Bill Boyd

Nyemaster Goode, P.C.

wlb@nyemaster.com

An important function of the Board of Directors of a trade association is to determine the compensation for the senior leadership.  The Board may delegate the function to an executive committee.  In either case, it is important that the determination of compensation for the Chief Executive Officer of the organization meet the requirements imposed under the Internal Revenue Code for compensation of tax-exempt leaders.  This responsibility should be understood broadly: compensation is not limited to salary, but also includes retirement accounts, housing, car allowances, insurance premiums and other benefits.  Because executive compensation can implicate the interests of the IRS, members of the organization, and the public, the Board should approach compensation as a governance and compliance process, not merely as a budget decision.  Below is a summary of the requirements for determining reasonable compensation as well as some practices organizations can follow to ensure that they are in compliance with the requirements.[1]

Tax-Exempt Organization Principles.  A basic premise of nonprofit and other tax-exempt organizations is that the organization exists to serve its public or exempt purposes, not to confer improper private benefit on private persons.  Section 501(c)(3) of the Internal Revenue Code (“IRC”) expressly provides that no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual, and comparable private-inurement concerns apply to other exempt organizations, including section 501(c)(4), section 501(c)(6) and section 501(c)(7) organizations.  Inurement to insiders—such as directors, officers and employees—is prohibited, and the potential consequence can be revocation of tax-exempt status.

Under IRC section 4958, the IRS may impose excise taxes on disqualified persons who engage in excess benefit transactions with organizations that are exempt from taxation under Section 501(c)(3) or 501(c)(4) of the Internal Revenue Code..  An excess benefit transaction includes a compensation arrangement or property transfer in which a disqualified person receives more than fair market value from the exempt organization or pays the organization less than fair market value for property or services received.  Although section 501(c)(6) trade associations are separately subject to the private-inurement prohibition, the intermediate-sanctions framework can be useful because it highlights the same core questions of fair market value, independence, comparability and contemporaneous documentation.

Reasonableness of Compensation.  The central substantive question is whether the total compensation package is reasonable in exchange for the services provided.  The IRS does not apply a fixed formula, such as a percentage of total assets, expenses or revenues, to determine reasonableness.  As a practical matter, the Board should focus on the full economic package, including salary, deferred compensation, retirement benefits, health and medical benefits, housing, car allowances, insurance premiums, tuition assistance and other material benefits.

For organizations subject to the intermediate-sanctions rules, the Internal Revenue Code provides a rebuttable presumption that a compensation arrangement is reasonable if three procedural steps are satisfied.  First, the arrangement must be approved in advance by an independent board or authorized committee composed of individuals without conflicts of interest.  Second, the approving body must obtain and rely on appropriate objective comparability data.  Third, the approving body must contemporaneously document the basis for its determination in the minutes of the relevant board or committee meeting.  Even if an organization is not subject to the intermediate sanctions rules, these three steps are important given that the IRS asks about them in the Form 990.

The documentation requirement should be treated as a discipline, not a formality.  The minutes should record the terms of the compensation arrangement, the date of approval, the Board or committee members present during the discussion and vote, the comparability data used and how conflicts of interest were addressed.  The documentation should be completed before the later of the next Board or committee meeting or 60 days after the final action approving the compensation arrangement.

The reasonableness discipline should not stop with the chief executive officer.  Although non-executive employees and independent contractors generally are not covered by intermediate sanctions, the compensation paid to them still must be reasonable.  A consistent compensation review process therefore helps the organization manage both tax compliance and broader governance risk.

Form 990 Transparency.  The compensation process also has a disclosure dimension.  Part VI of Form 990 asks whether the process for determining compensation for the chief executive officer, executive director, top management official and other officers or key employees included review and approval by independent persons, use of comparability data and contemporaneous substantiation of the deliberation; if so, the organization must describe the process on Schedule O.  Part VII requires disclosure of trustees, directors, officers, key employees, the five highest compensated employees above the reporting threshold and certain former insiders, and Schedule J may require additional detail for highly compensated individual managers and compensation and expense reimbursement practices.

