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Nonprofit Organizations
Drexel University School of Law
Field, Robert I.

Identify the Charitable Mission
Does the purpose fall within one of the listed categories within IRC § 501(c)(3)?
Is the purpose “charitable” within the scope of 501(c)(3)
Charitable (§ 1.501(c)(3)-1(d)(2))
Charity should be broadly defined in “generally accepted legal sense” of charitable, additionally,
Charity is not so limited but also embraces any benevolent or philanthropic objective not prohibited by law or public policy which tends to advance the well-doing and well-being of man. (Rev Rul 71-447)
Includes lessening the burdens of gov’t and the promotion of social welfare by orgs designed to:
Relief of the poor and distressed or of the underprivileged
to lessen neighborhood tensions
to eliminate prejudice and discrimination
to defend human and civil rights secured by law, or
to combat community deterioration and juvenile delinquency
Restatement (Third) of Trusts § 28 – Definition of Charitable
Relief of Poverty
Advancement of Education
Advancement of Religion
Promotion of Health
Governmental or Municipal Purposes
Other Purposes Beneficial to the Community
Identity the type of Organization
Public Benefit Org v. Mutual Benefit Org.
Public Benefit (Charitable) Orgs are either 501(c)(3) NPCs or Private Foundations. A group serving what may loosely be called a public or charitable purpose – to do good works, benefit society or improve the human condition
Unincorporated Association
Two or more persons informally organized for some purpose
Nonprofit Corporation
Private Foundation (Grant Making Orgs) – NPOs are PRESUMED to be Private Foundations unless they give NOTICE to the IRS AND apply by filing a FORM 1023
Charitable Trusts – Trust instrument created for the charitable purpose and charitable use of trust assets
Is the organization ORGANIZED and OPERATED for a charitable purpose? (Affirmative Requirements)
In order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt (Treasury Reg. § 1.501(c)(3)-1(a)(1))
ORGANIZATIONAL TEST § 1.501(c)(3)-1(b)(1)) – The test relates solely to the language used in the org’s governing document (i.e trust instrument, articles of incorp or association, charter; including the language only in the bylaws is insufficient) which must:
Limit the purpose of the organization to one or more exempt purposes described in 501(c)(3), and
Not expressly empower the org to engage (except to an insubstantial degree) in any activities which do not further one of more exempt purposes.
Activities include lobbying or participating in political campaigns
Scope of Org’s Purposes – Purpose can be as broad as statute itself (“formed for charitable and educational purposes within the meaning of 501(c)(3) of the Code”) or more limiting (“formed to operate a school for adult education”)
Purpose CANNOT be too broad (“promote health and welfare of human race”) OR authorize non-exempt activities (“operation of a social club”)
Distribution of Assets upon Dissolution – Either in its charter or under applicable state law, the org must expressly dedicate its assets to one or more exempt purposes in the event of dissolution.
OPERATIONAL TEST § 1.501(c)(3)-1(c)(1) – An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose (EXCLUSIVELY = PRIMARILY)
PROHIBITION of Private Inurement or Benefit – An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals
NO SUBSTANTIAL LOBBYING (Action Org) – An organization is an action organization if a substantial part of its activities is attempting to influence legislation by propaganda or otherwise. For this purpose, an organization will be regarded as attempting to influence legislation if the organization:
(a) Contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation (Grassroots lobbying); or
Contact with legislators or their staff for the purpose of proposing, supporting, or opposing legislation (Direct Lobbying)
(b) Advocates the adoption or rejection of legislation; or
(c) having primary objectives which may be attained only by legislation or defeat of proposed legislation and campaigning for the attainment of that objective rather than engage in nonpartisan analysis and research and making the results available to the public 1.501(c)(3)-1(c)(3)
Nonprofit Sector – History, Purpose, Rationale
History – First NPOs were hospitals (charitable wards) for the poor and ill
Rationale for NPOs
Market Failure – Free markets often fail to provide public goods and services
Government Failure – Gov’t fails to meet needs of the public
Formation of Nonprofits
NPC – File Form 1023, Form NPO with State, Draft Bylaws
Dissolution of Nonprofits
Dissolution generally requires notice to creditors and attorney general. Distribution of assets upon dissolution may not be made to members. If mutual benefit org, distribution could be made to members
Distribution of Assets

Duty of Care
Investments Strategies
Cy Pres (As near/close as possible)
Enforcement of Fiduciary Obligations
Attorney General Oversight
General Power – Standing
Standing – The attorney general can institute appropriate proceedings in situations involving the state or public interest and to secure compliance with statutory norms or ensure proper administration of trusts.
Specific Power – Civil Action
Civil Actions – AG has the power to annual corporate existence, dissolve corps that have acted ultra vires or restrain them from carrying out unauthorized activities. He may remove directors or trustees, enforce the rights of members, directors or officers; bring proceedings and accounts for the assets of the corp upon dissolution, supervise indemnification awards; and investigate transactions and relationships of directors and trustees to determine whether property held or uses by them has been allocated to charitable purposes
Donor Standing
Carl J. Herzog Foundation v. U. of Bridgeport  – At common law, a donor who made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of the gift or trust unless the donor had expressly reserved the right to do so.
Member Standing – Members of a NPO may have standing to sue for the following actions:
Derivative Suits – proceedings against insiders (i.e. members v. directors)
Sue to enjoin Ultra Virest Act
Enforce right to Inspect Records
Beneficiaries Standing and Special Interest Requirement – beneficiaries of charitable trusts and other plaintiffs, including corps, may be granted standing to sue if they can show some special interest beyond being a mere member of the public or the attorney general is unwilling or unable to intervene.
What Constitutes Special Interest
(1) The extraordinary nature of the acts complained of and the remedy sought by the plaintiff
(2) The presence of fraud or misconduct on the part of the charity or its directors
(3) The state attorney general’s availability or effectiveness
(4) The nature of the benefitted class and its relationship to the charity
(5) The subjective and case-specific factual circumstances