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Nonprofit Law/Non-profit violations


I was elected to a private preschool board two years ago. This school is a nonprofit organizations and is exempt under section 501(3)(c). They file IRS form 990. At no time after I was elected to the board did I know what my responsibilities were as a board member. I was only given a copy of the by laws 3 months ago after I requested them from the business manager 4 times.

My question...since I have been on the board, at the end if each school year we have a have a board meeting to discuss the financials and review what the net income or what money is left over after all the tuition comes in and all the bills are paid. Each year we have had excess of $20k which is voted on each year by the board members on how to distribute the balance of income. And each year the majority vote is to give the teachers and other staff bonuses. From what I have read online regarding us non-profit organizations, the net income at year end is supposed to be put back into the business. When we bring up other things to use the money for we are told that is not something the board decides and the comment always is "we will just put that into the budget for next year". Is this even legal? Mid-appropriation of funds? Is this school in violation?

I don't feel comfortable with such little knowledge or being part of a board that is not following correct laws and am therefore looking for guidance.

IRS Internal training materials for exempt organization agents from the year favorably commented on page 26 on an IRS decision that had earlier "allowed a compensation plan in which participants shared savings generated by productivity improvements. The G.C.M. allowed this plan because it was arm's length, and it was a means of providing reasonable compensation to employees without any potential for reducing the charitable services or benefits otherwise provided".  A similar argument could be made by a preschool that it needs to retain its staff and has determined that, unless such bonuses are given, they would lose competent staff and the quality of the school's services may be reduced.

But, as you can see from that article, the total compensation, including bonuses, cannot result in the 501(c)(3) organization giving an employee more than reasonable compensation.

It is not correct if someone informs you that "it is not something the board decides", if they are referring to how to spend the $20k.

Harvey Mechanic
Attorney at Law

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

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Harvey Mechanic


I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "" without the quotes and then add your search terms before hitting enter.


I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.


B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.

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