For Form 990 purposes, reportable compensation is broader than current cash salary.  It includes W-2 or Form 1099 compensation for the relevant calendar year, employer contributions to retirement plans, the value of health and medical benefits and certain other benefits above the reporting threshold, including housing, legal and tuition assistance.  Amounts paid by related organizations also may need to be reported, and transactions with interested persons may require separate disclosure on another schedule.

Iowa Law and Fiduciary Duties.  The Revised Iowa Nonprofit Corporation Act imposes two main fiduciary duties on a director:  a duty of care and a duty of loyalty.  As part of the duty of care, directors should ensure that the Board has approved reasonable and not excessive compensation for the organization’s executives.  Directors generally must act in good faith and with the care that a person in a like position would reasonably believe appropriate in like circumstances, and they may rely on officers, counsel, accountants, other qualified experts or committees of the Board when that reliance is reasonable.

The duty of loyalty also is implicated when an executive serves on the Board.  A conflict of interest transaction may arise when a director, the director’s company or a family member has a direct or indirect financial or other interest in a transaction subject to Board approval.  The Revised Iowa Nonprofit Corporation Act also prohibits loans to officers and directors except in limited circumstances.

Recommended Governance Practices.  An organization should adopt and periodically review written policies addressing compensation, director independence and conflicts of interest.  A sound compensation policy should require review and approval by independent persons, reliance on comparability data and contemporaneous substantiation of the decision.  A conflict of interest policy should cover officers, directors and key employees and should be reviewed at least every two or three years, and more frequently if organizational circumstances or legal standards change.

The method used to determine comparability should fit the size and complexity of the organization.  If the organization pays significant executive compensation, the Board should consider retaining an independent valuation firm or compensation consultant.  The Board should determine executive compensation at least annually, tie compensation determinations to the executive’s performance evaluation and make clear that any bonuses awarded in a given year do not guarantee bonuses in future years.

If a committee of the Board, such as an executive committee, determines the executive’s compensation, consideration should be given to having the full Board be informed of the determination, preferably in closed session and without the executive present.  These practices will not eliminate judgment from compensation decisions, but they create a record that the Board acted deliberately, independently and on an informed basis.

Willard L. Boyd III- Nyemaster Goode, P.C. 

Roles and Authority of Officers

While the board of directors is responsible for overseeing and managing the affairs of a nonprofit corporation, officers are responsible for carrying out the direction and policies established by the board. Officers handle the day-to-day leadership and administration of the organization within the authority delegated to them.

There is no legal requirement that a nonprofit have specific “named” officers; however, most organizations typically designate, at a minimum, a president and/or chair, a secretary, and a treasurer.

Standard of Conduct for Officers

The standard of conduct for officers is similar to that of directors, although the Revised Iowa Nonprofit Corporation Act (the “Iowa Nonprofit Act”) recognizes that officers and directors serve different roles within the organization.

Under the Iowa Nonprofit Act, officers owe the organization duties of care and loyalty. Officers are expected to:

• Act in good faith;
• Exercise the care that a person in a similar position would reasonably use under similar circumstances; and
• Act in a manner the officer reasonably believes to be in the best interests of the organization and its members, if any.

Reliance on Others

In carrying out their responsibilities, officers are permitted to rely on information and assistance from others, including:

• Employees of the organization;
• Other officers; and
• Information, opinions, reports, or statements prepared or presented by such individuals.

  An officer may rely on these individuals and the information received as long as the officer reasonably believes the person providing it is reliable and competent with respect to the matter involved.

  Officers may also rely on legal counsel, public accountants, and other professionals retained by the organization for matters the officer reasonably believes fall within the professional’s expertise
  
  Liability Protection and Indemnification
  
  Under the Iowa Nonprofit Act, an officer is not liable to the organization or its members for decisions to take or not take action, or for a failure to take action, if the officer has performed the duties in compliance with the standards of conduct described above. Whether an officer who does not comply with those standards may incur liability depends on applicable law, including the principles applicable to directors under the business judgment rule (Iowa Code section 504.832) and the liability protections provided by the Iowa Nonprofit Act (Iowa Code section 504.901).
  
