Chap 7

7.
Nonprofit law: from tax advantages to

employment law challenges
Darla J. Hamann
INTRODUCTION
Nonprofit law is a complex and dynamic area of law, including law from mul-
tiple levels of governing bodies. This chapter will discuss the nonprofit organ-
izations that have incorporated in the United States (US) and are recognized
as tax-exempt by section 501(c) of the US Internal Revenue Service (IRS) Tax
Code. To be incorporated, the nonprofit organization must meet the criteria
and complete all reporting requirements in the US state in which the nonprofit
is located, or in rare cases they may incorporate federally. To be tax-exempt,
the nonprofit organization must meet the statutory guidelines to be recognized
by the IRS as an organization that is exempt from paying the federal corporate
income tax on its profits (Hopkins, 2016, p. 4). Within this broad field of
nonprofit law, this chapter will focus on three common legal issues faced by
nonprofit executives: nonprofit tax advantages and related constraints, board
of directors’ legal responsibilities, and anti-discrimination law challenges.
CHAPTER OBJECTIVES
• Provide a broad overview of the legal context of nonprofit organizations

consistent with the NACC guidelines.
• Understand the regulation of different types of nonprofit organizations,
especially charitable nonprofit organizations.
• Understand the taxation of nonprofit revenue and the regulation of non-
profit lobbying activity.
• Understand the legal responsibilities of boards of directors in nonprofit
organizations.
• Analyze the application of anti-discrimination laws in the nonprofit sector.
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Nonprofit law 111
NONPROFIT CLASSIFICATIONS UNDER THE IRS
There are two general classifications of nonprofit organizations: member

serving and public serving. Member-serving nonprofits vary widely, includ-
ing civic clubs and mutual support groups, country clubs, mutual insur-
ance companies, credit unions, business associations (e.g., Chambers of
Commerce), labor unions, professional associations (e.g., the American
Society for Public Administration), and professional sports associations (e.g.,
the National Football League). The other main category of nonprofits com-
prises public-serving organizations, and they are action organizations (501(c)
(4) organizations) and public and private foundations and public charities
(501(c)(3) organizations).
THEORY
Nonprofit Tax Law
There are two forms of tax advantages that nonprofit status may provide: the
corporate income tax exemption and the tax deductibility of donations. The
federal corporate income tax is a tax set by Congress that all incorporated
entities must pay on their income that exceeds their expenses, their profits.
Incorporated nonprofit organizations of any of the types listed above may file
with the IRS for tax-exempt status if they meet statutory guidelines. Some
nonprofit organizations do not need to file the IRS but may file voluntarily.
Others, such as political organizations and health insurers, must file with
the IRS (Hopkins, 2016). Organizations that meet the IRS qualifications are
exempt from paying corporate income taxes on income that is related to their
mission. However, if they earn income that is not “substantially related” to
their mission, such as income from a trade or a business, they may need to pay
taxes on that income. This tax is referred to as Unrelated Business Income Tax,
and is equal to the corporate tax rate. Even if the “profits” from the trade or
business are reinvested into the nonprofit to serve its mission, the corporate tax
may still apply (Thomas and Strom-Gottfried, 2018). However, if the clients or
volunteers of the nonprofit work for the trade or business, the enterprise may
be considered “substantially related” to the mission and therefore tax exempt
(Thomas and Strom-Gottfried, 2018). Examples of “substantially related”
businesses include a nonprofit employment agency employing its clients in
an automotive shop where they receive skills training and a volunteer- and
client-run thrift store. Most federally tax-exempt nonprofit organizations are
also exempt from state corporate income taxes, but they should check state
laws as eligibility and reporting requirements vary (Hopkins and Gross, 2016).
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112 Teaching nonprofit management
The tax deductibility of donations is a benefit that applies only to 501(c)

