A Summary Explanation of the Doctrine of Charitable Immunity

Charitable immunity is perhaps one of the most misunderstood concepts in the law. Many charities are under the mistaken assumption that they are immune from any lawsuit simply because they operate as a non-profit and for a charitable purpose. This is a misunderstanding that can have unfortunate consequences.

In Virginia, “[a] charitable institution is immune from liability to its beneficiaries for [ordinary] negligence arising from acts of its servants and agents, but only if due care has been exercised in their selection and retention.” Ola v. YMCA of South Hampton Roads, Inc., 270 Va. 550 (2005). This statement obviously merits further analysis.

First, in order to obtain charitable immunity, the organization must be a charitable institution. To determine whether an institution is charitable, Virginia courts “apply a two-part test, examining (1) whether the organization’s articles of incorporation have a charitable or eleemosynary purpose and (2) whether the organization is in fact operated consistent with that purpose.” Davidson v. The Colonial Williamsburg Found., 817 F.Supp. 611 (E.D. Va. 1993). It is therefore imperative that non-profit organizations operating as charitable or public benefit organizations not only draft articles of incorporation that reflect their mission, but that they also operate in a manner wholly consistent with that mission.

Second, a charitable institution is immune from liability only to its beneficiaries. In Virginia, charities are not immune from liability to legal strangers. A beneficiary is someone that receives something of value, which the organization, through its charitable purposes, undertakes to provide. Egerton v. R.E. Lee Memorial Church, 395 F.2d 381 (4th Cir. 1968). As an example, the recipient of an in-home meal from a charity providing in-home meals to the sick or disabled would be considered a beneficiary of the organization’s charitable purpose. However, the victim of an automobile accident occurring on the roads while the same charity was delivering a meal would not be a beneficiary.

“Non-Profit” Does Not Equal “Tax-Exempt”: Applying for Federal Tax-Exempt Status

Many individuals who start a “non-profit” organization incorrectly assume that setting up a “non-profit” entity (i.e. a “non-stock corporation” in Virginia) will automatically make that entity exempt from federal, state and local taxes, and will permit donors to take a charitable deduction on their individual tax statements. A full discussion of tax law applicable to non-profit organization is beyond the scope of this article. However, we want to impart some general knowledge regarding how to set up a non-profit organization in Virginia and some general information regarding applying for tax-exempt status with the Internal Revenue Service.

In Virginia, a non-profit organization is usually a non-stock corporation, which is a form of entity that does not issue stock and is governed by the by-laws adopted by the members of the organization. There are many ways to organize the governance of the corporation, but generally, it is run by a board of directors that is elected by members of the organization. How a person becomes a member of the organization is determined in accordance with the rules set out in the by-laws. Of course, the members or the board of directors can elect a CEO or President to run the day to day operations of the organization.   
Becoming a non-profit entity under Virginia state law permits certain exemption from various state and local taxes, but does not automatically result in exemption from federal income tax. The first step to gaining federal tax-exempt status is to determine which type of tax-exempt organization the entity is. The most common categories of tax-exempt entities are: (1) Charitable and religious organizations; (2) Business leagues; (3) Labor organizations; (4) Social welfare organizations; and (5) Agricultural/horticultural organizations. The two most common types of tax-exempt organizations that Gross & Romanick helps to establish are charitable/religious organizations and business leagues.