Table of Contents Chapter One Regulation of Nonprofits... 1 A. The Attorney General... 1 1. Statutory Basis for the Attorney General s Authority... 2 a. Not-For-Profit Corporation Law... 3 b. Estates, Powers and Trusts Law... 3 c. Executive Law... 4 2. The Attorney General s Regulatory Role... 4 a. Incorporation... 4 b. Fundamental Corporation Changes... 6 3. The Attorney General s Enforcement Role... 6 a. Not-For-Profit Corporation Law... 6 b. Estates, Powers and Trusts Law... 7 c. Executive Law... 8 B. The Internal Revenue Service... 8 1. Reporting Obligations... 9 a. IRS Regulation of Charities Generally... 9 C. Philanthropic Watchdog Organizations... 10 1. The BBB Wise Giving Alliance... 10 2. New York Philanthropic Advisory Service... 11 3. Independent Sector... 11 Chapter Two Corporate Structure and Board Governance... 13 A. Types of Organizations... 13 1. New York Corporations Generally... 13 2. Business Corporations... 14 3. Not-For-Profit Corporations... 14 4. Religious Corporations... 16 5. Education Corporations... 16 6. Unincorporated Associations... 18 B. Bylaws... 19 1. Content of Bylaws... 19 2. Statutory Bylaw Provisions... 20 3. Adoption and Amendment of Bylaws... 21 C. Board of Directors... 21 July 2014
Lawyers Alliance for New York 1. Qualification and Selection of Directors... 22 2. Actions of the Board... 23 3. Board Committees and Required Policies... 25 4. Officers... 26 D. Members... 27 1. Qualifications for Membership... 27 2. Membership Meetings... 28 E. Staff... 31 Chapter Three Directors Duties, Executive Compensation & Inside Party Transactions... 33 A. Directors May be Liable for Breach of Duties of Care, Loyalty and Obedience... 33 1. Duty of Care... 34 a. The Business Judgment Rule... 34 b. Liability for Investment Decisions... 35 2. Duty of Loyalty... 36 3. Duty of Obedience... 37 B. Executive Compensation and Insider Transactions... 38 1. Intermediate Sanctions Under the IRC... 38 a. Excess Benefit Transactions... 38 b. Disqualified Persons... 39 i. General... 39 ii. Disqualified Persons Based on Powers and Responsibilities... 40 iii. Per Se Disqualified Persons... 41 iv. Persons without Substantial Influence... 41 v. Facts and Circumstances Test... 42 c. Substantial Influence Guidelines... 42 i. Indications of Substantial Influence... 42 ii. Lack of Substantial Influence... 42 2. Reasonable Compensation... 43 a. Rebuttable Presumption of Reasonableness... 44 i. Individuals without Conflicts of Interest... 44 ii. Comparison with Similar Transactions... 45 iii. Adequate Documentation... 45 b. Bonuses and Discretionary Payments... 45 c. Revenue Sharing Transactions... 46
C. Penalties, Correction and Abatement... 47 1. Penalties... 47 2. Correction... 48 3. Abatement... 49 4. Period of Limitations... 50 D. Related Party Transactions under State Law... 50 1. Related Party... 51 2. Disclosure... 52 3. Review Transaction... 52 4. Board Action... 52 5. Delegation to a Committee... 53 E. Executive Compensation under State Law... 54 1. Executive Order 38... 55 F. Third Party Liability... 58 1. New York Standard of Care in Third Party Actions... 58 2. Statutory Liability... 60 3. Helpful Advice for Avoiding Liability... 61 Chapter Four Fundamental Corporate Changes... 62 A. Changes to the Certificate of Incorporation... 62 1. Certificate of Correction... 64 2. Certificate of Amendment... 64 3. Restated Certificate... 65 B. Mergers and Consolidations... 66 1. Overview... 66 2. Mergers... 66 3. Consolidations... 67 4. Process... 68 5. Other Strategic Alliances... 72 C. Dissolutions... 74 1. Dissolution... 74 2. Judicial Dissolution... 74 3. Non-Judicial Dissolution... 75 Chapter Five Financial Management of Nonprofits... 80 A. Setting Financial Goals... 81
