Nonprofit Nonprofit Legal and Compliance 2 — Questions and Answers
Question 1: What is a private foundation in contrast to a public charity?
- An organization that derives most of its support from a single source like a family or corporation, subject to stricter IRS rules (Correct answer)
- A foundation that only funds private schools
- A nonprofit that does not solicit public donations
- A government-funded charitable organization
Correct answer: An organization that derives most of its support from a single source like a family or corporation, subject to stricter IRS rules
Private foundations are 501(c)(3) organizations that typically receive funding from one source and are subject to excise taxes, mandatory distributions, and self-dealing restrictions.
Question 2: What is the minimum distribution requirement for private foundations?
- They must distribute at least 5% of investment assets annually for charitable purposes (Correct answer)
- They must spend all income within 90 days
- They must distribute 10% of total assets each year
- There is no minimum distribution requirement for private foundations
Correct answer: They must distribute at least 5% of investment assets annually for charitable purposes
Private foundations are required by the IRS to distribute at least 5% of the fair market value of their investment assets each year to charitable purposes.
Question 3: What is lobbying in the nonprofit context and how does it affect 501(c)(3) status?
- 501(c)(3) organizations may engage in a limited amount of lobbying but are prohibited from substantial lobbying activity (Correct answer)
- Lobbying is completely prohibited for all nonprofits
- 501(c)(3) organizations have no restrictions on lobbying
- Only private foundations are allowed to lobby legislators
Correct answer: 501(c)(3) organizations may engage in a limited amount of lobbying but are prohibited from substantial lobbying activity
While 501(c)(3) organizations may engage in limited legislative lobbying, substantial lobbying can jeopardize their tax-exempt status.
Question 4: What political activity is absolutely prohibited for 501(c)(3) organizations?
- Endorsing or opposing candidates for public office (Correct answer)
- Registering voters in the community
- Educating voters on policy issues
- Testifying before a state legislative committee
Correct answer: Endorsing or opposing candidates for public office
The IRS absolutely prohibits 501(c)(3) organizations from endorsing, opposing, or contributing to political campaigns of candidates for public office.
Question 5: What is the role of a state Attorney General regarding nonprofits?
- Overseeing charitable organizations to ensure assets are used for the public benefit (Correct answer)
- Approving all nonprofit grant applications
- Certifying that nonprofit financial statements are accurate
- Appointing nonprofit board members in cases of governance failure
Correct answer: Overseeing charitable organizations to ensure assets are used for the public benefit
State Attorneys General have broad authority to investigate and take legal action against nonprofits that misuse charitable assets or engage in fraud.
Question 6: What is the Sarbanes-Oxley Act's relevance to US nonprofits?
- Two provisions—whistleblower protection and document retention—apply directly to nonprofits (Correct answer)
- It requires all nonprofits with over $1 million in revenue to conduct an annual audit
- It mandates that nonprofits disclose executive compensation to the IRS
- It applies only to publicly traded corporations, not nonprofits
Correct answer: Two provisions—whistleblower protection and document retention—apply directly to nonprofits
While Sarbanes-Oxley primarily governs public companies, its whistleblower protection and document retention provisions explicitly apply to nonprofit organizations.
Nonprofit Nonprofit Legal and Compliance 2
What is a private foundation in contrast to a public charity?