  
  A nonprofit organization may indemnify and advance expenses to an officer who is a party to a legal proceeding because of their service as an officer:
  
  

• To the same extent as indemnification is permitted for directors; and
• If the individual is an officer but not a director, to any additional extent authorized by the articles of incorporation, bylaws, board resolution, or contract.

Still, indemnification may not be provided for:

• Liability in connection with a proceeding by or in the right of the organization, except for reasonable expenses incurred in connection with the proceeding; or
• Liability arising from conduct that includes:
  • Receipt of a financial benefit to which the officer was not entitled;
  • Intentional infliction of harm on the organization or its members; or
  • An intentional violation of criminal law.

Conclusion

Officers play a critical role in carrying out the board’s direction and advancing the mission of the organization. By acting in good faith, exercising reasonable care, and relying appropriately on others, officers can fulfill their responsibilities effectively. When these standards are met, the Iowa Nonprofit Act provides important protections against personal liability.

A number of virtual meeting platforms offer the use of artificial intelligence (“AI”) to generate transcripts, minutes and other records of meetings, including board and committee meetings of organizations.  This tool can be helpful for a variety of reasons, including generating minutes of meetings in a cost effective, efficient, and expeditious manner. Still, there are important reasons to be cautious in the use of AI tools in this context.

A benefit of using an AI tool in generating a transcript of board or committee meetings is that the transcript or other record can be used to generate minutes of a meeting.  To the extent a transcript is developed by AI, it likely will be much more detailed than normal board or committee meeting minutes, so it should not be viewed as a substitute for minutes of a meeting but instead as a tool to assist with the preparation of minutes.

One issue with regard to the use of an AI tool to generate transcripts or other records of board meetings relates to the accuracy of the information that is generated.  The tool may have trouble in the accurate transcription of the statements made during the meeting.  The tool also can have issues in identifying speakers and therefore not attribute statements to the correct individual. In addition, because the tool cannot understand tone, nuance, or context in which statements are made, an AI generated record could have significant deficiencies and convey a record that could easily be misunderstood.

Another issue with regard to the use of an AI tool has to do with confidentiality.  Once a transcript or other record is generated it can become part of a database for the tool used by others.  In addition, many AI tools store the data using a cloud-based system, which does not guarantee security of the information, and it is possible the information can be subject to security breaches. 

Some virtual meeting platforms and other AI tools allow any participant to utilize an AI tool to transcribe or otherwise record a meeting.  Thus, it is possible that the transcription or record will not be maintained by the secretary or other officer of the organization, but by someone else.  The ease with which the tool can be used to generate a record that is easily transferrable through email increases the risk of loss of confidentiality.

It is important to recognize that records generated by an AI tool may become discoverable in litigation.  As a result, an organization might determine that it is appropriate to not utilize an AI tool when discussing sensitive topics or matters subject to the attorney-client privilege in board or committee meetings.  It is also important to understand that to the extent a record is created, the record should be maintained in a manner consistent with the organization’s record retention and destruction policies.

Another issue with to the use of AI has to do with the impact of the AI tool on participants in a meeting. If a board or committee member knows that a meeting is being transcribed by an AI tool, the member could be reluctant to make points the member would otherwise make in a meeting. This, in turn, could result in a board or committee not functioning at an optimal level.

In light of the above, as an organization considers the use of AI in its overall operations, it is prudent to consider how the organization will use AI tools for board and committee meetings and to develop a policy with regard to the use of such tools in this context. 

A main reason why a tax-exempt nonprofit organization might consider establishing a
for-profit subsidiary is when the organization is involved in activities that go beyond the tax-
exempt purposes of the organization. These activities may be very profitable to the organization
but they also can subject the organization to unrelated business income tax (“UBIT”). In
addition, if the activities become too substantial in terms of the overall activities of the
organization, the organization can be at risk of losing its tax-exempt status. A nonprofit
organization can minimize the risk of losing its tax-exempt status by having the activity
conducted by a for-profit taxable subsidiary. In this regard, the IRS has stated that where the
subsidiary is incorporated, there is a significant legal barrier to overcome before the commercial
activities of a subsidiary will be attributed to the parent.

