| Nonprofit Issues

Boards Should Build Diversity For Maximum Performance

Varied perspectives can improve fundamental management decisions

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....

Term Limits Are For Cowards

Arbitrary end of service assures that organizations lose some of their best talent

We received a call not too long ago from the CEO of a nonprofit client asking how the Board could retain the services of its chairman during a particularly challenging year of transition for the organization. The chairman was coming to the end of his third three-year term and everyone thought he would have to go off the Board because of the term limit in the bylaws.

Fortunately for the organization, the term limit was 10 years, not three terms, and the Chair could be re-elected to a fourth term. Although he would have to leave at the end of...

Charities Consider Role for Audit Committee

Although Sarbanes-Oxley rules apply only to publicly traded businesses, nonprofits are beginning to look to its standards for "best practice" guidelines.

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.

Boards Should Assess Their Own Performance

Assessment can help improve board performance and transition ineffective members; the important thing is not worrying about doing it perfectly, but just doing it

Board self-assessment is an antidote to stagnation and drift. It helps assure that board members understand their responsibilities and work actively to fulfill them.

Scrutinizing the performance of the group as a whole and the board members individually will help improve performance of the board as a whole and facilitate “retirement” of ineffective members. It can also eliminate the need for arbitrary term limits, which guarantee that the services of the best people will be lost to the organization.

Indictment Spells Out Claims of Benefit, Obstruction of Justice by State Senator

Grants outside service area, improper political activity, and misinformation to accountants are basis for criminal charges

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...

Top Ten Policies and Practices for Nonprofit Organizations

Increased emphasis on transparency and accountability requires more formal attention to governance and administration

The emphasis since the enactment of Sarbanes-Oxley on governance practices of all nonprofits organizations, and the specific questions on the revised Form 990 about conflict of interest, whistle blower, document retention and compensation setting policies and procedures of 501(c)(3) public charities have spurred renewed interest in written policies. The following are policies and practices that 501(c)(3)s and other nonprofits may want to consider.

New Form 990 Will Greatly Expand Reporting Requirements for Nonprofits

It still offers an important public relations opportunity, but many Boards will have to adopt new policies to look good

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...

IRS Issues Tips to Agents on Collecting “Automatic” Excess Benefits Taxes from Nonprofits

Benefits not reported as compensation when paid will be treated as excess even though total compensation is reasonable

As part of its new effort to enforce “automatic” excess benefits taxes for unreported compensation by nonprofits, the Internal Revenue issued some “Tips for Agents” in its 2004 Continuing Professional Education materials published in January.

Agents reviewing the finances of Section 501(c)(3) public charities and Section 501(c)(4) civic associations are supposed to review all agreements, loans and expense reimbursements with any “disqualified person,” any member of their family and any organization in which the disqualified person or any family members have an ownership interest.

IRS Proposes New Regulations To Clarify Basis For Revocation of Exemption For Excess Benefits

Service will make judgment call based on “all relevant facts and circumstances” By Eric Vieland Montgomery McCracken

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...

Charities Must Avoid Excess Benefit Transactions

Intermediate Sanctions statute imposes tax on "disqualified persons" who receive more from a transaction with a nonprofit than they give in return.

Excess Benefit Transactions can trigger serious consequences for all involved. Happily, the IRS provides very simple guidelines for investigating and approving business deals. These guidelines also constitute solid business practice, even in the negotiation of an arm's-length deal that cannot be an Excess Benefit Transaction.

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