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Wednesday, November 16, 2011

Automatic Revocation of Tax Exemptions - An Outline of Issues

This is outline of issues pertaining to the automatic revocation of tax exemptions by the IRS that occurred as a result of failing to file a tax return for three consecutive years.


Exempt entities required to file returns (990, 990EZ, 990PF), with exceptions:

  • $25K - Years ending prior to January 1, 2010
  • $50K - thereafter  [See IRC section 6033(a)(3)]

2006 law, the Pension Protection Act of 2006, revised prior law to ADD ANNUAL NOTIFICATION REQUIREMENT

  • Applicable to all entities not required to file returns
    • Must file Form 990-N e-Postcard (or other 990 form)  [IRC 6033(i)]
    • Applicable for all tax years past 2006
    • 2007, 2008, 2009 were first years for which Annual Notification Requirement was in place
  • First automatic revocations took place in 2010
    • Effective dates of automatic revocation: date third consecutive 990N not filed by the 15th day of fifth month following the close of the fiscal year
  • IRS sends notices of automatic revocation to "last known address"


  • Entity is no longer exempt, and is subject to regular income tax
  • Contributions might not be tax deducible (especially if charitable)
  • Issues to consider:
    • Need we notify the board?  (Yes)
    • Need we notify the members?  (Unclear)
    • No change in corporate status  (Still a corporation, simply not tax exempt)
    • File different returns?  (Unclear.  Depends on whether exemption is reinstated.)
  •    Challenges to automatic revocation difficult
    • IRS taken hard line
    • Declaratory judgment court action prohibited [IRC 7428(b)(4)]
    • Long story short, you must apply for reinstatement of the exemption


Two options/"Transitional Relief":

  • Reinstatement - a new Form 1023 (501(c)(3)) or 1024 (501(c)(4-6) and others)
    • Effective the date of application for reinstatement; date of filing
  • Retroactive Reinstatement - a new Form 1023 or 1024
    • Effective the date of automatic revocation
    • Must establish "reasonable cause" for the failure to file  [IRC 6033(j)(3)]
    • Describe reasonable cause factors such as:
      • volunteer responsibility/lack of awareness of filing requirement
      • good faith reliance on information provided by IRS
      • circumstances beyond the control of the taxpayer
      • substantial, written procedures to prevent future failures
      • do above for every year for with a return or notification was not filed
    • Must file within 15 months of automatic revocation

Application required, even if not required in past (eg: group exemption)

  • User fee $850
  • Reduced user fee $100 under Revenue Procedure 2011-36
  • Eligibility
    • The entity was NOT required to file notices/returns prior to 2007
    • The entity was eligible to file Form 990N e-Postcard
    • The entity had annual gross receipts of not more than $25,000 in 2007, 2008 and 2009             based on averaged gross annual receipts for current filing year plus the two preceding years
  • File not later than 12/31/2012
  • Write "Notice 2011-43" on top of Form 1023/1024, AND on the envelope
  • Include properly completed 990/990EZ forms for 2007, 2008, 2009 and interim years
  • Attach letter with declaration:

"[Name of organization] was not required to file annual information returns for taxable years beginning  before 2007; was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to file a Form 990-N e-Postcard; and had annual gross receipts of normally not more than $25,000 in each of its taxable years beginning in 2007, 2008 and 2009.

I, [insert name and title of an officer or director] declare, under penalties of perjury, that I am authorized to sign this request for retroactive reinstatement on behalf of [insert name of organization], and I further declare that I have examined this request for retroactive reinstatement, including the written explanation of all the facts and information pertaining to the claim for reasonable cause and the evidence to substantiate the claim for reasonable cause, and to the best of my knowledge and belief, this request is true, correct and complete."


