The Legal Basis for NPO Regulation
This page provides information about and links to the laws from which NPO regulation is derived, or leads you to pages that provide that information. It does not offer an introduction to any general aspect of NPO regulation, such as tax-exempt status or charitable solicitations, which are addressed by other parts of this Web site. If you are familiar with the general issues of NPO regulation as presented elsewhere at this site, this page will lead you to the laws and regulations that underlay legal NPO operations.
Most government regulation of nonprofit organizations activities, such as charitable solicitation, derives from federal and state law that is established by elected legislatures. Regulations that implement those laws are then developed by the associated Executive Branch agency. The first section of this page presents links to U.S. federal laws and regulations, the second section deals with state jurisdictions, and the final section with other jurisdictions.
Note that other Web sites and resources that provide information related to nonprofit law are listed elsewhere at this site.
Federal law that specifically regulates the operations of tax-exempt nonprofit organizations is primarily in Title 26, "Internal Revenue," of the United States Code (USC). Title 26 is referred to as the Internal Revenue Code (IRC). Accordingly, the reference "26 USC 501(c)(3)" is often presented as IRC 501(c)(3). The Internal Revenue Service (IRS) is the government agency responsible for implementing Title 26. The U.S. Code, including Title 26, is available online through the federal government's National Archives and Records Administration (NARA).
Another copy of the U.S. Code is available online from Cornell's Legal Information Institute. This version is nicely formatted and can be browsed. Accordingly, the links below from the section numbers lead to the Legal Information Institute version of the U.S. Code, with a link to the NARA version appended to each line. HOWEVER, the Cornell LII site information is usually somewhat older than the information from NARA. FURTHERMORE, note that the version of the IRC available from NARA online the at the time of this writing (11/20/98) is from 1/6/97, and therefore is itself somewhat out of date. Always be careful to note when any particular resource was derived and to verify that it is the latest version, else you must obtain more recent information. YOU HAVE BEEN WARNED!
IRS operations are based on Title 26 of the Code of Federal Regulations (CFR). Title 26 of the CFR is developed by the IRS both to govern its own operations and to implement the laws that Congress creates as collected in the United States Code. The labeling scheme of 26 CFR roughly corresponds to that for 26 USC. For instance, 26 USC 501(c)(3) is amplified and implemented by 26 CFR 1.501(c)(3)-1. The IRS also releases various other clarifications and notices (e.g. Revenue Rulings, Revenue Procedures, and Revenue Bulletins), and also bases its subsequent activities on those.
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Although most states have laws directly addressing nonprofit organization activities and operations that at least slightly differ from any other state's, several model acts have been developed and been adopted or considered for adoption by most states. These model acts were developed both to encourage states to update their laws to the best current understanding of how appropriate regulation may be achieved, and to harmonize the legal and regulatory environment faced by organizations that operate in more than one state. Accordingly, familiarity with the models provides a great deal of familiarity with the laws of the states that have adopted them. Unfortunately, not all states have adopted the models, and those that have done so almost invariably modify them either immediately or eventually. For this reason, familiarity with the models only provides an introduction to the state laws, which must be supplemented by further study.
The Model Nonprofit Corporation Act is a comprehensive set of statutes that can be adopted by states to regulate the establishment and operation of nonprofit corporations within their jurisdictions. The "Revised Model Nonprofit Corporation Act" was adopted in 1987 by the Subcommittee on the Model Nonprofit Corporation Law, of the Business Law Section of the American Bar Association. The model act describes both the requirements for registration with the state, and what must be included in an acceptable set of Articles of Incorporation and Bylaws. There have been no updates since 1987.
The Revised Model Act has been adopted, in whole or in part, in Arkansas, Indiana, Mississippi, Montana, North Carolina, South Carolina, Tennessee, Washington and Wyoming. Georgia and Ohio have explicitly rejected the Revised Model Act. Nearly half the states, while not formally adopting the Act, follows the Act's application of the traditional duty of care on nonprofit directors, and possibly other aspects. Evelyn Brody, Institutional Dissonance in the Nonprofit Sector, 41 Vill. L. Rev. 433, 504 n. 223 (1996).
