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TAX LAW AND ESTATE PLANNING SERIESTax Law and Practice
Course Handbook SeriesNumber D-464
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Practising Law Institute1177 Avenue of the Americas
New York, New York 10036
Advising Nonprofi t Organizations 2016
ChairPamela A. Mann
Copyright © 2016 by Practising Law Institute. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of Practising Law Institute. 978-1-4024-2691-9
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The methods of reproduction, both print and electronic, were chosen to ensure that program registrants receive these materials as quickly as possible and in the most usable and practical form. The Practising Law Institute wishes to extend its appreciation to the authors and faculty for their contributions. These individuals exemplify the finest tradition of our profession by sharing their expertise with the legal community and allied professionals.
Prepared for distribution at the ADVISING NONPROFIT ORGANIZATIONS 2016 Program New York City, June 3, 2016 CONTENTS: PROGRAM SCHEDULE ........................................................................... 7 FACULTY BIOS ...................................................................................... 13 1. Starting a Nonprofit ......................................................................... 21
Amarah K. Sedreddine Sedreddine & Whoriskey, LLP
2. The New York Nonprofit Revitalization Act ..................................... 31
Jason R. Lilien Loeb & Loeb LLP
3. Private Foundations: Basic Principles and
New Developments ......................................................................... 45 Pamela A. Mann Carter Ledyard & Milburn LLP
4. Understanding Nonprofit Financial Statements and Audits ............ 61
Dennis J. Morrone, CPA Grant Thornton LLP
5. Will the FASB’s Changes to the Nonprofit Financial
Reporting Model Better Help You Tell Your Financial Story? ......... 89 Dennis J. Morrone, CPA Mary Foster, CPA Grant Thornton LLP
6. Lobbying Activity by Nonprofit Organizations ............................... 113
Sean Delany Lawyers Alliance for New York
7. Lobbying Activity by Nonprofit Organizations
(PowerPoint slides) ....................................................................... 145 Sean Delany Lawyers Alliance for New York
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8. Nonprofit Governance Materials ................................................... 203
a) Right from the Start: Responsibilities of Directors of Not-for-Profit Corporations, New York State Attorney General Eric T. Schneiderman, Charities Bureau, Guidance Document 2015 - 6, V. 1.0 (May 15, 2015), available at: http://www.charitiesnys.com/pdfs/Right%20From% 20the%20Start%20Final.pdf .................................................... 205
b) Internal Controls and Financial Accountability for Not-for-Profit Boards, New York State Attorney General Eric T. Schneiderman, Charities Bureau, available at: http://www.charitiesnys.com/pdfs/Internal% 20Controls%20-%20Final%20-%20Small%20Type.pdf .......... 215
c) Directors of Nonprofit Held Financially Liable for Relying on Incompetent Officers and Lack of Oversight, Shveta Kakar and Dan Kurtz, March 6, 2015, available at: http://www.dwt.com/Directors-of-Nonprofit-Held-Financially-Liable-for-Relying-on-Incompetent-Officers-and-Lack-of-Oversight-03-06-2015/ ............................................................. 225
d) Capacity Building and Oversight Best Practices, Not-for-Profit Vendor Reviews, NYC Mayor’s Office of Contract Services available at: http://www1.nyc. gov/assets/mocs/downloads/pdf/nonprofit_help/ Capacity%20Building%20and%20Oversight% 20Best%20Practices.pdf .......................................................... 231
Submitted by: Shveta Kakar
INDEX ................................................................................................... 239 Program Attorney: Ilizabeth Hempstead
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Program Schedule
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ADVISING NONPROFIT ORGANIZATIONS 2016 New York City, June 3, 2016 Live Webcast, www.pli.edu, JUNE 3, 2016
Morning Session: 9:00 am - 12:30 pm
9:00 Introduction and Welcome Pamela A. Mann
9:15 Nonprofit Organizations: Formation and Start-up Issues Differences between federal exemption categories The incorporation process Primary state law issues Establishing governance structures
Amarah K. Sedreddine
10:15 Update on the Nonprofit Revitalization Act Overview of the key provisions Progress report Implementation strategies Tips for staying compliant and staying out of the crosshairs
Jason R. Lilien
11:15 Break
11:30 Private Foundations: Basic Principles and New DevelopmentsSelf-dealing Foreign grant making Program-related investments Impact investing
Pamela A. Mann
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12:30 Lunch
Afternoon Session: 1:30 pm – 5:00 pm
1:30 Understanding Nonprofit Financial Statements and AuditsUnique accounting concepts for nonprofits Using financial statements to evaluate financial position and performance How nonprofits maximize the usefulness of the auditStatus and discussion of the FASB’s proposed changes to the reporting standards for nonprofits
Dennis J. Morrone, Pamela A. Mann
2:30 Political Activity and Lobbying: Limitations on Nonprofit Organizations Definitions and limitations Exceptions to lobbying rules Political activity by 501(c)(4) organizations Election year considerations
Sean Delany
3:30 Break
3:45 Federal and State Governance Rules Applicable to Nonprofit Organizations Prohibition against private inurement Excess benefit transactions State duties of care and loyalty Compensation issues Best practices
Shveta Kakar
5:00 Adjourn
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Chair:
Pamela A. Mann Carter Ledyard & Milburn LLP New York City
Faculty:
Sean DelanyExecutive Director Lawyers Alliance for New York New York City
Shveta KakarNew York City
Jason R. LilienLoeb & Loeb LLP New York City
Dennis J. Morrone, CPA Partner-in-Charge, National Not-for-Profit and Higher Education Audit Practice Grant Thornton LLP Iselin, New Jersey
Amarah K. SedreddineSedreddine & Whoriskey, LLP New York City
Program Attorney:
Ilizabeth Hempstead
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Faculty Bios
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PAMELA A. MANN
Pamela A. Mann is the Chair of the Tax-Exempt Organizations Group at Carter, Ledyard & Milburn LLP. At CL&M, Ms. Mann is counsel to numerous public charities and private foundations and advises clients in a wide range of governance, regulatory, tax, and general corporate matters. From 1985 to 1995, Ms. Mann was Chief of the Charities Bureau in the New York Attorney General’s office, directing scores of important cases and initiatives and influencing the adoption of significant legislative changes affecting tax-exempt organizations. Her diverse background includes clinical teaching at Rutgers University School of Law’s Constitutional Litigation Clinic and the litigation of employment discrimination and other employment related matters at the National Employment Law Project. Prior to CL&M, Ms. Mann was the principal in the Law Offices of Pamela A. Mann, LLC, a practice concentrated in the representation of tax-exempt organization.
Ms. Mann has been recognized in New York Magazine’s Best Lawyers in New York and in Super-Lawyers Magazine in the category of lawyers specializing in Nonprofit/Charities Law. Ms. Mann was Chair of the Committee on Nonprofit Organizations of the Association of the Bar of the City of New York from 1998-2001 and has served as President and Vice-President of the National Association of State Charities Officials. She is a member of the American Law Institute, the Government Relations Committee of the Nonprofit Coordinating Committee of New York and of the Exempt Organizations Committee of the American Bar Association. She has written many articles for professional and lay publications and is a frequent lecturer on non-profit issues. She is a graduate of Oberlin College and the University of Pittsburgh School of Law. Additional information about CL&M is available at www.clm.com.
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Sean Delany As Executive Director, Mr. Delany positions Lawyers Alliance among peer institutions, law firms, community-based organizations, and the general public. Mr. Delany works with the organization's Board and staff to carry out all aspects of its operations. Mr. Delany also advises nonprofits in the areas of exempt organizations tax law and nonprofit law, with a focus on the regulation of lobbying and political activity. Prior to becoming Executive Director in 1999, Mr. Delany was Legal Director at Lawyers Alliance, Section Chief and then Assistant Attorney General in charge of the Charities Bureau of the New York State Attorney General's Office, and Staff Attorney at Bronx Legal Services. He received a J.D. from the University of Virginia School of Law in 1980 and B.A. from Hamilton College in 1975. Professional Activities: Advisory Committee on Tax Exempt and Government Entities of the Internal Revenue Service (2006-2008); Board of Advisors, Frances L. & Edwin L. Cummings Memorial Fund; Advisor, American Law Institute's Restatement of the Law of charitable Nonprofit Organizations; President, National Association of State Charities Officials (1996-1997); Adjunct Professor, New York University School of Law. Lawyers Alliance publications: Advising Nonprofits, Fifth and Sixth Editions and Mergers and Strategic Alliances for New York Not-for-Profit Corporations.
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Shveta Kakar
SHVETA KAKAR is a litigator with over a decade of experience, representing
clients in a wide range of nonprofit organizations in governance disputes and
government investigations. She also conducts internal investigations and
counsels not-for-profit clients in matters that could potentially ripen into
government investigations or litigation and provides governance advice to not-
for-profit boards and has written and presented on crisis management and board
liability.
She has a LL.M from Harvard Law School and a law degree from The London
School of Economics and Political Science where she graduated summa cum
laude. She is admitted to practice in New York State, the Southern and Eastern
District of New York and the Second Circuit.
She currently serves on the Nonprofit Organizations Committee of the New York
City Bar Association. She is also a Board member and serves on the
Governance Committee of Third Street Music School Settlement, a 120 year-old
community music school on the lower east side of Manhattan serving more than
5,000 students.
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These materials may constitute "Attorney Advertising" under the New York Rules of Professional Conduct and under the law of other jurisdictions.
JASON R. LILIEN Partner
345 Park Avenue New York, New York 10154
Direct 212.407.4911 Fax 646.607.9262 [email protected]
Jason Lilien counsels clients throughout the nonprofit sector on corporate governance, regulatory compliance, corporate transactions, internal investigations, governmental enforcement actions, nonprofit formation, charitable fundraising, and cause marketing.
A former Bureau Chief of the New York State Attorney General’s Charities Bureau, Mr. Lilien oversaw New York’s more than 100,000 nonprofit organizations and developed legislation and regulatory initiatives that serve as national models. As head of the largest state charities regulatory office in the country, Mr. Lilien was responsible for bringing nationally prominent enforcement actions. He also led efforts to resolve some of New York’s most high-profile and complex trust and estate matters, including the settlements of the hotly contested Huguette Clark and Brooke Astor estates, which collectively provided hundreds of millions of dollars to charities supporting education, the arts, and other causes.
Mr. Lilien was principal author of the Nonprofit Revitalization Act of 2013, which spearheaded the most comprehensive reform of New York’s nonprofit laws since they were enacted in the 1960s. In 2012, he drafted best practices for cause marketing that were adopted by some of the country’s most prominent charities and that have become a national model. Mr. Lilien also authored key provisions of the New York Prudent Management of Institutional Funds Act (NYPMIFA) — the New York version of the national Uniform Prudent Management of Institutional Funds Act (UPMIFA) — which governs how nonprofits can invest and utilize their endowments.
Mr. Lilien has worked on various initiatives that have furthered the development of corporate governance best practices. He has also been a national thought leader on these subjects, having written numerous articles and publications and having frequently appeared as a speaker at national conferences. He has served as a member of numerous boards, including on the board of directors of the National Association of State Charity Officials, and served as a commissioner on the National Association of Corporate Directors’ Blue Ribbon Commission on the Role of the Board in Corporate Strategy.