  • Same rules apply, even if group letter exemption
  • Parent responsibility to verify?
  • Parent responsibility to assist chapters with revoked exemptions?
  • Records and record keeping challenges
  • Management of chapter risks
    • Separate incorporations
    • Affiliation agreements
    • Supporting chapters


Automatic Revocation of Exemption

Automatic Exemption Revocation for Non-Filing: Reinstating Tax-Exempt Status

Annual Exempt Organization Return: Who Must File

Automatic Exemption Revocation for Non-Filing: Requesting Retroactive Reinstatement

Rules concerning reduced User Fee

Rules Concerning "Transitional Relief"

Automatic Revocation of Exemption List -

Annual Electronic Filing Requirement for Small Exempt Organizations — Form 990-N (e-Postcard)

Form 990 Series - Which Form to File (Filing Phase-In) 

Form 1023 Application

Form 1024 Application

Tuesday, November 8, 2011

Associations and Contracts for Meetings and Events

(Here are some of the highlights from a presentation we did recently on hotel contracts for SmartMeetings Magazine)

Over the course of the next 18 to 24 months we believe meetings and events will continue to be impacted by the state of the economy, changing attendee expectations and what appears to be a permanent trend of booking outside the block.

General Factors

The economy will continue to drive what hotels and convention centers are willing to provide in the way of service and the extent to which they will choose to engage in negotiations.  Attendee expectations are increasing and crescent rounds versus hollow square aren't really the issues anymore.  We need to be looking at space utilization issues and being more creative with the spaces we decide to interact in.  Also, booking outside of the block is the new normal and we don’t see it going back any time soon.  So using historical data to create contracts can be risky.

The New 990

Although it hasn’t been tested yet in the courts to our knowledge, we believe there may be implications for meeting planners in the new IRS Form 990 that 501(c)(3) and 501(c)(6) organizations file.  It could be argued that meeting planner points and other booking incentives do not belong to the planner, but to the association, and that the planner’s acceptance of those things could amount to either a conflict of interest or a private inurement.  Consult counsel if you have questions regarding a specific situation.

Starting a Negotiation

Here are some quick tips to keep in mind before you start any negotiation:

  • Know the value of your meeting
  • Know the going rates
  • Know your terminology
  • Know the economic landscape of the area
  • Know your members/attendees
  • Know your history
  • Know what your reputation is

Helpful Keys

Here are some quick factors that may influence your ability to find better rates and contract conditions:

  • Location
  • Meeting month
  • Holidays
  • Arrival/Departure Days
  • Sleeping room/meeting room ratios

Contract Basics

Remember, just because something looks like a “standard contract” does not mean it is.  Virtually every hotel has a different contract, and every term of every contract is subject to negotiation.  Carefully reading each section is critical.  If you are unclear on terms, make sure you have definitions that are spelled out or use examples as a way of demonstrating meaning. Having your own addendum can be very helpful as many times hotel representatives can’t change the terms on the “boilerplate” without a tremendous amount of hassle, but they can and often do, sign addendums that change the terms of the boilerplate with a certain amount of ease.  (See below for more on the addendum ideas.)

Here are some major clauses with some quick hints about each one:

  1. Attrition – Consider using a “best efforts” clause, arrange for multiple cut-off dates so you can revise the block, negotiate "minimum pickup" between 75% and 90% of the total room block, negotiate on hotel’s profit margin on unused rooms (not room rate), make sure you are credited for all rooms booked (even those outside the block) and never pay taxes on unused rooms or meals.  (Sometimes attrition clauses are so egregious, they actually end up being penalties and penalties are rarely enforced in court.  If you want to not point it out, and deal with attrition penalties if that happens, you could conceivably do that.)
  2. Cancellations–Limit to hotels lost profits versus lost revenues, don’t pay cancellation fees immediately, build in a provision that if the hotel achieves average occupancy rate over the dates in question that you don’t owe them anything, provide for the possibility of moving the event (or an event with a similar foot print) to a new date with the property in lieu of cancellation fee, consider putting renovations and pest infestations as reasons to cancel.
  3. Force Majeure – Beyond what we normally think of as “acts of God” such as natural disasters or war or civil disturbances you should also include the following as reasons for Force Majeure: terrorism/threat of terrorism, union activity and picket lines, government action, outbreak of disease/illness/pandemic, transportation disruptions, pest infestation or any other reason making it inadvisable to hold a meeting. (Note:  It is critical to thoroughly consider the issue of strikes and picket lines when negotiating a hotel contract.  Some groups will NOT cross a picket line, regardless of whether that particular hotel or convention center is actually on strike or not.  If your group, or even portions of it, will not cross a picket line, then this is a serious concern.)
  4. Indemnification – Be careful with indemnification clauses. You are not an insurance company and you aren’t responsible for the acts, omissions, negligence or willful misconduct of your attendees or their guests. Also, any indemnification clause should be fair to both the facility and the group; most hotel indemnification clauses are unilateral and unreasonable (the group pays for any claim that the hotel did not purposely cause). In most cases, NO indemnification clause is better than the clause included in the hotel’s form.
  5. Non-Disclosure Agreement – Consider including a non-disclosure agreement that states the facility cannot share information about rates or other contract specifics with other properties. It is unethical (and possibly illegal) for hotels and convention centers to share such information, but that doesn’t mean it doesn’t happen. We know of cases where it did happen.


