Federal Regulation of Nonprofit Board Independence: Focus on Independent Stakeholders as a 'Middle Way'

Benjamin M. Leff


While the federal government and the states have regulated charities for decades, significant opposition has recently been voiced to a perceived increase in IRS regulation of the management of charitable nonprofits. Some argue that the IRS has over-stepped its bounds recently by, among other things, requiring charitable nonprofits to have 'independent' boards of directors. The IRS argues that it is not requiring anything, but critics point to a series of recent actions by the IRS in which charities without 'independent' boards have been denied tax-exempt status. This article attempts to discern the IRS’s position, and provide a theoretical framework to make sense of it. That theoretical framework makes 'independent stakeholders' the centerpiece of an approach that both justifies the limited actions the IRS has taken thus far, and provides a rationale for cabining the IRS’s intervention going forward. The approach described in this article could be a model for the proper balance between federal and state regulatory interests in the nonprofit sector, as well as between regulation and nonprofits’ interests in autonomy.