A lifelong New Yorker, Mr. Lilien was instrumental in the formation of the National September 11 Memorial and Museum, the not-for-profit entity established to finance, own, and operate the official Memorial and Museum at the World Trade Center site. He served, pro bono, as its counsel to the board, treasurer, and secretary from the entity’s inception in 2003 until he was chosen to head the Charities Bureau. Mr. Lilien was also actively involved in the establishment of the Lower Manhattan Development Corporation, the state-city agency charged with overseeing the rebuilding of Lower Manhattan, and served as pro bono counsel to the board.
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Dennis J. Morrone Partner-in-Charge of Grant Thornton LLP’s National Not-for-Profit & Higher Education Audit Practice
Dennis is the Partner-in-Charge of Grant Thornton’s National Not-for-Profit & Higher Education Audit Practice. Prior to joining Grant Thornton LLP in May of 2002, Dennis was previously part of Arthur Andersen's Metro New York Not-For-Profit Practice. Dennis has served a variety of not-for-profit and higher education clients, including AARP; The American Museum of Natural History; the Field Museum of Natural History (Chicago); the Chicago Historical Society; the American Bible Society; MDRC; Council on Foreign Relations; The Institute of Electrical and Electronics Engineers, Inc.; National Multiple Sclerosis Society – National Headquarters; the American Lung Association – National Headquarters; Crohns and Colitis Foundation; the Institute of International Education; the Roman Catholic Archdiocese of Newark; the Archdiocese of Baltimore; The Bridgeport Roman Catholic Diocesan Corporation; Securities Investor Protection Corp (SIPC); Merck Institute for Science Education; The Doris Duke Charitable Foundation; the Alfred P. Sloan Foundation; the Jack Kent Cooke Foundation; the William S. Paley Foundation; Make-a-Wish Chapters in New York and New Jersey; Natural Resources Defense Council, Inc.; Covenant House; Phoenix House Foundation, Inc.; the Gerry Foundation; Seton Hall University; Ithaca College; Skidmore College; Stevens Institute of Technology; Gallaudet University; Saint Peter's College; Georgian Court University; Wagner College; The College of New Jersey; the College of Mount Saint Vincent; and Dominican College of Blauvelt, amongst many others. Dennis received his B.S. degree, cum laude, in Accounting from Villanova University. Dennis has been a frequent speaker at various not-for-profit and higher education industry seminars, including the AICPA, NJCPA, NACUBO, and EACUBO. He has led and created numerous training sessions on a full range of not-for-profit accounting and auditing topics as well as OMB Circular A-133 (Uniform Grant Guidance) for firm staff as well as the not-for-profit industry. Dennis has represented Grant Thornton on the AICPA’s Center for Government Audit Quality and is a member of the FASB’s Not-for-Profit Resource Group. Dennis is a member of Grant Thornton’s National Not-for-Profit Leadership Team and part of Grant Thornton’s Professional Excellence and Technical Committees. He has also written several articles for Grant Thornton’s Not-for-Profit Industry letters as well as for the Not-for-Profit Times. He is a Certified Public Accountant in New Jersey, New York, and Washington D.C. and a member of the American Institute of Certified Public Accountants, the New Jersey Society of Certified Public Accountants, and the New York State Society of Certified Public Accountants.
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Amarah Sedreddine
Amarah Sedreddine is a founding partner of Sedreddine & Whoriskey, LLP, a boutique law firm focused exclusively on serving nonprofit and tax-exempt organizations and mission-driven businesses.
Amarah represents and counsels a wide variety of organizations, including both public charities and private foundations, as well as mission-driven for-profit businesses, at all stages of development and operation. She provides comprehensive legal counsel and strategic guidance to her clients, advising on a wide range of tax, regulatory, governance, employment and general corporate and transactional matters. She is informed in this work by her extensive expertise advising nonprofit organizations developed over the course of her career in the public sector. Prior to her work as a founding partner of Sedreddine & Whoriskey, LLP, Amarah served as outside corporate counsel to Rockefeller Philanthropy Advisors, a philanthropic organization that administers over $200 million annually in grantmaking, worldwide, as special counsel and assistant general counsel at the Vera Institute of Justice, and as associate general counsel at The New York Community Trust. She commenced her legal career in private practice at Morrison & Foerster, LLP and Mann Legal Group, LLC, where she focused her work on tax-exempt organizations. Amarah graduated from Princeton University in 1998 and New York University School of Law in 2004, and returned to NYU Law in 2012 to serve as co-faculty of its Business Law and Transactions Clinic, supervising the work of third-year law students providing pro bono legal services to tax-exempt organizations. She is a member of the New York City Bar Association’s Nonprofit Organizations Committee and is admitted to practice in New York.
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Starting a Nonprofit
Amarah K. Sedreddine
Sedreddine & Whoriskey, LLP
If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.
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I. INTRODUCTION
a. Overview of Nonprofit Sector in Facts and Figures b. Background and Context
i. Terminology & Definitions 1. Nonprofit or not-for-profit 2. Tax-exempt organization 3. 501(c)(3) (Charitable organizations)
a. Public charity b. Private foundation
ii. Legal Framework 1. Nonprofits are creatures of state and federal law 2. State law governs the establishment of the organizational
form a. Unincorporated association b. Corporation c. Trust d. LLC
3. Federal law governs the tax status of an organization iii. Alternative Vehicles
1. For-profit! 2. Donor-advised fund 3. Fiscal sponsorship
II. CATEGORIES OF EXEMPT ORGANIZATIONS
a. 501(c)(3) organizations i. Public charity
1. Per se public charities 2. Publicly supported organizations 3. Supporting organizations
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ii. Private foundations 1. Non-operating foundations 2. Operating foundations
a. Exempt operating foundations b. Other exempt organizations
i. 501(c)(4)s and 27 other categories under 501(c)
III. OPERATING AS A 501(c)(3) ORGANIZATION
a. Advantages: i. Tax-advantaged donations ii. Tax-free income (generally) iii. Reputational status and partnerships
b. Disadvantages: i. Limitations on private benefit, compensation ii. Restrictions on activities iii. Compliance and reporting obligations
IV. THRESHOLD CONSIDERATIONS
a. Initial considerations i. Mission and scope of activities ii. Funding sources iii. Budget iv. Tax status
1. Look back to sources of support a. General public b. Private individual c. Private foundations d. DAFs
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2. And activities a. Lobbying b. Political activities
3. Remember limitations! a. Revisit alternatives
b. Secondary considerations i. Organizational form ii. Jurisdiction (NY vs Delaware vs other) iii. Board composition iv. Membership
V. ENTITY FORMATION AND REGISTRATION
a. Corporate vehicle established under state law b. Steps
i. Name reservation (optional) ii. Certificate of Incorporation
1. State law components (vary by state) a. Name b. Statement of purpose c. Agent for service of process
i. (Delaware: registered agent) d. (NY:
i. Names and addresses of initial directors ii. County in which located iii. Consent or none needed)
2. Federal law components a. “....organized and operated exclusively for exempt
purposes...” i. Track language of 501(c)(3)
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ii. Limits on certain activities (no support for political campaign, no substantial lobbying expenditures)
iii. Certain, limited activities outside your exempt purpose are allowed (“primarily” for exempt purposes)
iv. No inurement b. Distribution of assets
iii. Hold Organizational Meeting 1. Elect directors, officers 2. Adopt Bylaws, Conflict of Interest Policy, other policies
(Investment, Whistleblower) 3. Authorize filing relevant applications (including EIN,
1023), and opening bank account iv. Application for authority, if relevant v. Charitable fundraising registration
1. Status retroactive to date of formation vi. State and local tax exemptions
1. CT-247 NY State Franchise Tax Exemption 2. Sales Tax Exemption 3. Property Tax Exemption (if relevant)
VI. APPLICATION FOR RECOGNITION OF TAX-EXEMPTION
a. Form 1023, 1023 EZ; 1024 i. Thresholds for EZ
1. $50,000 limitation on annual gross receipts in 3 year period;
2. Assets < $250,000; 3. Eligibility worksheet.
b. File within 27 months of forming your org for exemption retro-active to formation
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c. 1023: 1. Program narrative 2. 3 year budget
d. Processing time at historic low
VII. ONGOING COMPLIANCE
a. Public Charity i. Reporting: Form 990 (EZ; postcard); 990-T; state filings ii. Corporate formalities
1. Board meetings and minutes 2. Conflict of interest procedures / disclosures 3. Other corporate / operational procedures
iii. Contribution acknowledgments iv. Limitations on activities
b. Private Foundation i. Minimum annual distribution requirement ii. Reporting: Form 990 PF; 990-T; state filings iii. Corporate formalities
1. Board meetings and minutes 2. Conflict of interest procedures / disclosures 3. Other corporate / operational procedures
iv. Limitation on activities 1. Excise tax regime
VIII. FURTHER INFORMATION / RESOURCES
a. IRS Publication 557, Tax Exempt Status for Your Organization
• https://www.irs.gov/pub/irs-pdf/p557.pdf b. NYS Charities Bureau Publication, Forming and Changing a New
York Not-For-Profit Corporation
• http://www.charitiesnys.com/pdfs/how_to_incorporate.pdf
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c. New York Department of State Not-For-Profit Incorporation Guide
• http://www.dos.ny.gov/forms/corporations/1511-f-l_instructions. pdf
d. Incorporation Forms
• New York: http://www.dos.ny.gov/forms/corporations/1511-f.pdf
• Delaware: https://corp.delaware.gov/incnstk09.pdf
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NOTES
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NOTES
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The New York Nonprofit Revitalization Act
Jason R. Lilien
Loeb & Loeb LLP
These materials may constitute “Attorney Advertising” under the New York Rules of Professional Conduct and under the law of other jurisdictions.
If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.
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BIOGRAPHICAL INFORMATION
Jason R. Lilien is a partner in the New York office of Loeb & Loeb LLP. A former Bureau Chief of the New York State Attorney General’s Charities Bureau, Mr. Lilien oversaw New York’s more than 100,000 nonprofit organizations and developed legislation and regulatory initiatives that serve as national models. At the firm, Mr. Lilien’s practice focuses on advising clients throughout the nonprofit sector on corporate governance and compliance matters, internal investigations, regulatory and enforce-ment actions, corporate transactions, nonprofit formation, and charitable fundraising. Contact: 212.407-4911, [email protected]
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In June 2013, the New York State Legislature unanimously passed the Nonprofit Revitalization Act of 2013 (the “Act”), the most compre-hensive reform of New York’s nonprofit laws in decades. The Act amended the Not-for-Profit Corporation Law (N-PCL), the Estates, Powers and Trusts Law (EPTL) and Article 7-A of the Executive Law to strengthen board oversight and accountability and reduce unnecessary regulatory burdens and costs on nonprofits. Further minor amendments were enacted in 2014 and 2015. Virtually all New York nonprofits were impacted by the changes, whether as a result of new mandated governance requirements, modernized corporate law procedures, or enhanced attorney general enforcement powers.
The new requirements, most of which took effect July 1, 2014, have required nonprofits and their boards to evaluate their current policies and procedures to assess compliance and adopt appropriate changes.