Here are some suggestions for you to consider when preparing your own custom addendum to add to facility contracts:

Walking Provisions – If the host hotel overbooks and ends up walking one of your attendees the hotel should arrange and pay for both housing and transportation costs between the host hotel and another comparable facility in the area.

Function Review – Reserve the right to review and adjust room block, meeting space and function details periodically and at least six months prior to the event.

Rates and Fees – Hotel should not advertise promotional fees lower than your contracted room rate at their facility over the dates you are onsite.  If they do, a discount should be given to your attendees.  (Watch Orbitz and other travel sites and grab a screen shot if you see a lower rate publicized.)

Complimentary Space and Set Up – Make sure there aren’t any hidden fees or charges with space and room set-up for meeting space you are using.  Also check for energy surcharges and AV “access fees” that suddenly show up when you choose to use an outside AV vendor.

Other Groups/Quiet Enjoyment – The hotel should be able to provide a quiet atmosphere for your attendees and disruptions due to other meetings, events or renovations should be kept to a minimum.  Competing or adversarial groups should not be booked at the same facility on the same day without your being apprised of and agreeing to such a booking.

Food and Beverage – There should be an understanding that the F&B pricing quoted during negotiation of the contract should not be raised.

Alcoholic Beverages – Consider including a provision that states all alcoholic beverages should be dispensed by hotel employees, those employees should be properly trained on mixing, should not serve to underage individuals and should not serve to attendees who appear inebriated or intoxicated.

Change in Management – Reserve the right to modify or cancel the agreement based on changes in management or ownership of the property.

Deterioration – Reserve the right to modify or cancel the agreement based on deterioration of hotel or facility upkeep and maintenance.

Construction and Remodeling – Require the hotel to advise the group of any construction or remodeling that might take place during the group’s event, and reserve the right to modify or cancel the agreement based on interference with the groups enjoyment of the property.  This is a common occurrence, and should be considered in every meeting plan.

Fiscal Challenges – Reserve the right to modify or cancel the agreement should the hotel or facility or the association itself find itself in severe financial distress and is unable to make or keep their commitment.


Every hotel and convention contract should be carefully reviewed by a qualified person representing the group.  This could be an experienced meeting planner, or an attorney.  Contract terms change all the time, and virtually every hotel contract is different.  A strong relationship with a reputable hotel, and a careful drafting of the agreement will help prevent misunderstandings and conflicts.  The use of an addendum is sometimes very efficient, and a checklist like the one provided above is also helpful.  As always, in cases of doubt, the group should contact legal counsel for input concerning contracts.

Monday, August 29, 2011

Setting Up Subsidiaries for Nonprofits and Associations

The Association Law Blog recently published an article on unrelated business income, and how under certain circumstances it may be advisable for a nonprofit association or foundation to establish a subsidiary to address unrelated business income and activities. This posting provides a brief overview of how a subsidiary is formed.

First, the existing nonprofit organization should determine that a subsidiary is needed. This analysis should include review of tax issues, the increased costs and burdens of operating an additional entity, future plans of the organization, and similar issues.

If it is determined that a subsidiary should be formed, it is helpful to form a task force to carry out the project. The task force should be fully accountable to the parent organization, and all substantial documents and plans of the task force should be subject to ratification by the board of the parent company.