(3) organizations (Hopkins and Gross, 2016). It means that individual or cor-
porate donors can deduct from their federal income taxes the full value of any
gifts that they give to a 501(c)(3) nonprofit organization, but not the value of
any gift made to any other type of nonprofit organization. However, in order
to claim this tax deduction, donors must forgo their standard deduction and
itemize their deductions. The fair-market value of in-kind gifts (e.g., clothing,
household goods, computer equipment donated) can also be deducted.
The most important recent legislation to affect the sector was The Tax Cuts
and Jobs Act of 2017, which made changes to the value of the tax deduction.
Taxpayers can deduct charitable gifts of up to 60 percent, up from 50 percent,
of their adjusted gross income if they itemize their deductions. However, the
doubling of the standard deduction will reduce the number of taxpayers who
itemize deductions substantially (NOLO, 2018). Tax deductibility is not only
a great incentive for annual donations, but tax deductibility from the estate tax
creates incentives for families to form private foundations, make bequests, or
use planned giving tools such as trusts and life insurance policies that secure
long-term funding for nonprofit programs. This law also doubled the amount
of an estate that is exempt from the tax (NOLO, 2018), reducing substantially
the number of people who will need estate planning. The 2017 tax law did
sustain a provision allowing people to donate appreciated assets (e.g., real
estate or stocks), taking a tax deduction for the full market value of the asset.
These changes in the value of the tax deduction suggest leaders in 501(c)3
nonprofit organizations shift effort from estate planning towards major gift
strategies involving appreciated assets and increase overall fundraising efforts
to guard against shortfalls.
Costs Associated with Tax Benefits
While the income tax exemption is a valuable benefit, not all organizations
that serve members or serve the public choose to become tax exempt. This
is because tax-exempt status is associated with a set of costs and restrictions.
First, the primary purpose of the organization, as stated in the articles of
incorporation, constitution, trust, or other founding documents, must be one
of the IRS’s stated tax-exempt purposes. The organization’s primary purpose
may be charitable, religious, educational, scientific, social welfare, or labor or
agricultural. Their purpose could also be that of a business league, social club,
fraternal society, veterans’ organization, or political organizations (Hopkins
and Gross, 2016). There are several other small categories outlined in the law,
and states may have their own categories. Some organizations may have one
or more of these purposes, but may also have competing goals, like earning
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Nonprofit law 113
a profit. If their primary purpose is not an exempt purpose, they do not qualify
for tax-exempt status.
Second, there are reporting tasks that must be completed for the IRS and
state governments (Thomas and Strom-Gottfried, 2018). The IRS requires
that nonprofit organizations submit a financial statement (Form 990) each
year. This data includes operating expenses, revenues, salaries of the five top
paid executives, fees paid to consultants, and other information requested
by the IRS. These forms are publicly available, so not only is the report-
ing a time commitment, but it is a transparency requirement (Thomas and
Strom-Gottfried, 2018). Additionally, there is an excise tax of 21 percent on
the salaries in excess of $1 million of the top five highest paid employees
(National Council of Nonprofits, 2018).
Third, tax-exempt nonprofit organizations have a “non-distribution con-
straint”; they cannot distribute profits to anyone who can control organiza-
tional decision-making (e.g., the executive director, key employees, the board
of directors, contractors or fundraisers). Nonprofit organizations can have
profits—revenues in excess of expenses—but they must be used to further
the organization’s mission, saved as reserves, invested, or donated to another
tax-exempt organization. The IRS refers to the non-distribution constraint as
the “private inurement doctrine” and states that the profits and assets of the
nonprofit organization cannot enrich a shareholder or individual (Thomas and
Strom-Gottfried, 2018, p. 158). This makes using bonuses for executives or
key employees tricky in nonprofit organizations; an auditor could interpret
bonuses as a violation of the “private inurement doctrine” unless the organi-
zation can show that the bonuses compensate employees for less-than-market
pay. Consequently, most nonprofit organizations avoid paying bonuses or
using merit pay (Ben-Ner et al., 2011). In addition, paying fundraising employ-
ees or contractors a portion of the money raised is viewed as unethical by all
leading fundraising professional associations (Tempel, 2016). The private
inurement doctrine is one of the reasons that nonprofit organizations are
strongly encouraged to have and abide by a strict conflict of interest policy,
avoiding even the appearance of a conflict of interest. If any private party
benefits from the nonprofit organization’s profits, the IRS can impose financial
sanctions on the nonprofit or even revoke its tax-exempt status (Thomas and
Strom-Gottfried, 2018).
The Tax Deductibility of Donations
Unlike tax exemptions, only public-serving charitable nonprofit organizations