1. STRENGTHENING BOARD OVERSIGHT AND ACCOUNTABILITY
To promote good governance practices and enhance the public’s trust in the nonprofit sector, the Act established new governance requirements for not-for-profit corporations and wholly charitable trusts. Among the key changes, the legislation amended the N-PCL to add a new section 712-a to establish board oversight procedures for financial audits and revised section 715 to provide for new procedures for reviewing and approving related-party transactions. The Act also amended the N-PCL to add new sections 715-a and 715-b to require that all not-for-profit corporations adopt conflict of interest policies and that larger organizations adopt whistleblower policies. A new section 8-1.9 of the EPTL imposed similar requirements on wholly charitable trusts.
a. New Financial Audit Oversight Responsibilities
The Act imposed new board oversight responsibilities on charities that are required to obtain a financial audit under Article 7-A of New York’s Executive Law (generally charities are required to obtain audits if they raise funds from the public and meet specified revenue thresholds, as discussed further below). i. Under new N-PCL section 712-a, the board or a designated audit
committee of the board, is required to: a. Retain the independent auditor to conduct the audit; and
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b. Review the audit’s findings with the independent auditor upon completion.
ii. The board (or audit committee) of organizations with annual revenue of more than $1 million also is required to: a. Review with the independent auditor the scope and planning
of the audit prior to the audit’s commencement; b. Upon completion of the audit, review and discuss with the
independent auditor: (1) any material risks and weaknesses in internal controls identified by the auditor; (2) any restrictions on the scope of the auditor’s activities or access to requested information; (3) any significant disagreements between the auditor and management; and (4) the adequacy of the organi-zation’s accounting and financial reporting processes;
c. Annually consider the performance and independence of the independent auditor; and
d. If an audit committee performs these duties, report on the committee’s activities to the board.
iii. The board (or audit committee) is also responsible for overseeing the adoption, implementation and compliance with the organi-zation’s conflict of interest and whistleblower policies, if the function is not otherwise performed by another committee of the board comprised solely of independent directors.
iv. Only independent directors (as defined in the Act) are permitted to serve on the audit committee; if the board itself performs the oversight function, only independent directors can participate in the voting or related deliberations with respect to the matters set forth in N-PCL section 712-a. However, individuals with an interest in any of these matters are permitted to present information as background or answer questions at a board or committee meeting prior to deliberations or voting.
v. The Act’s definition of independent directors is very strict. Under the Act, an individual is not independent if he or she: a. Is an employee of the corporation or an affiliate of the cor-
poration, or was an employee of the corporation or an affiliate of the corporation during the past three years;
b. Has a relative who is a key employee of the corporation or an affiliate of the corporation, or was a key employee of the
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corporation or an affiliate of the corporation during the past three years;
c. Has received, or has a relative who has received, more than $10,000 in direct compensation from the corporation or an affiliate of the corporation in any of the past three fiscal years (other than reimbursement for reasonable director expenses or payment of reasonable director fees);
d. Is a current employee of or has a substantial financial interest in, or has a relative who is a current officer of or has as substantial financial interest in, any entity that has made pay-ments to, or received payments from, the corporation or an affiliate of the corporation for property or services in an amount, which in any of the last three fiscal years, exceeds the lesser of $25,000 or two percent of such entity’s consolidated gross revenues; or
e. Is (or has a relative who is) a current owner, director, officer or employee of the corporation’s outside auditor or who has worked on the corporation’s audit during the past three years.
vi. The N-PCL defines “key employee,” “relative,” and “affiliate” as follows: a. “Affiliate” of a corporation means any entity controlled by,
or in control of, such corporation. b. “Relative” means an individual’s spouse, domestic partner,
parent or ancestor, child, grandchild, great-grandchild or sibling (whether whole or half-blood), and the spouse or a domestic partner of a child, grandchild, great-grandchild or sibling.
c. “Key Employee” means any person who is, or at any time during the past five-year period was, in a position to exercise substantial influence over the affairs of a corporation, as referenced in applicable provisions of 26 U.S.C. § 4958(f) (1)(A) and related regulations.
vii. Section 8-1.9 of the EPTL imposes similar requirements on wholly charitable trusts.
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b. New Requirements Concerning Related Party Transactions
The Nonprofit Revitalization Act created a new statutory framework for reviewing and approving related party transactions. i. A “related party transaction” is defined as “any transaction,
agreement or any other arrangement in which a related party has a financial interest and in which the corporation [or trust] or any affiliate of the corporation [or trust] is a participant.”
ii. A related party includes any officer, director (or trustee) or key employee of the organization or an affiliate of the organization, or any other person who exercises the powers of directors, officers or key employees over the affairs of the organization or an affiliate of the organization, any relative of such any such individual, or any entity in which the individual owns a 35% or greater interest.
iii. A related party cannot participate in the deliberations of voting relating to a related party transaction in which he or she has an interest. However, the related party is allowed to present infor-mation as background or answer questions concerning a related party transaction at a board or committee meeting prior to the deliberations or voting.
iv. Certain provisions apply to all not-for-profit corporations and wholly charitable trusts—such as requiring that the board (or trustees) affirmatively determine that the transaction is fair, reasonable and in the best interest of the organization—while additional review procedures apply only to charitable organizations. 1. With respect to related party transactions involving a chari-
table organization and in which a related party has a substantial financial interest, the board (or trustees), or an authorized committee, is required to: a. Prior to entering into the transaction, consider alternative
transactions to the extent available; b. Approve the transaction by not less than a majority vote
of the directors (or trustees) or committee members present at the meeting; and
c. Contemporaneously document in writing the basis for the board (or trustees) or authorized committee’s approval, including its consideration of any alternative transactions.
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c. Mandatory Conflict of Interest Policy
The Act mandated that all not-for-profit corporations and wholly charitable trusts have a written conflict of interest policy, and set forth the minimum provisions that the policy must contain. i. The conflict of interest policy must include, at a minimum, the
following provisions: a. A definition of the circumstances that constitute a conflict of
interest; b. Procedures for disclosing a conflict of interest to the audit
committee or, if there is no audit committee, to the board (or trustees);
c. A requirement that the person with the conflict of interest not be present at or participate in deliberation or voting on the matter giving rise to such conflict; however, the person with the conflict is allowed to present information as back-ground or answer questions at a committee or board meeting prior to deliberation or voting on the matter;
d. A prohibition against any attempt by the person with the conflict to influence improperly the deliberation or voting on the matter giving rise to such conflict;
e. A requirement that the existence and resolution of the conflict be documented in the organization’s records, including in the minutes of any meeting at which the conflict was discussed or voted upon; and
f. Procedures for disclosing, addressing, and documenting related party transactions.
ii. Directors (or trustees) also are required to annually sign a con-flicts of interest disclosure statement. New directors (or trustees) must sign a disclosure statement before joining the board.
d. Mandatory Whistleblower Policy
Not-for-profit corporations and wholly charitable trusts with 20 or more employees and annual revenue in excess of $1 million are required to adopt a whistleblower policy and implement procedures for directors (or trustees), officers, employees, and volunteers to report potential illegality and protect them from retaliation. i. The whistleblower policy must include the following provisions:
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a. Procedures for the reporting of violations or suspected violations of laws or corporate policies, including procedures for preserving the confidentiality of reported information;
b. A requirement that an employee, officer or director (or trustee) of the organization be designated to administer the whistle-blower policy and to report to the audit committee or other committee of independent directors (or trustees) or, if there are no such committees, to the board (or trustees); and
c. A requirement that a copy of the policy be distributed to all directors (or trustees), officers and employees and to volunteers who provide substantial services to the organization. To satisfy this requirement, the organization may post the policy on its website or at the organization’s offices in a conspicuous location accessible to employees and volunteers.
e. Independent Board Leadership
The Act prohibits, effective January 1, 2017, any employee of a not-for-profit corporation from also serving as its board chair. The effective date was extended to allow more time for impacted organi-zations to identify and appoint a new chair.
f. Enhanced Attorney General Enforcement Powers
The Act provides the New York State Attorney General with enhanced enforcement powers to remedy financial abuses that result from improper related party transactions. i. The Attorney General is authorized to bring actions to enjoin,
void, or rescind a transaction that violates law or was not other-wise reasonable or in the best interest of the organization.
ii. Additionally, the Attorney General’s authority to seek financial restitution, the recovery or replacement of transferred assets and the removal of directors or officers is enhanced.
iii. In cases of willful and intentional misconduct, the Attorney General also is authorized to seek double damages.
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2. REDUCING BURDENS ON NONPROFITS
The N-PCL had not been meaningfully updated since it was passed in 1970. Over time, many key provisions became outdated, resulting in increased costs, delays and frustration for not-for-profit corporations operating and forming in New York. A key objective of the Act was to streamline and modernize the N-PCL to enable existing organizations to operate more effectively and efficiently while making it less burdensome and costly for new ones to form in the state.
a. New Procedures for Mergers, Asset Sales, Dissolutions, and Certificate of Incorporation Changes
i. To expedite government approval time and reduce transaction costs, not-for-profit corporations seeking to merge or sell sig-nificant assets now have the option of obtaining approval from the attorney general in lieu of court approval. Amendments enacted in 2015 afford the same option to religious corporations.
ii. The Act similarly streamlined the process for dissolving a corpo-ration or amending its certificate of incorporation.
b. Increased Financial Thresholds for Independent Financial Audits
The Act provided relief to charitable organizations required to obtain an annual financial audit. Generally, under prior law, charities that raised funds from the public and had annual revenue of over $250,000 were required to obtain a financial audit by an independent certified public accountant. Organizations with over $100,000 in annual revenue had to obtain a review by an independent certified public accountant. i. Effective July 1, 2014, the revenue threshold for an audit was
raised from $250,000 to $500,000, and it will be further raised to $750,000 effective July 1, 2017 and to $1 million in 2021.
ii. The revenue threshold for an independent financial review by a certified public accountant was also raised to $250,000 (up from $100,000).
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c. Streamlined Incorporation Procedures
The Act made numerous changes to streamline New York’s cum-bersome incorporation process in an effort to reduce delays, costs and burdens. i. The Act amended section 201 of the N-PCL to eliminate corporate
“types,” creating only two categories of corporations (“charitable corporations” and “non-charitable corporations”).
ii. The Act also amended section 404(d) of the N-PCL to limit the organizations that must obtain the consent of the State Education Department (or the Board of Regents) prior to incorporation. Under prior law, consent was required if the certificate of incor-poration included purposes “for which a corporation might be chartered” by the Regents. Under new Section 404(d), pre-approval is limited to corporations that include among its purposes the operation of a library, historical society, museum, school, college, or university or other entity providing post-secondary education.
iii. To clarify statutory ambiguities and expedite processing certificates of incorporation, the Act amended section 402(a) of the N-PCL to make clear that new organizations need only state their corporate purposes in the certificate; they are not required to specify the particular activities they plan to undertake. (Note: technical amend-ments adopted in 2014 permit even more flexibility.)
iv. The Act also permits the Department of State to correct typo-graphical errors in certificates of incorporation or applications for authority when authorized in writing by the filer. Historically, organizations were required to resubmit entire filings, resulting in additional costs and delays.
d. Permitting Electronic Notices and Voting and Use of Videoconferencing
Bringing the law into the 21st century, organizations are now permitted to use email to send board and membership meeting notices and conduct voting by unanimous written consent. They also are able to hold meetings by videoconference, Skype, and other forms of video communication.
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e. Real Property Transactions
Providing greater flexibility to boards and clearing time on board meeting agendas, the new law permits boards to delegate to a com-mittee the responsibility for reviewing and approving most real property transactions (prior law required that the entire board approve such transactions by either a two-thirds or majority vote).
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Private Foundations: Basic Principles and New Developments
Pamela A. Mann
Carter Ledyard & Milburn LLP
If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.