Lawyers Alliance for New York 1. Engaging Leadership in Financial Planning... 82 2. Planning for the Future with a Deep Understanding of Historical Trends... 82 3. Budget versus Actual Reports... 83 4. Cash Flow Project... 84 5. Statement of Financial Position... 85 6. Where do We Want to Be?... 85 7. Ensuring Access to Working Capital... 87 B. Developing the Budget... 88 1. Understanding the Full Financial Plan... 88 2. Creating the Budget... 88 a. Beginning the Budget Development Process... 88 b. Budgeting Revenues and Expenses... 89 c. Budgeting for Capital Needs... 91 d. Projecting Future Cash Flow... 92 e. Finalizing the Budget... 92 f. Modifying the Budget... 93 C. Reporting and Monitoring... 93 1. Communication between Finance and Non-Finance Staff... 94 2. Reliable Financial Reports and Analytical Tools... 95 a. Summary Reports... 95 b. Organizational Dashboard... 95 c. Detailed Reports... 96 d. Who Gets What Reports... 98 D. Getting to the Right Software... 98 1. The Importance of Configuration... 99 2. Choosing a Software System... 99 3. Additional Considerations... 99 E. Internal Controls and Efficiencies... 100 1. Internal Controls... 100 2. Efficiencies... 101 a. Informational Technology and Staff Training and Development... 101 b. Operational Processes... 102 F. Managing Grants and Contracts... 102 1. Grants and Contract Planning... 103 2. Contract Formation... 103 3. Contract Management... 104 4. Allocating Expenses to Grants and Contracts... 104
G. Ensuring Proper Fiscal Staffing... 105 H. Managing the Annual Financial Audit... 107 1. Purpose of the Audit... 107 2. Auditor Selection... 108 3. The Audit Process... 108 I. The Board s Role in Fiscal Oversight... 111 1. Overview... 111 2. New York Prudent Management of Institutional Funds Act... 112 3. Expenditures from Endowment Funds... 113 4. Roles of the Finance Committee... 114 5. Roles of the Audit Committee... 115 J. Conclusion...116 Chapter Six Tax Compliance and Registration and Reporting Requirements... 117 A. Tax Compliance - Public Charities... 117 1. Introduction... 117 2. Qualifying as a Public Charity... 118 a. Qualifying Based on Organization s Activities... 119 b. Qualifying as an Organization that Provides Support for a Public Charity... 119 c. Qualifying Based on Organization s Sources of Support: Publicly Supported Organizations... 120 i. Mechanical Test... 121 ii. Facts and Circumstances Test... 125 iii. Definition of Normally... 130 d. Process for Obtaining Public Charity Status as Publicly Supported Organization... 130 B. Consequences of Private Foundation Status... 131 1. Tax on Investment Income... 131 2. Prohibited Activities... 132 3. Minimum Distributions... 132 4. Limitation on Charitable Deduction from Income Tax... 133 5. Reporting Requirements... 133 C. Operating Foundations... 133 D. Federal Reporting... 134 1. Internal Revenue Service... 134
Lawyers Alliance for New York a. Annual Reports Form 990... 134 b. Withholding: Income and Social Security Taxes... 139 2. Federal Lobbyists... 140 E. New York State Registration and Annual Reporting Requirements... 141 1. Reporting to the Attorney General... 141 2. NYS Department of Taxation and Finance... 143 a. Withholding: Income Taxes... 143 b. Unrelated Business Income Tax... 144 3. NYS Department of Labor: Unemployment Insurance... 144 4. The State Insurance Fund: Workers Compensation... 146 5. New York State Lobbying Activity... 147 F. New York City Reporting Requirements... 147 1. NYC Tax Commission: Real Property Tax... 147 2. NYC Lobbying Activity... 147 Chapter Seven Fundraising... 149 A. Deductibility of Donations... 150 1. Documentation of Contributions... 153 2. Noncash Contributions... 154 3. Quid Pro Quo Contributions... 155 B. Fundraising Without an IRS Determination Letter... 