business law section prmcle/mcle meeting …...2019/04/09 · azam nizamuddin is general counsel of...

Business Law Section PRMCLE/MCLE Meeting Location: Attorney Resource Center

Date: April 9, 2019

11:45 AM – Noon Welcome/Introductions Richard Lofgren, Section Chair

Noon – 1:00 PM Program

“Advising Not For Profits.” Azam Nizamuddin – General Counsel of American Trust Corp. and Chief Compliance Officer of Allied Asset Advisors. Speaker’s Bio

See attached bio

Presentation Summary

This seminar will provide an overview of not for Profit Law and how practitioners can guide their clients through the maze of NFP law.

Next Meeting: May 14th

DCBA Events: April 11th – Ask a Lawyer Help Desk. DuPage Judicial Center, Room 2017. 1:00 p.m. – 4:30 p.m. April 18th – Happy Hour at Rock Bottom in Warrenville @ 5:30 pm

April 30th – Law Day 2019- State of the Courthouse Address – Honorable Daniel Guerin. Le Jardin @ Cantigny, Wheaton

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Azam Nizamuddin is General Counsel of the American Trust Corporation and Chief

Compliance Officer of Allied Asset Advisors, where he oversees the legal department in the

areas of real estate, tax-exemptions, corporate transactions, and litigation strategy, and further

provides guidance in promoting and ensuring AAA’s compliance with SEC regulations,

company policies and contracts, including chairing its enterprise-wide Risk Management

Committee. Previously, Mr. Nizamuddin has worked for 18 years as a litigator for large firms,

small firms, and as a solo, advising companies and individuals in the areas of general liability,

commercial litigation, shareholder disputes, real estate, employment, and family law.

He is a member of the DuPage County Bar Association, the Association of Corporate

Counsel, and the Muslim Bar Association. He is Vice Chair of the Civil Law Section of the

DCBA and the former Editor in Chief of the DCBA Journal, the Brief.

Mr. Nizamuddin has given CLE credit presentations for the DuPage County Bar

Association on Risk Management for public companies, Preventing Sexual Harassment in the

Workplace, and the Pitfalls of Employee Termination. He has also provided presentations at the

Annual ABA Conference on the Rights of Religious Minorities, the Mid-Year Meeting of the

ISBA on the intersection of Law and Religion, and at the Cook County Domestic Relations GAL

Committee on Cultural Issues in Custody Cases.

He can be contacted at:

Azam Nizamuddin

General Counsel

American Trust Corporation

715 Enterprise Dr.

Oakbrook, IL 60523

630-789-8500 (w)

847-212-5459 (c)

[email protected]

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Not for Profit Governance 101

By

Azam

NizamuddinGeneral Counsel - American

Trust Corp. and

Chief Compliance Officer -Allied Asset Advisors

copyright: Azam Nizamuddin

Key Principles for NFPs

Public Trust

Government Oversight

Transparency

Mission Integrity

Donors Are Not Shareholders

Use of Donor Dollars

Lobbying and Political Activitiescopyright: Azam Nizamuddin

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Top 10 Nonprofit Governance Mistakes

1. Failing to understand the Board’s fiduciary duties

2. Failing to provide effective oversight

3. Deference to the Executive Committee, Board Chair or the Founder

4. Micro-managing staff

5. Avoiding the hard questionscopyright: Azam Nizamuddin

Top 10 Mistakes Cont:

6. Insufficient conflict of interest management

7. Lack of awareness of laws governing tax-exempt organizations

8. Operating with outdated, inconsistent governing documents

9. Airing disagreements outside of the board

10. Failure to cultivate board diversitycopyright: Azam Nizamuddin

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TEN EXCUSES THAT WILL ONLY MAKE IT WORSE

• 1) We’ve always done it that way;

• 2) Our auditor was supposed to do that;

• 3) We’re a volunteer board and don’t have the time to do _________;

• 4) Only our Treasurer gets to see the financial records;

• 5) Our administrative assistant keeps those records, and she is on maternity leave or hajj;

• 6) We’re just a bunch of volunteers; we don’t know anything about financial

• reports / articles of incorporation / by-laws, etc., etc.;

• 7) We haven’t had a board meeting in ______ years;

• 8) Our ED takes care of all that for us;

• 9) The fundraiser told us he would take care of everything;

• 10) We didn’t realize we had by-law.


