Today's disclosure laws allow
than ever before to watch nonprofit managers
sink or swim
By Julian H. Spirer
Some years ago, a disgruntled member of a nonprofit homeowners association sought the opinion of the Virginia Attorney General on this question: Were the association's books, records, and correspondence open to inspection under the Virginia Freedom of Information Act and the Virginia Nonstock Corporation Act?
The Attorney General replied that the latter statute, like similar statutes in many other states, indeed gave the association?s members access to official documents— principally the minutes—for any “proper purpose," (“Proper purpose” is interpreted to be any purpose that furthers the interests of an organization—such as trying to influence corporate policy—as opposed to furthering the narrow interests of an individual member.) However, Virginia's top lawyer concluded that neither statute afforded access to the nonprofit's correspondence, which would include letters, e-mail, faxes, and so forth. (1981-82 Op. Atty. Gen. Va. 429).
Certainly executives can take comfort that a nonprofit's private communications are off-limits both to members and, by extension, the general public. But the favored tax and regulatory status enjoyed by nonprofits comes with a price: The law mandates broad, and ever expanding, disclosure duties.
IRS rules have long allowed members of the public to inspect a nonprofit's tax exemption application and its three most recent annual information returns (excluding the names and addresses of routine contributors to public charities). The only requirement has been that the inspection be done on-site during normal business hours.
A law passed in August 1997, known informally as the Taxpayer Bill of Rights 2, requires that nonprofits now also disseminate copies of their returns, at reasonable cost, upon written or in-person request. (Exceptions are available only where returns are widely available—such as on the Internet—or where they are sought as part of a harassment campaign.) In addition, the new law raises the non-disclosure penalty from $1,000 per document to $5,000.
These days, association members and the public have many ways to check up on non profit managers' activities. For example, the public has access to operational details and summary results of charitable fund-raising campaigns conducted in many states. (See “Legal Potholes on the Fundraising Trail” in the Spring 1999 issue of Who Cares.) When the IRS completes a project currently underway with the Urban Institute, every nonprofit organization's tax return may be published on CD ROM.
Under most, if not all, state corporations statutes, nonprofits must hold annual meetings of members to elect directors and approve certain major changes in operations (mergers, sale of substantially all assets, adoption of benefit plans, appointment of auditors). According to statute in many states and common law in others, executives in these meetings must tell the members about significant developments during the prior or coming year. And they must reply to reasonable questions.
Many state statutes, like that in Virginia, also give members access to corporate books and records (principally minutes) and, occasionally, membership rosters, for a “proper purpose,” as defined above.
Nonprofit executives may have adjusted to life in a fishbowl under
the watchful eye of the organization's directors and the IRS. Increasingly,
they will have to adjust to having others—members and even the general
public—peering through the glass.
Julian H. Spirer (firstname.lastname@example.org)
is a senior lawyer with the firm of
Spirer & Goldberg, PC., in Washington, D.C.
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