and public and private foundations may choose to file under 501(c)(3) of the
IRS tax code, which is required to allow donors to deduct their donations from
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their individual or corporate income taxes. To meet this designation, they must
pass two tests: the organizational test and the operational test (Hopkins, 2016).
To pass the organizational test, the nonprofit must first have a statement
of purpose in its articles of incorporation or organization, or similar founding
document, clarifying that it exists for one of the particular exempt purposes
explicitly mentioned in section 501(c)(3) of the IRS code (e.g., religious,
charitable, educational, or scientific purposes). Its articles of incorporation or
organization should not devote more than an insubstantial amount of its activity
to attempts to influence legislation, participation in political campaigns, or activ-
ities of a political nature (Hopkins, 2016, p. 69). The statement of purpose does
not need to explicitly exclude partisan activities; the organization just cannot
be organized primarily for these purposes. Second, the nonprofit must state
that upon dissolution of the organization, its assets would be donated to other
tax-exempt nonprofit organizations or to government organizations (Hopkins,
2016, p. 71). Third, the nonprofit must have a mission statement. Recently, the
IRS has also required the board of directors to be sufficiently large and consist of
unrelated individuals, except in private foundations (Hopkins, 2016).
To pass the operational test, the nonprofit must show that it is operating in
accordance with its stated exempt purpose and mission, and that no nonexempt
purpose uses more than an insubstantial portion of its resources (Hopkins, 2016).
It must not distribute its profits to individuals or corporations (avoid private inure-
ment), and it cannot be an “Action Organization.” An “Action Organization”:
(a) has a primary objective that cannot be met without the adoption or defeat
of legislation at any level of government; or (b) participates in the election of
a candidate for a governmental office (Hopkins, 2016). Consequently, 501(c)(3)
organizations should avoid partisan politics but may engage in lobbying for or
against legislation directly related to its mission or stated purpose if the lobbying
is “insubstantial.” What is insubstantial? Hopkins and Gross (2016) suggest less
than 20 percent of expenditures and capped at $1 million for most charitable
nonprofits, but even less for private foundations. Action Organizations do not
qualify for 501(c)(3) status; they are most often incorporated under 501(c)(4)
and remain tax exempt, but their donors cannot claim tax deductions.
Governance
Nonprofits are governed by their board of directors, who are collectively

responsible for supervising the top executive, and hence, responsible for the
organization’s leadership. Members of the board of directors have several legal
responsibilities, the most important of which are: (1) the Duty of Care; (2) the
Duty of Loyalty; and (3) the Duty of Obedience. The Duty of Care requires
meeting preparation and attendance, and the use or reasonable care and sound
judgment in all decisions, including the properly researching options, gathering
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Nonprofit law 115
necessary data, and providing oversight over operations. The Duty of Loyalty
requires the board member to place the organization’s wellbeing above all other
concerns and act solely on behalf of the organization. This includes the duty to
acknowledge all conflicts of interest and recuse oneself whenever one arises.
Even the appearance of a conflict of interest can lead to increased scrutiny from
the IRS. The Duty of Obedience includes the duty to remain faithful to the
mission of the organization, to the organization’s by-laws and to all applicable
federal, state and local laws. It also includes the duty to honor donor intentions
when using their funds, or at minimum, using restricted funds only for their
intended purposes (BoardSource, 2012; Hopkins and Gross, 2016; Thomas
and Strom-Gottfried, 2018). Table 7.1 contains a service-learning exercise for
students to apply their legal knowledge to an applied setting under the guidance
of faculty.
Anti-Discrimination Law
The area of law that nonprofit managers need to understand the most for risk
management and operational effectiveness, as well as to have good relation-
ships with their employees, is anti-discrimination law. In this section, the three
primary types of anti-discrimination law—disparate treatment, disparate impact,
and reasonable accommodation—will be discussed. In the United States, the
groups of employees or applicants, referred to as “classes,” protected by some
form of anti-discrimination law are race/color (Civil Rights Act of 1964), sex
(Civil Rights Act of 1964), national origin (Civil Rights Act of 1964), religion
(Civil Rights Act of 1964), age over 40 (Age Discrimination in Employment Act
of 1967), disability (Americans with Disabilities Act of 1990), pregnancy/lacta-
tion (Pregnancy Discrimination Act of 1978), veterans status (Federal Vietnam
Era Veterans Readjustment Assistance Act of 1974), and genetic information
(Genetic Information Nondiscrimination Act of 2008). Sexual orientation and
gender identity are protected classes in organizations that contract with the
federal government and in many states (Cihon and Castagnera, 2017).
Disparate treatment
“Disparate treatment” is unequal treatment that is based on an employee’s mem-
bership in a protected class that results in the limitation or denial of an employ-
ment opportunity. Disparate treatment involves an intention to discriminate,
although the discriminator need not be aware that his or her actions are unlawful
(Walsh, 2016). The employee shows disparate treatment in hiring or promotion
by first establishing the following: (1) that he/she is a member of a protected
class; (2) that an opportunity existed and he/she applied for it; (3) that he/she was
qualified for the opportunity; (4) that he/she was passed over for the opportunity;
and (5) that the employment opportunity remained open or other candidates
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Table 7.1 Exercise 1: board of directors’ legal roles and responsibilities
NACC Guideline Alignment 7.1–7.4

