Chapter 1: Overview of NP Sector
Problem @ 63à Intro Problem on NP/FP
Leona Read and Tom O’Brien, both full time law professors with considerable practical experience, are interested in forming and operating an entity that will conduct continuing legal education programs to attorneys in your state. They plan to call their entity “Lear’s Council.” The impetus is the CLE that has been mandated by state bar. For now, Leona and Tom intend to remain as full-time faculty members, but ultimately they may devote more time to CLE if it proves to be successful.
Leona and Tom are seeking some general advice as to what factors should be considered in deciding whether to conduct their CLE activity as FP or NP educational org. If NP, advice as to the appropriate form and the formal org steps req under jur’s law.
· Issue: Whether it’s better to form as non-profit or for-profit.
· Rule?: No strict legal rule. Only considerations.
· Arguments/Considerations:
o This is an entrepreneurial endeavor. But is the non-distributive constraint important? (Only if they’re going to make a TON of money; probably won’t here).
§ Won’t effect their salaries, but do they want to sell/change this long-term?
o Their most likely source of income is charging for the service, so 501(c)(3) status isn’t too critical, even factoring in the “Halo effect.”
§ An org like this is not going to get lots of public support, since they already think lawyers are rich and over-educated.
o Depends on state jurisdiction and laws regarding property taxes.
§ Even though NP status or 501(c)(3) status may not matter for getting tax-free stuff, it may help in the payments the org has to make.
§ Anything besides property? Prop is biggest, but
· Securities an issue? Probably not.
§ Since this is a CLE, will they be hosting the education sessions, or will they be providing them at conferences? If this is a small operation that travels, they may not even HAVE property.
o Other considerations:
§ Getting 501c3 isn’t expensive. Apps are public. Use another org’s app as a template.
o Note: we’re not locked in. Conversions from NP to FP are common. Some reversals from FP to NP also possible. So whatever we decide it isn’t fatal.
o It’s unlikely that political lobbying is going to be a factor here, but remember that 501(c)(3)’s can’t lobby.
· Conclusion:
o Depends on above stated.
o They would almost certainly get it if they applied, since it’s educational.
o Biggest factor will be taxes org has to pay to state, especially property tax implications.
o [Make a recommendation:] Probably doesn’t hurt to have as NP. You can always change it later.
Chapter 2: Formation
Problems @ 77à NP Structures, Public/Mutual Benefit
In November, Marissa was informed by financial advisor, Petra, that she faced a substantial income tax liability for that year b/c of large capital gains from stock sales. Petra recommended that Marissa should increase her charitable contributions to reduce her overall tax bill. Marissa thought this was great and was greatly concerned of the plight of the llama. Petra warned her that she needed to make her contribution by the end of the year. Marissa knew of no charities that focused on llama, but she wanted to control the charitable efforts in any case.
· Conclusion: TRUST
· Reasoning:
o Control.
§ She can appoint herself Trustee. If it were a corp, a BoD would have decision power. Of course, sometimes there’s a conflict of interest with appointing oneself trustee, but almost certainly won’t be an issue here.
§ Where might conflict of interest be an issue? Counter-example?
o She’s only giving money away. Don’t have to worry about soliciting for funds, etc. Otherwise, a trust wouldn’t be as attractive. Might need an organizational form of corp then.
o ***Formation is really quick with a trust. So she could get it in by year’s end. It’s already November, and facts suggest this is the biggest factor.
o However, if she wants to operate a facility for llamas, like a zoo or something, then there’s a liability issue. So the trust has limitations too.
o Note: If it’s a trust, need to pay attention to the language of the document (trust instrument), since it can be challenged for a lack of specificity. At the same time, don’t be too specific or it gets really inflexible.
o Note: [Think about Wills] Of course, if she’s giving away less than a million dollars, donating it via 501(c)(3) may not be as important since she’d be covered by the gift tax exemption. But that’s a factor with donations generally and outside of her annual exclusion, her problem would remain.
Trollope was Victorian novelist with devoted following today. Harding wants to found the North Chemung Country Trollope Society, a literary discussion group of Trollope devotees. 4 of his friends also interested in participating. Harding hopes to receive grants from State Counsel for the Humanities and from private foundations/individuals.
