Let's start at the beginning...

When any non-profit applies for its tax exemption, the organization is required to specify the activities it plans to conduct and to make the case that their mission qualifies for charitable, tax-exempt status. Upon review, the IRS either grants or denies the application and issues its 'exemption letter'.

If your planned activity falls outside of the specified mission of your non-profit, then the activity may be non-compliant. Non-compliant? With what? Your IRS-approved exemption! How do you know, for sure, if your planned activity is within your compliance parameters? Easy...just ask! Who? The IRS (your regulatory reference)!

Please ponder the following hypothetical example: a local community Food Bank is deciding whether or not to purchase a national fast-food chain restaurant adjacent to its main food bank facility.

It sounds like a great idea when presented to the board for approval:

* the fast-food restaurant brings in lots of customers who would learn that the food bank is located right next door; * the profitability of the restaurant could subsidize the operations of the food bank

Good idea? Bad idea? How would you vote if you were on the board?

This is a good example of the challenges of a non-profit board. Let's take this scenario a step further before we try to deal with the dilemma.

This Food Bank was organized 30 years ago and received its IRS approval as a charitable, tax-exempt organization serving the public good. The founding executive director (ED) led the organization for 20 years until he retired.

Following the retirement of the founding ED, the board conducted a search and hired a replacement ED. Unfortunately, their new ED left after just one year, accepting an opportunity at a larger food bank. Since that time, the organization has suffered rapid turnover among four EDs, but the board believes the tide has turned: the current ED is an experienced manager, who was looking for a career change, and is committed to remaining in this position for quite a few years.

The idea for the purchase of a fast-food restaurant took shape during a scheduled fund-raising call between the new 'out-of-the-box' ED and the owner of the fast-food chain. The owner, a former board member of the Food Bank, suggested the purchase as a mechanism for alleviating the ongoing financial challenges of the Food Bank and as part of his estate planning. The deal was a gracious opportunity; the owner would even provide the financing. To answer any questions, the owner offered to attend the board meeting with the ED.

Okay.

An opportunity presents itself: a former board member offers to be unbelievably philanthropic and an excited Executive Director presents the idea to the board at its regular meeting. You are a board member. You hear the presentation. The opportunity sounds great! What should the board do?

(We could spend quite a bit of time strategizing, but that is beyond the scope of this post.)

Question #1: Yes, you are a board member; however, are you qualified to analyze the deal and make an informed decision? Would you be willing to be that 'lone voice in the wilderness' that dares question the deal? Are you willing to admit your lack of knowledge?

Question #2: Did your ED research the language in your original IRS determination letter as a guide for what your scope of services can be? Did your ED consult with legal and accounting counsel?

Question #3: Are you familiar with 'unrelated business income' - whereby income-producing activities can result in taxable revenues (even for a non-profit)?

Question #4: Do you understand 'noncompliant activity'? Has your ED mentioned that issue in the board presentation?

Per usual, a lot is happening at this (hypothetical) non-profit board meeting. This good idea of purchasing a fast food restaurant is outside the description of the activities of the food bank. The IRS could approve the deal; but, failing to request a definitive ruling would be irresponsible on the part of the board and would literally jeopardize the charitable status of the Food Bank.

A lot to worry about? Nope. Not really. Just remember to ask the right questions. If you do not know the right questions, you are probably on the wrong board.