Preface

1. The Nonprofit Sector in the Twenty-First Century

The Legal Meaning of Charity

Size and Characteristics of the Nonprofit Sector

Current Challenges for Specific Components of the Sector

Religious Organizations

Health Care Organizations

Educational Organizations

Human and Social Service Organizations

Arts and Cultural Organizations

Foundations and Other Grantmakers

How Extensive Is Wrongdoing in the Sector?

Policy Issues Facing the Nonprofit Sector in the Twenty-First Century

2. A Brief History of the Law of Charities

Introduction

Evolution of Charities in Early Society

Islamic Foundations

Charities in England

Development of Trusts

Restrictions on Charitable Gifts

The Statute of Charitable Uses

The Role of the Attorney General and the Charity Commission

Regulation of Charities after 1950

Developments in Substantive Charity Law after 1601

Charitable Corporations

Charities in the United States

Development of the Law of Charitable Trusts

Charitable Purposes

Charitable Corporations

State Regulation of Charities

Federal Regulation of Charities: The Internal Revenue Code

Deductibility of Contributions

Federal Reporting and Disclosure Requirements

Congressional Investigations of Charities prior to 1969

The Walsh Commission

The Cox and Reece Committees

The Patman Committee

1965 Treasury Department Report on Private Foundations

Tax Reform Act of 1969

Reactions to the Tax Reform Act from the Nonprofit Sector

The Peterson Commission

The Filer Commission

Congressional Activity after the Tax Reform Act of 1969

Private Foundations

Lobbying by Public Charities

Unfair Competition with Small Businesses

Standards for Exemption of Hospitals

Regulation of Church Activities

Relief for Victims of the Terrorist Attacks of September 2001

The Effectiveness of the IRS as Regulator

Major Expansion of Federal Regulation: Intermediate Sanctions for Excess Benefit Transactions

Other Changes in Substantive Laws after 1970

Changing Parameters of the Definition of Charitable Purposes

Application of the Public Policy Doctrine to Definitions of Charitable Purposes

State Action Limitations on Charitable Purposes: The Subsidy Theory

Lobbying

UBIT and Commercial Activities

Regulation of Public Companies and Auditing Firms in 2002 and 2003

Treasury Department Anti-Terrorist Financing Guidelines

Conclusion

3. Creation, Administration, and Termination of Charities

Charitable Purposes

State Law Definitions

Motives of Donors

Gifts for Charitable and Noncharitable Purposes

Charitable Purposes for Nonprofit Corporations

Requirement of Indefinite Beneficiaries

Definitions in State Tax Laws

The Trust Form for Charities

Creation of Charitable Trusts

Restrictions on the Amount of Charitable Bequests

Duration and Restrictions on Remoteness of Vesting

Termination

Accumulation of Income

Administrative Duties of Trustees

Administrative Powers of Trustees

Discretionary Powers of Trustees

Exercise of Powers by Majority of Trustees

Compensation of Trustees

Exculpatory Clauses

Liability to Third Persons

Court Supervision of Trusts

The Corporate Form for Charities

Development of a Model Nonprofit Corporation Act

Creation of Charitable Corporations

Power of the Legislature to Modify Corporate Charters

Restrictions on Holdings of Charitable Corporations

Duration

Amendment, Merger, and Dissolution

Accumulation of Income

Internal Organization

Administrative Duties of Directors

Administrative Powers of Directors

Discretionary Powers of Directors

Compensation of Directors

Ultra Vires Contracts

Corporations Formed to Administer Charitable Trusts

Trust Rules Inapplicable to Corporations

Reporting Provisions

The Doctrines of Cy Pres and Deviation

Cy Pres

Deviation

Application to Charitable Corporations

4. Fiduciary Duties: State Law Standards

Fiduciary Duties of Trustees: Prudence and Loyalty

Duty of Prudence

Investment of Trust Funds: The Modern Prudent Investor Rule

Standards for Investments

Investment of Trust Funds: Diversification

Duty of Loyalty

Liability of Trustees for Breach of Trust

Exculpatory Clauses

Fiduciary Duties of Corporate Directors: Care

Duty of Care

Reliance

Review of Current Law

The Business Judgment Rule Limitation on Liability

The Duty of Care as Related to Investments

The Modern Prudent Investor Rule

The Uniform Management of Institutional Funds Act (UMIFA)

Fiduciary Duties of Corporate Directors: Loyalty (Fair Dealing)

Duty of Loyalty (Fair Dealing)

Statutory Formulations of the Duty of Fair Dealing

Definitions of Conflicts of Interest

Procedures for Validating Conflicts

Duty to "Mission" and the Cy Pres Doctrine

Prohibition against Loans to Directors

Statutory Relief from Liability

Codification of the Business Judgment Rule

Indemnification, Insurance, and Liability Shields

Procedural Limits on Directors' Liability: Shifting the Burden of Proof

State Prohibitions Based on Federal Tax Laws

Protection of Volunteer Directors from Tort Liability

Proposals for Reform

Duty of Care

Duty of Loyalty

5. The Internal Revenue Code

Permitted Purposes for Tax-Exempt Charities

Basic Requirements for Exemption

The Organizational Test

The Operational Test

Prohibition against Private Inurement

Limitation on Private Benefit

Prohibition against Excess Benefit Transactions Applicable to Publicly Supported Charities

