Nissenbaum Law Blog

When Will a Nonprofit Corporation That Works with a For Profit Corporation Lose the Charitable Property Tax Exemption?

A nonprofit company should generally maintain a solid boundary between its activities and those of a related for profit company. A recent decision of the New Jersey Supreme Court highlighted why this is so important.

In that case, the Court held that nonprofit companies could lose their property-tax exemptions if they commingle their affairs with affiliated entities that operate for profit. International Schools Services v. West Windsor Township, 207 N.J. 3 (N.J. 2011).

The plaintiff, International Schools Services, Inc. (ISS), was a nonprofit corporation that ensured that American children living overseas receive a quality education. In 1999, ISS created Independent Schools Group, Inc. (ISG), a for profit corporation that provided insurance and investment services to the educational community abroad. In 2002, ISS created ISS Financial and Insurance Network Inc. (ISSFIN), a for profit corporation that provided insurance services to ISS clients. The headquarters of both ISG and ISSFIN was located on ISS-owned property in West Windsor, New Jersey. Both ISG and ISSFIN paid below-market rates for their lease of the office space and ISS issued an unsecured loan to ISG. Additionally, ISS’ president was a member of the board of directors for both for profit entities.

West Windsor granted ISS a property-tax exemption from 1990 through 2001 under New Jersey Statute 54:4-3.6. However, after reviewing the entity’s activities, the town revoked the exemption based on ISS’ close relationship with ISG and ISSFIN. The Tax Court rejected the plaintiff’s appeal and the Appellate Division partially agreed.

In 1984, the New Jersey Supreme Court set out three criteria for a nonprofit corporation to meet in order to secure a tax exemption for its real property:

1. It must be organized exclusively for the moral and mental improvement of men, women and children.
2. Its property must be actually and exclusively used for the tax-exempt purpose.
3. Its operation and use of its property must not be conducted for profit.

Paper Mill Playhouse v. Millburn Township, 95 N.J. 503, 506 (N.J. 1984).

The Legislature has since amended the second prong of the test, removing the requirement of exclusivity and instead permitting an exemption for property that is “actually used” in connection with tax-exempt functions. The Court considered this change and asked “whether the Legislature’s elimination of the exclusivity requirement allows a nonprofit entity to conduct for profit activities in a commingled fashion on its owned and occupied property.” International Schools Services at 6.

The Court determined that the Legislature did not intend for such a result, because doing so would allow a nonprofit entity “to claim a property tax exemption when it has become inseparably entangled with for profit entities” and thus “would allow indirect taxpayer subsidization of those entities.” Id. at 42. The Court upheld West Windsor’s denial of the tax exemption “because the commingling of effort and entanglement of activities and operations by ISS and its profit-making affiliates was significant and substantial, with the benefit in the form of direct and indirect subsidies flowing only one way – from ISS to the for profit entities.” Id. at 4.

This decision is important for nonprofit companies that have close corporate relations with for profit companies that might jeopardize their ability to receive tax exemptions. It suggests that allowing a nonprofit entity to get too close – financially or otherwise – with a for profit entity could leave the nonprofit without the tax exemptions they value so greatly. 

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Addressing a Conflict of Interest Confronting a Nonprofit Board of Trustees

There are a host of materials available for download on the topic of (a) what constitutes a conflict of interest for a member of the Board of Trustees of a nonprofit and (b) what penalties may arise as a result. However, the purpose of this post is to address (c) what procedure to put in place to vet it in the first instance.

It is obvious that an overt conflict of interest should be dealt with by simply prohibiting the activity. Yet, most conflicts of interest are not that overt. They are usually subtle, close calls; what lawyers refer to as mere potential conflicts of interest. In many  cases, assuming there is an appropriate written policy, these can be waived by a vote of the Board of Trustees after full disclosure and non-participation in the vote by the affected person(s).