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PAMELA A. MANN
Pamela A. Mann is the Chair of the Tax-Exempt Organizations Group at Carter, Ledyard & Milburn LLP. At CL&M, Ms. Mann is counsel to numerous public charities and private foundations and advises clients in a wide range of governance, regulatory, tax, and general corporate matters. From 1985 to 1995, Ms. Mann was Chief of the Charities Bureau in the New York Attorney General’s office, directing scores of important cases and initiatives and influencing the adoption of significant legislative changes affecting tax-exempt organizations. Her diverse background includes clinical teaching at Rutgers University School of Law’s Con-stitutional Litigation Clinic and the litigation of employment discrimi-nation and other employment related matters at the National Employment Law Project. Prior to CL&M, Ms. Mann was the principal in the Law Offices of Pamela A. Mann, LLC, a practice concentrated in the repre-sentation of tax-exempt organization.
Ms. Mann has been recognized in New York Magazine’s Best Lawyers in New York and in Super-Lawyers Magazine in the category of lawyers specializing in Nonprofit/Charities Law. Ms. Mann was Chair of the Committee on Nonprofit Organizations of the Association of the Bar of the City of New York from 1998-2001 and has served as President and Vice-President of the National Association of State Charities Officials. She is a member of the American Law Institute, the Government Relations Committee of the Nonprofit Coordinating Committee of New York and of the Exempt Organizations Committee of the American Bar Association. She has written many articles for professional and lay publications and is a frequent lecturer on non-profit issues. She is a graduate of Oberlin College and the University of Pittsburgh School of Law. Additional information about CL&M is available at www.clm.com.
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I. PRIVATE FOUNDATIONS GENERALLY1
Private foundations are Section 501(c)(3) organizations that are classified as “private foundations” pursuant to Internal Revenue Code (“Code”) § 509(a). Private foundations typically are organizations that anticipate funding from one source or from related individuals and/or entities, intend to make grants rather than engage in programs, and anticipate revenue from their investments rather than from donations or program activities.
The Code imposes certain excise taxes, distribution requirements, and restrictions on the activities of private foundations. In brief summary, these are as follows: A. Annual Excise Tax under Code §4940: Foundations are subject to
an annual excise tax equal to 2% of the Foundation’s “net invest-ment income”. If certain distribution requirements are met each year, the tax is reduced to 1% of net investment income. In general, interest, dividends and rents, as well as capital gains on the sale of secu-rities, are included in the Foundation’s net investment income.
B. Restriction on Self-dealing under Code §4941: discussed in Section II below.
C. Minimum Distribution Rules under Code §4942: A foundation must make so-called qualified distributions each year in an aggre-gate amount equal to at least 5% of the fair market value of the foundation’s assets. 1. To determine the required amount, the Foundation’s assets must
be valued annually. (Marketable securities and cash accounts must be valued monthly and averaged.) The amount of distri-butions required for any given taxable year of the Foundation must be made by the end of the next succeeding taxable year.
2. If distributions are not made in the required minimum amount, there is a penalty tax of 15% of the amount of the “shortfall”, and if the required distributions are not made within a pre-scribed correction period, the penalty tax is greatly increased.
3. The distributions must be made to qualified recipients in order to count towards the 5% requirement. Generally, qualified recipients are
1. The author gratefully acknowledges the assistance of Justin L. Peters in the
drafting of these materials.
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a. Tax-exempt organizations that are also “public charities.” If a private foundation makes a grant to another private foundation, it will generally be required to do “expenditure responsibility.”
b. Individuals, but only if the Foundation has received prior IRS approval of the selection process. (There are narrow exceptions to this rule, but they are so specific that it is prudent to seek IRS approval before a private foundation begins any individual grant-making.)
c. Administrative expenses of the Foundation may also be counted in the Foundation’s minimum distribution amount.
d. Foundations may also make grants to foreign organi-zations: those rules are discussed in Section III infra.
D. Excess Business Holdings Rules under Code §4943: If a private foundation holds more than 2% of both (i) the voting stock and (ii) all outstanding shares of a company, then Code §4943 limits the amount of stock which the foundation and its disqualified persons may hold in the company to a total of 20% (or in some cases 35%) of the voting stock.
E. Investment Rules under Code §4944. The topics of jeopardizing investments, program related investments, and impact investing, are discussed in Section IV infra.
F. Taxable Expenditure Rules under Code §4945: Code §4945 imposes a penalty tax on impermissible payments (so-called “taxable expendi-tures”) from private foundations. Penalty taxes are incurred when a foundation makes payments: 1. to carry on lobbying activities 2. to influence the outcome of election or to carry on a voter
registration drive; 3. as grants to any individual, except with prior Internal Revenue
Service approval;
II. SELF-DEALING
The Internal Revenue Service (“IRS”) imposes stringent rules on private foundations and transactions between the private foundation and “dis-qualified persons.” These types of transactions are generally prohibited,
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subject to some exceptions, and engaging in these transactions may result in the imposition of excise taxes. IRC § 4941. A. Definition of Disqualified Person. Disqualified persons are defined
as: a) substantial contributors to the foundation; b) a foundation manager; c) an owner of more than 20% of the voting power of a corporation, profits interest of a partnership, or the beneficial interest of a trust or unincorporated enterprise, which is a substantial con-tributor to the foundation; d) a member of the family of any indi-vidual described in a), b), or c); e) a corporation, partnership, trust or estate in which an individual described in a), b), c), or d) owns or holds more than a 35% interest. IRC § 4946(a).
B. Definition of Self-Dealing Transaction. Self-dealing is defined as any direct or indirect: 1. Sale, exchange or leasing of property between a private foun-
dation and a disqualified person. IRC § 4941(d)(1)(A). 2. Lending of money or other extension of credit between a pri-
vate foundation and a disqualified person. IRC § 4941(d)(1)(B). 3. Furnishing of goods, services or facilities between a private
foundation and a disqualified person. IRC § 4941(d)(1)(C). 4. Payment of compensation, including reimbursement of
expenses, by a private foundation to a disqualified person. IRC § 4941(d)(1)(D).
5. Transfer of a private foundation’s income or assets to or for the benefit of a disqualified person, including the use of such assets by the disqualified person. IRC § 4941(d)(1)(E).
6. Agreement by a private foundation to make payments of money or other assets to a government official. IRC § 4941(d)(1)(A).
C. Exceptions to Self-Dealing. The self-dealing rules provide some exceptions to allow for specific transactions to be excluded from the rules and the resulting penalties. 1. The leasing of property by a disqualified person to a private
foundation without charge does not constitute self-dealing, even when the private foundation pays for the basic mainte-nance costs it incurs in relation to its use of the property (as long as the payment is not made directly or indirectly to the disqualified person). Treas. Reg. § 53.4941(d)-2(b)(2).
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2. The lending of money, or extension of credit, to a private foundation by a disqualified person is not an act of self-dealing as long as no interest or other charge is involved. Treas. Reg. § 53.4941(d)-2(c)(2).
3. It is not an act of self-dealing for a disqualified person to furnish goods, services or facilities to a private foundation without charge. For purposes of this exception, the private foundation can pay for transportation, insurance and maintenance costs associated with its use of the property or services, as long as the payment is not made directly or indirectly to the dis-qualified person. Treas. Reg. § 53.4941(d)-2(d)(3).
4. It is not an act of self-dealing for a private foundation to furnish goods, services or facilities to a disqualified person so long as they are made available to the general public on as least as favorable terms. Treas. Reg. § 53.4941(d)-3(b)(1).
5. It is not an act of self-dealing for a private foundation to pay compensation to a disqualified person for personal services ren-dered that are reasonable and necessary to carry out the exempt purposes of the foundation, as long as the compensation is not excessive. This exception does not apply to government officials. Treas. Reg. §§ 53.4941(d)-2(e), 53.4941(d)-3(c)(1).
6. A disqualified person can receive incidental benefits from a private foundation’s use of its income or assets without running afoul of the self-dealing rules. For example, if a private foun-dation gives public recognition to a disqualified person who has been a substantial contributor to the foundation, this benefit is viewed as incidental and, thus, is not an act of self-dealing. Treas. Reg. § 53.4941(d)-2(f)(2).
7. The “First-Bite” Exception. Self-dealing does not include a transaction between a private foundation and a disqualified person where the disqualified person status arises as a result of the transaction. For example, if a person sells property to a foundation at a bargain price and, as a result of this trans-action becomes a substantial contributor (and, thus, a disquali-fied person) as a result of the transaction, this “first-bite” transaction will not be considered an act of self-dealing. Treas. Reg. § 53.4941(d)-1(a). However, the person who became a substantial contributor by virtue of this transaction will be treated as a disqualified person going forward.
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8. Transactions During Estate Administration. Fair market value sales and exchanges that occur as part of the administration of an estate of which the private foundation is a beneficiary are not acts of self-dealing but are subject to court approval. Treas. Reg. § 53.4941(d)-1(b)(3).
D. Excise Taxes. The IRS may impose a tax on the self-dealer and foundation managers that engage in self-dealing. 1. Tax on the Self-Dealer. The IRS may impose a tax of 10% of
the amount involved in the self-dealing on any disqualified person (other than a foundation manager acting only in that capacity) who engaged in self-dealing. The disqualified person will be subject to the tax even if they had no knowledge their act constituted self-dealing, unless the disqualified person is a government official. IRC § 4941(a)(1). A disqualified person may still be taxed even in instances where he or she directed another person to engage in the transaction. Treas. Reg. § 53.4941(a)-1(a)(3). If the act of self-dealing is not corrected in a timely manner, the disqualified person may be subject to an additional tax of 200% of the amount involved. IRC § 4941(b)(1).
2. Tax on Foundation Managers. The IRS may impose on foun-dation managers a tax equal to 5% of the amount involved in self-dealing. Participation in an act of self-dealing is defined as a foundation manager willfully participating in a transaction he or she knows to be self-dealing and participation is not due to reasonable cause. IRC § 4941(a)(2). If the foundation manager refuses to agree to all or part of the correction, an additional tax equal to 50% of the amount involved will be imposed. IRC § 4941(b)(2). These taxes on foundation managers are capped at $20,000 per transaction, regardless of how many foundation managers participated. IRC § 4941(c)(2).
E. Recent IRS Private Letter Rulings have provided additional guid-ance on situations the IRS may or may not consider to be self-dealing and subject to excise taxes. 1. The IRS ruled a private foundation’s acquisition by gift of a
nonvoting interest in an LLC from the founder of the foun-dation/owner of the LLC where the LLC’s only asset is a promissory note from the founder/owner’s daughter is not an act of indirect self-dealing. PLR 201407023.
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2. The IRS ruled there was no self-dealing where a for-profit company used a foundation it created to match employee dona-tions to public charities. The IRS ruled there was no self-dealing because the foundation would not match any donations made during the company’s matching program and any benefit the company receives from the matching donations is inci-dental. PLR 201417022.
3. The IRS ruled that the reformation of a revocable trust to increase the percentage of the trust’s assets to the Settlor’s children and decrease the percentage received by a private foun-dation was not self-dealing because all parties and the State court consented to the change, the change occurred before the trust became irrevocable and the change would have been completed prior to the Settlor’s death but for a clerical error. PLR 201432025.
4. The IRS ruled that the donation of LLC membership interests to a private foundation through a decedent’s estate did not con-stitute self-dealing because there was no consideration paid or liability assumed by the private foundation. The IRS also ruled that the co-location of property owned by the LLC near property owned by disqualified persons only provided inci-dental or tenuous benefits to the disqualified persons and there-fore was not self-dealing. Additionally, the IRS ruled that use of a road and parking spaces controlled by the LLC and used by visitors to the disqualified persons’ building was not self-dealing because the easement granting use predated the dis-qualified persons being classified as such, and agreements with the disqualified persons to maintain the road and parking spaces were with third party vendors. PLR 201435017.