Disqualified Persons

Excess Benefits

Revenue-Sharing Arrangements

Rebuttable Presumption of Reasonableness

Excise Taxes on Disqualified Persons

Excise Tax on Manager

Applicable Organizations

Early Experience Applying Excess Benefit Limitations

Section 4958 and Revocation of Exemption

Restrictions on Private Foundations

Internal Revenue Code Definition of Private Foundations

Governing Instrument Requirements and Termination Rules

Disqualified Persons

Self-Dealing

Mandatory Distributions

Excess Business Holdings

Jeopardy Investments

Taxable Expenditures

Impact of Chapter 42 on Charitable Fiduciaries

Reconciling Chapter 42 and the Excess Benefits Provisions

Prohibition against Participation in Politicial Campaigns

Restrictions on Lobbying Activities

Unrelated Business Income Tax

Joint Ventures and Taxable Subsidiaries Conducting Exempt Activities

The Role of the Internal Revenue Code in Assuring Compliance with Fiduciary Duties

6. Regulation of Charities in the States

The Courts

The Attorney General

Statutes Enhancing Attorney General's Enforcement Powers

Registration and Reporting Requirements

Power to Conduct Investigations

Required Notice to Attorney General of Judicial Proceedings

Power of the Attorney General over Conversions

The Role of the Attorney General in Interstate Disputes

Charities Operating in Several States

Charities Seeking to Move Out of the State of Origin

Charities Operating Outside Their State of Origin

Standing to Sue to Enforce Duties of Charitable Fiduciaries

Exclusion of the General Public

Standing to Sue Granted to Certain Interested Parties

Review of Recent Standing Cases

Proposals for Reform of Standing Rules

The Power of Visitation: Reserved Rights of Donors and Heirs

Parties to Suits Involving Charities

Necessary Parties

Proper Parties

Statutes of Limitations and Laches as Bars to Actions

Effective State Enforcement Programs

California

New York

Ohio

Massachusetts

Other Jurisdictions

The Legislature

Supervision by Other State Agencies

Secretaries of State and Corporation Commissions

Departments of Education, Health, and Similar Agencies

Supervision of Bank and Trust Companies

Departments of Tax and Revenue

Regulation of Charitable Fundraising

Proposals for Independent Boards for Charity Supervision

7. The Role of the Federal Government in the Regulation of Charities

The Congress

General Accounting Office

The Treasury

Promulgation of Regulations

Treasury Oversight of Published Rulings

Treasury Inspector General for Tax Administration

Treasury Department Antiterrorist Activities

The Internal Revenue Service

Regulation of Exempt Organizations in the Restructured IRS

Role of IRS Counsel

Commissioner's Advisory Committee on Tax-Exempt and Government Entities

Components of IRS Regulation

Revenue Rulings and Revenue Procedures

Information Releases and Notices

Private Letter Rulings, General Counsel Memoranda, and Technical Advice Memoranda

Limits on Disclosure of IRS Actions

Department of Justice and the Solicitor General

The Courts

Judicial Remedies Available Universally

Declaratory Judgment Procedure on Denial or Loss of Exemption

Appellate Courts

Tax Regulation in Operation

Determinations of Exemption (Form 1023)

Information and Tax Returns

Record Retention

Document Availability and Disclosure Requirements

Audit Process

Appeals Process

Standing to Sue

Other Federal Agencies That Regulate Charities

Federal-State Cooperation

8. Improving the Law and Regulation of Charities

Effect of a Dual Legal System

State Laws Governing Charities and Their Fiduciaries

Enabling Statutes for Charitable Corporations

Duty of Care

Duty of Loyalty

Indemnification, D&O Insurance, and Liability Shields

Cy Pres; Deviation; Amendment Powers

Rights and Duties of Members

Powers of Donors

State Regulation of Charities

Regulation by the Office of the Attorney General

Standing to Sue

Other State Agencies Regulating Specific Charitable Activities

Federal Laws Governing Charities and Their Fiduciaries

Internal Revenue Code Provisions

Recommendations for Changes in the Code and Regulations

Financial Reporting

The Effect of Privatization on Nonprofits

Federal Regulation of Charities: The Internal Revenue Service as Regulator

Proposals to Change the Situs of Regulation

The Role of the Charitable Sector

Organizational Components of the Current Infrastructure

Organizations Monitoring and Studying Nonprofit Activity

Measuring Performance

The Future of the Law and Regulation of Charities

Appendix

Table 1: State laws governing creation, administration, and dissolution of charities

Table 2: Cy pres doctrine applicable to outright transfers and trusts

Table 3: Fiduciary duties under state laws

Index