Background A need exists in many communities for nonprofit boards of directors to better understand their roles and responsibilities, especially
from a legal perspective. BoardSource (2017) found that board members of their member nonprofits gave themselves a grade of “B”
for understanding their basic roles (this does not guarantee that they understand the law); smaller nonprofits may have even more
difficulty finding experienced board members who understand the legalities of board membership. BoardSource also found the extent
to which the board of directors understood their roles was one of two important factors driving nonprofit performance. The same
survey found board member recruitment to be one of the largest challenges faced by boards (BoardSource, 2017). Legally, board
members can be paid, but only up to their market value (Thomas and Strom-Gottfried, 2018). In practice, 97 percent of nonprofits
have unpaid boards of directors (Thomas and Strom-Gottfried, 2018), and many board members give substantial sums of money to
the nonprofit organizations that they serve. While the board of directors may certainly help with the organization’s fundraising, part
of their oversight and fiduciary responsibilities are to know where the money they assist in raising is being spent and ensuring that
money is furthering the organization’s mission (Walker, 2012). But without paying them, and requiring much work, small nonprofits,
Teaching nonprofit management
in particular, often welcome a board of director training during a board meeting during the regular semester.
Preparation Prior to semester beginning, the instructor finds “client” organization(s). The instructor may use the chapter citations to provide
additional background information to students. Graduate students may be expected to conduct their own research, using chapter
citations or other sources. Students are expected to focus on the tax law and governance portions of the chapter.

