Charitable organizations receive all types of donations, including cash,  personal property, and even business interests.  Often times, the charity is so excited about a potential gift that no diligence is completed prior to acceptance, and failure to complete diligence on gifts can turn out to be costly.    Take gifts of real property – these are very common and can be financially beneficial to a charity.  However, without completing diligence, the charity may find that it now owns a superfund site.   Another not-so-obvious example is a donation of stock.  Although most donated stock is marketable, certain types of stock, including stock in an S corporation (usually small, family owned corporations), are not.  This post explores the implications of a charity accepting gifts of S corporation stock.  

Subchapter S corporations can only have certain types of shareholders.  Generally, these “permissible shareholders” include individuals (who are not nonresident aliens), estates, certain trusts, and certain exempt organizations.  We will focus on the permissible exempt organization shareholder. (more…)

The first and second installments of this series briefly discussed the duty of care and the duty of loyalty.  A third duty fiduciary duty imposed on charity board members is the duty of obedience (although some characterize the duty of obedience as a sub-set of the first two duties).  To satisfy the duty of obedience, a board member must act with fidelity, within the bounds of the law, to the charity’s mission as expressed in its Articles and Bylaws.  Therefore, it is important for every board member to carefully review the Articles and Bylaws, understand the charity’s mission, and consider this mission when making board decisions.

In the first installment of this series on board duties, we briefly discussed the fiduciary duty of care.  This second installment briefly discusses the fiduciary duty of loyalty.  To satisfy the duty of loyalty, a board member must act in the interest of the charity, and not act in their own interest or that of another person or entity.

The duty of loyalty primarily relates to conflicts of interest, corporate opportunity, and confidentiality. A conflict of interest is present whenever a director has a personal interest, whether direct or indirect, in connection with any proposed contract, arrangement or transaction. The mere presence of a conflict of interest, however, does not necessarily render a transaction void or voidable, or expose a director to liability.  When faced with a potential conflict of interest transaction, the board should consult the Internal Revenue Code (IRC Section 4941 or IRC Section 4958) and applicable state law.  Some helpful suggestions regarding the duty of loyalty include, but are not limited to, the following: (more…)

The board of directors of most charities are made up of good-hearted volunteers who are passionate about the charity’s exempt mission and eager to donate their time and experience.  Before agreeing to serve, however, a potential board member must understand the fiduciary duties that they will owe to the charity as a member of the board, including the duty of care, duty of loyalty, and duty of obedience.   The following is a brief overview of the duty of care.  A brief discussion of the duty of loyalty and duty of obedience will follow in subsequent blog entries.   

To satisfy the duty of care, a board member must discharge his or her duties as a director in good faith, with the care of an ordinarily prudent person and in a manner the director reasonably believes to be in the best interests of the charity.  This means, among other things, the director should pay attention to fiscal matters, conscientiously decide matters that come before them, create and enforce internal information systems, and serve as a check or veto on management. Some helpful suggestions include, but are not limited to, the following: (more…)

Last week, my husband and I attended an event for one of our favorite charities. For a $160 donation, the two of us enjoyed a nice steak and lobster dinner and an open bar. This was a great deal for the charity - since all of the food and drinks had been donated. At the silent auction, I successfully bid on a dinner party for 4, hosted by a famous local chef who donated the item. And I got a great deal on that dinner – it normally goes for $300, and all I paid was $150! My husband won the raffle – for five dollars, he entered for the chance to win all of the money in the pot, and scored a whopping $510! Of course, being the charitable person that he is (and with a bit of urging), he donated the entire amount back to the charity. Finally, after watching the gut-wrenching stories about all of the children who benefit from the charity’s work, we donated an additional $250. If you haven’t figured it out yet, I REALLY like this charity. BUT: for tax purposes, how much did I really donate? The answer isn’t that simple…let’s go one by one: (more…)

We frequently get asked by new and existing nonprofit organizations about directors and officers liability insurance (“D&O Insurance”). Should you obtain coverage? Is it worth the cost?

Yes, you should explore obtaining D&O Insurance. If you want to recruit high-quality directors, you may find that they will not serve on your board without seeing a copy of your policy. They want to know that they will be protected. In addition, their employers may not allow them to serve on your board unless you have D&O Insurance.

On a related note, you might also want to review your organizational documents for provisions that indemnify your directors and officers against certain acts. The same potential directors who want to see a copy of your D&O Insurance policy may also want to see your indemnification provisions.

There are a number of organizations, some of them nonprofit themselves, that provide affordable D&O Insurance to nonprofit organizations of all sizes. When discussing your policy, make sure that you understand its terms and the acts it actually covers.

For a variety of reasons, several nonprofits have undergone mergers or consolidations over the last year or so.  At the same time, both the IRS and Financial Accounting Standards Board (“FASB”) have issued guidance on mergers of non-profit organizations.  So, although these rules are not brand new, they are relatively new and relevant for many exempt organizations.  IRS Publication 4779  describes the IRS rules and FASB Statement No. 164 (which you can access here after free registration) details the accounting rules.  A thoroughly-researched summary of each is located here.  For those of you with little time, I hereby summarize the requirements with brevity: (1) notify the IRS of any merger by filing a final Form 990, (2) have someone smart–preferably an accountant–explain FASB Statement No. 164 and (3) try to say “Financial Accounting Standards Board” 5 times fast.

The Form 990 includes numerous governance and management questions.   A brief summary of the more significant governance and management questions are provided below. The IRS has indicated that, although a negative response to a question on the Form 990 will not necessarily result in an audit, the IRS will use such negative responses in conjunction with other information on the Form 990 to determine whether further inquiry is necessary.  It is important for the leadership of public charities to become familiar with these provisions and should analyze each of the following:

• Records Management Program – Form 990 asks whether the organization has a written document retention and destruction policy. Nonprofit corporations should adopt a document retention and destruction policy, along with a records retention schedule, utilizing the standards under Sarbanes-Oxley, 18 U.S.C. 1512(c), and the new Federal Rules of Civil Procedure regarding e-Discovery, Fed. R. Civ. P. 34. Such a policy should cover the responsibilities of staff, volunteers, board members, and outsiders to maintain, store, or dispose of the organization’s records.
• Whistleblower Protection Policy – Form 990 asks whether the organization has a whistleblower policy. Nonprofit corporations should adopt a whistleblower policy, utilizing the standards under Sarbanes-Oxley, 18 U.S.C. 1513(e), that identifies specific staff members, board members, or outside parties to whom a staff member or volunteer can report information on illegal practices or violations of organization policy. (more…)