A for-profit subsidiary might also be attractive to a tax-exempt organization because of
the liability protection it provides for the activities conducted by the subsidiary. A for-profit
subsidiary also allows a structure where there can be investors other than the nonprofit
organization. This might be particularly helpful if the nonprofit organization does not have
sufficient capital to fund an activity important to the organization. A for-profit subsidiary can
also be helpful in compensating individuals without the compensation restraints that are imposed
on tax-exempt nonprofit organizations.

A nonprofit organization can establish a for-profit subsidiary by incorporating a business
corporation where the nonprofit organization is the sole shareholder or majority shareholder. In
order to ensure that the taxable activities of a for-profit subsidiary will not be attributed to the
tax-exempt parent, the IRS has stated that it is important that the purposes for which the
subsidiary is incorporated are equivalent to the business activities the subsidiary actually carries
on. The IRS also has stated it is important that the parent organization not control the affairs of
the subsidiary so much that it is merely an instrumentality of the parent.

A nonprofit organization can fund a for-profit subsidiary either through capital
contributions or loans; however it is important that any transactions between the entities are at
arm’s length and well documented in the same manner that would be done if the parties were not
related to each other.

Dividends received by the nonprofit organization from a for-profit subsidiary are not
taxable; however, if the nonprofit parent owns more than fifty percent of the for-profit subsidiary,
any interest, rents, royalties, and annuities distributed to the tax-exempt parent are taxable.

Affiliates and Subsidiaries
Willard L. Boyd III
Nyemaster Goode, P.C.
wlb@nyemaster.com

Nonprofit organizations can incorporate or otherwise organize affiliate or subsidiary
entities for various reasons. For instance, an organization may be involved in some type of
activity important to the mission of the organization that nevertheless presents substantial risk of
liability to the organization (such as services subject to data breach laws). In such a situation, the
“parent” organization might find it beneficial to shield itself (and its assets) by establishing an
affiliate or subsidiary organization where the activity will be performed. This may be
particularly attractive in the situation in which the parent organization has significant assets. In
addition, to the extent that an organization is involved in substantial activities that are taxable,
the parent nonprofit organization can minimize the risk of losing its tax-exempt status by having
the activity conducted by a for-profit taxable affiliate or subsidiary.

A nonprofit organization can establish a for-profit subsidiary, such as a business
corporation, as well as a nonprofit affiliate or subsidiary, such as a nonprofit corporation. In
addition, nonprofits establishing subsidiaries often choose to organize limited liability company
subsidiaries. From a tax standpoint, a for-profit corporate subsidiary will be subject to federal
income tax. A nonprofit corporation affiliate or subsidiary will also be subject to federal income
tax unless it obtains its own tax-exempt status. To the extent the nonprofit organization
organizes a limited liability company subsidiary, such subsidiary generally will be treated as a
disregarded entity by the IRS and will therefore not be treated as a taxable entity.

To the extent that the “parent” nonprofit establishes an affiliate or subsidiary for reasons
other than tax issues (such as to protect the assets of the parent nonprofit), the LLC subsidiary
alternative can be very attractive because it will not be necessary to seek a determination letter
from the IRS regarding the tax-exempt status of the subsidiary. In addition, as a disregarded
entity, it is not necessary for a separate tax-return or Form 990 be filed on behalf of the LLC
whereas with a tax-exempt nonprofit affiliate or subsidiary, it is necessary to file a Form 990 (in
addition to the Form 990 filed for the parent organization).

A mutual benefit nonprofit corporation, such as a trade association, might find it
beneficial to establish a nonprofit corporation affiliate that is a charitable nonprofit corporation
with tax-exempt status under section 501(c)(3). This type of entity would have a charitable
purpose, such as supporting education related to the trade supported by the mutual benefit
corporation. By establishing such a nonprofit affiliate subsidiary, it is possible to attract
charitable contributions that are deductible to the contributor as well as obtain grant funding that
is restricted to entities with tax-exempt status under section 501(c)(3).