5. The IRS ruled that the sale of a private foundation’s present and future interests in real property to a disqualified person did not constitute self-dealing because all requirements of the estate administration exception were met. PLR 201441020.
6. The IRS ruled that the potential sale of real property of a partnership, in which a private foundation owned an interest, to a disqualified person through a court-ordered auction is not self-dealing where the sale is through an auction by a third party and the private foundation did not control the partnership for purposes of self-dealing. PLR 201510050.
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7. The IRS ruled that grants from a private foundation and chari-table lead annuity trusts pursuant to agreements entered into by disqualified persons did not constitute self-dealing because the donation obligations were between the grantee and the grantor entities and not the disqualified persons personally. PLR 201421023. PLR 201421024.
III. FOREIGN GRANT-MAKING
A. The rules private foundations must follow when making grants to non-U.S. organizations are set out in IRS Revenue Procedure 92-94. Under the Revenue Procedure, a private foundation’s grant to a foreign organization will be treated as a grant to an exempt organi-zation if the private foundation makes a “good faith determination” that the recipient organization is described in IRC § 509(a)-(1), (2), or (3), or § 4942(j)(3). Private foundations making grants to foreign organizations needed to complete a two-step process prior to issuing the grant. 1. The private foundation’s foundation manager must make a
“reasonable judgment” that the foreign organization is the equivalent of an exempt organization.
2. The private foundation must make a “good faith determination” based on an affidavit from the grantee organization or an opinion of counsel that the foreign organization is the equivalent of an exempt organization. Any grantee affidavits used under this Revenue Procedure must be “currently qualified.” A grantee affidavit will be considered “currently qualified” if: a. The affidavit reflects information from the foreign organi-
zation’s most recent accounting year; b. The substantive requirements on which the affidavit is
based reflect current legal standards. B. Recent Developments in Grants to Foreign Organizations. On
September 25, 2015, the IRS issued final regulations revising the standards and procedures for grant-making to foreign organizations. 1. Expanded Class of Advisors. The new regulations allow private
foundations to rely on written advice from qualified tax practitioners. Qualified tax practitioners include CPAs, enrolled agents, the private foundation’s in-house counsel, and outside counsel. The tax practitioners must be authorized to practice
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in a state, territory, or possession of the U.S. or as an enrolled agent. Reliance on a practitioner’s written advice will not be considered reasonable if the private foundation knows or should have known the practitioner lacks knowledge regarding relevant U.S. tax laws. A private foundation may also not rely on the written advice from a practitioner if the private foundation knows or has reason to know relevant facts were not disclosed to the practitioner or the written advice is based on repre-sentations or assumptions that likely are not true.
2. Reliance on Opinion of Foreign Counsel. A private foun-dation may rely on written advice from a qualified tax prac-titioner that reasonably relies on assistance from foreign counsel on foreign law issues or other areas within the foreign counsel’s knowledge.
3. Reliance on Grantee Affidavits. The new regulations eliminate the previous ability for private foundations to solely rely on a foreign organization’s affidavit to make a “good faith deter-mination.” Affidavits may still be used as one source of infor-mation in making a “good faith determination,” but may not be the only basis. The regulations provide for a 90-day transition period where grants may continue to be distributed under the previous rules allowing for grantee affidavits.
4. Period for Reliance on Written Advice: The new regulations require that the qualified tax practitioners’ written advice be “current.” Similar to the previous “currently qualified” require-ments for affidavits, the written advice is considered current if relevant laws in the written advice are unchanged and the information regarding the foreign organization relied upon is from the organization’s most recent or current year.
5. Reliance on Written Advice Shared by Another Foundation. A private foundation may reasonably use written advice regarding the same foreign organization received from another private foundation in making a good faith determination, but the written advice relied upon by the private foundation must come from a qualified tax practitioner.
6. Repositories of Equivalency Determinations. Private foundations making grants to foreign organizations can use repositories containing equivalency opinions and other materials, to gain access to equivalency determinations in a cost-effective manner.
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NGO Source, a project of the Council on Foundations is one such repository.
IV. INVESTMENT RULES FOR PRIVATE FOUNDATIONS
A. Jeopardizing Investments. Under Code § 4944, a tax may be imposed on any investments that might jeopardize a foundation’s charitable purpose. These are investments which might put the value of the Foun-dation’s assets at risk, and are generally considered to be specu-lative or unsound investments. Most prudent investments will not raise Code § 4944 issues. An investment may be considered a jeop-ardizing investment where, in making the investment, the foundation manager does not exercise ordinary business care and prudence and account for the private foundation’s financial ability to further its charitable purpose. Treas. Reg. § 53.4944-1(a)(2). The IRS may impose a tax on a private foundation that engages in so-called “jeopardizing investments.”
B. Program-Related Investments. A program-related investment is an investment (i) the primary purpose of which is to accomplish one or more of the purposes described in section 170(c)(2)(B), (ii) no sig-nificant purpose of which is the production of income or the appre-ciation of property, and (iii) no purpose of which is to accomplish one or more of the purposes described in section 170(c)(2)(D). Treas. Reg. § 53.4944-3(a)(1). A private foundation’s program-related invest-ments are not considered jeopardizing investments. IRC § 4944(a)(1); IRC § 4944(a)(1). 1. The eligible purposes are “religious, charitable, scientific,
literary, or educational purposes, …foster[ing] national or inter-national amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equip-ment), or … the prevention of cruelty to animals.” IRC § 170 (c)(2)(B).
2. The excluded purposes are attempting to influence legislation or to participate in, or intervene in any political campaign on behalf of, or in opposition to, any candidate for public office. IRC § 170(c)(2)(D).
3. An investment will be considered to be made to accomplish one of the eligible purposes if it “significantly furthers the accomplishment of the private foundation’s exempt activities and if the investment would not have been made but for such
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relationship between the investment and the accomplishment of the foundation’s exempt activities.” Treas. Reg. § 53.4994-3(a)(2)(i).
4. To determine if a significant purpose of an investment is the production of income or the appreciation of property, a private foundation should consider whether investors only seeking profit from the investment would make the investment on the same terms as the private foundation. Significant income or capital appreciation from an investment alone does not prove the primary purpose of the investment was the production of income or the appreciation of property. Treas. Reg. § 53.4994-3(a) (2)(iii).
5. A potential program-related investment will not be considered to be made to accomplish one of the excluded purposes if the investment recipient communicates with a legislative body regarding legislation in which the recipient has a direct interest. Treas. Reg. § 53.4944-3(a)(2)(iv).
6. A private foundation’s program-related investments receive special treatment under the Internal Revenue Code. a. In determining a private foundation’s “distributable
amount” for a taxable year, program-related investments need not be included. Treas. Reg. § 53.4942(a)-2(c) (3)(ii)(d).
b. A private foundation’s program-related investments are generally considered “qualifying distributions.” Treas. Reg. § 53.4942(a)-3(a)(2)(i).
c. Program-related investments are not considered business holdings for the purpose of calculating excess business holdings subject to excise taxes. Treas. Reg. § 53.4943-10(b).
d. Program-related investments are not considered taxable expenditures if a private foundation exercises expenditure responsibility when necessary. Treas. Reg. § 53.4945-5(b)(4); Treas. Reg. § 53.4945-(6)(c)(1)(i).
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V. IMPACT INVESTING
A. “Impact investing” is the increasingly common practice of investing to provide a financial return, but also to achieve a positive social and environmental impact. Foundation managers engaged in this “impact investing” have run the risk that these investments, which may not provide the same financial return as purely result-driven investments, might be characterized by the IRS as a jeopardizing investment and subject to taxes.
B. New Guidance. In September 2015, the IRS issued guidance that explicitly states that foundation managers may make investments that further the private foundation’s charitable purpose, even if the investment provides a lower return, as long as the managers exercise ordinary business care and prudence in making the investment. I.R.S. Notice 2015-62. 1. Significantly, the Notice recognizes that, so long as a foun-
dation manager is prudent and considers the investment portfolio as a whole, an investment that furthers the foundation’s chari-table purposes at the expense of higher returns will not be considered a jeopardizing investment.
2. The Notice also cites with approval the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), sug-gesting that the Service would use the prudence standards articulated in those state laws to determine whether an invest-ment was a jeopardizing investment.
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Understanding Nonprofit Financial Statements and Audits
Dennis J. Morrone, CPA
Grant Thornton LLP
If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.
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1) UNIQUE ACCOUNTING CONCEPTS FOR NONPROFITS
a. Financial Statements of Not-for-Profit Organization
i. Statement of financial position – Required Components
The statement of financial position of the entity presents its assets, liabilities and net assets. A statement of financial position is the financial statement of an NFP that corre-sponds to the balance sheet of a business entity.1 The required elements include:
Total assets
Total liabilities
Total net assets
Permanently restricted net assets
Temporarily restricted net assets
Unrestricted net assets.2 ii. Statement of Activities (and changes in net assets) – Required
Components
The statement of activities for NFPs is the financial state-ment that an NFP issues instead of a business entity’s income statement.3 A statement of activities shall report the following amounts for the period: ○ The change in net assets ○ The change in permanently restricted net assets ○ The change in temporarily restricted net assets ○ The change in unrestricted net assets.4
iii. Statement of Cash Flows - Required Components
The primary purpose of a statement of cash flows is to pro-vide relevant information about the cash receipts and cash
1. FASB ASC 958-210-05-1. 2. FASB ASC 958-210-45-1. 3. FASB ASC 958-225-05-1. 4. FASB ASC 958-225-45-1.
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payments of an entity during a period.5 A statement of cash flows shall classify cash receipts and cash payments as resulting from investing, financing, or operating activities.6
iv. Statement of Functional Expenses * - Required Components
A statement of functional expenses is useful in associating expenses with service efforts and accomplishments of NFPs. A statement of functional expenses includes information about expenses by their functional classes, such as major classes of program services and supporting activities, as well as information by their natural classification (natural expense classification), such as salaries, rent, electricity, interest expense, depreciation, awards and grants to others, and professional fees.7
v. Supplementary information
Information about an NFP’s major programs (or segments) can be enhanced by reporting the interrelationships of program expenses and program revenues. Related nonmonetary infor-mation about program inputs, outputs, and results also is helpful. Such information is feasible in supplementary infor-mation or management explanations or by other methods of financial reporting.8
*(The statement of functional expenses is only required for voluntary health and welfare organizations.9)
b. Contributions
i. Recognition Principles
A contribution is an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its lia-bilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.10
5. FASB ASC 958-230-05-2. 6. FASB ASC 230-10-45-10. 7. FASB ASC 958-205-45-6. 8. FASB ASC 958-720-45-4. 9. FASB ASC 958-720-45-15. 10. FASB ASC Master Glossary.
