Monday, October 20, 2014

Around the Sector: The Five Hundred-Thousand Dollar Question with Sherry Quam Taylor

The W&O Blog occasionally goes outside the firm to seek helpful insight from other experts and innovators in the nonprofit sector.  This guest post is by Sherry Quam Taylor of QuamTaylor LLC.  Sherry provides organizational and development counsel to equip nonprofit leaders with tangible strategies to grow into the next phase of their mission. 

Nonprofit organizations are so often staffed with sacrificial leaders striving hard toward achieving admirable missions.  They are full of passion and great ideas to make an even greater impact in the world.  At the same time, many are struggling to grow beyond their initial successes. Research indicates that 74% of the 1.4 million charitable organizations registered in the U.S. never reach the $500,000 mark in revenue.  Most of these never hire more than five employees (Source: Urban Institute’s Center on Nonprofits and Philanthropy).  This leads me to ask: 

Why is the $500,000 mark such a sticking point?  The same approach, tactics, and methods that once served the organization well during start-up will not propel them to the next phase of growth.  Something has to change.  It often it takes an outsider’s perspective to bring clarity to problem areas and processes that may have worked at one time, but aren’t working anymore.  Often the solutions are not too far out of reach, but leaders are too overwhelmed or in too deep and are blind to the issues.  

What are some of the most common areas holding back organizations from growing past this threshold?  Many executive directors voice similar challenges and concerns about this growth plateau.  If this sounds familiar, there are an initial four questions I’d advise you to ask:

1.  Are you always reactive and never proactive?  Often, when organizations start, a leader has no option but to be reactive.  Ten volunteers appear and want a task, a donor emerges and needs financial back-up, or a speaking opportunity arises – and it’s tomorrow!  But there comes a time when a leader has to make a conscious decision to become proactive by pressing pause and putting a strategy in place that will grow the mission and organization long term.

2.  Have you stretched your staff too thin for too long?  When nonprofits are small, the staff count is,too.  Although each staff member likely will wear multiple hats, there comes a time when a leader must determine if the organization’s mission can grow without adding additional manpower.  One solution is to implement a six-month timesheet initiative to identify the sticking points.  What recurring tasks are drowning your staff?  What percentage of staff time is spent on revenue-generating activities?  What time-intensive tasks could you outsource?  A leader must treat every hour of time as a valuable resource that should be spent wisely.  

3.  Are you treating all your donors the same?  Each of your donor groups has different needs.  A constituent that gives a $10,000 annual gift and one that gives $25 per month need to be treated differently to ensure retention.  Is it time to invest in software to help you plan and track donor engagement?  Are you customizing each donor’s experience with your organization?  If you are not, then you will likely see donor retention fade.  On the other hand, through strategic engagement, reporting, and expressions of gratitude, you can remind and affirm donors why they chose to support your organization in the first place.

4. Did your mission drift over the years?  When organizations are small and growing, it is common to have a donor, volunteer, or business come alongside to offer free advice or services.  This well-meant assistance can be extremely valuable, almost crucial at times.  What seemed like a simple request, however, can turn into a hassle that can push your mission off-course.  For example, a donor has an idea to start a retail business where proceeds would benefit your organization through the use of your volunteers.  Soon it turns into a giant management headache where valuable staff time and focus is being pulled away from your mission.  You know your organization’s needs the best.  Don’t be afraid to tell people the best way they can support you.

The formula to grow a nonprofit organization is complex and multi-faceted, but solutions will become clear with patience and counsel from someone who’s been through the process successfully.  As I tell all of my clients, together, we can do this.

For further information concerning nonprofit formation and growth strategies, please contact Sherry Quam Taylor at:

QuamTaylor LLC

For information concerning the legal aspects of nonprofit formation, governance and related issues, please contact one of our attorneys at or 312.626.1600, on visit us on the web at

Thursday, October 16, 2014

Supreme Court’s Same-Sex Cert. Denial: Tacit Refusal with Massive Implications

The Supreme Court of the United States recently refused to hear federal appeals from five states concerning the legality of same-sex marriage.  As explained in the Chicago Tribune, “When the Supreme Court declines to hear a case — known as "denying cert" — it can seem anticlimactic.  Instead of dramatic oral arguments and protests outside the court, we get a written notification that the decision of an appeals court will stand.  But sometimes, denying cert is an earthquake.  And that's what happened last week.  The court denied cert in same-sex marriage cases from Indiana, Wisconsin, Utah, Virginia and Oklahoma…    Argument over same-sex marriage is all but over,” Chicago Tribune, October 8, 2014. 
            Given the nature of federal courts’ jurisdiction, the Tribune could be right.  Federal circuit courts of appeal have jurisdiction over more than one state.  When a federal court of appeals makes a decision affecting one state, generally that decision is binding on all the states within that circuit’s jurisdiction.  In this case, the circuits involved cover 30 states.  The Supreme Court’s refusal to hear an appeal of the circuits’ decision effectively legitimizes same-sex marriage in those thirty states.  Since the Supreme Court’s denial of cert, another federal district court judge has also struck down laws banning same sex marriage in Alaska.  Same-sex marriage therefore eventually could be the law of the land in all fifty states.