The task force should focus on developing a purpose statement and business plan for the new entity, and in engaging any assistance it may need, such as an accountant and attorney. The business plan should include draft articles of incorporation, bylaws and policies.

In order to maintain control of the subsidiary, the board of the subsidiary, or at least a majority of the board of the subsidiary, should be appointed by the parent nonprofit. Further, the bylaws of the subsidiary should require explicit written approval of proposed changes to the subsidiary bylaws before they become effective.

Notwithstanding the above paragraph, it is critical for leaders of both the parent and subsidiary organization to understand that the subsidiary is a separate legal entity that must be governed by its own board. The parent board may not make decisions for the subsidiary. Rather, the parent board should appoint persons to the board of the subsidiary who will carry out their duties responsibly. If the appointed persons displease the parent board, they may be removed from the subsidiary, but the parent board has no right to substitute its judgment and decisions for that of the subsidiary board.

Upon approval of these documents, the subsidiary should be incorporated, hold its first meetings, adopt the bylaws, obtain appropriate licenses and permits, obtain an employer identification number, and commence its own operations.

Of course, the above is just a rough outline, and as always, the devil is in the details. This is why it is important to engage the services of competent advisors. Despite the effort and expense involved in establishing a subsidiary, many nonprofits have them, and they can be critical to its success. It is not uncommon for both the nonprofit and for-profit operations to benefit from being distinguished from one another, leading to unanticipated efficiencies.

In every case, however, it is critical that a parent and subsidiary stay in close communication, and work together constructively. This is not always easy, and is likely to be the subject of future posts.

Tuesday, May 3, 2011

Associations and Trademarks

Trademarks are an important part of the association world. Association names themselves are trademarks. Association program names and even marketing phrases can be trademarks. These trademarks embody the association’s brand and identity. These trademarks can be extremely valuable, and are worthy of careful attention and protection.

The article summarizes some of the basics about trademarks that every association needs to know. Trademark law is a legal specialty, involving a vast range of specialized legal issues and knowledge. I am not a trademark specialist, and this article should not be regarded as legal advice or substitute for the advice of counsel.

Trademark Basics: the United States Patent and Trademark Office

One of the most valuable tools you can use in working with trademarks is the United States Patent and Trademark Office website, located at  It contains basic information about:

Aside from the online resources, I have found the USPTO staff to be helpful and reasonable.  They understand that most applicants are not trademark experts, and they are willing to help by suggesting wording for trademark descriptions, filing categories, and other matters.

More Basics About Trademarks

One key point to remember about trademarks is that a trademark need not be registered to be a trademark. So, I can call my business “Alcorn Associates” and that name will be my trademark even though I have not registered the name with the USPTO or California Secretary of State (Yes, trademarks can be registered with the USPTO and most states). If I do not register the trademark with the USPTO or Secretary of State, I can use a small “TM” in conjunction with the name to give notice to the public that I am claiming the mark as a trademark. If I register the trademark with the USPTO, I can use an R with a circle around it to give notice that the mark has been registered.

The advantages of registering a trademark are substantial. First, it helps verify your right to use the trademark. It can help prove that you were using a trademark first. It allows for statutory damages for infringement on the trademark. This is a major point, as damages that result from trademark infringement are very difficult and expensive to quantify; if the mark is registered the holder need not prove damages. Finally, registration of the trademark makes it much easier to secure the cooperation of both purposeful and inadvertent infringers. This is important to associations, as it is not uncommon for non-members to falsely claim association membership, endorsement or certification.

It is important to bear in mind that not every name or logo can be protected from use by third parties. In order to be protected, the mark must be distinctive.  For example, a soft drink maker would not be able to trademark the name “cola” because the word is not distinctive.  On the other hand, the trademark “Coca Cola” was allowed to be trademarked because it was/is distinctive.  Interesting issues arise when a trademarked name is so commonly used that it becomes generic.  For example, one might generically refer to a cola as a “Coke.”  Careful efforts by the trademark holder can usually prevent a trademark from becoming generic; this is the reason that restaurant servers ask patrons if Pepsi is okay when the patron orders a Coke.  The servers are not doing that because they care about your tastes; they do it because the trademark holders have forced them to do so.