Because a nonprofit is not “owned” by anyone, a nonprofit “parent” organization will not
actually own its nonprofit corporation affiliate or subsidiary. Instead, the parent nonprofit
generally will exert control over the affiliate or subsidiary nonprofit by either being the sole
member of the affiliate or subsidiary nonprofit with control over such organization or being able
to appoint and remove the board of directors of the affiliate or subsidiary nonprofit, or both.

Bill Boyd

Nyemaster Goode, P.C.

Des Moines, IA

wlb@nyemaster.com

Under the Revised Iowa Nonprofit Corporation Act, the Board of Directors of an organization is responsible for managing the affairs of the organization. Iowa Code section 504.801 (“[a]ll corporate powers shall be exercised by or under the authority of, and the affairs of the corporation managed under the direction of, and subject to the oversight of, its board of directors”).  Still, the Act contemplates that the Board will delegate functions to various parties, including officers, committees, and others. Iowa Code sections 504.831(4) and (5).

Sometimes, the question comes up as to what authority has been delegated to the Chief Executive Officer, Executive Director or other head of the organization.  This might be in the context of the CEO entering into a contract on behalf of the organization or otherwise binding the organization to some action.  Given that it is likely that a third party can rely on the authority of the CEO to bind the organization, it is important for there to be clarity on the authority of the officers.

Delegation authority should be well documented in the organization’s governance documents.  The Bylaws typically include a section that is devoted to describing the officers of the organization and their authority.  Often, however, the Bylaws describe the delegated authority in general terms, stating that the CEO shall be the principal executive officer of the Corporation and shall generally supervise and control all of the business and affairs of the Corporation subject to the ultimate direction and control of the Board of Directors.  In addition, the Bylaws might include a statement about the authority of the CEO to sign contracts on behalf of the organization.

Another way to provide for proper documentation of delegation authority is to have the Board approve a resolution specifying the authority of the senior executive, such as the CEO, as well as officers/employees subordinate to the CEO.  In this regard, one or more Board resolutions could specify different types of contractual arrangements (such as real estate purchase, space leases, loans, and labor agreements) that are delegated to the CEO and other officers/employees and identify what Board approval, if any, is necessary for such arrangements.  These types of resolutions also might specify a dollar amount over which it is necessary to obtain Board approval. 

Subject matter typically covered in these policies include the following:

• Identification of specific officers (by title) who have authority to bind the organization
• Identification of types of transactions officers may approve and bind the organization without Board authority
• Identification of types of transactions Board must approve

  [Note that there may be differences based on type of transaction and dollar amount]

• Duration of authorization

It is important to recognize that a Board of Directors (and its individual members) may not abdicate their responsibility simply by delegating authority to officers, including a CEO.  Still, the Revised Iowa Nonprofit Corporation Act provides that a Board is able to rely on others who have been delegated such responsibility unless the Board members know that the reliance is unwarranted. Iowa Code section 504.831(4).  By including provisions in the Bylaws as well as implementing Board resolutions on officer authority, the Board of Directors can set forth parameters on the types of arrangements the organization is undertaking.  These resolutions should provide the Board of Directors and the CEO comfort in understanding the authority of the CEO and other officers. 

                A business expense deduction for any organization dues is not permitted for that portion of dues or other payments not attributed to campaign or lobbying activities.  In particular, if a substantial part of an organization’s activities consist of political campaign activities or lobbying, a deduction under IRC section 162 is allowed only for the portion of dues or other payments to the organization that the taxpayer can clearly establish were not for political campaign or lobbying activities. IRS Reg. section 1.162-20(c)(3). 

            IRC section 6033 imposes reporting and notice requirements on tax-exempt organizations incurring expenditures to which IRC section 162(e) applies.  IRC section 162(e)(3) denies a deduction on dues or other similar amounts paid to certain tax-exempt organizations to the extent that the organization, at the time the dues are assessed or paid, notifies the dues payer that the dues are allocable to nondeductible lobbying and political expenditures of the type described in IRC section 162(e)(1). 