· Conclusion: Unincorporated Group.
· Reasoning:
o No need for annual meetings.
o Loose scope of activities.
o If it grows, you can always incorporate later.
o Small contingency probably doesn’t need formalities of corp.
o Remember, corps increase transaction costs.
o Don’t forget: will still need organizational docs.
o Liability not an issue?
o Why take on the prescriptions of corporate law if you don’t have to?
o Still need articles of organization setting forth principles and purposes to state when filing for exemption status. But you won’t need a constitution or bylaws unless you want the tax exemption.
o Exemption, donations, etc don’t seem relevant here.
Group of parents in Town, dissatisfied with the qualify of the day care in community, decide to establish own NP child care center. Best way to organize a NP day care center?
· Conclusion: NP CORP 501(c)(3)
· Reasoning:
o ***Biggest issue is liability. NP Corp shields the individuals, who would otherwise be liable.
§ RMNCA 2.02(b)(5) only covers liability to the corp, not to 3rd parties.
§ Most states have exculpatory provisions eliminating or limiting liability of volunteers, though (see, Volunteer Protection Act of 1997)
o 501(c)(3) as education. But must be open to all kids. Or at least a neutral mechanism for selecting kids (it can’t practically be open to every chilld). If it’s only open to the kids whose parents are involved in the corp, then it’s mutual benefit, not public benefit.
o **Also, they can receive donations. Especially attractive if they specialize in catering to children of poverty, etc, where donors will be more likely to give. “Halo effect.”
§ If the service pays for itself and donations not an issue, can always convert to FP Corp later.
· With childcare, 2 things happen: (1) it becomes more regulated, and (2) it’s more likely to be classified as a public benefit since it’s close to a gov’t function. On gov’t function:
o So even
fact that you benefit from a subsidy doesn’t preclude general NP status, but it does preclude charitable status.
o When the Kennedys sold energy to low-income communities, it was okay because they weren’t competing with other commercial enterprises.
Problems @ 105, Defining Charitable Orgsà Are these orgs charitable?
Trust directing income of $100/week to “oldest respectable inhabitant of Biloxi.”
· Conclusion: Probably upheld as a charitable trust.
· Reasoning:
o Case against: This is certainly benevolent, but charitable?
o Case against: Only 1 person benefits.
o *** Case for: Court might construe it as a grant to an elderly resident in financial straits. Courts tend to bend over backwards to uphold a trust, especially if they believe funds will generally be devoted to the public good. So a grant to an elderly resident relieves the town from having to otherwise provide.
§ Would it be different if the individual receiving was already rich? If all the really old people were already rich?
o It would probably be denied, however, if it were more money and residuary beneficiaries (with standing to challenge) had good lawyers.
o Of course, with court discretion, they may find a reason to deny it if they think the money will otherwise end up in the public coffers anyway.
o Would it be easier to go to the court for Cy Pres/Deviation to make sure it goes to someone who needs it? How much tweaking would be necessary to do that?
Legacy to Francis Bacon Society, whose main purpose is to encourage study of the evidence in favor of Francis Bacon’s authorship of plays commonly ascribed to Shakespeare. The purpose of the legacy is to find Bacon-Shakespeare manuscript.
· Conclusion: Yes, charitable.
· Reasoning:
o Educational purposes are charitable, and this is definitely educational.
o Since there are college courses dedicated to this type of thing, its easy to see education value. University courses provide a strong litmus test for what has education value.
o It’s not some fringe theory or something, but a recognized field of high culture and scholarship.
o Even though most people accept Shakespeare as the author, it seems more like legitimate scholarship than Shaw’s alphabet trust. But even Shaw’s alphabet trust might be ok today.
The Flat Earth Society, an English organization whose members do not believe the earth is a sphere, desires to establish an American branch and to seek tax exemption.
· Conclusion: No, not charitable.
· Reasoning:
o While education is a charitable purpose, there are some boundaries regarding rationality. This is almost anti-educational.
o Another way to think of it is that there are general educational standards that any group seeking the exemption for education must follow.