The requirement of distinctiveness is frequently a stumbling block for associations.  The problem is that most association names are “merely descriptive” rather than distinctive.  For example, the California Association of Widget Makers trademark simply describes an association of widget makers from California.  Fortunately, a name is generally deemed to have become distinctive based on five years of continuous use of the name in commerce.  Thus, if an association has been using its name exclusively (no one else is using the same name) in commerce for more than five years, the mark is usually deemed distinctive.  Brand new associations oftentimes use the TM mark in conjunction with their names.  Of course, logos are usually distinctive by design, so logos are rarely deemed merely descriptive.

Yet another facet of trademark law is that trademarks are granted based on the market category in which the trademark will be used.  In fact, sometimes the same trademark can be registered in different product categories.  For example, a software company might register the word “Infinity” as a trademark for a computer software consulting company.  A second company could register the word “Infinity” as a brand name for an automobile.
Finally, trademarks can be words (depicted in a typed format), or designs.  For example, one could register the name “California Association of Widget Makers” as words, as well as a distinctive design of the letters “CAWM”, as well as the entire name in a distinctive font.  This would entail filing three trademark applications.  Some organizations have numerous trademarks filed in different categories aimed at helping ensure that they can defend their brand.  For example, check “ADA” or “American Dental Association” on the USPTO site search page.  ADA has filed an impressive array of trademarks to protect its valuable name and logo.

What Should Associations Trademark?

Most associations do not thoroughly consider the various words and/or designs (trademarks) it uses to identify its products or identity.  They almost always consider registering their name and logo.  Additionally, associations should consider registering the name of its trade show, the names of key programs, its publications, its certification designations, and similar words or symbols as trademarks.   Just about any distinctive identifying mark used in commerce can be registered.

Applying for a Trademark

There is no requirement to use an attorney to apply for a trademark, but there are many reasons to do so.  Among other things, an experienced attorney will be able to file the trademark much more efficiently than most executives, and the technical descriptions and filing categories used are more likely to provide the protection you need when an infringement occurs.  If you have the time, however, nothing prevents you from filing the application yourself.  To apply, use the link provided earlier in this article.  The filing fee is either $275 or $325, depending on the options you choose, but I recommend the $325 option.  The $275 option is intended for frequent filers, and those with extensive experience in trademark law.  Attorneys fees for filing trademarks range from about $1,000 to $2,000, in addition to filing fees.  If there are technical glitches with the filing, as sometimes happens, fees can be higher.  Trademark litigation is, of course, incredibly expensive and out of reach of most associations.

Maintaining a Trademark

Most people do not realize that a trademark must be maintained.  Rights in a federally-registered trademark can last indefinitely if the owner continues to use the mark on or in connection with the goods and/or services in the registration and files all necessary documentation in the USPTO at the appropriate times. In general, the owner of a registration must periodically file proof of continuing use of the mark, and an application for renewal.  The dates for filing these documents require careful calendaring.  If you fail to file within the required filing period and a grace period, the trademark is cancelled without notice.  You will receive no reminders or warnings of any kind from the USPTO.

Filings are required between the 5th and 6th year after registration, and again between the 9th and 10th years, and once every 10 years thereafter.  Again, these dates should be placed on the organization's master calendar.


Trademarks are an important asset to any business or association. Association professionals should focus on protecting the interests and assets of the association by monitoring and protecting its trademarks. The reputation and brand of the association may depend on it.

Monday, March 14, 2011

The IRS, Private Inurement and Non-Profit Association Management

Few subjects in an association leader’s life are as misunderstood and nebulous as private inurement.  The mere reference to private inurement inspires puzzled looks on volunteer faces, and worry on the faces of association executives.  Indeed, even the IRS admits that it is unable to assign it a precise definition.  This posting is aimed at recapping private inurement principles, and provide some examples of it in association settings.  This is, of course, a summary, not an exhaustive review of the subject.