The Act was published as the "Revised Model Nonprofit Corporation Act" by the ABA Business Law Publications. Unfortunately, the publisher is out of stock, and the only way to find a copy at this time is in a public or private law library, and they are very rare. However, the text of the Model Act itself, without the annotations, is available online here.
American Bar Association
750 N. Lake Shore Dr.
Chicago, IL 60611
The Model Charitable Solicitations Act (available online here) is a comprehensive set of statutes offered for adoption by states to regulate charitable solicitations conducted within their jurisdictions. It was developed by the National Association of Attorneys General (NAAG), the National Association of State Charity Officials (NASCO), and a Private Sector Advisory Group (composed of representatives from the nonprofit sector who were not directly affiliated with the two sponsoring organizations). It was completed in 1986 and there have been no updates.
Unfortunately, the original Model Charitable Solicitations Act included several serious flaws. Two of its provisions have been struck down by the U.S. Supreme Court as unconstitutional, specifically, the requirements that professional solicitors register with the state and that certain financial details of service contracts be disclosed as part of any professional solicitation [respectively, Section 6(a) and Section 6(e)(1)(b) of the Model Act, decided in Riley v. National Federation of the Blind of North Carolina, 487 U.S. 781 (1988)]. Furthermore, it defined a "fundraising counsel" [Section 1(f) of the Model Act] as a person that didn't actually conduct the solicitations, in contrast to a "professional solicitor." Unfortunately, because it omitted any requirement that fundraising counsel never have control or custody of donations, most regulators have concluded that definition does not sufficiently distinguish this role from that of professional solicitors (which have the greatest regulatory obligations).
Consequently, most of the states that adopted the model act have modified their requirements for professional solicitor registration and solicitation disclosures to accommodate the Supreme Court decisions. Also, many have modified their definition of fundraising counsel to specifically omit persons who ever have custody or control of solicitations (who are now classified as professional solicitors). Some states renamed the role to "fundraising consultant" after adding the additional restriction.
The Uniform Unincorporated Nonprofit Association Act (UUNAA) (also here) was drafted and recommended to the states in 1996 by the National Conference of Commissioners on Uniform State Laws. This Act reforms the common law concerning unincorporated nonprofit associations in three basic areas: authority to acquire, hold, and transfer property, especially real property; authority to sue and be sued as an entity; and contract and tort liability of officers and members of the association. To some extent, it complements the ABA's Model Nonprofit Corporation Act.
The UUNAA was drafted with the small informal associations in mind. These informal organizations are likely to have no legal advice and so fail to consider legal and organization questions, including whether to incorporate. The Act provides better answers than the common law for a limited number of legal problems. Its answers are more in accord with the expectations of those participating in the work of the unincorporated nonprofit association than the common law.
Developed by the National Association of Insurance Commissioners, these two model acts were recommended on December 7, 1998 for enactment by the states to govern the creation and control of charitable gift annuities, a common "planned giving" mechanism.
The Charitable Gift Annuities Model Act imposes a "variety of administrative and financial regulations on charities that sell gift annuities, including a requirement that they maintain sufficient financial reserves to guarantee that annuitants are paid." The Charitable Gift Annuities Exemption Model Act requires "charities that offer gift annuities to notify state officials that they engage in such activity. In addition, a charity that wishes to offer gift annuities must have been in operation for at least three years, have at least $300,000 in available assets, and disclose to donors that annuity payments are backed only by the charity's assets." States are encourage to use either one or the other of these model acts.
Because these model acts were only recently finalized, it can be expected that some time will be required before any states adopt them.
The Uniform Prudent Investor Act (UPIA) is significant for those developing trusts as instruments for planning giving. The UPIA, promulgated by the National Conference of Commissioners on Uniform State Laws in 1994, allows trustees and like fiduciaries greater flexibility in choosing investments than had been permitted under previous laws, by removing much of the common law restriction upon the investment authority of trustees of trusts and like fiduciaries. It allows such fiduciaries to utilize modern portfolio theory to guide investment decisions. A fiduciary's performance is measured on the performance of the whole portfolio, not upon the performance of each investment singly. The act allows the fiduciary to delegate investment decisions to qualified and supervised agents. It requires sophisticated risk-return analysis to guide investment decisions. A summary and a fact sheet (listing the states that have adopted the UPIA) are available online.