Darla J. Hamann - 9781788118675
NACC Guideline Alignment 7.1–7.4
Activity Students are divided into teams. Graduate students’ teams can design a 20-minute training about the board of directors’ legal
responsibilities and nonprofit tax law designed to be delivered at a local small nonprofit organization’s board meeting. The training
should include a mini-lecture and an activity. Undergraduate students can design a 10-minute training. In the on-campus class,
students will deliver the training, and the instructor will grade the training and allow other students to vote on it (if there are enough
groups). Then, all teams take their feedback to improve their training and deliver it to an actual board of directors. Depending on the
number of community partners served and the number of student teams, the instructor may choose whether to have winning teams or
all teams present training. Undergraduate teams with short training can cover only one topic; graduate teams can cover all topics.
Nonprofit law
Online Modifications Students (teams or individually) make a short board of directors’ training on their phones or webcams and upload it as an mp4 file
attachment in a discussion post. Other students download and watch the video and provide comments. Students vote on the best video.
Alternatively, the videos could be uploaded on YouTube if the class is comfortable with that technology.
The intention would be to choose a client nonprofit that would receive the best video and play that video to their board at the next
board meeting. If a general audience is chosen, with the students’ permission, winning videos could be displayed on the university’s
social networking pages and used in outreach with local nonprofits who many appreciate the resource for training their boards of
directors.
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were considered (Walsh, 2016). An employee who was treated adversely first
shows that the employer knew he/she was a member of a protected class, that the
adverse action occurred, and that group membership is a plausible reason for the
adverse action (Walsh, 2016).
If the employee can make his/her case, the employer has two options for
a defense. The first option is to admit discriminatory motive but argue that
such motive was a “Bona-Fide Occupational Qualification” (BFOQ), meaning
that membership in the protected class is a business necessity, a defense that is
often viewed with skepticism (Cihon and Castagnera, 2017; Fleischer, 2018).
Nonprofit employers use this defense more frequently than other types of
employers. A nonprofit that serves an ethnic or cultural group may argue that
group membership was necessary for relating to clients. A nonprofit women’s
shelter may argue that female staff are necessary due to the trauma their clients
have faced from men. Religious nonprofit organizations may argue that the
job requires the knowledge or application of a faith. In religious nonprofit
organizations and churches, employees whose primary duties include teaching,
preaching, proselytizing, church or religious order governance, or participation
in worship are termed ministerial employees, and they are exempt from employ-
ment laws (Fleischer, 2018). To prove BFOQ, the employer must show that
group membership is necessary to perform the essential functions of the job.
The second option is for the employer to deny the discriminatory motive, and
provide evidence of a lawful motive, such as performance (Walsh, 2016). If the
employer is successful in showing that a reasonable nondiscriminatory motive
existed, the employee must argue that: (1) the nondiscriminatory motive is fab-
ricated or not credible; (2) the nondiscriminatory motive may be true, but was
not the motivating factor; or (3) the nondiscriminatory motive was not sufficient
to motivate the action (e.g., other employees with the same record were not
similarly treated). Additionally, the employee could present direct or indirect
evidence of discriminatory motive (e.g., racially biased statements, email jokes,
etc.) (Walsh, 2016).
Harassment cases, whether they be sexual harassment or harassment based
on race, ethnicity, national origin, religion, sexual orientation, or gender
identity, are also disparate treatment cases, but there is no BFOQ employer
defense. To succeed in a harassment case, the employee shows that: (1) he/she
is a member of a protected group and was subjected to unwelcome harassment
based on group membership; and (2) a tangible employment action (e.g., hiring,
terminating, reassignment to a significantly different position) was threatened
or conditioned on acceptance of harassment (quid pro quo harassment) or the
harassment was sufficiently severe and pervasive so as to create an environment
that would be considered hostile by a reasonable member of that class (hostile
work environment harassment) (Cihon and Castagnera, 2017). If the employee
shows that (1) and (2) occurred, the employer would be automatically liable if
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Nonprofit law 119
a supervisor committed Quid Pro Quo harassment. The employer would also be
automatically liable if the hostile environment was so severe and pervasive that
a reasonable member of the class would have been forced to quit, since that is
constructive discharge, which is a tangible employment action (Crumpacker and
Crumpacker, 2007). If, however, managers or supervisors engage in harassment
that does not result in tangible employment actions, the company can avoid
liability by showing that the employer exercised “reasonable care” to prevent
and correct any harassment or that the harassed employee unreasonably failed
to take advantage of the anti-harassment policy procedures (Crumpacker and
Crumpacker, 2007). Table 7.2 provides a case study for students to explore
the many issues involved in disparate treatment cases in religious nonprofit
organizations.
Disparate impact
Consider next disparate impact law. A policy that appears neutral, such as
a height or weight requirement, can have a disparate impact on a protected
class if members of that class are adversely impacted by the policy (Cihon and
Castagnera, 2017). Often, these are employee selection policies, but they may be
other policies as well. Examples of tests that have been scrutinized by the courts
include cognitive ability tests, English language tests, and physical strength tests.
Since 2012, the Equal Employment Opportunity Commission (EEOC), which
enforces the anti-discrimination laws, has been advising organizations to use
criminal background checks and credit reports with care due to disparate impact
against certain protected classes, and several states and localities have passed
laws regulating when during the hiring process they can be used and for which
jobs they can be used (Fleischer, 2018).
Even though a test or policy may have adverse impact upon a protected class,
the employer may still use the test if they can prove that the test is valid—that
it statistically significantly predicts job performance (Cihon and Castagnera,
2017). Specific employment tests that are created using job analyses are viewed
more positively than general tests. Another defense of a policy that has adverse
impact is that the policy is consistent with business necessity. For example, an
organization can argue that using credit checks in the employee selection process
is necessary to avoid employee theft. Narrowly construed policies, such as one
that would use credit checks only for positions that handle cash, are viewed more
positively by courts than a broad policy. Nonprofit employers are urged to use
caution with tests or policies that have a disparate impact on a protected group,
because even if they can show that the test or policy predicts performance and
is consistent with business necessity, the employer could still lose a lawsuit if
the EEOC or another plaintiff can show that a feasible alternative method exists
that would result in less adverse impact (Cihon and Castagnera, 2017). Table 7.3
explores these issues in a student discussion exercise.
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Table 7.2 Exercise 2: disparate treatment and the ministerial exemption for religious nonprofits
NACC Guideline Alignment 7.4