            Organizations that do not provide notices of the amounts of membership dues allocable to non-deductible lobbying and political expenditures are subject to a tax (commonly called a “proxy tax”) under IRC section 6033(e)(2) on the amount of the expenditures.  An organization that does provide notification on its dues statements, but underestimates the actual amount of non-deductible political or lobbying expenses, is subject to the proxy tax on the difference between the actual expenses versus the total non-deductible dues reported to members unless an election is made to carry over the deficit to the following year.  An organization must report the tax on Form 990-T.

Regardless of the tax-exempt status, it is important for all organizations to also be aware of federal and state campaign finance laws.

Bill Boyd

Nyemaster Goode, P.C.

Des Moines, IA 50309

The Revised Iowa Nonprofit Corporation Act recognizes two types of fiduciary duties of directors of nonprofit corporations: The duty of care and the duty of loyalty. 

The duty of care includes two main functions – decision-making and oversight.  In terms of decision-making, which is usually in the form of voting on a matter, each director needs to have sufficient information to be able to make an “informed” vote.

The oversight function relates to the board’s responsibility for monitoring the operations of the organization.  This means, among other things, that a director should have a general knowledge of the nonprofit corporation’s operations and be aware of what the financial records disclose and take appropriate actions to make sure there are proper internal controls, including compliance programs.  A director also should make reasonable inquiry in appropriate circumstances such as when there is troubling or unclear activity.  In addition, a director, upon becoming aware of warnings or reports of officer or employee theft or mismanagement, should ensure that a proper investigation is made and action taken.

Both the decision-making and oversight roles of directors relate to risk management activities involving the organization.  In terms of decision-making, the directors provide guidance with regard to the organization’s strategy and, in providing such guidance, directors need to be mindful of the risks associated with the strategy and various options.  In terms of oversight, the directors are expected to ensure that management has designed and implemented risk management policies and practices that are consistent with the organization’s strategy, risk tolerance, and applicable laws.  In addition, it is expected that the board will monitor the effectiveness of any policies and practices that have been implemented.  As with any matter presented to the board, the directors are expected to question management with regard to assumptions and other factors upon which the policies and practices are based.

In carrying out the duty of care and the work of risk management, a director may rely upon others – including officers, committees of the board of directors, lawyers, accountants and other experts – and delegate if the reliance is in good faith, unless the director knows or should know that such reliance is unwarranted.  See Guidebook for Directors of Nonprofit Corporations, Third Edition (ABA 2012).  With such reliance, directors are able to avoid being placed in a situation where they need to manage the day-to-day activities of the organization while still meeting their decision-making and oversight responsibilities.

Breaking down common myths and misconceptions about board meeting procedures can help associations run more effective and efficient meetings.

As an attorney and professional parliamentarian, I’m sometimes asked, “Who was Robert, and why do his rules rule?” Henry Martyn Robert was the original author of Robert’s Rules of Order.

Most organizations with a parliamentary authority use Robert’s. To the public, Robert’s Rules and parliamentary procedure are one and the same. However, a lot of what is “known” about procedure—especially board meetings—is wrong. Mark Twain warned, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Below are nine myths about board meeting procedure that associations should put to rest.

Myth 1: Parliamentary Procedure Doesn’t Matter

Many associations dictate in their bylaws or other governing documents that a parliamentary book will be followed when transacting business. Some states even have statutes that require certain organizations (e.g., HOAs, condos, nonprofits) to follow rules or Robert’s. Ignoring or incorrectly applying such procedures can lead to embarrassment and even lawsuits.

Myth 2: Any Robert’s Will Do

While there are many books with Robert’s Rules in the title, most are earlier editions or knockoffs. There is one official Robert’s that is the successor to earlier works. Each new edition brings changes to procedure. The current edition is  Robert’s Rules of Order Newly Revised, 12th Edition.  If your organization’s rules specify the “latest edition,” this is the book you need to use.

Myth 3: Boards Follow the Same Rules as Other Meetings

Rules aren’t one-size-fits-all. Problems are common when large meetings behave too informally, or small meetings behave too formally. Rules should be like clothes—they should fit the organization they are meant to serve.