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Accounting for contributions depends on whether the transfer of assets, including promises to give, is received by the NFP with donor-imposed conditions, donor-imposed restrictions, or both. Donor-imposed conditions create a barrier that must be overcome before a contribution can be recognized. Donor-imposed restrictions do not affect the timing of recognition; instead, they affect the classification of the contribution revenue.11
ii. Promises and pledges to give
A promise to give is a written or oral agreement to contribute cash or other assets to another entity. A promise carries rights and obligations—the recipient of a promise to give has a right to expect that the promised assets will be transferred in the future, and the maker has a social and moral obligation, and generally a legal obligation, to make the promised transfer. A promise to give may be either conditional or unconditional.10
iii. Conditions vs. restrictions, defined
A donor-imposed condition is a donor stipulation that speci-fies a future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets it has transferred or releases the promisor from its obligation to transfer its assets.10 Conditional promises to give shall be recognized when the conditions on which they depend are substantially met, that is, when the conditional promise becomes unconditional. Imposing a condition creates a barrier that must be overcome before the recipient of the transferred assets has an unconditional right to retain those promised assets. For example, a transfer of cash with a promise to contribute that cash if a like amount of new gifts are raised from others within 30 days and a provision that the cash be returned if the gifts are not raised imposes a condition on which a promised gift depends.12
However, if the possibility that the condition will not be met is remote, a conditional promise to give is considered
11. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) – paragraph 5.59.
12. FASB ASC 958-605-25-11.
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unconditional. For example, a stipulation that an annual report must be provided by the donee to receive subsequent annual payments on a multiyear promise is not a condition if the possibility of not meeting that administrative requirement is remote.13
A donor-imposed restriction is a donor stipulation that speci-fies a use for a contributed asset that is more specific than broad limits resulting from the following: ○ The nature of the not-for-profit entity (NFP) ○ The environment in which it operates ○ The purposes specified in its articles of incorporation or
bylaws or comparable documents for an unincorporated association.
A donor-imposed restriction on an NFP’s use of the asset contributed may be temporary or permanent. Some donor-imposed restrictions impose limits that are permanent, for example, stipulating that resources be invested in perpetuity (not used up). Others are temporary, for example, stipulating that resources may be used only after a specified date, for particular programs or services, or to acquire buildings and equipment.14 Donor-imposed restrictions do not affect the timing of recognition; instead, they affect the classification of the contribution revenue.15 Contributions with donor-imposed restrictions shall be reported as restricted support; however, donor-restricted contributions whose restrictions are met in the same reporting period may be reported as unre-stricted support provided that an NFP has a similar policy for reporting investment gains and income, reports consistently from period to period, and discloses its accounting policy.16
iv. Gifts in kind – services (specialized skills) and goods
Contributions of services shall be recognized if the services received meet any of the following criteria:
13. FASB ASC 958-605-55-16. 14. FASB ASC Master Glossary. 15. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) –
paragraph 5.59. 16. FASB ASC 958-605-45-4.
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a. They create or enhance nonfinancial assets. b. They require specialized skills, are provided by individu-
als possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen.17
Gifts in kind refer to all noncash gifts.18 v. Stock gifts
An equity security or debt security received as a contribution shall be initially and subsequently measured at fair value.19
vi. Donated Public Service Announcements
In some cases, entities other than an NFP use for an NFP’s benefit (or provide at no charge to an NFP) certain nonfi-nancial assets that encourage the public to contribute to the NFP or help the NFP communicate its message or mission. Examples of these include fund-raising material, informational material, or advertising, including media time or space for public service announcements or other purposes.20 The use of property, utilities, or advertising time are considered to be forms of contributed assets, rather than contributed services. Therefore, the criteria for recognition of contributed services in FASB ASC 958-605-25-16 are not applicable for donated public service announcements. An NFP would recognize the fair value of advertising time as both revenue and expense in the period received and used. Fair value could be estimated by using billing rates normally charged to other customers under similar circumstances.21
17. FASB ASC 958-605-25-16. 18. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) –
paragraph 5.123. 19. FASB ASC 958-320-30-1 and 958-320-35-1. 20. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) –
paragraph 5.152. 21. FASB ASC 958-605-55-23.
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vii. Charitable gift annuities – CRUTs, CRATs, Unitrusts
A split-interest agreement is an agreement in which a donor enters into a trust or other arrangement under which a not-for-profit entity (NFP) receives benefits that are shared with other beneficiaries.22 Under irrevocable split-interest agree-ments the assets contributed by the donor may either be: ○ Held by an NFP ○ Held by a third party.23
A charitable remainder trust is an arrangement in which a donor establishes and funds a trust with specified distribu-tions to be made to a designated beneficiary or beneficiaries over the trust’s term. Upon termination of the trust, an NFP receives the assets remaining in the trust. The NFP may ultimately have unrestricted use of those assets, or the donor may place permanent or temporary restrictions on their use.24
A charitable remainder unitrust (CRUT) is a charitable remainder trust in which distributions to the beneficiaries are for a specified percentage of the trust’s fair value as deter-mined annually.24
A charitable remainder annuity trust (CRAT) is a charitable remainder trust in which distributions to the beneficiaries are for a specified dollar amount.24
A charitable gift annuity is an arrangement between a donor and an NFP in which the donor contributes assets to the NFP in exchange for a promise by the NFP to pay a fixed amount for a specified period of time to the donor or to individuals or entities designated by the donor. The agreements are similar to charitable remainder annuity trusts except that no trust exists, the assets received are held as general assets of the NFP, and the annuity liability is a general obligation of the NFP.25 Such NFP should recognize the agreement in the period
22. FASB ASC Master Glossary. 23. FASB ASC 958-30-25-3. 24. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) –
paragraph 6.67. 25. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) –
paragraph 6.74.
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in which the contract is executed. The assets received should be recognized at fair value when received, and an annuity payment liability should be recognized at fair value.26
In the absence of donor-imposed conditions, an NFP shall recognize contribution revenue and related assets and liabilities when an irrevocable split-interest agreement naming it trustee or fiscal agent is executed. Assets received (including invest-ments) under those agreements shall be recorded when received. The contribution portion of the agreement (that is, the part that represents the unconditional transfer of assets in a voluntary nonreciprocal transaction) shall be recognized as revenue or gain.27 A liability for the future payments to be made to those other beneficiaries shall also be recognized at the date of initial recognition.28
viii. Beneficial interests in trusts (term endowments and perpetual trusts)
A beneficial interest in trust is recognized by an NFP when the entity is named as a party to a split-interest agreement in which the assets contributed by a donor are held or con-trolled by a third party (i.e. a party other than the NFP).29
If an NFP is the beneficiary of a split-interest agreement held by a third party and has an unconditional right to receive all or a portion of the specified cash flows from the assets held pursuant to that agreement, the NFP shall recog-nize that beneficial interest as an asset and contribution revenue.30
A term endowment is an endowment fund established to provide income for a specified period.33 After the specified period passes, the resources originally contributed for the term endowment become available for unrestricted or
26. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) – paragraph 6.76.
27. FASB ASC 958-30-25-4. 28. FASB ASC 958-30-25-6. 29. FASB ASC 958-30-25-16. 30. FASB ASC 958-30-25-17.
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purpose-restricted use by the entity.31 Fund balances that represent term endowments for which the gift must be invested for a specific period and then used at the end of the term for a specified purpose should be classified as temporarily restricted net assets.32
A perpetual trust held by a third party is an arrangement in which a donor establishes and funds a perpetual trust admin-istered by an individual or entity other than the not-for-profit entity (NFP) that is the beneficiary. Under the terms of the trust, the NFP has the irrevocable right to receive the income earned on the trust assets in perpetuity, but never receives the assets held in trust. Distributions received by the NFP may be restricted by the donor.33
The NFP beneficiary of a perpetual trust shall measure that beneficial interest at fair value.34
ix. Financial statement presentation
Contributions ○ Contributions received by not-for-profit entities (NFPs)
shall be reported as restricted support or unrestricted support. An NFP shall distinguish between contributions received with permanent restrictions, those received with temporary restrictions, and those received without donor-imposed restrictions. Contributions without donor-imposed restrictions shall be reported as unrestricted support that increases unrestricted net assets.35
○ A transfer of assets with a conditional promise to con-tribute them shall be accounted for as a refundable advance until the conditions have been substantially met or explicitly waived by the donor.36
31. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) – paragraph 16.18.
32. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) – paragraph 16.20.
33. FASB ASC Master Glossary. 34. FASB ASC 958-605-30-14. 35. FASB ASC 958-605-45-3. 36. FASB ASC 958-605-25-13.
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Contributions receivable ○ Contributions receivable shall be reported net of the
discount that arises if measuring a promise to give at present value. The discount shall be separately disclosed by reporting it as a deduction from contributions receiva-ble either on the face of a statement of financial position or in the notes to financial statements.37
○ If an unconditional promise to give is measured using present value techniques, a not-for-profit entity (NFP) shall report the subsequent accrual of the interest element as an increase in either temporarily or permanently restricted net assets if the underlying promise to give is donor restricted.38
○ Contributions receivable shall also be reported net of the allowance for uncollectible contributions if any bad debt expense was recorded for existing outstanding con-tributions receivable.39
x. Valuation and impairments
Contributions ○ Contributions received shall be measured at their fair
values.40
Promises to give for which payments are expected in future years ○ If present value techniques are used to measure the fair
value of unconditional promises to give, the entity shall determine the amount and timing of the future cash flows of unconditional promises to give cash (or, for promises to give noncash assets, the quantity and nature of assets expected to be received).41
37. FASB ASC 958-310-45-1. 38. FASB ASC 958-310-45-2. 39. FASB ASC 210-10-45-13. 40. FASB ASC 958-605-30-2. 41. FASB ASC 958-605-30-4.
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○ The present value of unconditional promises to give should be measured using a discount rate that includes consideration of the donors’ nonperformance risk.42
○ The discount rate shall be determined at the time the unconditional promise to give is initially recognized and shall not be revised subsequently unless the entity has elected to measure the promise to give at fair value in conformity with the Fair Value Option Subsections of Subtopic 825-10.43
Contributed services and gifts in kind ○ Contributions of services that create or enhance nonfi-
nancial assets may be measured by referring to either the fair value of the services received or the fair value of the asset or of the asset enhancement resulting from the services.44
○ Gifts in kind that can be used or sold shall be measured at fair value. In determining fair value, entities should consider the quality and quantity of the gifts, as well as any applicable discounts that would have been received by the entity, including discounts based on that quantity if the assets had been acquired in exchange transactions.45
Stock gifts ○ The value of a contribution receivable arising from an
unconditional promise to give equity securities with readily determinable fair values or debt securities may change between the date the unconditional promise to give is recognized and the date the asset promised is received because of changes in the future fair value of the underlying securities. For purposes of subsequent measurement, the method of determining the future fair value of the underlying securities shall be the same as the method used for determining that amount for pur-poses of initial measurement. Thus, if a promise to give
42. FASB ASC 958-605-30-5 and 820-10-55-5. 43. FASB ASC 958-605-30-5 and 835-30-25-11. 44. FASB ASC 958-605-30-10. 45. FASB ASC 958-605-30-11.