Government Accountability:IRS and IL State Attorney General

• IRS: Oversees the nonprofit though annual tax disclosures (IRS Form 990) and periodic audits

• IRS: Tax exemption is a privilege and may be withdrawn by the IRS upon audit

• IRS: Can use “intermediate sanctions” on excess benefit transactions

• State Attorney General: Oversees the nonprofit on behalf of the charitable class; level of oversight varies by state


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What is a Not For Profit organization?


Diff. b/w tax exemption & not for profit

A Not for Profit Org.

• A nonprofit organization is a group formed for purposes other than generating profit and in which no part of the organization's net income is distributed to its members, directors, or officers.

Tax Exempt Org.

• An organization is exempt from taxation if it is organized and operated exclusively for religious, charitable, scientific, public safety, literary, educational, prevention of cruelty to children or animals, and/or to develop national or international sports.copyright: Azam Nizamuddin

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Diff. b/w tax exemption & not for profit Cont:

• Nonprofit corporations are legal entities chartered under state law for a purpose other than making money.

• Nonprofit corporations are required to have a governing body that is responsible for the overall management of the organization.

• Nonprofit corporations may also have voting members –who, like for-profit shareholders, have the right to elect Board members and vote on other major corporate transactions.

• A tax-exempt organization is a nonprofit corporation that has been recognized as exempt from paying federal income tax; Section 501(c) of the tax code provides for different kinds of tax exemption.


Different types of 501(c)(3)

• 501 (c)(3) - Religious, Educational, or Charitable

• 501 (c)(4) - Civic Leagues, Social Welfare Organizations

• 501 (c)(5) - Labor, Agricultural, or Horticultural

• 501 (c)(6) – Business Leagues, Chambers of Commerce

• 501 (c)(7) - Social and Recreational Clubs

• 501 (c)(8) – Fraternal Beneficiary Societies

• 501 (c)(10) – Domestic Fraternal Societies and Associations

• 501 (c)(19) - Veterans’ Organizations


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What is a 501(c)(3) Org?To satisfy the requirements for a §501(c)(3) organization, a nonprofit must first organize and operate for one or more of the enumerated tax-exempt purposes:

religious, charitable, scientific, literary, educational purposes, testing for public safety, fostering national or international amateur sports competitions, and the prevention of cruelty to children or animals.

Primarily and Substantially – not exclusively

Public benefit; not a private benefit

No private Inurement


What is a PrivateFoundation?

• � A "private foundation" is any Section 501(c)(3) organization that does not qualify as a public charity.

• � Just because an organization has the word "foundation" in its name does not mean that it is a private foundation.


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Implications of PrivateFoundation Status

All Section 501(c)(3) organizations are stewards of their charitable assets, but "private foundations" also are subject to the series of excise taxes (in Sections 4940-4945) designed to police their behavior (and pay for enforcement).

Failure to comply with these provisions can result in costly penalty taxes, lead to compliance issues with the IRS and the Illinois Attorney General, and generate negative publicity for a private foundation.

Many types of charitable trusts are treated as private foundations for purposes of these excise taxes.copyright: Azam Nizamuddin

Tax Exemption Issues

IRS makes important distinction between : Charitable organizations Churches / Religious organizations Political Organizations Private Foundations

Are you Tax Exempt? – www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.

No need to apply for 501(c)(3) if church organization


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What is a Church for 501(c)(3) status?