157 1. Contributions Made While Application Is Pending... 157 2. Determination Letters Not Required for Certain Organizations... 157 3. Sponsorship by Another Organization... 158 a. Chapters and Affiliates... 158 b. Fiscal Sponsors... 160 C. Charitable Solicitation... 161 1. Fundraising Fraud... 161 2. Registration and Reporting Requirements... 161 a. Charities Bureau Registration... 161 3. Professional Fundraisers... 163 4. Charitable Solicitation Outside of New York... 165 5. Charitable Solicitation Over the Internet... 166 6. Notices and Disclosure of Information... 166 a. Notices on Solicitation Materials... 167 b. Public Access to Organizational Documents and Tax Information... 168
7. Sanctions... 169 8. First Amendment Limits on the Regulation of Fundraising... 169 D. Particular Fundraising Practices... 170 1. Gaming Activity... 170 a. Federal Law... 170 b. State Law... 172 2. Raffles, Bingo, and Other Games of Chance... 172 a. General Licensing Requirements... 172 b. Raffles... 173 c. Do s And Don ts of Charitable Gaming... 174 d. Bingo... 175 3. Auctions... 177 a. State Law... 177 b. Federal Law... 177 Chapter Eight Employment and Personnel... 178 A. Review of Practices and Procedures... 178 B. Review of Specific Employment Related Practices and Policies... 182 1. The Nature of the Employment Relationship The Employment At Will Doctrine... 182 2. The Hiring Process... 184 a. Stating the Nature of the Employment Relationship in All Written Material Used in the Hiring Process... 184 b. Advertisements... 184 c. Employment Application... 185 d. Interview... 185 3. Fair Credit Reporting Act... 187 4. Offers of Employment... 189 C. Managing Existing Employees... 190 1. Handbooks or Personnel Policy Manuals... 190 2. Must Provisions for Personnel Practices Manuals... 193 a. Equal Employment Opportunity and Harassment Policies... 193 b. Disclaimers... 193 c. Zipper Clause... 194 d. Modification Provision... 194 e. Trial or Probationary Period... 195 f. Performance Evaluation... 195
Lawyers Alliance for New York g. Progressive Discipline/Standards of Conduct... 197 3. Summary of Points Regarding Personnel Policy Manuals... 198 D. Termination... 198 1. Procedure for an Internal Review of Termination Decision... 199 2. Layoff or Reduction-In-Force... 200 E. Post-Employment... 201 1. Exit Interviews... 201 2. Notice of Termination... 202 3. Separation Agreements... 203 4. Employment References... 205 5. Discrimination Charges and Employment Litigation... 205 6. Unemployment Compensation... 206 7. Retention of Employment Records... 207 F. Distinguishing Employees from Independent Contractors... 207 1. Determination of Independent Contractor or Employee Status... 208 a. The IRS Analysis... 209 i. Behavior Control... 209 ii. Financial Control... 210 iii. Relationship of the Parties... 211 b. The Department of Labor Analysis... 211 c. Federal and State Employment and Labor Law Analysis... 212 2. Employer Liability... 213 G. Labor Relations... 213 1. Coverage under The National Labor Relations Act... 215 2. Determination of Supervisory Status... 217 3. Employees Rights... 217 4. The Right to Strike... 218 5. Employer Unfair Labor Practices... 220 6. Union Unfair Labor Practices... 221 7. The Organizing Campaign... 223 8. No Solicitation No Distribution Rules... 225 9. Responding to a Request for Recognition... 226 10. The Petition for Election and the Campaign... 227 11. The Election Campaign... 227 a. Employer Do s and Don ts... 228 b. Union Conduct... 229 12. The Election... 229 13. Preparing for Negotiations and Negotiating with the Union... 230
