Gift Givers’ Guide.
12) Copy of Florida Sales Tax Exemption Certificate — These certificates are issued by the Florida Department of Revenue to allow an organization to avoid paying sales tax on most purchases and leases. The certificate is good for five consecutive years from date of issuance and may be renewed.31 F. S. §§212.08(6), 212.08(7), and 213.12(2) govern which types of organizations may qualify for a sales tax exemption.
If an organization cannot provide you with most of the “dirty dozen” listed above, you should seriously reconsider joining the board. If you are already a board member of an organization that cannot provide most of the items listed above, encourage staff, officers, volunteers, and other board members to get current with their required paperwork and filings.
1 See Stern v. Lucy Webb Hayes National Training School, 381 F. Supp. 1003 (D.C. 1954).
2 See Taylor v. Wellington Station Community Association, Inc., 633 So. 2d 43 (Fla. 5th D.C.A. 1994), and Munder v. Circle One Condominium, Inc., 596 So. 2d 144 (Fla. 4th D.C.A. 1992).
3 See I.R.C. §§501(c)(4) and 501(c)(7). All references made to the Internal Revenue Code shall mean the Internal Revenue Code of 1986 as amended.
4 See Fla. Stat. §607.0850(11)(d), which defines “proceeding” to include any formal or informal, threatened, pending or completed action, suit or other matter, whether civil, criminal, administrative, or investigative. All references are to the 2010
Fla. Stat. unless otherwise provided.
5 See Fla. Stat. §607.0850(1).
6 See Fla. Stat. §607.0850(12).
7 See I.R.S. Rev. Rul. 2004-51 (June 1, 2004).
8 See Fla. Stat. Ch. 617.
9 Florida Dept. of State, Division of Corporations, Corporation Fees,
10 See Fla. Stat. §617.01401(3).
11 See generally ALI-ABA Revised Model Nonprofit Corporation Act (1987).
12 See I.R.C. §501(h).
13 See I.R.C. §6072(e).
14 See I.R.C. §6104(a)-(b).
15 See Treas. Reg. §1.501(a)-1(a)(2).
16 See Treas. Reg. §601.201(n)(3)(iii)(a).
17 See Fla. Stat. §617.1622.
18 See Fla. Stat. §617.1222(2).
19 See Fla. Stat. §617.1622(7). This report is available to the public at
20 See IRS Form 1023 (rev. June 2006) at 4, Part 5, Question 5(a), (b) and (c).
21 See Fla. Stat. §617.0840(1).
22 See id.
23 See Fla. Stat. §617.0840(4).
24 See Fla. Stat. §617.0842(1).
25 See Fla. Stat. §617.0802.
26 See Fla. Stat. §617.0806.
27 See I.R.C. §501(c)(3).
28 See Fla. Stat. §617.2001(1).
29 See Andrew S. Lang, Financial Responsibilities of Nonprofit Boards, 20 (Boardsource 2003).
30 See Fla. Stat. §§496.095 and 496.096.
31 See Fla. Stat. §212.084.
Adam Scott Goldberg practices tax, probate, and estate planning in Weston with Krause & Goldberg, P.A. He received his LL.M. in estate planning from the University of Miami and J.D. from Nova Southeastern University. He chairs the Tax Section Exempt Organizations Committee and is an adjunct professor at the Nova Southeastern University Law Center.
This column is submitted on behalf of the Tax Section, Domenick R. Lioce , chair, and Michael D. Miller and Benjamin Jablow, editors.