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securities is measured based on the fair value of the underlying securities at the date of gift an observed change in the current fair value of the underlying secu-rities shall be recognized. The change shall be reported as an increase or a decrease in contribution revenue in the period(s) in which the change occurs. The change shall be recognized in the net asset class in which the contribution was originally reported or in the net asset class in which the net assets are represented.46
Bad debt expense ○ If the value of a contribution receivable decreases
because of changes in the quantity or nature of assets expected to be received, the decrease shall be recog-nized in the period(s) in which the expectation changes. That decrease shall be reported as an expense or loss (bad debt) in the net asset class in which the net assets are represented. Because all expenses are reported in the unrestricted net asset class, those decreases shall be reported as losses if they are decreases in temporarily restricted net assets or permanently restricted net assets.47
xi. Disclosures
Recipients of unconditional promises to give shall disclose all of the following: a. The amounts of promises receivable in less than one
year, in one to five years, and in more than five years b. The amount of the allowance for uncollectible promises
receivable c. The discount that arises if measuring a promise to give
at present value, if that discount is not separately dis-closed by reporting it as a deduction from contributions receivable on the face of a statement of financial position.48
46. FASB ASC 958-310-35-11. 47. FASB ASC 958-310-35-7 and 958-310-45-3. 48. FASB ASC 958-310-50-1.
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Recipients of conditional promises to give shall disclose both of the following: a. The total of the amounts promised b. A description and amount for each group of promises
having similar characteristics, such as amounts of prom-ises conditioned on establishing new programs, com-pleting a new building, and raising matching gifts by a specified date.49
An entity that receives contributed services shall describe the programs or activities for which those services were used, including the nature and extent of contributed services received for the period and the amount recognized as revenues for the period.50
c. Contributions Made (Grants)
i. Unconditional commitments to grantees
Unconditional promises to give shall be recognized at the time the donor has an obligation to transfer the promised assets in the future, which generally occurs when the donor approves a specific grant or when the recipient of the promise is notified.51
Contributions made shall be recognized as expenses in the period made and as decreases of assets or increases of lia-bilities depending on the form of the benefits given. For example, gifts of items from inventory held for sale are rec-ognized as decreases of inventory and contribution expenses, and unconditional promises to give cash are recognized as payables and contribution expenses.52
ii. Valuation (present value discounts)
Contributions made shall be measured at the fair values of the assets given or, if made in the form of a settlement or
49. FASB ASC 958-310-50-4. 50. FASB ASC 958-605-50-1. 51. FASB ASC 958-720-25-2. 52. FASB ASC 720-25-25-1.
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cancellation of a donee’s liabilities, at the fair value of the liabilities cancelled.53
Unconditional promises to give that are expected to be paid in less than one year may be measured at net settlement value because that amount, although not equivalent to the present value of estimated future cash flows, results in a reasonable estimate of fair value.54
iii. Cancellations and rescissions
If a donor explicitly reserves the right to rescind an intention to contribute, or if a solicitation explicitly allows a donor to rescind the intention, a promise to give shall not be rec-ognized by the donor.51
iv. Agency vs. exchange transactions
Agency transactions ○ If an NFP makes contributions or awards grants to other
NFPs upon specific requests of others, the NFP may be acting as an agent, trustee, or intermediary in a transfer between the donor and the beneficiary specified by the donor (agency transaction).55
○ When NFPs act as agents, trustees, or intermediaries helping donors to make a contribution to another entity or individual, they do not receive a contribution when they receive the assets, nor do they make a contribution when they disburse the assets to the other entity or individual. Instead, they act as go-betweens, passing the assets from the donor through their organization to the specified entity or individual.56
○ Federated fund-raising entities, community foundations, and institutionally related entities are examples of NFPs that commonly serve as agents, trustees, or intermediaries, but any NFP can function in those capacities.56
53. FASB ASC 720-25-30-1. 54. FASB ASC 720-25-30-2. 55. FASB ASC 958-720-25-3. 56. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) –
paragraph 5.08.
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○ Such NFPs shall recognize its liability to the specified beneficiary concurrent with its recognition of cash or other financial assets received from the donor.57
An exchange transaction is a reciprocal transfer between two entities that results in one of the entities acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations.58 Examples of revenues NFPs earn through exchange transactions include, but are not limited to: ○ Conference registration fees for professional organizations ○ Tuition, housing and meal fees for colleges and
universities v. Disclosures
If NFPs make contributions to other NFPs, the Financial Reporting Executive Committee (FinREC) believes the best practice is to separately identify such contributions to other NFPs (both those to related parties and those to NFPs that are not related), either in the statement of activities or notes to the financial statements. FinREC believes contributions to other NFPs, including grants that are contributions, are dif-ferent in concept from expenses incurred in running an organization’s own activities, and that distinction may be meaningful to financial statement users.59
d. Net Assets
i. Permanently restricted net assets
Permanently restricted net assets are the part of the net assets of an NFP resulting from the following: ○ Contributions and other inflows of assets whose use by
the NFP is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the NFP
57. FASB ASC 958-605-25-24. 58. FASB ASC Master Glossary. 59. AICPA Audit and Accounting Guide: Not-for-Profit Entities (March 1, 2015) –
paragraph 13.28.
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○ Other asset enhancements and diminishments subject to the same kinds of stipulations
○ Reclassifications from or to other classes of net assets as a consequence of donor-imposed stipulations.60
ii. Temporarily restricted net assets
Temporarily restricted net assets are the part of the net assets of an NFP resulting from the following: ○ Contributions and other inflows of assets whose use by
the NFP is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the NFP pursuant to those stipu-lations
○ Other asset enhancements and diminishments subject to the same kinds of stipulations
○ Reclassifications from or to other classes of net assets as a consequence of donor-imposed stipulations, their expiration by passage of time, or their fulfillment and removal by actions of the NFP pursuant to those stipulations.60
iii. Unrestricted net assets
Unrestricted net assets are the part of net assets of an NFP that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations.60
Unrestricted net assets generally result from revenues from providing services, producing and delivering goods, receiving unrestricted contributions, and receiving dividends or interest from investing in income-producing assets, less expenses incurred in providing services, producing and delivering goods, raising contributions, and performing administrative functions.60
iv. Board-designated net assets
Board-designated net assets are net assets that are earmarked (restricted) for a specified purpose by an NFP’s board of
60. FASB ASC Master Glossary.
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directors. Since such restrictions on net assets are not donor-imposed, board-designated net assets are presented as part of unrestricted net assets.
v. Endowment funds
An endowment fund is an established fund of cash, secu-rities, or other assets to provide income for the maintenance of an NFP. The use of the assets of the fund may be per-manently restricted, temporarily restricted, or unrestricted.61
Endowment funds generally are established by donor-restricted gifts and bequests to provide either of the following ○ A permanent endowment, which is to provide a per-
manent source of income ○ A term endowment, which is to provide income for a
specified period.61
Alternatively, an NFP’s governing board may earmark a portion of its unrestricted net assets as a Board-Designated Endowment Fund (also referred to as a quasi-endowment fund).61
vi. Spending rules/policies
An endowment spending policy is a mechanism that helps an institution develop an annual operating budget that has a predictable and meaningful cash distribution from its endow-ment funds.62
Some NFPs, in managing their endowment funds, use a spending-rate or total return policy. Those policies consider total investment return—investment income (interest, divi-dends, rents, and so forth) plus net realized and unrealized gains (or minus net losses). Typically, spending-rate or total return policies emphasize the use of prudence and a rational and systematic formula to determine the portion of cumu-lative investment return that can be used to support
61. FASB ASC Master Glossary. 62. Morrone, Dennis J., and Mary F. Foster. “Endowment Spending Policies.” Grant
Thornton: Business Insights and Trends for Trustees and Higher Education Administrators (2012): 1-5. Web.
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operations of the current period and the protection of endow-ment gifts from a loss of purchasing power as a consid-eration in determining the formula to be used.63
vii. UPMIFA (Endowment laws)
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) was approved in 2006 and designed to replace the existing Uniform Management of Institutional Funds Act (UMIFA), which was the pioneering statute and active law governing endowments since 1972.64
49 states have adopted UPMIFA.65
Two general principles of UPMIFA: 1) Investments – Institutions should invest investment “in
good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”
2) Expenditure – Institutions “may appropriate for expendi-ture or accumulate so much of an endowment fund as the institution determines to be prudent for the uses, benefits, purposes and duration for which the endowment fund is established.”64 UPMIFA includes an optional provision that allows
states to enact another kind of safeguard against excessive expenditure. If a state does not want to rely solely upon the rule of prudence provided in UPMIFA, the state may adopt a provision that creates a rebuttable presumption of imprudence if an institution expends an amount greater than seven
63. FASB ASC 958-320-45-9. 64. “Prudent Management of Institutional Funds Act Summary.” Uniform Law Com-
mission. N.p., n.d. Web. 22 Mar. 2016. <http://uniformlaws.org/ActSummary.aspx? title=Prudent+Management+of+Institutional+Funds+Act>.
65. “Legislative Fact Sheet - Prudent Management of Institutional Funds Act.” Uniform Law Commission. N.p., n.d. Web. 22 Mar. 2016. <http://uniformlaws.org/Legislative FactSheet.aspx?title=Prudent%20Management%20of%20Institutional%20Funds%20 Act>.
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percent of fair market value of a fund, calculated in an averaging formula over three years.66
viii. Disclosures
The financial statements shall provide a description of the nature of the NFP’s activities, including a description of each of its major classes of programs. If not provided in the notes to financial statements, the description can be pre-sented on the statement of activities (for example, using column headings).67
An NFP shall disclose the following information about its endowment funds: ○ Net asset classification ○ Net asset composition ○ Changes in net asset composition ○ Spending policies ○ Related investment policies.68
At a minimum, an NFP shall disclose all of the following information for each period for which it presents financial statements: ○ A description of the governing board’s interpretation of
the law or laws that underlie the NFP’s net asset classi-fication of donor-restricted endowment funds.
○ A description of the NFP’s policy or policies for the appropriation of endowment assets for expenditure (its endowment spending policy or policies).
○ A description of the NFP’s endowment investment policies, including all of the following: Return objectives and risk parameters
66. “Prudent Management of Institutional Funds Act Summary.” Uniform Law Commis-sion. N.p., n.d. Web. 22 Mar. 2016. <http://uniformlaws.org/ActSummary.aspx?title= Prudent+Management+of+Institutional+Funds+Act>.
67. FASB ASC 958-205-50-1. 68. FASB ASC 958-205-50-1A.
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How return objectives relate to the NFP’s endow-ment spending policy or policies
The strategies employed for achieving return objectives.
○ The composition of the NFP’s endowment by net asset class at the end of the period, in total and by type of endowment fund, showing donor-restricted endowment funds separately from board-designated endowment funds.
○ A reconciliation of the beginning and ending balance of the NFP’s endowment, in total and by net asset class, including, at a minimum, all of the following line items that apply: Investment return, separated into both of the
following:
Investment income (for example, interest, dividends, rents)
Net appreciation or depreciation of investments. Contributions Amounts appropriated for expenditure Reclassifications Other changes.69
For each period for which a statement of financial position is presented, an NFP shall disclose the aggregate amount of the deficiencies for all donor-restricted endowment funds for which the fair value of the assets at the reporting date is less than the level required by donor stipulations or law.70
69. FASB ASC 958-205-50-1B. 70. FASB ASC 958-205-50-2.
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e. Investments
i. Marketable securities
A marketable security is an easily traded investment that is readily converted into cash, usually because there is a strong market for the security.
Examples of marketable securities include stocks, commer-cial paper, bonds, and commercial paper.
ii. Non-exchange traded securities
Non-exchange traded securities are investments that are difficult to trade as they do not trade on a normal market or exchange. Such securities trade over the counter or in private transactions.