14. Protected Concerted Activity in the Non-Union Context... 230 15. Managing an Organized Workforce... 231 a. The Importance of Preserving Management Rights... 231 b. Preserving Management Rights through Consistent Contract Administration... 231 c. Just Cause: Establishing the Legal Requirements for Effective Discipline... 232 d. Weingarten Rights: What are They and When Do They Apply?... 232 Chapter Nine Employee Benefits... 234 A. Statutory Benefits... 237 1. Unemployment Insurance... 237 2. Short-Term Disability Insurance... 237 3. Workers Compensation... 237 4. FICA (Social Security and Medicare)... 238 5. New York City Sick Leave... 239 B. Welfare Benefits... 239 C. Health Care Reform... 241 D. Health Plans... 246 1. Types of Health Coverage... 246 a. Indemnity Arrangements... 246 b. Health Maintenance Organizations ( HMOs )... 247 c. Dual Choice Programs... 247 d. Managed Care... 247 e. Self-Insurance... 248 2. Health Plan Design Decisions... 248 a. Who is Eligible for Coverage?... 248 b. Who Pays for the Coverage?... 249 c. How Comprehensive is the Coverage?... 251 3. Additional Forms of Benefits... 251 a. Cafeteria Plans... 251 i. Premium Conversion Plans... 251 ii. Flexible Spending Accounts ( FSAs )... 252 b. Health Savings Account... 255 c. Health Reimbursement Arrangements ( HRAs )... 255 E. Disability Income Coverage... 256
Lawyers Alliance for New York F. Life Insurance... 257 G. Payroll Practices/Vacations/Severance Payroll Practices... 257 1. Vacation Pay... 258 2. Severance Pay... 258 H. Retirement Benefits... 260 1. Overview... 260 a. Employer vs. Employee Contributions... 260 b. Defined Contribution vs. Defined Benefit Plans... 261 c. ERISA vs. Non-ERISA Plans... 262 d. Qualified vs. Non-Qualified Plans... 262 2. Choice of Plan Types... 263 a. Section 403(b) Voluntary Plans Containing Only Employee Contributions... 264 b. SEPs Containing Only Employer Contributions... 265 c. SIMPLE... 266 d. Section 403(b) Plans... 266 e. Qualified Section 401(a) Pension Plans... 271 f. Special Situations:... 272 i. Section 401(k) Plans... 272 ii. Section 457(b) And 457(f) Plans... 275 3. ERISA... 279 a. Scope... 279 b. Annual Filing... 280 c. Trusts/Fiduciary Rules... 281 d. Claims Procedures... 282 4. Excess Benefit Transactions... 284 5. Prohibited Tax Shelter Transactions... 285 I. Conclusion... 285 Chapter Ten Indemnification and Insurance... 286 A. Indemnification... 286 1. Scope of Indemnification... 287 2. Actions Brought by Third Parties... 287 3. Actions Brought by the Corporation... 288 4. Qualified Immunity for Uncompensated Directors and Officers... 289 5. Timing of Indemnification... 289 a. Before the Lawsuit... 290
b. During the Lawsuit... 291 c. After the Lawsuit... 291 6. Other Provisions... 291 B. Insurance... 292 1. Liability Insurance for Not-for-Profits... 292 2. An Introduction to Insurance... 293 3. Buying Insurance and Types of Coverage... 294 4. Anatomy of a Liability Insurance Policy... 296 a. The Declarations Page... 296 b. Coverage... 297 c. Endorsements... 297 5. Filing Claims... 297 6. Defense of Claims and Defense Costs... 298 7. General Liability Insurance... 298 a. Commercial General Liability Policy... 299 b. Additional Coverage... 300 8. Professional Liability Insurance... 301 9. Directors and Officers Liability Insurance... 301 Chapter Eleven Political Activity and Lobbying by Nonprofits... 304 A. Restrictions on Political Activity... 305 1. 501(c)(3) Organizations... 305 a. Supporting or Opposing Candidates is Prohibited... 305 b. Certain Election-Related Activities Are Allowed... 306 i. Candidate Forums... 306 ii. Voter Registration and Get-Out-the-Vote Drives... 307 iii. Voter Education... 307 iv. Other types of education... 307 v. Personal activity by the organization s leaders or employees... 308 c. Special Cautions... 308 d. Private Foundations... 309 e. Penalties for Intervening in Campaigns... 309 2. Political Activity and Non-charitable Exempt Organizations... 310 3. Tax Limits on Section 527 Political Organizations... 312 4. Permissible Links between 501(c)(3), 501(c)(4) and Section 527 Organizations... 313