Section 501(c)(6) of the Internal Revenue Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues, which are not organized for profit and “no part of the net earnings of which inures to the benefit of any private shareholder or individual.”  Because determination of whether inurement exists is largely based on facts, the definition of inurement is not precise.  An outline of inurement principles is available in the IRS publication “Exempt Organizations – Technical Instructions Program for FY 2003.”

The inurement prohibition does not completely preclude members of a 501(c)(6) organization from receiving benefits such as newsletters and informative materials, and of course there is no rule against an association member being more successful as a result of being a member of an organization.  However, inurement results from “an expenditure of organizational funds resulting in a benefit which is beyond the scope of benefits which logically flow from the organization’s performance of its exempt functions.  G.C.M. 38599 (11/1980).

Payments to Insiders.  Payments to association insiders, including officers, directors and other leaders, should be made only on an arm’s length, reasonable basis.  Circumstances in which a director or officer is compensated for their time beyond that which primarily benefits the association, is a potential inurement.  For example, an association may pay a stipend for officers in order to enable the association to recruit high quality leaders, provided the stipend is paid primarily for the benefit of the association.  Also for example, an association paying its CEO more than a reasonable salary could be found to have paid an excess benefit, a form of private inurement, and be severely penalized for having done so.  The moral of the story: always scrutinize payments to insiders to ensure the payment is absolutely defensible in terms of the reason for the payment, and in terms of the amount.

Payments to Members.  Historically, the IRS and courts have found inurement when the exempt organization’s payments directly benefit members.  Examples include:

  • Providing financial assistance and welfare benefits for members (See Rev. Rul. 67-251, 1967-2 C.B. 196).
  • Paying members for expenses incurred in defending, and judgments rendered in, malpractice suits (See National Chiropractic Association, Inc. v. Birmingham, 96 F. Supp. 874 (N.D. Iowa 1951).
  • Owning a copyright on a product sold, and distributing the royalties to members.
  • Distribution of non-member income to members in the form of rebates or reduced dues.
  • Rebates to members of amounts paid by both members and nonmembers for space at a trade show.

Performance of Particular Services for Members.  Further, an organization's performance of particular services for its members or others is not an exempt activity under Code section 501(c)(6).  Although such activities alone do not preclude exemption, an organization engaged primarily in performing particular services is not exempt under section 501(c)(6).   Examples are as follows:

  • Advertising that carries the names of members may be performing particular services; but promoting the business of an industry by encouraging the use of its products is not.
  • Furnishing particular information and specialized individual services to members through publishing and other means to effect economies in business operations may be performing particular services; but educating members on how to improve their business results is not.
  • Operating a multiple listing service for members of a real estate involves performing particular services.
  • Operating parking lots for members' customers may be performing particular services, but providing parking as part of a plan to promote patronage of businesses in an area may not be.
  • Providing insurance coverage often involves performing particular services.  Similarly, negotiating discounted healthcare or similar services for members and/or nonmembers and providing related services may be performing particular services.

Assessing Your Risk.  Presumably, every association has exempt purposes, such as improvement of business conditions, education, and the general advancement and growth of its members and industry.  From there, it is essential to determine whether any of the benefits members receive exceed the scope of benefits that would logically flow from its performance of the associations exempt functions.  Are the association’s general funds subsidizing or offsetting members costs of doing business?   Is the association providing “particular services” that would otherwise be provided by a business ordinarily carried on for a profit?  Are nonmember dues or other profits being used to provide benefits at little or no cost to members?  If the answer to these kinds of questions is arguably “yes,” then it is time to carefully review the question with your lawyer or accountant.

The penalties for private inurement are substantial.  Depending on the depth of the inurement, the nonprofit could suffer financial penalties and lose its tax exempt status.  If the persons receiving the benefit are “insiders” (generally officers, directors, senior employees), the IRS may declare an excess benefit transaction, and impose severe fines and penalties.  Interestingly, the most common form of private inurement comes in the form of these “excess benefit” transactions, usually overcompensation paid to “volunteer” leader, a staff member or consultant (who is an insider).