① A place of worship

② Recognized creed and form of worship

③ Definite/distinct ecclesiastical government

④ Formal code of formal code of doctrine

⑤ Distinct religious history

⑥ Ordained ministers/clergy

⑦ Regular congregation/religious service

⑧ Operates a Sunday schoolcopyright: Azam Nizamuddin

Religious organizations

①Non-denominational ministries

②Interdenominational & ecumenical organizations

③Entities whose principal purpose is the study or advancement of religion

④Unlike churches, must apply for tax exemptions


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Filing sequence for your not for profit

• Name Your Organization

• Recruit Incorporators and Initial Directors

• Appoint a Registered Agent

• Prepare and File Articles of Incorporation with SOS

• Obtain an Federal Employer Identification Number (EIN)

• Obtain IL Dept. Revenue ID number

• Register with IL Dept of Employment Security (IDES).

• Hold Organizational Meeting of the Board of Directors

• Apply for 501(c)

• Register for Charitable Solicitation (Fundraising)

• Obtain Other Business Licenses & Permits

• Establish Initial Governing Documents and Policies


The first meeting after Incorporation in IL

Under the NFPCA, the directors at an initial meeting must:

1) adopt bylaws,

2) elect officers,

3) conduct such additional business as may be necessary.

Additional activities may include:

1) acknowledgment of the articles of incorporation as filed with the Secretary of State;

2) designation of a financial institution;

3) retention of legal counsel or accountant; and

4) authorization of an officer to file the necessary state and federal registration forms and obtain tax-exempt recognition by the IRS and the Illinois Department of Revenue.


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State Filing Requirements

• Articles of Incorporation (state charter) and Bylaws (internal governance document), compliant with state law

• State tax-exempt status determination letter and initial filings

• Registrations to engage in charitable solicitations

• Certificates of authority to conduct business in other jurisdictions


Charitable solicitation and fundraising


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Board & Governance

• Setting policy and directives consistent with the mission of the organization

• Selection and oversight of the Executive Director and senior management


Board Directors have Duties of Care, Loyalty and Obedience

Fiduciary Duties

Your Board of Directors has the ultimate responsibility and authority for managing the organization’s affairs;

State nonprofit law imposes on Directors the obligation to act in the best interests of the organization


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The Law requires the Director to act:

In good faith;

With the care an ordinary prudent person in a like position would exercise under similar circumstances; and

In a manner the Director reasonably believes to be in the best interests of the organizationcopyright: Azam Nizamuddin

Board member involvement

• Attendance at meetings• Absolute must

• Directors bound by Board decisions regardless of attendance and will still be liable if Board action is negligent or unlawful

• Failing to attend meetings is in itself negligent; repeated failure is the basis for resignation or grounds for removal


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Board member involvement Cont:

• Delegation vs. Abdication

• Board may delegate its duties to committees or outside parties, such as accountants, attorneys or other professionals;

• Must supervise those to whom authority was delegated;

• Delegation does not relieve a Director or the Board collectively of liability copyright: Azam Nizamuddin

Duty of Loyalty

• Director commits allegiance to the organization;

• Acknowledges that the best interests of the organization must prevail over any individual interest of the Director, or his or her family or associates


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Duty of loyalty

• Transgressed when Director uses his or her position to promote, advance or effectuate a transaction that is:

• (1) Between the organization and such person or his or her relatives or associates; and

• (2) Not substantially fair to the organization


Duty of Loyalty cont.• Full disclosure and abstention from discussion and

voting required when a Director may be influenced by a private interest:

• Procedures detailed in a conflicts of interest policy

• Who decides whether there is a conflict?

• Disinterested Directors have the duty to:• Obtain all the information they need• Be prepared and informed• Speak their minds and ask hard questions• Hold the organization’s interests foremost when

votingcopyright: Azam Nizamuddin

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Personal Liability?