However, that process can be particularly unwieldy for large Boards. For example, if there is a decision on a potential conflict of interest that is time sensitive, such as to allow or not allow a transaction to go forward between two Board members, the idea of placing it on the agenda for the next month’s meeting to be decided by two dozen people who are pressed for time is not the most efficient approach.

Instead, a better solution would be to create a standing committee of the Board that would review potential conflicts of interest. It would be empowered to consider the matter between normal meetings of the Board of Trustees. It would also be authorized to make decisions to (a) waive the conflict of interest; (b) take some provisional action until the matter can be heard by the entire Board; or (c) disapprove of the conflict and not allow it to continue. The standing committee would be required to keep minutes and report to the Board as a whole, which would also have the right to overrule the committee’s decision. In other words, the Board would remain ultimately responsible.

This is not a complete solution, and there are circumstances in which this approach simply would not work given the nature of the conflict and surrounding circumstances. However, it is an approach that is workable if applied in good faith and moderation.

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Does a non-profit advocating for animal rights have standing to sue New York for violation of animal rights laws?

In 2009, Judge Shafer of the Supreme Court, New York County ruled in favor of the non-profit corporation, Stray from the Heart, Inc. (“Stray”), in its Article 78 application – an action brought to challenge the activities of an administrative agency in court – to compel the City of New York to comply with the statutory requirement that it provide full service animal shelters in all five boroughs of New York City.  Matter of Stray from the Heart, Inc. v. Department of Health & Mental Hygiene of the City of New York, 2009 N.Y. Slip Op. 52092(U), 25 Misc.3d 1214(A).

In 2000, New York City’s Committee on Health determined that the overpopulation of stray dogs posed a serious threat to the public’s health, safety and welfare.  As a result, the City passed Local Law 26 of 2000, the Animal Shelters and Sterilization Act (the “Act”) and incorporated it into New York City’s Administrative Code at §§17-801 through 17-809.  The Act required the City to ensure that a “full-service animal shelter” be maintained in each of the five New York City boroughs, twenty-four hours per day, seven days per week.  The Act defined “full-service animal shelter” as “a facility … that houses lost, stray or homeless animals and (1) accepts dogs and cats [24 hours per day, 7 days per week]; (2) has an adoption program open [24 hours a day, 7 days per week]; and (3) provides sterilization services for dogs and cats.”  See §§17-802(c); 17-809.  The Act also required that all animals be sterilized before leaving the shelter, except in certain specified situations.

The City was required to be in full compliance with the Act by January, 2005.  When the statutory deadline passed, the City still had no shelters that were open twenty-four hours per day and there were no shelters at all within the Bronx or Queens.

Stray is a non-profit volunteer organization that rescues, rehabilitates and places homeless dogs.  Stray, as the Petitioner, sued the City of New York alleging that the City’s failure to comply with the Act “created a dangerous public health threat and overburdens citizens and private rescue organizations, such as the petitioner, which are forced to bear costs of rescuing, sheltering, treating and sterilizing unwanted animals.  Petitioner seeks restitution to recover its expenses.”  Id. at *1.

The court held that Stray had standing to bring the action to compel the City to comply with the Act.  An Article 78 proceeding was the appropriate means for Stray to seek to compel the City to perform a statutory duty that is ministerial in nature and does not require the exercise of judgment or discretion by a City officer.  Stray’s standing was based upon the ground that it provided services to homeless animals which the City failed to provide as required by the Act.

The court held that the City, “blatantly failed to comply with the mandatory requirements of the Act, which unambiguously requires shelters in each borough, not in 3 out of 5, open 24 hours per day, not 12 or ‘as needed.’  While it is true that the creation of a shelter involves discretionary decision-making, the process by which an imposed duty is implemented is irrelevant.”  Id. at *2. 