Potential collision course for religious organizations

For many churches, other religious institutions, and faith-based organizations, these appellate court decisions – coupled with the Supreme Court’s cert denial – conflict with sincerely religious beliefs.  The First Amendment provides protection for religious liberty interests.  Accordingly, churches and other religious institutions are generally considered exempt from laws related to sexual orientation and gender identity.  Such exemptions do not necessarily extend, however, to other faith-based organizations, such as para-church ministries.  Many states, counties, and municipalities have increasingly included sexual orientation as a protected class in nondiscrimination statutes, with only limited protections for religious organizations.  

With respect to a for-profit business, no religious liberty protections whatsoever exist.  On this basis, for example, the New Mexico Supreme Court recently held that a photography company had engaged in sexual orientation discrimination when it declined, on religious grounds, to photograph a same-sex commitment ceremony.  See Elane Photography, LLC v. Willock, 2013-NMSC-040.

These statutory restrictions typically cover employment, places of accommodation, and housing.  Religious organizations thus should be particularly mindful regarding use of facilities.  Federal and state laws prohibit discrimination in “public accommodations.”  The definition of “public accommodation” could soon expand from “essential services,” (such as public carriers, motels, restaurants, etc.) to “all activities in commercial and civic law.”  Such an expanded definition could encompass a wide range of services, such as coffee shops, camping programs, and counseling centers.  While no church-owned sanctuaries or conference centers have been deemed “public accommodations” yet, but instead are private property, it may well be only a matter of time for a legal test case. 

Action items:  Evaluation and hard decisions

            The changing legal landscape affecting same-sex marriage, sexual orientation, and gender identity makes it all the more important that nonprofit leaders carefully evaluate organizational documents, operational policies, and activities in light of these new laws.  Specifically, nonprofit boards can take the following actions to protect the organization and reduce the risk of legal liability.

1.              Seek to understand the emerging legal landscape so as to best protect the organization.  In some cases, the organization’s policies or activities may be illegal under new laws or at least subject to challenge.  Experienced legal counsel in these areas can provide information and guidance to assist nonprofits in navigating these challenging waters. 

2.              Evaluate organizational charter documents, internal operations, and activities provided to others to ensure that they are consistent and accurately reflect the organization’s values. 

3.              Evaluate the organization’s programming to ensure that the entity’s activities do not expose the organization to liability.  Facility rentals, for example, may be an important revenue stream for organizations, but such activities may expose an organization to liability under the “public accommodation” theory if not properly structured and executed. 

4.              Carefully develop and implement other organizational policies to further reduce legal exposure for the entity and to allow the nonprofit to operate consistently with its sincerely held beliefs.  For example, if religious aspects are important to a particular job (e.g., a counselor at a faith-based organization, who is expected to live out sexuality-related Biblical requirements), then the job description should reflect such requirement and the basis therefor (e.g., to provide counseling consistent with the organization’s sincerely held religious beliefs, to be an effective role model, etc.).

For further information concerning the changing laws concerning same-sex marriage and nondiscrimination statutes, issues of public accommodation, and other important issues affecting nonprofit organizations, please contact one of our attorneys at 312.626.1600 or, or visit us on the web at

Friday, October 10, 2014

Defying the IRS Preaching Ban: Good Politics?

On Sunday, October 5, 2014, hundreds of religious leaders preached politics from the pulpit -- part of a now annual tradition and nationwide protest against the IRS’s ban on nonprofit involvement in political campaign activity.  Known as “Pulpit Freedom Sunday,” the event is organized by the Alliance Defending Freedom.  While tax practitioners, scholars, and religious leaders often question the IRS ban’s constitutionality, active violation of the ban warrants great caution and discretion.             Believers need not – and should not be required to – cabin their faith, but they need to proceed carefully within the present legal, political, and cultural context.

            A Short History Lesson.  Long before Section 501(c)(3), or even the U.S. Tax Code itself, was enacted, our country’s religious institutions enjoyed religious liberty protection from government interference.  As the U.S. Supreme Court observed in the landmark case of Walz v. Tax Commission (1970):

Few concepts are more deeply embedded in the fabric of our national life beginning with pre-revolutionary colonial times, than for the government to exercise at the very least this kind of benevolent neutrality toward churches and religious exercise generally, so long as none was favored over others and none suffered interference.