Background Students consider the case study of Emily Herx, a language-arts teacher in a religious nonprofit school. She signed a contract when
she began her position saying that she would uphold the teachings of the Catholic Church, and those teachings included a prohibition
on the use of in-vitro fertilization. However, she and her husband were struggling with infertility, and after exhausting other methods,
they turned to in-vitro fertilization. She shared her struggle with the school’s principal, who appeared supportive during her first
and second attempts, which required approved absences from work. Then, when she attempted in-vitro fertilization the third time,
the clergy found out and she was fired. Neither side disputed that she was fired for using in-vitro fertilization. Additional details can
be found by reviewing the text of Emily Herx v. The Catholic Diocese of Fort Wayne-South Bend and St. Vincent de Paul School,
Defendants, United States Court of Appeals, Seventh Circuit. A video is available at: https://www.cnn.com/2012/04/26/us/indiana-in
-vitro-lawsuit/index.html.
Preparation Prior to semester beginning, instructor locates a currently working course video or chooses to assign the written law: https://caselaw
.findlaw.com/us-7th-circuit/1685291.html. Materials are prepared for undergraduate students; graduate students may be expected to
conduct their own research.
Activity Students watch the video during the class. Instructor leads a guided discussion about the different types of disparate treatment that may
have occurred:
- Was she fired because of her gender? (Instructor could encourage students to discuss the fact that only women receive in-vitro
fertilization treatments that require time off work. Men can easily not disclose that their partners receive treatment.)
- Was she fired because of her disability? (Instructor could lead students to consider that infertility is disability under the law,
whether her disability was accommodated, and whether it was the reason she lost her job.)
- Is she a ministerial employee? (Instructor could lead students to consider the definition of ministerial employee and consider
Herx’s core job duties as a teacher.)
- If a religious nonprofit wants their employees to uphold church teachings and wants to avoid lawsuits, what should they do?

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Online Modifications Students are given the link to the full case. Discussion boards ask the following questions:
- What evidence could (or did) Emily use that she was fired because of her gender? Regardless of what the court found, do you
believe it was convincing?
- What evidence could (or did) Emily use that she was fired because of her disability? Regardless of what the court found, do
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you believe it was convincing?

- Is Emily a ministerial employee, and why does that matter?
- If a religious nonprofit wants their employees to uphold church teachings and wants to avoid lawsuits, what can they do?
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122
Table 7.3 Exercise 3: disparate impact discussion

Background Many years ago, civil rights leaders fought to remove pictures from résumés. Early in the selection process, when little is known
about a candidate, it is easy for stereotypes to cloud the judgment of decision-makers. Most of the time, the decision-makers are not
even aware that the stereotypes entered their mind; they simply had a “gut feeling” about that résumé. Later in the selection process,
as more is known about the candidate, stereotypes still influence decision-makers, but their influence is attenuated. Are LinkedIn and
other social media sites bringing us back to the days of photos on résumés, and with the photos, the implicit biases?
Acquisti and Fong (2015) found in a randomized, controlled experiment that employers used social media in employee selection and
were less likely to call Muslim than Christian job applicants.
Preparation Instructor ensures students bring their laptops/tablets to class. Instructor finds out whether students have LinkedIn, Facebook, Twitter
or Instagram accounts and uses the type of social media used by the majority of students.