Most parliamentary manuals provide that board and membership meetings are conducted differently. Large meetings must be fairly formal. However, formality can hinder business in smaller bodies. Robert’s recommends less formal rules for boards where there are not more than about a dozen members present, including:

• Members may raise a hand instead of standing to obtain the floor.
• Members may remain seated while speaking or making motions.
• Motions need no second.
• Discussion of a subject is permitted while no motion is pending.
• When a proposal is clear, a vote can be taken without a formal motion.
• There is no limit to the number of times a member may speak to a subject or motion.
• Occasions where debate must be limited or stopped should be rarer than in larger meetings.
• The chair is typically a full participant and can debate and vote on all questions.
• Votes are often taken by a show of hands.

Smaller boards that dislike informality may follow more formal procedures. Informal boards may also choose to be more formal on important or controversial matters.

Myth 4: Seconds Always Matter

In a larger or more formal body, a second to a motion implies that at least two members want to discuss it. If there is no second, there should be no further action on the proposal. However, after any debate, the lack of a second is irrelevant. For less formal smaller bodies, seconds aren’t required.

Myth 5: Debate and a Formal Vote Are Required

Many noncontroversial matters can be resolved without debate through “general” or “unanimous” consent. Using this method, the presiding officer asks, “Is there any objection to …?” For example, “Is there any objection to ending debate?” If no one objects, debate is closed. If a member objects, the matter is resolved with a motion and vote. Unanimous consent allows an assembly to move quickly through non-contested issues.

Myth 6: The Maker of a Motion Gets to Speak First and Last

The maker of a motion has the right to speak first to a proposal. After speaking, the maker has no more rights to speak than other members.

Myth 7: “Old business”

“Old business” is not a parliamentary term and suggests a revisiting of any old thing ever discussed. The correct term, “unfinished business” makes clear the term refers to specific items carried over from the previous meeting. A presiding officer never needs to ask, “Is there any unfinished business?” Rather, the officer should simply state the question on the first item.

Myth 8: Yelling “Question!” Stops Debate

The previous question (or motion to close debate) is often handled wrong. Shouting “Question!” is not only bad form, but it’s also ineffective. A member wanting to close debate must be recognized by the chair. The previous question requires a second and a two-thirds vote. Only the assembly decides when to end debate.

Myth 9: The Chair Rules the Meeting

The chair is the servant of the assembly, not its master. If the assembly rules are being violated, any member can raise a “point of order.” Once the chair rules on the point of order, a member can appeal from the decision of the chair. If seconded, the appeal takes the parliamentary question away from the chair and gives it to the assembly. The assembly is the ultimate decider of all procedural issues.

The benefits of a well-run board meeting go beyond legal concerns. Proper procedure can turn long, confrontational meetings into short, painless ones. Eliminating these myths will bring your meetings more in line with proper procedure and result in shorter, more effective meetings.

Noah Sattler

Bill Boyd

Nyemaster Goode, P.C.

Des Moines, IA

            Nonprofit corporations formed in Iowa with tax-exempt status must make regular filings with the Internal Revenue Service (“IRS”) to preserve their status as a tax-exempt entity. While this requirement may sound simple enough, completing the appropriate form by the recurring deadline can trip up even the largest nonprofits, and reinstating tax-exempt status can be administratively burdensome.

            Filing the Form 990

            To preserve its existing tax-exempt status, a nonprofit must file one of several annual information filings (tax return forms) with the IRS known as Form 990, 990-EZ, and 990-N. As reviewed below, the appropriate form depends on the nonprofit’s size and operations. In general, a nonprofit should file the annual return with the least amount of administrative burden associated, provided the nonprofit meets the relevant qualifications. Nonprofits should keep in mind that much of the information disclosed on Form 990 or any of its variations will be publicly available, including on the IRS website.