The court continued, “[C]ompliance with almost any statutory directive will involve some measure of discretion exercised by those implementing its terms, but this will not render nonjusticiable a claim which asks the courts to compel compliance with a statute that is otherwise mandatory on its face.”  Id.  In other words, courts may “compel acts that officials are duty-bound to perform, regardless of whether they may exercise their discretion in doing so.”  Id.

The court granted Stray’s Petition and directed the City of New York to “submit a plan for the immediate implementation of their compliance with the statutory directives of the Animal Shelters and Sterilization Act, Local Law 26 of 2000 within 60 days.”  Id. at *3.  The court also awarded Stray its costs for providing the services the City failed to provide as incidental damages – reasonable expenses incurred by one party as a result of another party’s failure to do what they were supposed to do – and referred the case to a Special Referee for calculation of those incidental damages.

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Under what circumstances may a hospital be held liable for discrimination against employees who undertake military service?

On March 1, 2011, the United States Supreme Court was asked to decide whether an employer was liable for discrimination under the Uniformed Services Employment and Reemployment Rights Act (“USERRA”) for firing a hospital employee that was also a member of the United States Army Reserve.  Staub v. Proctor Hospital, No. 09-400, 2011 WL 691244 (2011).

Vincent Staub worked as an angiography technician at Proctor Hospital (the “Hospital”) until he was fired in 2004.  The Hospital fired Staub for leaving his desk without permission in violation of a disciplinary notice he previously received called a “Corrective Action.”  Staub sued the hospital claiming that he was discharged due to his military obligations in violation of the USERRA. 

A trial was held and the jury found in favor of Staub.  The Hospital moved for judgment as a matter of law or for a new trial.  The United States District Court for the Central District of Illinois denied the Hospital’s motion.  The Hospital appealed that decision to the United States Court of Appeals for the Seventh Circuit which reversed the decision of the District Court, granting the Hospital’s motion for judgment as a matter of law and dismissing Staub’s complaint.  The United States Supreme Court agreed to hear Staub’s appeal to “consider the circumstances under which an employer may be held liable for employment discrimination based on the discriminatory animus of an employee who influenced, but did not make, the ultimate employment decision.”  Id. at *2.

In January 2004, Staub was issued a disciplinary warning called a “Corrective Action” by his immediate supervisor, Janice Mulally, for allegedly leaving his work area without permission.  Staub disputed the “Corrective Action” on two grounds: the rule Mulally relied upon did not exist and, even if it did, Staub did not leave his work area. 

In April 2004, Staub was, once again, accused of leaving his work area without permission.  Staub denied the allegation and claimed he left Mulally’s supervisor, Michael Korenchuk, a voice mail notification that he was leaving his work area.  Linda Buck, the Hospital’s vice president of human resources, relied on Korenchuk’s accusations and, after reviewing Staub’s personnel file, decided to fire Staub.  The official reason for Staub’s firing was that he ignored the directive of the January “Corrective Action.”  Staub challenged his firing through the Hospital’s grievance process claiming that Mulally fabricated the allegation underlying the “Corrective Action” out of hostility toward Staub’s military obligations.  Despite Staub’s claims, Buck refused to change her decision.

Staub thereafter sued the Hospital under the USERRA, which states:

A person who is a member of ... or has an obligation to perform service in a uniformed service shall not be denied initial employment, reemployment, retention in employment, promotion, or any benefit of employment by an employer on the basis of that membership … or obligation.” 38 U.S.C. §4311(a).

An employer shall be considered to have engaged in actions prohibited … under subsection (a) if the person’s membership … is a motivating factor in the employer’s action, unless the employer can prove that the action would have been taken in the absence of such membership.  38 U.S.C. §4311(c)

The Supreme Court determined from the evidentiary record that Mulally and Korenchuk were hostile to Staub’s military obligations.  The Court accepted as true Staub’s allegations that Mulally scheduled Staub for additional shifts without notice so that he could “pay back the department for everyone else having to bend over backwards to cover [his] schedule for the Reserves.”  Id. at *2.  Mulally also told one of Staub’s co-workers that his military duty “had been a strain on the department” and asked that co-worker to help Mulally “get rid of him [Staub].”  Id.  Korenchuk referred to Staub’s military obligations as “a bunch of smoking and joking and a waste of taxpayer’s money.”  Id.  Korenchuk was also aware that Mulally was “out to get” Staub.  Id.