As noted above, private inurement is a difficult but important subject.  It is important for association professionals to understand enough about it to recognize when it becomes a potential problem.  At that point, or whenever there is doubt, the association should seek expert input and opinions concerning the risk.  In so doing, the association gains a significant level of protection in the form of lessened risk, and proof of good faith (that is, that the association was concerned about private inurement, obtained an opinion of a CPA or legal counsel that the practice was probably not an inurement, and acted in good faith on reliance on that advice).

Thursday, February 3, 2011

Flip Camera and Cell Phone Videos at Association Meetings - A Lawyer's Perspective

Did you know almost everyone attending your meeting has a video recorder with them? And they can get audio and video of almost everything without you knowing it? And the technology exists for almost anyone to post these videos on the Internet for the world to see?

Of course, you did. It can be scary.  But let's take a common sense approach to the matter.

The following note is my almost exact response to a long-time, awesome client asking about whether the association could/should stop a member from posting video of association meetings and educational courses, and whether the association could prevent such taping.  The name of the executive has been changed and we have replaced the organization name with a generic "Association Name."


Derek (Not his real name)-

Thanks for the message.

I viewed the YouTube video. I was worried that it might have been a hit piece, but was pleased at how supportive it was to [Association Name], and how it suggests that the meetings are worthwhile and a good time. Good press! In fact, you might want to keep that going...

Anyway, concerning THIS video, I recommend that you not do a cease and desist, as it will call more attention to the video and turn a fan into a critic. It is not my call, but I would leave it alone. Even better, THANK this person in order to make [Association Name] appear open and gracious, not cranky and secretive.

Concerning future videos: Yes, this is a concern. The next videographer might be a jerk and create a hit piece. If someone did, it would again call more attention to the video to try to stop it. And it could be impossible to stop, since once it hits the air, others (enemies, and there are a few) can copy and distribute it. Also, if a person recorded an entire class, or took class materials out of context, [Association Name] could be badly injured. You are right to be concerned.

I recommend [Association Name] adopt a strict, "No recording or photography of any kind at [Association Name] events/meetings/lectures/classes without the prior written consent of [Association Name]" policy, and enforce the policy. This policy would need to be made public/known at all events. Persons might still be able to secretly record, but they would be breaking the rules, and subject to ejection and court action.

Then, I would contact the person who made the above video (this person has some skills), and others who are interested in doing so, and make them part of YOUR team. Give them authority to make videos on behalf of [Association Name], subject to REVIEW AND APPROVAL by [Association Name] prior to publishing, and acknowledging them at the event (and elsewhere) for doing so. This puts them squarely on the association's team, and [Association Name] will receive tens of thousands of dollars worth of free publicity if they are well constructed. And these videos are really authentic looking, involving real members and real meetings, not overly professional so as to suggest that they are contrived.

Best regards,


Have you got your policy in place? Are you getting your fair share of free publicity? Please share your video and YouTube stories with me at I would love to see them.

Monday, January 24, 2011

New Rules for Ex Officio Board Members in California

A few clients have been calling in the past few months concerning a California legislative bill, AB 1233, which took effect more than a year ago (January 1, 2010). Most of the questions relate to whether an ex officio member of their board will have voting rights in light of the new law.  In the past, the issue of whether a director had voting rights or not was established by the corporation’s articles or bylaws. AB 1233 is a lengthy, multi-part bill that makes numerous technical changes. (Click here to see full text of AB 1233.)

Certain parts of the bill apply directly to statutes that govern public benefit corporations, mutual benefit corporations, religious corporations, or other laws. Corporations Code sections 5001 - 5080 are general provisions that pertain to all nonprofit corporations. Corporations Code sections 5110 - 6910 apply to public benefit corporations. Corporations Code sections 7110 - 8910 apply to mutual benefit corporations. Corporations Code sections 9110 - 9690 pertains to religious corporations. Of special note, sections 7110 through 8910 apply directly to 501(c)(6) organizations. Again, most of those changes are fairly minor and technical, but there are at least two exceptions.