• Directors face potential personal liability on a variety of grounds:

Employees claiming wrongful terminationIndependent contractor vs. Employee – tax withholding

requirementsGovernmental entities (e.g., State Attorney General)

claiming waste of charitable assets or violation of lawsStudents/public claiming negligence in selection and

supervision of employees and volunteersViolations of limitations on lobbying and political

activities“Intermediate Sanctions” - IRS


Protecting against Personal Liability

• Fulfilling individual duties of care, loyalty and obedience

• Four principal shields:➡Corporate statutes - indemnities➡State and Federal Volunteer

Protection Statutes➡Indemnification➡D&O Insurance


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Transparency

Vision and mission statementsStatements of values

and code of ethicsConflict of Interest

policyForm 990’sMost recent audited

financial statementsPrograms and

activities

Information on evaluation procedures

Annual Reports

Information on accreditations/certifications/standards

List of board members and officers

General information on contributors

Bylaws and Articles of Incorporation


AccountabilityNo legal duty to the general public

• Charitable Class / Intended Beneficiaries• Members (if any)• Donors

Public and press is aware of the NP through its:• Fundraising materials• IRS Form 990• NP’s website• NP’s activities

Directors must be sure that all representations of their NP are consistent with its purposes and operations


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Accountability to charitable class

• Nonprofits must serve a charitable class

• Directors must ensure that their organization is serving that class

• Examples of charitable classes:

• Immigrants

• Youth

• Battered Women

• Directors can start doing this by understanding the identity of the charitable class


Accountability to members

• Many nonprofits are membership-based

• Members are typically granted rights to elect and remove directors and approve fundamental changes

- Amendments to the NP’s articles of incorporation

- Dissolution of the NP

• Directors must read and abide by the Bylawscopyright: Azam Nizamuddin

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Accountability to donors

• Accountability may arise under the terms of a donor’s contribution (“restricted funds”)

• NP staff must be sensitive to donor concerns and expectations

• Do not accept a contribution if: • the terms of such contribution are inconsistent with your

organization’s purposes; and • the organization is not able to comply with the terms

• Example: Social service agency permits a donor to contribute funds and then dictates to the NP to send those funds to the donor’s poor relatives overseas


Records Retention• Record Retention: How long?

Documents enduring value –in perpetuity e.g., governing documents, Form 1023, IRS recognition letter, copyright, trademarks, Ins. policies

Trusts –California 10, other states 7 years

Records with limited value –3 years

Financial statements –IRS 7 years

Articles of Incorporation and Bylaws –in perpetuity

Employment Records –7 years

Employment Applications –3 yearscopyright: Azam Nizamuddin

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How to stay exempt from taxation

Inurement of benefits – using organizations income to benefit an insider, board member, employee

Substantial lobbying activity

Political campaign activity

Excessive Unrelated Business Activity


Politics and Advocacy –501(c)(3)

1) Political Activity – political campaign intervention Never

2) Advocacy - Always

3) Lobbying - Limited

No substantial part test or 501(h) election.


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General 501(c)(3) Electioneering Prohibitions

• No campaign Intervention

• No contributions to candidates

• No use of corporate resources to support candidates

• No events/activities designed to benefit a candidate

• No candidate endorsementscopyright: Azam Nizamuddin

Lots that can be done

• Interact with office-holders who are candidates

• Host debates and forums

• Communicate on issues

• Send scorecards and questionnaire


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Other Considerations

• The prohibition against political campaign intervention does not apply to non-elective public offices.

• Also, the IRS does not generally target churches or religious organizations. But it will investigate based on complaints or media reports or watchdog groups.


Violations & Penalties

• Penalties :

1) Revocation – if the violation is gratuitous and recurring;

1) Excite tax – if violation is unintentional or small in amount. 10% on expenditures 100% 2.5% on organization’s manager who knowingly

agrees to political expenditure copyright: Azam Nizamuddin

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IRS case Factors

Basis to Intervene

ID’s one or more

candidates

Preference for

candidate views

Time in relation to

election

Reference to voting or election

Regular communica-

tions regardless of election

Non election

event references


Can a NFP intervene in political campaigning?

• How?