Lawyers Alliance for New York B. Federal Election Campaign Act Restrictions on Political Activity... 314 1. Limitations on Political Activity by Corporations Generally... 314 2. Political Action Committees... 316 a. Connected PACs... 316 b. Non-Connected PACs... 318 C. Registration and Periodic Reporting of Political Activity... 318 1. IRS: Reporting for 527 Organizations and Other Political Organizations... 319 2. FEC: Reporting for Organizations Involved in Federal Elections... 320 3. New York State Board of Elections: Reporting for Organizations Involved in Express Advocacy in a State, County, or Local Election... 320 4. New York State Attorney General: Reporting for Organizations Required to Register With the Charities Bureau... 323 5. New York City Campaign Finance Board: Reporting for Organizations Involved in New York City Elections...324 D. Lobbying Activity and Nonprofit Organizations... 325 1. Lobbying by 501(c)(3) Organizations... 325 a. Substantial Part Test... 330 b. The 501(h) Election: Lobbying Expenditures Test... 330 c. Penalties for Exceeding the Expenditure Limits... 333 d. Special Rules for Private Foundations... 334 2. Lobbying/Advocacy by Noncharitable Organizations... 335 3. Lobbyist Registration and Reporting Rules... 336 a. Federal Lobbying Disclosure Act... 336 b. New York State Lobbying Act... 339 c. New York City Lobbying Reporting Requirements... 344 Chapter Twelve Revenue-Generating Activities of Tax-Exempt Nonprofits... 348 A. Relationship Between a Nonprofit s Revenue-Generating Activities and Its Exempt Purposes... 349 1. The Operational Test... 350 2. The Commerciality Doctrine... 352 a. The Counterpart Test... 353 b. The Primary Purpose Rule... 354 c. The Role of Profit... 354 B. Unrelated Business Income Tax Issues... 356
1. The UBIT Test... 356 a. Trade or Business... 357 b. Regularly Carried On... 358 c. Substantially Related... 358 2. Exceptions to UBIT... 359 3. UBIT Exclusions... 360 C. Private Inurement, Impermissible Private Benefit, and Excess Benefits (and Intermediate Sanctions)... 362 1. Private Inurement... 362 2. Impermissible Private Benefit... 363 3. Excess Benefits and Intermediate Sanctions... 364 a. Compensation... 365 D. Structuring Options for Revenue-Generating Activities... 366 1. Subsidiaries... 366 a. For-Profit Subsidiaries... 367 b. Not-For-Profit Subsidiaries... 369 c. Conflicts of Interest... 370 d. Shared Services/Resources... 371 e. ERISA/ Single Employer Rules... 371 f. Consolidation of Financial Statements... 372 2. Joint Ventures... 373 a. Forms of Joint Ventures... 374 i. Joint Venture Operating Agreements... 374 ii. Limited Liability Companies... 375 iii. Limited Partnerships... 375 b. Regulation of Joint Ventures... 375 i. New York Law... 375 ii. Federal Law... 376 E. Special Situations... 378 1. Advertising Income... 378 2. Income from Controlled Organizations... 379 3. Cause-Related Marketing... 379 4. Rental of Membership or Mailing Lists... 380 5. Corporate Sponsorships... 381 6. Program- Related Investments and Mission- Related Investments... 382 F. Conclusion... 383