One of the more significant changes is the code now clarifies that committees of the corporation authorized to exercise the powers of the Board of Directors must be comprised solely of directors, but that typical committees that do not exercise the powers of the Board may include non-directors (Section 7212). A typical executive committee is comprised solely of directors, and is therefore consistent with the revised statute. Other committees typically do not exercise the power of the Board, so they also appear to be consistent with the revised statute.

Another point to bear in mind is that portions of AB 1233 apply to all nonprofits. This includes revisions to Corporations Code Section 5047, which now provides the following:

5047. Except where otherwise expressly provided, "directors" means natural persons, designated in the articles or bylaws or elected by the incorporators, and their successors and natural persons designated, elected or appointed by any other name or title to act as members of the governing body of the corporation. A person who does not have authority to act as a member of the governing body of the corporation, including through voting rights as a member of the governing body, is not a director as that term is used in this division regardless of title. However, if the articles or bylaws designate that a natural person is a director or a member of the governing body of the corporation by reason of occupying a specified position within or outside the corporation, that person shall be a director for all purposes and shall have the same rights and obligations, including voting rights, as the other directors.

The meaning of this statute is not entirely clear at this point. For example, if it is made clear that a “director” does not have a right to vote, is it not clear under the second sentence of Section 5047 that such a director is not a director within the meaning of the statute? At the same time, many bylaws declare a person who holds a certain position, such as executive director, is an ex officio member of the board, without the right to vote. The third sentence of Section 5047 would appear to give the executive director the right to vote anyway. These results seem contradictory.

In light of the new law, it is important that nonprofits determine whether ex officio, honorary, emeritus and advisory directors have a statutory right to vote, regardless of what the bylaws provide.

How can nonprofits address this issue? Here are a few suggestions:
  • The safest approach is to avoid having ex officio, honorary, emeritus, advisory or similar director position.
  • Another approach is to use different words to describe these persons, and make it clear that these persons are not “directors.”
  • Yet another approach, as yet untested, is to give the board the power to appoint any of such “directors,” so if one of those directors insists on voting, they can be removed by the board.
  • Still another approach, also untested, would be for the bylaws to explicitly state the “director” shall not have the right to vote, and shall not be a director within the meeting of Section 5047.

Most importantly, the bylaws themselves should not designate that any person will be a member of the Board of Directors by reason of occupying any particular position, unless it is intended that they will have the right to vote.

Tuesday, January 4, 2011

SCIF "Safety Group" and "Trade Association Group" Programs Upended

This posting pertains primarily to California organizations, and particularly those with workers compensation insurance programs.

State Compensation Insurance Fund (SCIF) recently notified its trade group participants (Safety Groups and Trade Association Groups in letters dated December 20 - 31, 2010) that it is discontinuing its Safety Group programs, and tightening its Trade Association Group program requirements.   The changes will generally take effect in January 2012 or thereabouts, at which time SCIF will apparently not renew agreements with groups that cannot “… demonstrate to State Fund’s satisfaction …” that they meet the new SCIF program requirements.

The new program requirements include requirements that (1) 25% of the group’s annual membership dues are received from non-SCIF insureds and (2) no more than 75% of annual group revenues be sourced from SCIF program funds.  The requirements also include minimum “safety activities” referred to in an “Exhibit A,” which was not provided, and “communication and outreach activities” referred to in an “Exhibit B,” also not provided.

According to the notice, groups may continue under the program if they demonstrate that they meet the new program requirements at least 180 days prior to expiration of their current agreement.  Doing so will be difficult for many groups, as demonstration of compliance with new program requirements is based on prior fiscal year.  The problem will be demonstrating compliance for that initial year, because the new program requirements would not have been in place, or even known, during that period of time.

SCIF is apparently taking this action to curb payments to groups that some observers -- perhaps even regulators -- view as unduly lucrative to some groups (some of which allegedly do little or nothing for the money).  It also appears that SCIF has financial and competitive challenges at this time.  Regardless, many Safety and Trade Association Groups are concerned about their ability to conform new program requirements for the initial year, as the prior year’s program data would not have been subject to the new requirements.

If you are interested in being involved in discussion of this matter, please send me an email ( with your contact information.