• 501(c)(4) – a social welfare organization

• Primary purpose test – safe harbor activity is 60/40

• Expenditures / staff time / volunteer time


PAC

501(c)(3) 501(c)(4)

Super PAC

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Lobbying for NFPS

• Attempts to influence legislation / communicating with members of Congress or State legislatures

• 501(c)(3) organization – permitted but limited & reporting

1) No Substantial Part Test – 5%-10% expenditures of over-all budget

2) 501(h) election - mainly for charities and not churches

• 501(c)(4) organization – permitted and unlimited

• 501(c)(6) organization – permitted – purpose and missioncopyright: Azam Nizamuddin

The No Substantial Part Test

• Not defined by code or regulations

• Case law suggest that lobbying be no more than 5% to 15% of organization’s total activity.

• Measured by time, effort, expenditures and other factors.

• Those required to file annual information must report lobbing activities and expenditures on Schedule C or Form 990.

• Religious organization should track their activities and expenditures internally.

• Violations could lead to exempt revocationcopyright: Azam Nizamuddin

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The 501(h) ELECTION

• Passed in 1976;

• Sliding scale of percentages of exempt purposes.

• Cannot exceed $1,000,000 of lobbying expenditures

• Not available for churches, synagogues and mosques, and private foundations (they must use no substantial part test).

• Use Form 5768 from the IRS.

• Violation is usually in the form of excise taxes on the lobbying expenditures.


What is Lobbying under 501(h)?

• Direct Lobbying :

o Contacting elected officials and legislators

o For the express purpose of affecting legislation

o Federal, state, or local

• Grass Roots Lobbying :

o Urging the public at large to affect legislation

o Public referendum, amendment, initiative


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Summary of Laws Triggered

IRS Code

Federal Laws • Federal Election Campaign Act• Lobby Disclosure Act of 1995

States Laws – lobbying and campaigns


UNRELATED BUSINESS INCOME

Examples:

1) Advertising

2) Gaming

3) Sale of merchandising

4) Rental Income?

3 Requirements:

1) Trade or business

2) Regularly carried on

3) Not substantially related to further the exempt purpose of the organization.

Even though an organization is tax exempt, it still may be liable for tax on its UBI


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Exceptions to UBI

①Volunteer Labor – no compensation

②Convenience of Members – ex. cafeteria

③Selling Donated Merchandise –ex. Gifts/donations

④Bingo


Actual Letter from IRS • Dear Taxpayer:

• This is a Final Adverse Determination Letter as to your exempt status under section 501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under section 501(c)(3) ofthecode is hereby revoked effective January 1, 20XX.

• Our adverse determination was made for the following reason:

• You paid the personal expenses of the President during tax years ended December 31, 20XX, 20XX, and 20XX. I.R.C. §501(c)(3) precludes Federal income tax exemption if net earnings inure to the benefit of private shareholders or individuals. Because I.R.C. §501(c)(3) prohibits inurement of earnings, your exempt status is hereby revoked effective January 1, 20XX.

• Contributions to your organization are no longer deductible under section 170 Internal Revenue Code. copyright: Azam Nizamuddin

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Employment Considerations

At-Will or Contractual or volunteer

State or Federal law Implications

Discrimination –Protected Class?

Criminal implications?

Record Keepingcopyright: Azam Nizamuddin

Employment Gen. • Hiring / TerminationWritten Agreement

At-Will?

Employee v. independent contractor

Discrimination – age, gender, ADA, race,

• WagesMinimum wage

Overtime pay

• Immigration issues – legal able to work?

• Employee Handbook – benefits, etc.

• Employment Policies

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Volunteers – Source of Tremendous benefits

But Vicarious Liability can apply to the NFP using volunteers:• 1) organization and volunteer relationship

• 2) injury must be caused by the negligence of the volunteer

• 3) the volunteer must be acting within the scope of his or her volunteer assignment by the organization at the time of injury.

