By Eric Vieland
Montgomery, McCracken, Walker & Rhoads, LLP

A healthy board of directors serves an important function that an individual manager, no matter how skilled, could not. It provides a reservoir of diverse knowledge and experience, deeper and broader than that which an organization can muster on a daily basis.

Many boards will tend to drift with little diversity, since it is usually easier and more comfortable for a board to identify new members who are much like the existing members. But diversification is an important process, and a rewarding one for organizations that pursue it diligently.

Although the Sarbanes-Oxley statute passed last summer to improve financial statement reporting in response to the for-profit debacles applies only to publicly traded for-profit companies, it is beginning to set standards for "best practices" for larger charities.

Drexel University in Philadelphia claims to be the first large charity to amend its bylaws to require that its Audit Committee be composed entirely of "independent" directors.

The federal criminal indictment of a powerful Pennsylvania State Senator focuses heavily on the operations of a 501(c)(3) community betterment organization founded by the Senator’s employees and allegedly run for his personal benefit.

It alleges conduct, such as using the organization’s credit card to buy tools and equipment for his personal houses, which has traditionally deemed to be criminal. It also alleges improper actions that have more traditionally been handled as civil matters, not criminal. (U.S. V. Fumo, E.D. PA, Crim. No. 06-319, 2/6/07.)

The indictment focuses on activities of the Citizens Alliance for Better Neighborhoods, originally founded in 1991 as the First District Environmental Defense Fund, a reference to the Senator’s senatorial district number. It amended its articles of incorporation in 1994 to become the Citizens Alliance. Its purpose is “to promote public health, housing, safety and education in the City and County of Philadelphia,” a geographically limited purpose that becomes important in the indictment.

The Internal Revenue Service has recently released a draft of detailed instructions for the new Form 990 tax information return that many public charities and other tax-exempt organizations will have to file next year.  (IR-2008-60.) 

The Form significantly expands the reporting requirements and the Boards of many organizations will want to adopt new policies and procedures so that their returns will portray the organization in the most favorable light possible.

The basic Form 990 has not been significantly revised since 1979 and, according to the IRS, “is universally regarded as needing major revision.”  It has “failed to keep pace with changes in the law and with the increasing size, diversity, and complexity of the exempt sector.  As a result, the current form fails to meet the Service’s tax compliance interests or the transparency and accountability needs of the states, the public and local communities served by the organization.”

The Internal Revenue Service has proposed new regulations that would help Section 501(c)(3) charities and (c)(4) social welfare organizations understand the IRS’ approach to enforcing various restrictions on private inurement, private benefit and excess benefit transactions. (Published in Federal Register, 9/9/05.)

Under existing law, an organization is not exempt under section 501(c)(3) or 501(c)(4) if any of its net earnings inure to the benefit of any person with a personal or private interest in the activities of the organization. This is termed the “private inurement” prohibition, and it is absolute. Furthermore, an organization is not exempt under Section 501(c)(3) if more than an insubstantial part of its activity benefits private individuals, for other than charitable purposes, even if those individuals have no personal interest or involvement in the activities of the organization. This is termed the “private benefit” limitation, and it is measured relative to the total activity of the organization.