The Supreme Court determined that it was necessary to construe the phrase, “motivating factor in the employer’s action.”  Id. at *4.  The problem arises when the company official making the adverse employment decision “has no discriminatory animus but is influenced by previous company action that is the product of a like animus in someone else.”  Id.  The Supreme Court held that “if a supervisor performs an act motivated by antimilitary animus that is intended by the supervisor to cause an adverse employment action, and if that act is a proximate cause of the ultimate employment action, then the employer is liable under USERRA.”  Id. at *6.

Applying that analysis to the facts, the Supreme Court decided to reverse the Court of Appeals decision dismissing Staub’s complaint.  It found that both Mulally and Korenchuk were acting within the scope of their employment when they took the actions that caused Buck to fire Staub.  There was evidence that Mulally and Korenchuk were motivated by hostility toward Staub’s military obligations.  There was also evidence that the actions of Mulally and Korenchuk were “causal factors underlying Buck’s decision to fire Staub” as Buck clearly relied upon the allegation that Staub ignored the January “Corrective Action.”  Id.  Finally, there was evidence that both Mulally and Korenchuk intended to get Staub fired.  Id.  The Supreme Court remanded the case to the Court of Appeals so that court could determine whether a new trial was necessary.

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Does the First Amendment protect the speech of church members protesting the funeral of an American serviceman?

In a decision on March 2, 2011, the United States Supreme Court held that a protest by church members at the funeral of an American serviceman was speech protected by the First Amendment.  Snyder v. Phelps, No. 09-751, 2011 WL 709517 (2011).

Marine Lance Corporal Matthew Snyder was killed in the line of duty in Iraq.  Fred Phelps, founder of the Westboro Baptist Church (“Westboro”), learned the location of the funeral in Maryland and planned to protest that funeral.  For approximately 20 years, Westboro members made it a point to picket at military funerals to express their dissatisfaction with the United States’ tolerance of homosexuality.  Westboro members picketed at approximately 600 funerals before the funeral for Matthew Snyder.

On the day of the funeral, Westboro members picketed on public land adjacent to public streets near the Maryland State House, the United States Naval Academy and Matthew Snyder’s funeral.  Westboro members carried signs that stated, among other things, GOD HATES THE USA/THANK GOD FOR 9/11; THANK GOD FOR DEAD SOLDIERS; YOU’RE GOING TO HELL; and GOD HATES YOU.  Westboro notified the authorities in advance of its planned protest and complied with all police instructions in staging its protest.  The protest took place approximately 1,000 feet from the church; several buildings separated the picketers from the church; none of the protesters entered the church or went to the cemetery; none of the protesters yelled or used profanity; and there was no violence associated with the picketing.  The funeral procession passed within 200 to 300 feet of the picket site but Snyder’s father, Albert, testified he could neither see the signs nor read what they said.  He did not learn the content of the signs until he watched a news report later that night.

Albert Snyder sued Phelps and Westboro in the United States District for the District of Maryland for defamation; publicity given to private life; intentional infliction of emotional distress; intrusion upon seclusion; and civil conspiracy.  Westboro made a motion to dismiss on the ground that Westboro’s speech was protected by the First Amendment.  The District Court dismissed Snyder’s claims for defamation and publicity given to private life, but permitted a trial on the remaining claims.  The jury returned a verdict in favor of Snyder, holding Westboro liable for compensatory damages of $2.9 million and punitive damages of $8 million for intentional infliction of emotional distress, intrusion upon seclusion and civil conspiracy.