As U.S. Supreme Court Justice O’Connor further observed, the early American leaders “accorded religious exercise a special constitutional status,” with all agreeing that “government interference in religious practice was not to be lightly countenanced.”  City of Boerne v. Flores (1997).  Religious institutions may be subject to the state in limited ways (e.g., payroll taxes, health and safety regulations), but all such intrusions must be strictly scrutinized and limited so as to not overreach.

            Muzzling Political Speech.  In the 1950s, then U.S. Representative Lyndon Johnson reportedly became upset when a charity supported his opponent with tax-deductible contributions.  As a result, Johnson pushed through an amendment to Section 501(c)(3), which bans all political campaign activity of public charities, including churches and other religious institutions.  This restriction has been upheld as part of the price tag of such tax-favored status.  (See, e.g., Branch Ministries v. Rossotti (D.C. Cir. 2000).)

            Fast forward to 2010, when the U.S. Supreme Court decided the landmark Citizens United case and upheld a Section 501(c)(4) nonprofit’s right to “speak” through politically related activity.  Since that ruling, the IRS, the current Presidential administration, and others have sought to restrict free speech rights of such groups.  Such efforts seem to be based on a perceived abuse of the political process through excessive spending.  Several Congressional leaders have proposed an amendment to the First Amendment to restrict politically related speech. 

            Increasing Criticism of Religious Institutions.  With that historical backdrop, the practice of political speech by religious leaders is even more potentially problematic, given the following three emergent factors:

            First, the IRS has indicated its willingness to resume its previously dormant practice of auditing religious institutions.  This news comes out of the recent settlement of a lawsuit filed by the atheist organization Freedom From Religion Foundation against the IRS.  Due to outdated federal regulations, the IRS had essentially ceased all auditing of churches, including those that may have engaged in prohibited political campaign activity.  This is no longer the case.  According to settlement-related IRS correspondence, the IRS has its eyes on 99 churches that may be in legal trouble. 

            Second, religious institutions (as well as other nonprofits) are increasingly finding themselves mired in financial scandal involving mismanagement – even theft – of their charitable assets.  But for First Amendment religious freedom reasons, and unlike all other public charities, they are not required to file the annual IRS Form 990s.  Many political and other leaders have thus called for increased accountability, positing other interests above religious liberty values.  

            Third, enter the groundswell of legislative activity, court rulings, and debates over same-sex unions, sexual orientation, and gender identity.  The result: an increasing clash between proponents of such beliefs and people with sincerely held theological and other opposing religious beliefs about human sexuality and our societal well-being.   

            Prudence.  What does prudence warrant?  Caution and discretion.  This is not an ideal time to push for a judicial or IRS showdown on the political campaign prohibition for religious institutions.  Recent 5-4 Supreme Court decisions on religious liberty and free speech demonstrate that protection of religious institutions’ First Amendment rights is by no means assured.  (See, e.g., Burwell v. Hobby Lobby (2014); Federal Election Commission v. Wisconsin Right to Life (2007).)  In addition, the IRS has demonstrated that it cannot be trusted to protect constitutional freedoms, particularly in light of the 2013 scandal regarding its improper handling of tax-exemption applications filed by conservative organizations.  Further, with the apparently growing intolerance of religious liberty, this is not the time to thumb one’s nose at the political campaign prohibition.

            What can and should religious institutions do?  First, respect and obey the law, insofar as such obedience is consistent with one’s conscience.  Second, preach one’s beliefs, doctrine, and values wholeheartedly and fully.  Preach and teach from the Bible, the Koran, and other sacred texts about the key underlying issues: caring for the poor, sanctity of life, sexuality, the environment.  This kind of communication can be done without reference to a specific political candidate or party.  (Such approach may otherwise be quite practically prudent to avoid divisive partisanship.)  Likewise, exhort listeners to follow religious doctrine and live out religious values.  Such exhortation can be performed as sincere religious adherents, or simply as citizens. 

            For more information regarding legal aspects of religious institutions, political discourse, and other nonprofit issues, contact one of our attorneys at 312.626.1600 or, or visit us on the web at

Wednesday, October 1, 2014

Conflicts of Interest – What Hat Are You Wearing?

Does your nonprofit have established policies for handling conflicts of interest?  While such policies have long been recommended by the IRS and state agencies, adoption of a specific corporate conflict of interest policy is not generally a legal requirement.  However, through its newly enacted Nonprofit Revitalization Act, New York now requires its nonprofit corporations to adopt policies regarding the disclosure and handling of potential conflicts of interest.  Other states may follow suit.  Until then, take note:  conflict of interest policies – and accompanying disclosure statements – help promote nonprofits’ “best practices” and legal compliance.