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Activity Students pair with a partner and search online profiles to figure out the protected class status of “friends” they do not know well.
They answer:
- Which protected classes are easily identified on each site?
After the activity, discuss:
- Could the use of social media in employee selection (not employee recruitment) result in adverse impact against any protected
class?
- If one of those “friends” who is a member of a protected class believed they were screened out of consideration for
employment by a company due to a social media search and filed a lawsuit, what do you think will determine whether he
or she wins the case? (Possible probing questions: Should third parties go through the social media sites of job applicants
and remove information that identifies protected class membership from their prepared reports? How would that impact
Nonprofit law
small to medium nonprofit organizations that want to hire people who have values that are consistent with their mission but
have limited budget? What about the study that showed that using social media in hiring resulted in adverse impact against
Muslims?)
- Is there any information available on social media that is especially useful for nonprofit organizations to learn about
prospective employees?
- Graduate students can be asked to construct the employer’s defense.
Online Modifications Have students look at their own social media sites and email the instructor the answer to the first question by a certain deadline early
in the module. The remaining questions can be on the discussion boards, and the instructor can return to the board during the module
to ask more probing questions.
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Reasonable accommodation
The third type of anti-discrimination law is reasonable accommodation, which
requires employers to provide accommodation for employees with disabilities,
pregnant employees, or sincerely held religious beliefs, if it is not an undue
hardship. Consider first individuals with disabilities. The Americans with
Disabilities Act (ADA) requires employers to provide reasonable accommo-
dation to qualified employees with disabilities that will allow them access to
their job locations and supplies, and enable them more successfully or more
comfortably to perform their job duties. A “disability” is broadly defined by
the ADA to include most conditions that substantially limit a major life activ-
ity, but not the current use of alcohol and drugs. A “qualified” employee is one
who can perform the essential functions of the job with or without reasonable
accommodation (Moran, 2014; Walsh, 2016).
Employers cannot retaliate against an employee with a disability for seeking
accommodation and cannot share disability-related information (Moran,
2014). Employees with disabilities should be included in all conversations
regarding reasonable accommodation but providing the employee with his/her
preferred accommodation is not required (Walsh, 2016). Pregnant and nursing
mothers should be accommodated the way other employees with disabilities
are accommodated, and nursing mothers need to be provided with a private
space with an electrical outlet for expressing milk (Mulvaney, 2019).
Reasonable accommodation must also be made for an employee’s sincerely
held religious beliefs. While most religious accommodation is for scheduling
shifts or breaks around religious services or prayer, sincerely held beliefs about
clothing or grooming must also be accommodated (Moran, 2014). In the last
ten years, people of all religious faiths have been requesting accommodation
more frequently or arguing that expressions of faith by co-workers are infring-
ing on their rights (Knowledge@Wharton, 2015). Since religious nonprofits
may favor members of their religion, employees of these organizations need
to accept religious bias, but other organizations must accommodate the sin-
cerely held religious beliefs of people of all faiths equally and prevent people
of one faith from creating a hostile work environment for people of another
faith (Knowledge@Wharton, 2015). Employees do not need to be given their
preferred accommodation for their religious beliefs, but they must be included
in the discussions.
An employer can claim that accommodating an employee with a disabil-
ity, a pregnant employee, or an employee’s religion is an “undue hardship”
when the accommodation is so costly, extensive, or disruptive that it would
require a fundamental alteration in how the employer operates or would create
a significant financial burden. Undue hardship is relative, depending on the
size and resources of the employer, the expense and disruption caused by the
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accommodation, industry and occupational norms, and the nature of the work
performed (Walsh, 2016).
CONCLUSION
This chapter provided a brief overview of the tax advantages and legal restric-
tions for all IRS 501(c) recognized tax-exempt nonprofits, and the extra tax
advantages and legal restrictions of a special class of nonprofits, 501(c)3
charitable nonprofit organizations and foundations. Organizations recognized
under 501(c)3 of the IRS code have better fundraising prospects since they
can advertise the tax deductibility of donations, but they must be wary of the
extent to which they engage in lobbying because it cannot be a “substantial”
part of their budget or activities and they cannot support or oppose candidates
for public office. Organizations that are recognized as tax exempt under any
other part of 501(c) are unable to collect tax-deductible donations, but they can
engage in politics and lobbying. All tax-exempt nonprofits must ensure that
not more than an “insubstantial” amount of their activity is unrelated to their
exempt purpose, and they must honor the non-distribution constraint.
Antidiscrimination law includes a prohibition on the disparate, or unequal,
treatment of a member(s) of any legally protected class. It also protects
members of protected classes from unintentional discrimination that results
from seemingly neutral employment practices, such as routine criminal back-
ground checks of all job applicants. Religious nonprofits may favor members
of their own faith in hiring and may include following doctrinal teachings as
BFOQs for ministerial employees. However, their non-ministerial employees
and employees of other faiths have a legal right to work in an environment free
of harassment. Nonprofit executives also have the duty to reasonably accom-
modate employees’ disabilities and pregnancies, and sincerely held religious
beliefs.
DISCUSSION QUESTIONS
1. Consider a local unincorporated association in your community that

provides a benefit to the public. What are the reasons for it to incorpo-
rate as a nonprofit, and why might it choose to remain unincorporated?
2. Assume that you work for a nonprofit organization, and your nonprof-
it’s mission is highly affected by the choices made by the politicians in
your state. Consider what you can and cannot do to impact legislation
that is important to your cause (e.g., improve the quality of life for
Darla J. Hamann - 9781788118675