The Uniform Management of Institutional Funds Act clarifies the right of governing boards to invest funds of such nonprofit institutions as hospitals and colleges for total return. This means governing boards could, for example, invest in growth stocks paying low or no dividends but having a high potential for appreciation in long-term value, rather than concentrate entirely on investments with immediate high income yields. It authorizes institutions to treat, as income, many book value capital gains on growth stocks. This model act was developed by the National Conference of Commissioners on Uniform State Laws in 1972. A summary and a fact sheet (listing the adopting states) are available online.
The Uniform Principal and Income Act, promulgated by the National Conference
of Commissioners on Uniform State Laws in 1997, addresses certain financial issues encountered by fiduciaries
of trusts, including charitable trusts. This model act provides procedures for trustees administering an estate
in separating principal from income, and to ensure that the intention of the
trust creator is the guiding principle for trustees. It offers statutory help identifying principal and income, its allocation, and apportionment of assets between income and principal. A summary, and a fact sheet listing the adopting states, is available online.
The Uniform Trust Act is the first comprehensive attempt at the national level to codify the law of trusts, including charitable trusts. It is still under development by the National Conference of Commissioners on Uniform State Laws. The latest drafts are available online.
Links to individual state's regulations are provided on a separate page.
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State and federal laws are not the only ones to which nonprofit organizations are subject. Government authorities of jurisdictions smaller than a state, such as counties and municipalities, can and do implement laws that may be more strict than their superior governments. Such a government authority may also require soliciting organizations and their paid contractors to register specifically within their jurisdiction, in addition to all other state and federal registrations. Any soliciting organizations, wherever based, that present charitable solicitations to residents of these intrastate jurisdictions, and that don't adhere to the local law and its associated regulations, may be subject to legal action by that jurisdiction's government authority.
A more extensive discussion of the efforts of intrastate authorities to regulate nonprofit organizations based outside their jurisdictions will be found in the "Registration as a Charitable Solicitor" part of this Web site. Also, intrastate authorities whose laws and regulations are not satisfied by fulfilling the state's laws and regulations are presented in a dedicated section ("Smaller Jurisdictions") of each state's page in the "Resources by State" part of this site. Finally, the rights of such authorities to regulate outside organizations are currently being challenged in court. A presentation of this controversy is given in "Current Controversies: Out-of-State Solicitation and Registration." Obviously, this is a very contentious and difficult area of regulation for nonprofit organizations, and the advent of the Internet and its use for soliciting donations promises to make this field of law very hot and uncomfortable for all involved parties.
Although the U.S. probably has the most active and strong nonprofit organization sector in the world, most countries have analogous or similar organizations based within their jurisdictions. In many countries, these are referred to as "non-government organizations" or NGOs. U.S.-based NPOs that operate outside the U.S. become subject to the laws of the countries in which they operate, including the laws that apply specifically to NPOs and NGOs. Although a specific description of such regulations is beyond the realm of what this Web site presents, it is safe to assume that the advent of the Internet, and charitable solicitations conducted using this mechanism, will sooner or later lead to U.S.-based NPOs being subject to legal action by government authorities in other countries. This eventuality is probably best characterized as something between a mess and a disaster.
At the time of this writing, there has already been at least one case of a U.S. citizen traveling as a tourist being arrested under foreign law for material appearing on his Web site based in the U.S., since citizens of that foreign country were able to access it through the Internet. Although it may seem unlikely, it is not at all impossible to imagine nonprofit organization administrators being jailed while traveling for activities conducted by their organization back home. Since the Internet projects those activities world-wide, even if the organization intends only to reach U.S. residents, there is a whole new area of regulation and law that may catch on fire in the near future. U.S. nonprofit organizations seeking to avoid getting burned would be wise to at least try to keep up on developments in this area.
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Statutory law (laws developed by legislature) is only one component of the legal landscape that controls nonprofit organization operations. Another major component is case law, developed through judicial rulings when real-world cases are tested in court against the significant statutory law and case law precedents.
Some of the court decisions that have had the largest impact on NPO operations will be listed and summarized below, but this section is not yet complete. However, two significant sections already available at this site are:
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Main page | Legal basis for regulation | Tax-exempt status | Registration for soliciting | Charitable solicitations | Financial accounting | Other issues | Easing the burden | Glossary | Resources by state
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Page last updated 15Mar99
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