            What is a “conflict of interest”?  To understand conflicts of interest, one must first look at the duty of loyalty placed on directors of nonprofit organizations.  Under the duty of loyalty, directors may not use their positions of trust for personal advantage at the expense of the corporation.  All states and the federal government require directors to act in the best interest of the organization, rather than that of a director.  Furthermore, some states place more specific duties on directors.  For example, under the Illinois Charitable Trust Act directors are charged with a duty to avoid self-dealing and conflicts of interest.

            As part of the duty of loyalty, directors should be “disinterested” and independent of one another.  Disinterested directors are not uninterested, but are interested in the organization’s benefit rather than personal benefit.  Conflicts of interest occur when a nonprofit director acts in a different capacity than his or her capacity as a disinterested, independent director, such that the director is no longer living up to the duty of loyalty.

            If I have a potential conflict, does that mean I can’t be a director?   Not necessarily.  The key question is whether you can act in the best interest of the nonprofit corporation.  Colloquially speaking, how many “hats” are you wearing?  At a minimum, you have your director’s hat, which comes with the duty of loyalty.  You may also have a family member hat, a businessperson hat, a second director’s hat as a director of another organization, etc.  Potential conflicts become actual conflicts of interest when you are unable to take off all the other hats and wear only one hat:  your nonprofit leader hat.

            The following are some common scenarios that arise where directors have a potential conflict of interest:

Scenario 1:  You and your spouse (or other family member) are asked to serve on the same board.

            May you accept the position as a director?  It depends.  Can you and your spouse each vote independently rather than to please each other?  This may be a particularly tough question with a very small board, such that the two of you will have substantial control of the organization’s affairs.  On a very large board, having two members of the same family may not have as much of an impact.  Will either of you be compensated by the organization?  If so, you may still be able to serve on the board, but both you and your spouse should be excused from any vote regarding this compensation.

Scenario 2:  You are asked to serve on the boards of two very similar organizations.

            May you serve on both boards?  Once again, the answer is that it depends.  The most likely situation in which this could become a problem is if both organizations go after the same funding, such as specific government grants or a common donor base.  Will you help write grant proposals for both organizations?  You may be able to avoid an actual conflict by stepping back from any responsibilities pertaining to such grants.  What about when you network with the donors targeted by these organizations?  How will you choose which organization to talk about if you have a duty of loyalty to both?  If this is a common situation in which you find yourself, you may need to step down from one of the boards.

Scenario 3:  You are asked to provide services to an organization for which you are a board member.

            May you charge the organization a fee for the services?  As above, it depends.  Here the key question is whether the fee is fair to the organization.  Will you provide the best price?  Will the organization be getting the best value for that price?  Make sure you point out such a potential conflict and excuse yourself from any vote regarding whether the organization should hire you and how you should be compensated.  The organization should also document how it determined that the cost of your services is a fair price to pay.   You should also consider whether you will be able to take off your businessperson hat when you need to be wearing your director hat.  This can be particularly important for professionals like lawyers and accountants, whose ethical duties to the organization as a client may conflict with their duties as directors.

            Whether you can say yes in each scenario depends on the circumstances, but it is important to note that disclosure is key!  Always disclose potential conflicts to the board so that steps may be taken if necessary to prevent potential conflicts from becoming actual conflicts.

            What disclosures are appropriate or legally required?  Directors are legally required to disclose when they have an actual conflict of interest that will keep them from being disinterested and from acting solely for the benefit of the nonprofit corporation.  For purposes of limiting liability, other disclosures may be appropriate.   To promote the orderly and appropriate handling of conflicts of interest, all nonprofits should have a written conflict of interest policy.  The policy should explain when such disclosures are necessary and outline the organization’s procedures when a potential conflict arises.

            As now required in New York and recommended for all, the organization’s policy should require that directors submit signed disclosure statements – both prior to the director’s initial term and at least annually thereafter.  Such statements should identify whether the director is an officer, director, trustee, member, owner, or employee of any other entity with which the organization has a relationship.  The statement  should establish whether other potential conflicts of interest exist.  Even if not required by law, such disclosure statements can be a great reminder to directors about their continuing duty of loyalty.  They further remind directors to report conflicts of interest that actually arise during their term.

            Most importantly, the nonprofit corporation should not just have a policy regarding conflicts of interest; it should also follow it!  Be sure to document in the organization’s minutes when a conflict or potential conflict is disclosed, any action taken to resolve the conflict, any recusal of the interested person(s), and specifically how the nonprofit’s best interests are served.

            For more information regarding conflicts of interest and other nonprofit governance issues, contact one of our attorneys at 312.626.1600 or, or visit us on the web at