Westboro appealed the jury’s verdict to the Court of Appeals which disagreed with the District Court and held that Westboro’s speech was protected by the First Amendment.  The Court of Appeals reasoned that Westboro’s statements were entitled to First Amendment protection because they were on matters of public concern, were not provably false and were expressed solely through “hyperbolic rhetoric.”  Snyder sought to appeal that decision to the United States Supreme Court.

The Supreme Court decided to hear the case and affirmed the decision of the Court of Appeals.  Per the Supreme Court, the issue was whether Westboro’s speech was protected by the First Amendment.  The answer to that question depended on whether the speech was “of public or private concern, as determined by all the circumstances of the case.  Speech on matters of public concern  . . . is at the heart of the First Amendment’s protection . . . Accordingly, speech on public issues occupies the highest rung of the hierarchy of First Amendment values, and is entitled to special protection.”  Id. at *5. 

The Court analyzed the speech – the use and content of the signs - of Westboro and determined that the issues raised by them – the political and moral conduct of the United States and its citizens, the fate of the Nation, homosexuality in the military and scandals involving the clergy – were matters of public importance.  The fact that Westboro’s speech took place at a funeral did not change the analysis; the speech still dealt with matters of public concern no matter where it took place.

There was also no evidence of a pre-existing conflict between Westboro and Matthew Snyder that might suggest Westboro’s speech on public matters was intended to mask a private attack on Matthew.  The Court also noted that the protest took place upon public streets, which are “the archetype of a traditional forum” having been used for centuries for public assembly and debate.  Id. at *8.  As a result of this analysis, the Court set aside the jury verdict in favor of Snyder for intentional infliction of emotional distress.

The Court similarly set aside the jury’s verdict in favor of Snyder on the claims of intrusion upon seclusion and civil conspiracy.  Snyder argued that as a “member of a captive audience” at his son’s funeral he was unable to avoid Westboro’s speech.  The Court disagreed and refused to extend the definition of a “captive audience” to include Mr. Snyder under these facts.  Here, Westboro stayed “well away” from the memorial service; Mr. Snyder could only see the tops of the signs and could not read their contents while driving to the funeral; and there was no evidence the picketing interfered with the funeral in any way.  Id. at *10.  As a result, Snyder could not demonstrate that he was a member of a captive audience.

In summary, the Court stated,

Westboro addressed matters of public import on public property, in a peaceful manner, in full compliance with the guidance of local officials.  The speech was indeed planned to coincide with Matthew Snyder’s funeral, but did not itself disrupt that funeral, and Westboro’s choice to conduct its picketing at that time and place did not alter the nature of its speech . . . As a nation we have chosen a different course – to protect even hurtful speech on public issues to ensure that we do not stifle public debate.  That choice requires that we shield Westboro from tort liability for its picketing in this case. 

Id. at 10-11.

Download Snyder v. Phelps, No. 09-751, 2011 WL 709517 (2011)

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Do New York’s laws prohibiting business monopolies apply to charities?

New York’s Donnelly Act makes it illegal to create monopolies in certain types of businesses in that State. Does this apply to a charitable organization? The Supreme Court of New York (the trial court) was presented with a case in which a charity took the position that it did. The dispute in that case was straightforward: the charity was told that it was not permitted to solicit donations via employee payroll deductions. It argued that this was an illegal restraint of trade since other charities were permitted to solicit donations that way. The question was whether the Donnelly Act would prohibit such a monopoly when it involved a non-profit, rather than a for-profit business. The charity’s position was unsuccessful. The Supreme Court held that the Donnelly Act was not intended to apply to the fundraising activities of charitable corporations or associations. International Service Agencies v. United Way of New York State, 437 N.Y.S.2d 533 (N.Y.Sup. 1981). This is an important case for charities since it highlights another of the many ways that nonprofit organizations are treated differently than for profit entities. Comments/Questions: gdn@gdnlaw.com © 2011 Nissenbaum Law Group, LLC Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com