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Nonprofit Law/President of Booster Club Position

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QUESTION: Hi Harvey,

I hope you enjoyed your time off.  I have a concern and a questions regarding the conflicts of interest. Our current president of the board has fallen into a financial hardship. She is 4 months behind on her daughters tuition account with the Gym owner. She now has taken a position in the office to work off her balance.  The concern is that it appears to be a conflict of interest... as well as a risk for us financially. She has access to ALL bank accounts... We feel like we should vote her out but want to know if there are legal ramifications that we can rely upon to explain why this can not be allowed.

ANSWER:  Arizona Code Title 10 Chapters 24 - 42 has the State Law for Nonprofit Corporations and it is available at http://scrible.com/s/6fvOO and go down to:

Article 3   Standards of Conduct
10-3830   General standards for directors
10-3833   Liability for unlawful distributions

and I don't see anything there as to conflicts of interest (on the State level).

The IRS has published at
www.irs.gov/irm/part7/irm_07-025-003-cont02.html#d0e4718
---Start of Excerpt--
Where an exempt organization engages in a transaction with an
insider and there is a purpose to benefit the insider rather than
the organization, inurement occurs even though the transaction
ultimately proves profitable for the exempt organization. The test
is not ultimate profit or loss but whether, at every stage of the
transaction, those controlling the organization guarded its
interests and dealt with related parties at arm's-length.
---End of Excerpt--

--- Start of Excerpt ---
an organization may represent that services will be provided at a
significant discount to the organization. When an organization
contracts with interested board members, the circumstances may
demonstrate that the organization does not have a purpose to
benefit the insiders. Sales or services by the board members'
businesses to an organization at a significant discount, at or
below cost, would help to justify the selection based on the
economic benefit to the organization....Transactions at fair market
value with board members may be allowed. But the determination to
do business with a board member or other interested party with
control must be made by an independent disinterested board. It is
not unusual for a board member to offer his own business services
to the organization. However, if the board member is not selected
by a disinterested board, then a transaction that would provide
services even at low market rates is problematic.
---End of Excerpt---
www.irs.gov/pub/irs-tege/eotopicb96.pdf on pages 22-23

Generally, under state law, the interested director should
disclose to the Board the particular conflicts annually and before
any vote and then should not vote in the matter, but
I suggest you check your particular state's law as to the details.

But, from what you wrote, just because she works for the for-profit gym, does not mean that she is personally benefiting directly by her votes or actions on behalf of the nonprofit organization, even when the organization is determining contracts with the for-profit gym.  Therefore, it does not appear that she is in what is called an illegal conflict of interest. Not all conflicts are illegal.

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

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.

---------- FOLLOW-UP ----------

QUESTION: Ok I understand that part. I guess my main concern is that she is financially having trouble.. We wrote our bylaws to state that a member that is not in good standings with the gym could not participate in any meets until that account is current.... She took the liberty of taking that entire section out of the bylaws. At the time I didn't understand why until she disclosed that she was several months behind on her own tuition... Maybe my issue of concern is more of a personal matter and not legal but I honestly am trying to make sure we protect our parents money's she has all access to the bank accounts and payment box. I'm just not sure we have voted in the right person for the position.

Answer
Generally one person does not have the power to amend bylaws.  You could look into the previous version of the bylaws and they should indicate how bylaws are to be amended. It may be grounds for her removal if she actually misused her position to hide the read bylaws.

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

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

Expertise

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 Harvey108@hotmail.com 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 "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

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.

Education/Credentials

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

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


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