CNC Nonprofit Legal & Ethical Considerations 2 — Questions and Answers
Question 1: Under the IRS intermediate sanctions rules (IRC § 4958), who is considered a 'disqualified person' for a public charity?
- Any paid employee earning over $50,000
- Someone who exercises substantial influence over the organization's affairs (Correct answer)
- All board members regardless of their role
- Volunteers who receive in-kind benefits
Correct answer: Someone who exercises substantial influence over the organization's affairs
A disqualified person is anyone who has substantial influence over the organization, such as executives, major donors, or board members with significant control.
Question 2: Which document establishes the foundational rules governing a nonprofit's internal operations and leadership structure?
- Form 990
- Articles of Incorporation
- Bylaws (Correct answer)
- Conflict of Interest Policy
Correct answer: Bylaws
Bylaws establish the internal governance rules, including board composition, meeting procedures, officer duties, and voting requirements.
Question 3: A nonprofit's executive director approves a vendor contract with a company owned by her spouse without disclosing the relationship. This is best described as:
- A material weakness in financial controls
- A conflict of interest that should have been disclosed (Correct answer)
- Permissible if the price is market-rate
- A violation only if the board was unaware of the marriage
Correct answer: A conflict of interest that should have been disclosed
Any financial relationship between an officer and a vendor creates a conflict of interest that must be disclosed regardless of pricing fairness.
Question 4: What is the primary legal significance of a nonprofit achieving 501(c)(3) status?
- It exempts the organization from all state and local taxes
- Donations to the organization become tax-deductible for donors and the org is exempt from federal income tax (Correct answer)
- The organization can engage in unlimited political campaigning
- Board members receive personal liability protection from the IRS
Correct answer: Donations to the organization become tax-deductible for donors and the org is exempt from federal income tax
501(c)(3) status grants federal income tax exemption to the organization and allows donors to deduct contributions on their federal tax returns.
Question 5: Which IRS form must most tax-exempt nonprofits file annually to maintain their exempt status?
- Form 1040-NP
- Form 990 series (Correct answer)
- Form 8283
- Schedule H
Correct answer: Form 990 series
The Form 990 series (990, 990-EZ, or 990-N depending on revenue size) is the annual information return required of most tax-exempt organizations.
Question 6: The 'private benefit' doctrine prohibits a 501(c)(3) organization from:
- Paying any compensation to employees
- Serving constituents who are also donors
- Providing more than incidental benefit to private individuals or entities (Correct answer)
- Owning real property
Correct answer: Providing more than incidental benefit to private individuals or entities
The private benefit doctrine requires that a 501(c)(3)'s activities primarily serve public interests, with private benefit being only incidental.
Question 7: A nonprofit board member who personally loans $50,000 to the organization should:
- Recuse from any board votes related to the loan and document the transaction thoroughly (Correct answer)
- Resign from the board immediately to avoid legal complications
- Obtain IRS pre-approval before completing the transaction
- Charge the maximum allowable interest rate to avoid scrutiny
Correct answer: Recuse from any board votes related to the loan and document the transaction thoroughly
Board members with financial transactions with the organization must disclose, recuse from related votes, and ensure the transaction is documented as fair market value.
CNC Nonprofit Legal & Ethical Considerations 2
Under the IRS intermediate sanctions rules (IRC § 4958), who is considered a 'disqualified person' for a public charity?