Lawyers Alliance for New York Chapter Thirteen Intellectual Property... 384 A. Trademarks... 385 1. Trademark Registration... 386 a. Advantages of Registration... 386 b. Unregisterable Marks... 387 c. The Distinctiveness Requirement... 388 d. Likelihood of Confusion... 389 e. The Use Requirement... 389 B. The Federal Registration Process... 391 C. Common Law Marks... 393 1. Use Of and TM... 394 2. Trademark Infringement... 395 3. Dilution... 398 4. Asserting a Claim of Trademark Infringement... 398 5. Defenses to Trademark Infringement... 399 a. Descriptive or Generic Marks... 400 b. Laches... 400 c. Unclean Hands... 401 d. Fraud... 401 e. Antitrust Laws... 402 f. Free Speech and Fair Use... 402 g. Abandonment... 403 h. Functionality... 403 i. Continuous Use without Knowledge... 404 6. Trademarks Online: Domain Names... 404 a. Anti-Cybersquatting Consumer Protection Act... 404 b. The Uniform Dispute Resolution Policy... 406 c. Other Online Trademark Infringement... 407 D. Licensing and Other Revenue Generation Opportunities Related to Marks... 408 E. Copyright... 410 1. Copyrights Generally... 410 2. Protected Rights... 411 3. Copyright Ownership and Work for Hire... 412 4. Term of Protection... 414 5. Advantages of Copyright Registration... 414 6. Registration Process... 415
7. Copyright Notice... 417 8. Copyright Infringement... 417 9. Injunctive Relief... 419 10. Damages... 419 11. Fair Use Defense... 420 12. Copyright on the Internet... 421 13. Internet Links and Framing... 425 14. Copyright Disputes... 426 15. Revenue Generation Opportunities Related to Copyrights... 427 F. Patent... 428 1. Patent Protection... 428 2. Patent Infringement... 430 G. Trade Secret... 430 1. Definition of a Trade Secret... 431 2. Misappropriation of Trade Secrets... 432 3. Remedies for Misappropriation... 433 4. Exploitation of Trade Secrets... 433 H. Other Intellectual Property Issues... 434 1. Security Breach Notification Laws... 434 a. Generally... 434 2. New York... 435 3. Minors and Intellectual Property... 436 a. Capacity to Enter into Contracts... 436 4. COPPA... 437 Chapter Fourteen Contracts... 439 A. Legal Formation of a Contract... 439 1. Offer and Acceptance... 439 2. Consideration... 441 B. Negotiating a Contract... 442 1. Leverage... 443 C. Preliminary Forms of Agreement... 444 1. Memorandum of Understanding or Letter of Intent... 444 2. Term Sheet... 444 D. Drafting a Contract... 444 E. General Contract Provisions... 446 1. Stating the Parties Promises and Responsibilities... 447
Lawyers Alliance for New York 2. Covenants... 447 3. Representations and Warranties... 447 4. Term... 449 5. Intellectual Property Provisions... 450 6. Changed Circumstances... 450 a. Modification or Amendment... 450 b. Assignment... 451 7. Conditions... 452 8. Defined Terms... 453 9. Entire Agreement Clause... 453 F. When the Relationship Sours... 454 1. Termination, Renewal, and Survival... 455 2. Indemnification Clause... 456 3. Dispute Resolution... 456 4. Choice of Law and Jurisdiction... 457 G. Breach of Contract and Remedies... 458 1. Breach of Contract... 458 2. Remedies for Breach... 459 a. Damages... 459 b. Liquidated Damages... 460 c. Specific Performance... 460 d. Injunctive Relief... 461 H. Avoiding Personal Liability... 461 I. Service Providers Contracting with Government Agencies... 462 1. New York State Procurement Guidelines... 463 a. Contract Procurement... 463 b. Vendor Responsibility... 464 c. Contracting and Registration Process... 464 i. Approval... 464 d. Contract Renewal or Termination... 464 e. Interest Payments... 465 2. New York City Procurement Guidelines... 465 a. Vendor Responsibility... 466 b. Performance Evaluations... 466 c. Contract Changes... 467 d. Prompt Payment... 467 e. Dispute Resolution... 467
Appendix A Sample Bylaws... 469 Appendix B Sample Conflict of Interest Policy... 480 Appendix C Sample Whistleblower Policy... 485 Appendix D Pre-Employment Inquires Guidelines... 489 Appendix E Personnel Policy Manual Checklist... 499 Appendix F Termination Review Checklist... 501 Appendix G Personnel Records Retention Requirements... 507 Appendix H NYC Dispute Resolution Procedure... 517 Appendix I Financial Management Metrics and Ratios... 518 Index... 521