No Charitable Immunity in Illinois, but:

Federal Volunteer Protection Act of 1997

o Limits punitive damages unless C/C willful or criminal misconduct

o Exceptions for violence, terrorism, hate, sexual offense, intoxication


Exceptions to At-Will Employment

1. Discrimination i) Is the employee part of a protected class? –Age, Race, color, sex, religion, national origin, , disability;

2. Public policy – Retaliation

i) health & safety (Wheeler v. Caterpillar – (1985))

ii) workman’s compensation (Kelsay v. Motorola (1978))

iii) whistle -blowers – (Palmateer (1981))copyright: Azam Nizamuddin

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Exceptions continued:

3. Written modifications of employment at-will

• A) Employee handbook – Duldulao v. St. Mary, 115 Ill.2d 482 (1987);

• B) Applications, offer letters & other letters to prospective employees; benefit descriptions

2. Oral Modifications – clear terms & specific duration and specific benefit McInerney v. Charter Golf – 176 Ill.2d 482 (1997).

3. Promissory Estoppel


Featuring the 2019 State of the Courthouse AddressHonorable Daniel P. Guerin Chief Judge Eighteenth Judicial Circuit

Judge Daniel P. Guerin is Chief Judge of the 18th Judicial Circuit. After graduating from DePaul University College of Law, Judge Guerin worked for thirteen years as an Assistant State’s Attorney in the DuPage County State’s Attorney’s office in the misdemeanor and felony criminal divisions. In March 2003, while working as the Supervisor of the Domestic Violence and Child Abuse Unit of the DuPage County State’s Attorney Office, he was appointed as Associate Judge. In 2010, the Illinois Supreme Court appointed Judge Guerin as Circuit Judge. Since that time, he has served as Presiding Judge of both the Misdemeanor and Felony Divisions.

Judge Guerin is the recipient of many accolades for his professional and community work including the “Felony Assistant of the Year Award” in 1996, the DuPage Family Shelter “Justice System Partner Award” in 2006, and the La Rabida Children’s Hospital “Big Hearts for Young Heroes Award” for his work for victims of child abuse. In addition to his role in the Judiciary of DuPage County, Judge Guerin loves to spend time with his family including his wife and three children. He is an avid reader of history and particularly of American legal and political history. He coaches basketball, soccer, and baseball, and can also be found playing golf on occasion.

Join the celebration of Law Day 2019Tuesday, April 30, 2019

Le Jardin at Cantigny Park in Wheaton

Attorney or Guest Ticket $60New, Public Service or Government Attorneys and Courthouse Staff $50

Purchase tickets before April 24th to save $20

11:15AM - 1:00 PM Plated Lunch, State of the Courthouse,

Pro Bono Awards and Liberty Bell Award

Register online at www.dcba.org or call (630) 653-7779

2019 Law DayLuncheon

VOLUNTEERS NEEDED FOR LAW DAY ACTIVITIESIllinois Legal Answers Online Pro Bono Clinic

April 29, 2019 - 11:30 AM - 1:00 PM - Attorney Resource Center - Lunch Served

Grade School Mock TrialMay 3, 2019 - 10:00 AM - 1:00 PM - Courthouse

Call (630) 653-7779 or write to [email protected] to volunteer

Join us to give legal assistance to those in need through a discrete pro bono opportunity!

Lunch will be provided. Advance registration is required by Thursday, April 25th at

www.pili.org/18thcircuit. If you have any questions or problems with the registration form, please

contact Rebecca Fernández at [email protected] or 312-832-5127.

Attorneys will be trained on how to answer questions posted on Illinois Legal Aid Online’s Legal Answers website.

What is Legal Answers? Legal Answers is a secure website (IL.freelegalanswers.org) where lower income Illinois residents can ask a lawyer for help with a legal issue. Qualified users post questions about civil legal problems. Volunteer lawyers then log onto the site and select questions to answer. It’s like a virtual walk-in legal clinic.

Monday, April 29, 201911:30 a.m. to 1:00 p.m.Attorney Resource CenterDuPage Judicial Center - 3rd Foor505 North County Farm Road Wheaton, Illinois

Legal Answers Pro Bono Clinic Day

How the Legal Answers Clinic will work:1. Before the event, volunteers register with IL.freelegalanswers.org.2. At the event, volunteers will be trained on how to answer Legal Answers questions.3. Lawyers will choose 1-2 questions to answer at the event and then will be able to answer

many more whenever they want.

Public Interest and Education Commission