Source: https://www.floridabar.org/the-florida-bar-journal/the-dirty-dozen-twelve-documents-every-attorney-should-review-before-serving-on-the-board-of-a-tax-exempt-organization/
Timestamp: 2019-04-26 09:39:59+00:00

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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.
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.
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.
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.
10 See Fla. Stat. §617.01401(3).
11 See generally ALI-ABA Revised Model Nonprofit Corporation Act (1987).
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).
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).
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.
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.

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