Nonprofit Governance: Who Should Be Watching? A Look at State, Federal and Dual Regulation

Ohio St. Bus. L.J. Vol.13:1, 2019

39 Pages Posted: 21 Apr 2019

See all articles by Jaclyn Fabean Cherry

Jaclyn Fabean Cherry

University of South Carolina - School of Law

Date Written: 2019

Abstract

Recent scandals in the nonprofit sector have once again called into question the issue of nonprofit governance. Who is governing these organizations and are they doing so appropriately? Who is regulating and what law applies — federal, state, or both? The one thing that is certain is that clarity is needed. True to form, the egregious behavior of some of those serving on the boards of directors of large organizations has brought these issues back into the spotlight, raising questions for regulators and the general public about the validity of these and other organizations and the truth of their stated missions. While most assume that clear laws dictate the behavior of those entrusted with the care of charitable nonprofit organizations, some scholars question just how clear these laws are and whether overstepping by the Internal Revenue Service in this area may be causing confusion. Some believe that while nonprofit governance was once the purview of the states alone, the federal government has inappropriately preempted oversight in this area. Charitable nonprofit organizations incorporate under state law and receive tax exemption in accordance with federal law, resulting in a system that has sometimes complicated legal matters. Yet, under both state and federal law, nonprofits must function to carry out their organizational missions for the good of the public.

Recently, the Trump Foundation, the Resnick Foundation (Wonderful Company) and Goodwill Omaha, all designated as charitable nonprofit organizations by the Internal Revenue Service, have been the focus of scandal and review. Taken together, they represent many of the challenges that are at the core of the governance issue. A review of the facts in these and other situations will help clarify this issue and focus on potential resolution.

This Article begins by discussing nonprofit governance, board of director fiduciary duty, and federal, state, and common law as they pertain to nonprofit governance. It sets out different theories for whether the IRS has in fact overstepped its authority in this area by regulating nonprofit governance matters and discusses whether there should be more cooperation between the IRS and states attorneys general. It then summarizes three recent situations as examples of this current dilemma.

More specifically, this Article reviews the claim by many scholars that by regulating nonprofit governance through IRS forms 1023 and 990, the IRS has overstepped its authority; it explores the theory that the IRS has gone even farther by regulating through the private benefit doctrine. It asks if the IRS has overstepped and, if it has, whether it has done so out of necessity because state attorneys general are overworked, understaffed, and generally unable to keep up in this area. It will also ask whether, as one scholar advocates, dual oversight is not only legal but actually more effective. Further, this Article compares similarities between nonprofit and for-profit governance regulation to glean any useful lessons, and explores policy considerations surrounding these governance issues. Finally, it suggests that perhaps dual jurisdiction with established roles and mandatory information sharing may work best given the many nuances in the sector and the political nature of the offices tasked with this oversight.

Keywords: Charitable Organizations, Board of Directors, Nonprofit Organizations, Tax Exempt Organizations, Dual Regulation, Governance, Fiduciary Duties

Suggested Citation

Cherry, Jaclyn Fabean, Nonprofit Governance: Who Should Be Watching? A Look at State, Federal and Dual Regulation (2019). Ohio St. Bus. L.J. Vol.13:1, 2019. Available at SSRN: https://ssrn.com/abstract=3356959

Jaclyn Fabean Cherry (Contact Author)

University of South Carolina - School of Law ( email )

1525 Senate Street
Columbia, SC 29208
United States

HOME PAGE: http://sc.edu/study/colleges_schools/law/faculty_and_staff/directory/cherry_jaclyn.php

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