your clients, provide funding opportunities for the people you serve, or
increase awareness or generate research related to your cause).
3. Why do nonprofit leaders and board members need to avoid even the
appearance of a conflict of interest?
4. In what ways do anti-discrimination laws differ for religious nonprofits
than for secular nonprofit corporations? Do religious nonprofits have
to accommodate the sincerely held beliefs of employees of differing
faiths? Are churches exempt from anti-discrimination law?
5. Can a religious nonprofit force its employees to uphold church doc-
trines when off duty?
REFERENCES
Acquisti, A. and Fong, C.M. (2015). An experiment in hiring discrimination via online
social networks. Accessed at: https://ssrn.com/abstract=2031979.
Ben-Ner, A., Ren, T. and Paulson, D.F. (2011). A sectoral comparison of wage levels
and wage inequality in human services industries. Nonprofit and Voluntary Sector
Quarterly, 40(4), 608–33.
BoardSource (2012). The nonprofit board answer book (3rd edn). San Francisco, CA:
Jossey-Bass.
BoardSource (2017). Leading with intent: 2017 National index of nonprofit board
practices. Washington, DC: BoardSource.
Cihon, P.J. and Castagnera, J.O. (2017). Employment and labor law (9th edn). Boston,
MA: Cengage.
Crumpacker, M. and Crumpacker, J.M. (2007). The U.S. Supreme Court clarifies
constructive discharge under Title VII: Responsibilities & opportunities for human
resources practitioners. Public Personnel Management, 36(1), 1–19.
Fleischer, C.H. (2018). The SHRM essential guide to employment law. Alexandria, VA:
Society for Human Resource Management.
Hopkins, B.R. (2016). The law of tax-exempt organizations (11th edn). Hoboken, NJ:
John Wiley and Sons.
Hopkins, B.R. and Gross, V.C. (2016). The legal framework of the nonprofit sector in
the United States. In D.O. Renz and R.D. Herman (eds), The Jossey-Bass Handbook
of Nonprofit Leadership and Management, 4th edn (pp. 43–79). Hoboken, NJ: John
Wiley and Sons.
Knowledge@Wharton (2015). Separation of church and cubicle: Religion in the work-
place, 30 April. Accessed 14 April 2019 at https://knowledge.wharton.upenn.edu/
article/separation-of-church-and-cubicle-religion-in-the-modern-workplace/.
Moran, J.J. (2014). Employment law: New challenges in the business environment (6th
edn). Hoboken, NJ: Pearson Education.
Mulvaney, E. (2019). 11th Circuit pregnancy bias case tests 2015 Supreme Court
ruling. The National Law Journal, 22 February. Accessed 12 April 2019 at https://
www.law.com/nationallawjournal/2019/02/22/11th-circuit-pregnancy-bias-case
-tests-2015-supreme-court-ruling/?slreturn=20190314015738.
National Council of Nonprofits (2018). New federal tax law – Now what for
nonprofit board and staff members? Accessed 12 April 2019 at https:// www
Darla J. Hamann - 9781788118675

Nonprofit law 127
.councilofnonprofits.org/sites/default/files/documents/tax-law-checklist-nonprofits
.pdf.
NOLO (2018). The Tax Cuts and Jobs Act: Key changes for nonprofits. Accessed
12 April 2019 at https://www.nolo.com/legal-updates/the-tax-cuts-and-jobs-act-key
-changes-for-nonprofits.html.
Tempel, E.R. (2016). Ethics and accountability. In E.R. Tempel, T.L. Seiler and D.F.
Burlingame (eds), Achieving Excellence in Fundraising (pp. 467–87). Hoboken, NJ:
Thomas, M. and Strom-Gottfried, K. (2018). The best of boards: Sound governance
and leadership for nonprofit organizations (2nd edn). Durham, NC: Association of
International Certified Professional Accountants.
Walker, J.I. (2012). A fundraising guide for nonprofit board members. Hoboken, NJ:
Walsh, D.J. (2016). Employment law for human resource practice (5th edn). Boston,
MA: Cengage.
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7.

Nonprofit law: from tax advantages to

• Provide a broad overview of the legal context of nonprofit organizations

Darla J. Hamann - 9781788118675

NONPROFIT CLASSIFICATIONS UNDER THE IRS

There are two general classifications of nonprofit organizations: member

Nonprofit Tax Law

Darla J. Hamann - 9781788118675

The tax deductibility of donations is a benefit that applies only to 501(c)

Costs Associated with Tax Benefits

Darla J. Hamann - 9781788118675

The Tax Deductibility of Donations

Unlike tax exemptions, only public-serving charitable nonprofit organizations

Darla J. Hamann - 9781788118675

Nonprofits are governed by their board of directors, who are collectively

Darla J. Hamann - 9781788118675

Darla J. Hamann - 9781788118675

Table 7.1 Exercise 1: board of directors’ legal roles and responsibilities

NACC Guideline Alignment 7.1–7.4

via Nanyang Technological University, Singapore

via Nanyang Technological University, Singapore

Darla J. Hamann - 9781788118675

Darla J. Hamann - 9781788118675

NACC Guideline Alignment 7.4

via Nanyang Technological University, Singapore

you believe it was convincing?

via Nanyang Technological University, Singapore

Table 7.3 Exercise 3: disparate impact discussion

NACC Guideline Alignment 7.4

via Nanyang Technological University, Singapore

via Nanyang Technological University, Singapore

Darla J. Hamann - 9781788118675

1. Consider a local unincorporated association in your community that

Darla J. Hamann - 9781788118675

Darla J. Hamann - 9781788118675

Darla J. Hamann - 9781788118675

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