filing requirements, particularly annual information returns.
(b) Duty of Loyalty
The duty of loyalty requires board members to exercise their power in the interest of the tax‐exempt organization and not in their personal interest or the interests of another entity, particularly one with which they have a formal relationship. When acting on behalf of the exempt organization, board members are expected to place the interests of the organization before their personal and professional interests. The duty of loyalty extends to a beneficiary of an exempt organization.17
The duty of loyalty is satisfied when board members disclose any conflicts of interest, otherwise adhere to the organization's conflict‐of‐interest policy, avoid the use of corporate opportunities for the individual's personal gain or other benefit, and do not disclose confidential information concerning the organization.
(c) Duty of Obedience
The duty of obedience requires that directors of a tax‐exempt organization comply with applicable federal, state, and local laws; adhere to the organization's governing documents; and remain guardians of the organization's mission. This duty is complied with when the board endeavors to be certain that the organization is in compliance with applicable regulatory requirements, complies with and periodically reviews all documents governing the organization's operations, and makes decisions in advancement of the organization's mission and within the scope of the entity's governing documents.17.1
§ 5.7 IRS AND GOVERNANCE
(c) IRS Ruling Policy
p. 102. Insert as first complete paragraph:
Most recently, the IRS wrote: “Generally, a governing board that consists primarily of family members or of members who share a domestic life, does not constitute an independent body, and has an inherent conflict of interest when placed in a position to approve financial transactions involving other members of the family unit.”89.1
Notes
1 17 This aspect of fiduciary responsibility principles may come into play where the beneficiary is another tax‐exempt organization. For example, a court held that a trustee of a charitable trust breached his duty as a trustee by refusing to execute documents required to effect distributions of funds to another charitable entity in its capacity as a beneficiary of the trust (Cook v. Marshall, 2019 WL 917598 (E.D. La. 2019)). Likewise, a court held that the trustees of a supporting organization (see § 12.3(c)) breached their duty of loyalty to the supported organization in a variety of ways (Cohen v. Minneapolis Jewish Federation, 286 F. Supp. 3d 949 (W.D. Wis. 2017)), with this court subsequently holding that the fees and costs owed to the supported organization must be paid by the trustees of the supporting organization personally and that these trustees must be removed and replaced (Cohen v. Minneapolis Jewish Federation, 346 F. Supp. 3d 1274 (W.D. Wis. 2018)). These opinions were affirmed (776 Fed. Appx. 912 (7th Cir. 2019)).
2 17.1 In general, Hopkins, Legal Responsibilities of Nonprofit Boards, Third Ed. (BoardSource, Washington, D.C.: 2019).
3 89.1 Priv. Ltr. Rul. 202010025.
CHAPTER SIX Concept of Charitable
§ 6.2 Public Policy Doctrine (b) Race‐Based Discrimination
§ 6.3 Collateral Concepts (a) Requirement of Charitable Class (i) Illegal Activities
§ 6.2 PUBLIC POLICY DOCTRINE
(b) Race‐Based Discrimination
p. 118, third paragraph, fourth sentence. Delete and substitute:
This policy must be publicized by the school to all segments of the general community served by the school, by notice in a newspaper, use of broadcast media, or (pursuant to guidelines issued in 2019)69.1 display of a notice on its primary publicly accessible Internet homepage in a manner reasonably expected to be noticed by visitors to the homepage.
p. 119, fourth line. Move footnote to follow guidelines.
p. 119, note 72. Insert before last period:
, as modified by Rev. Proc. 2019‐22, 2019‐22 I.R.B. 1260.
§ 6.3 COLLATERAL CONCEPTS
(a) Requirement of Charitable Class
p. 126, last complete paragraph. Insert as last sentence:
Yet, somewhat inexplicably, the IRS ruled that a resident advisory council with respect to a retirement community must have its tax exemption revoked because it is operating for the private interests of its members, portrayed as a “private class of residents,” and not functioning in ways that are “beneficial to the general public as a whole.”143.1
(i) Illegal Activities
p. 135, note 213. Insert following existing text:
The IRS determined that an organization could not be exempt because it engaged in illegal activities, which apparently were activities to obstruct administration of the revenue laws, as detailed in a plea agreement entered into by its executive director (Priv. Ltr. Rul. 201924018).
p. 135, last paragraph. Insert as last sentences:
The IRS thus denied recognition of exemption in a case involving an organization that had as its mission provision of a way for its members to collectively and cooperatively cultivate and distribute marijuana for medical purposes to qualified patients and primary caregivers who came together to cultivate physician‐recommended marijuana.217.1 The IRS adopted a similar stance in denying recognition of exemption to a nonprofit organization providing financial assistance to patients in need who are adversely affected by the costs of medical treatments using cannabis‐based compounds217.2 and to a nonprofit organization with a program of fundraising and dissemination of funds to patients in a state program who had been approved to receive medical marijuana in the state.217.3
