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Governing Nonprofit Organizations: Federal and State Law and Regulation

The International Journal
of Not-for-Profit Law

Volume 7, Issue 2, February 2005

By Marion R. Fremont-Smith
Reviewed by Michael Bisesi*

“The nonprofit sector exists and thrives because the public believes in its integrity.”

–Marion Fremont-Smith

The online magazine Slate has a wonderful feature called The Explainer, in which questions great and small (such as “Who can lie to Congress?” and “What’s in Ovaltine”) are answered succinctly. When it comes to nonprofit regulation, Marion Fremont-Smith may well qualify as our explainer, addressing issues as varied as the multiple meanings of “charity” and the legal definition of “UBIT.” Governing Nonprofit Organizations: Federal and State Law and Regulation undoubtedly will be regarded as the regulatory reference of choice for years to come.

A major work on regulation may seem odd at a time when even the Geneva Convention, much less consumer and environmental protection, has been rendered “quaint.” But renewed interest in issues such as tax-exemption and donor confidence, culminating in the Senate Finance Committee’s far-reaching accountability hearings in fall 2004, would suggest that a serious scholarly effort actually is very timely indeed.

Fremont-Smith brings highly credible experience to her task. She currently serves as Senior Research Associate at Harvard’s Hauser Center for Nonprofit Organizations. Previously, she was Assistant Attorney General and Director of Public Charities in Massachusetts. She also has been a partner in a private law firm.

This encyclopedic volume covers a comprehensive array of topics in a thoroughly researched and well-documented set of chapters. The “Brief History of the Law of Charities” alone makes the book a must-read, and the chapter on fiduciary duties is a remarkably clear exposition. Other chapters focus on the Internal Revenue Code, federal and state regulatory roles, the function of courts, and the creation, administration, and termination of charities.

Even the most casual reader will learn that the nonprofit regulatory framework is so business-oriented because the corporate form of organization is so common in the nonprofit sector. This business-model orientation is pertinent because the United States is the only industrialized nation where big business preceded the appearance of big government. The resulting reactive character of regulation also reflects historical roots in the early colonial period (“preserving liberties, not imposing burdens”) and is codified by the minimalist form of government prescribed in the Constitution.

Regulatory action also has been guided by public attitudes. Fremont-Smith contends that “the populist distrust of large amounts of property being dispensed for public purposes without public control, the fear of conservatives that charitable funds are being used to support liberal causes, the opposing fears expressed by liberals, and the concerns of business that nonprofits receive unfair business at their expense” are among the many sources of laws designed to regulate nonprofit organizations.

While some entries may strike the non-attorney reader as common sense, the book provides enough citations to satisfy even the most curmudgeonly of board members. Nonprofits must be established to fulfill a social purpose. Fiduciary responsibility requires boards and individual board members to act for public rather than personal benefit. Board members must spend enough time, attend meetings, and make reasonable inquiries if problems appear–what the Corporate Library’s Nell Minow would call the “duty of curiosity.”

Fremont-Smith also does a masterly job explaining other key issues. She argues that the regulatory role of the Internal Revenue Service (IRS) became so prominent because states failed to “fulfill their traditional role in regulating charities.” She clarifies the “border between exempt and non-exempt activities” with detailed discussions of the Unrelated Business Income Tax (UBIT) and of limitations on lobbying activities.

Three substantive quibbles are worthy of note. First, Fremont-Smith contends that Enron and other corporate scandals have had “no direct impact” on nonprofits, but she should be given a pass on this one because that line was written before the Senate Finance committee hearings in fall 2004.

The second objection also may be time-related. She praises the work of the IRS as primary regulator because it has a record of “resisting political pressures, despite challenges to the contrary.” The fall 2004 pre-election inquiry into NAACP activities may be, one hopes, a singular exception to the historic rule.

The final criticism entails two intriguing but under-developed suggestions at the conclusion of the book: “remove the almost complete protection from liability given to fiduciaries” and “provide regulatory agencies in the states and the IRS adequate funds to effectively carry out their enforcement duties.” Further elaboration would have been very much appreciated.

Recent research suggests that regulation typically is more effective than voluntary control and that “the duality of deterrent fears and civic obligations” are strong motivators to avoid problems.[1] With that framework in mind, readers will quickly discern that Fremont-Smith has produced the definitive source for those who truly want to understand nonprofit regulation.


* Michael Bisesi is Professor and Director of the Center for Nonprofit and Social Enterprise Management, Seattle University.

[1] Peter J. May, “Regulation and Compliance Motivations: Examining Different Approaches.” Public Administration Review, Vol. 65, No. 1 (January-February 2005) pp. 31-41.