            Annual returns are generally due on May 15 for nonprofits with tax years ending on December 31. However, a nonprofit may obtain a one-time automatic six-month extension by filing Form 8868 with the IRS prior to the filing deadline. This extension is not available for nonprofits filing Form 990-N. If a nonprofit has reason to believe it might not meet the May 15 deadline, it should avoid the negative consequences of late filing by submitting Form 8868.

            Consequences of Non-Compliance

            Regardless of which variation of Form 990 the nonprofit is required to file, late filings and failure to file have significant consequences.

            Late Fees

            The IRS imposes different penalties for late filing relative to the nonprofit’s size. If a nonprofit with gross receipts of less than $1,000,000 files after the due date without reasonable cause, the IRS can impose a penalty of $20 per day for each day the return is late, with a maximum penalty of $10,000 or five percent of the organization’s gross receipts, whichever is less. The penalty increases to $100 per day, up to a maximum of $50,000, for a nonprofit whose gross receipts exceed $1,000,000.

            If a nonprofit fails to file its annual return for three consecutive tax years, the IRS will automatically revoke the nonprofit’s tax-exempt status and issue a Revocation Letter (CP120A) notifying the nonprofit. If the IRS revokes your organization’s tax-exempt status, the organization will be added to the Revocation of Exemption list. You can check that list at the IRS website.

            Abating Late Fees

            As noted above, a nonprofit that files its annual return after the due date without reasonable cause can be subject to significant penalties. To prove “reasonable cause” and abate the penalties reviewed above, a nonprofit should file its annual return even if it is past the May 15 deadline. The nonprofit should attach a written statement to its annual return containing the following:

1. A declaration by the authorized signatory that the written statement is made under penalty of perjury.
2. A description of the reason the penalty was charged. Penalties may be charged for a return being late, incomplete, or both; the written statement should identify why the relevant penalties were charged.
3. A description of what prevented the nonprofit from requesting an extension of time to file its return, assuming the organization did not request such an extension. This could be because the responsible person died or left the nonprofit, the nonprofit changed addresses, or any other justification for why the nonprofit was unaware it missed the filing deadline.
4. A description of how the nonprofit was not negligent or careless but exercised ordinary business care and prudence.
5. A description of the steps the nonprofit has taken to prevent the same situation in the future.

            Oftentimes nonprofits have few resources and rely on volunteers to meet multiple responsibilities, and filing annual returns can slip through the cracks. A well-written statement should honestly address each item above with special emphasis on how the nonprofit exercised ordinary care and prudence under the circumstances and the steps taken to avoid the same situation in the future.

            Although it is harder to establish reasonable cause if the nonprofit requested and received a six-month extension, such an extension does not disqualify and should not deter a nonprofit from requesting abatement of penalties.

            Reinstatement

            A nonprofit that fails to meet its annual filing requirements for three consecutive tax years will have its tax-exempt status revoked, leaving it subject to federal and state income tax. If an organization’s tax-exempt status is revoked, it can apply for reinstatement through a streamlined process or a more arduous one.

            The streamlined process is available to nonprofits that 1) were previously eligible to file Form 990-EZ or 990-N and 2) have not previously had their tax-exempt status revoked. The streamlined process requires that nonprofits file either Form 1023 or Form 1023-EZ with the IRS and pay the associated fee no later than fifteen months following the later of the date of the organization’s Revocation Letter and the date the organization appeared on the Revocation List on the IRS website. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.

            If the streamlined process may not be used, a nonprofit must file Form 1023 with the IRS and pay the associated fee within the fifteen-month period described above. The nonprofit must also include a statement establishing it had reasonable cause for failing to meet the filing requirement in one of the three years it did not file, as well as a statement confirming it has since filed returns for those years and any other necessary years. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.

            If a nonprofit is applying for reinstatement outside the fifteen-month period described above, it must comply with all the requirements above and must include a statement establishing it had reasonable cause for each of the years in which the nonprofit did not file its annual return. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.

            If none of the above processes for reinstatement are available, the nonprofit must apply for tax exemption by filing Form 1023 with the IRS and pay the associated fee as if it were applying for tax exemption for the first time, the only difference being that, if approved, reinstatement of tax exemption will be effective as of the postmark date of the application.