Examples of non-exchange traded securities are savings bonds and interests in limited partnerships.
iii. Presentation of returns and losses
A statement of activities shall report gains and losses rec-ognized on investments as increases or decreases in unre-stricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations or by law.71
Dividend, interest, and other investment income shall be reported in the period earned as increases in unrestricted net assets unless the use of the assets received is limited by donor-imposed restrictions. Donor-restricted investment income shall be reported as an increase in temporarily restricted net assets or permanently restricted net assets, depending on the type of restriction.72
Gains and investment income that are limited to specific uses by donor-imposed restrictions may be reported as increases in unrestricted net assets if the restrictions are met in the same reporting period as the gains and income are recognized, provided that the NFP has a similar policy for
71. FASB ASC 958-225-45-8. 72. FASB ASC 958-320-45-2.
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reporting contributions received, reports consistently from period to period, and discloses its accounting policy.73
Investment revenues may be reported net of related expenses, such as custodial fees and investment advisory fees, pro-vided that the amount of the expenses is disclosed either on the face of the statement of activities or in notes to financial statements.74
iv. Valuation
An equity security with readily determinable fair value or a debt security shall be initially measured at its acquisition cost (including brokerage and other transaction fees) if it is purchased.75
It shall be initially measured at fair value if it is received as a contribution or through an agency transaction.75
Investments in equity securities with readily determinable fair values and all investments in debt securities shall be measured at fair value in the statement of financial position.76
v. Disclosures
For each period for which a statement of activities is presented, an NFP shall disclose the following information: a. The composition of investment return including, at a
minimum, investment income, net realized gains or losses on investments reported at other than fair value, and net gains or losses on investments reported at fair value.
b. A reconciliation of investment return to amounts reported in the statement of activities if investment return is separated into operating and nonoperating amounts, together with a description of the policy used to deter-mine the amount that is included in the measure of operations and a discussion of circumstances leading to a change, if any, in that policy. The reconciliation need
73. FASB ASC 958-320-45-3. 74. FASB ASC 958-320-45-4. 75. FASB ASC 958-320-30-1. 76. FASB ASC 958-320-35-1.
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not be provided if an NFP includes all investment return in its measure of operations or excludes it from that measure entirely.
c. Investment revenues may be reported net of related expenses, such as custodial fees and investment advi-sory fees, provided that the amount of the expenses is disclosed either on the face of the statement of activi-ties or in notes to financial statements.77
For each period for which a statement of financial position is presented, an NFP shall disclose the aggregate carrying amount of investments by major types, for example, equity secu-rities, U.S. Treasury securities, corporate debt securities, mortgage-backed securities, oil and gas properties, and real estate.78
For the most recent period for which a statement of financial position is presented, an NFP shall disclose the nature of and carrying amount for each individual investment or group of investments that represents a significant concentration of market risk, such as risks that result from the nature of the investments or from a lack of diversity of industry, currency, or geographic location.79
f. Expense Reporting
i. Program vs. supporting services expenses
Program services ○ Program services are the activities that result in goods
and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the NFP exists. Those services are the major purpose for and the major output of the NFP and often relate to several major programs.80
77. FASB ASC 958-320-50-1. 78. FASB ASC 958-320-50-2. 79. FASB ASC 958-320-50-3. 80. FASB ASC 958-720-45-3.
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○ For example, a large university may have programs for student instruction, research, and patient care, among others.80
○ The components of total program expenses shall be evident from the details provided on the face of the statement of activities, unless the notes to financial state-ments provide the information about why total program expenses disclosed in the notes do not articulate with the statement of activities.81
Supporting activities ○ Supporting activities are all activities of an NFP other
than program services. Generally, supporting activities include the following activities: Management and general activities Fundraising activities Membership development activities.82
○ Management and general activities include the fol-lowing: Oversight Business management General recordkeeping Budgeting Financing, including unallocated interest costs Soliciting funds other than contributions and mem-
bership dues, for example, the costs associated with:
Promoting the sale of goods or services to customers, including advertising costs
Responding to government, foundation, and other requests for proposals for customer-sponsored contracts for goods and services
81. FASB ASC 958-720-45-5 and 958-720-50-1(b). 82. FASB ASC 958-720-45-6.
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Administering government, foundation, and similar customer-sponsored contracts, including billing and collecting fees.
Disseminating information to inform the public of the NFP’s stewardship of contributed funds
Making announcements concerning appointments Producing and disseminating the annual report All other management and administration except
for direct conduct of program services, fundraising activities, or membership development activities.83
○ The costs of oversight and management usually include the salaries and expenses of the governing board, the chief executive officer of the NFP, and the supporting staff. If such staff spend a portion of their time directly supervising program services or categories of other sup-porting services, however, their salaries and expenses shall be allocated among those functions.84
○ Fundraising activities include the following: Publicizing and conducting fundraising campaigns Maintaining donor mailing lists Conducting special fundraising events Preparing and distributing fundraising manuals,
instructions, and other materials Conducting other activities involved with soliciting
contributions from individuals, foundations, gov-ernment agencies, and others.85
○ Membership development activities include the following: Soliciting for prospective members and mem-
bership dues Membership relations
83. FASB ASC 958-720-45-7. 84. FASB ASC 958-720-45-8. 85. FASB ASC 958-720-45-9.
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Similar activities.86 ii. Operating vs. non-operating expenses (operating measure)
Classifying revenues, expenses, gains, and losses within classes of net assets does not preclude incorporating additional classifications within a statement of activities. This includes classifications based on operating and nonoperating activities.87
If an NFP’s use of the term operations is not apparent from the details provided on the face of the statement, a note to financial statements shall describe the nature of the reported measure of operations or the items excluded from operations.88
iii. Statement of functional expense reporting
The statement of functional expenses reports information about expenses by their functional classes, such as major classes of program services and supporting activities, as well as information about expenses by their natural classification (natural expense classification), such as salaries, rent, elec-tricity, interest expense, depreciation, awards and grants to others, and professional fees, in a matrix format.89
To the extent that expenses are reported by other than their natural classification (such as salaries included in cost of goods sold or facility rental costs of special events reported as direct benefits to donors), they shall be reported by their natural classification if a statement of functional expenses is presented. For example, salaries, wages, and fringe benefits that are included as part of the cost of goods sold on the statement of activities shall be included with other salaries, wages, and fringe benefits in the statement of functional expenses.89
Expenses that are netted against investment revenues shall be reported by their functional classification on the statement of functional expenses (if the NFP presents that statement).89
86. FASB ASC 958-720-45-11. 87. FASB ASC 958-225-45-9. 88. FASB ASC 958-225-45-12. 89. FASB ASC 958-205-45-6.
87
NOTES
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Will the FASB’s Changes to the Nonprofit Financial Reporting Model Better Help You Tell Your Financial Story?
Dennis J. Morrone, CPA Mary Foster, CPA
Grant Thornton LLP
© 2015 Grant Thornton LLP All rights reserved.
If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.
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Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
“We believe that these changes will refresh the model in ways that will make not-for-profit financial statements even more useful to donors, lenders and other users.1” – Lawrence Smith, FASB member
1 FASB. “FASB Proposes Improvements to Not-for-Profit Financial Statements” (news release), April 22, 2015. See www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176165948973 for details.
2 FASB. Proposed Accounting Standards Update, Presentation of Financial Statements of Not-for- Profit Entities, April 22, 2015. See http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176165949852&acceptedDisclaimer=true for the draft.
Dennis Morrone, National Partner-in-Charge, Not-for-Profit and Higher Education Practices, Audit Services Mary Foster, Managing Director, Not-for-Profit and Higher Education Practices
After nearly 20 years of living with the current not-for-profit reporting model, users of financial statements of nonprofit organizations in many cases still do not have a true understanding of the organization’s financial position and performance, and the achievement of its mission. The FASB reacted to these concerns by undertaking a project that reimagines the design of the financial statements and related disclosures.
In April 2015, the FASB issued an exposure draft of an Accounting Standards Update (Standard) that would change
the presentation of financial statements for not-for-profit entities, including health care entities.2 While the FASB has referred to its contemplated design as a refresh, we believe this proposed standard is far more substantive in design and construction than a mere refresh. It is a prodigious rewrite.
Impetus for this massive change is due in part to input from the Governmental Accounting Standards Board, the AICPA, the National Association of College and University Business Officers, the Not-for-Profit Advisory Committee, and the broader nonprofit community. More input and possibly more changes are to come, as the comment period for the draft extends through Aug. 20.
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That said, it is important to emphasize that the proposed reporting model does not change the current manner in which nonprofits recognize revenues or report expenses. The proposed Standard is principally focused on how the activities of all nonprofit organizations are presented for a reporting period. The reporting model will be applicable for all types of nonprofit organizations (e.g., museums/cultural institutions, higher education, social services, foundations, associations, and religious organizations).
The thrust of the proposed Standard is an array of more prescriptive approaches to sequencing and positioning a nonprofit’s activities for a reporting period. While the intention is to achieve more symmetry in reporting across the industry sector, the proposed design still allows for a fair amount of flexibility and autonomy in how nonprofits describe their activities.
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
The proposed Standard: • Reduces the number of net asset classes presented by eliminating
the distinction between temporarily restricted and permanently restricted net assets
• Requires presenting the statements of activities and financial position based on net assets with donor-imposed restrictions and net assets without donor-imposed restrictions
• Defines two intermediate measures of operations and requires their presentation as part of the financials
• Creates a new category of transactions labeled “transfers” on the face of the financial statements to move revenues to/from operating activities and nonoperating activities
• Defines investment earnings and expenses and interest expense as not part of operating activities
• Requires expenses to be reported by functional and natural expense categories
• Requires the statement of cash flows to be presented using the direct method, and recategorizes certain items previously reported as part of operating cash flows to align with the proposed definition of operations in the statement of activities
• Requires disclosures about liquidity
The proposed Standard focuses specifically on the following areas: net assets, liquidity, the statements of the activities, including expense reporting and cash flows, financial performance, and the extent and nature of the relevant complementing disclosures.
Take note of these major changes
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Elucidation and perspectives are provided here by Grant Thornton LLP. We offer them for your understanding of the proposed Standard, which we believe will ultimately become the prevailing standard to which all nonprofits must align their reporting. We believe our commentary will help you determine the impact these proposals would have on how financial performance is reported by your organization.
If you feel strongly about a specific aspect of the proposed Standard, you can convey your written thoughts directly to the FASB during this comment period.
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1. Eliminate the distinction between donor-imposed temporary restrictions and permanent restrictions in financial statements The most fundamental proposed modification would be the change to the current net asset reporting scheme. Specifically, the concept of permanently restricted, temporarily restricted and unrestricted net assets would be changed. These three categories would be distilled to two new categories — namely, net assets with donor restrictions and net assets without donor restrictions.
Grant Thornton perspective
• Although state laws have changed and evolved with respect to spending from endowment earnings — and, in some cases, a piece of the original endowment gift may be spent until the investment market rebounds — the amount of funds your organization maintains in perpetuity would no longer be reported on the face of the financial statements.
• Simplifying the presentation of restricted net assets would reduce reporting complexity and enhance the understandability of your organization’s net asset position.
• A potential exists that organizations would present less information on the face of their financial statements about the amount of spendable funds that is directed by donors to support specific programs/projects in future periods.
• Users of the financial statements would be able to more readily understand inherent restrictions on net assets given the revised naming scheme.
2. Define operating activities based on the mission of the organization and the availability of the funds The definition of an operating measure is influenced by the fact that boards of nonprofit organizations set policies that affect the long-term use of funds, and therefore cause certain funds to be unavailable for the current period. These actions are reflected in the intermediate measure of operations and the “Transfer” section of the statement of activities. The proposed Standard specifies a different treatment for those donor actions that cause funds to be unavailable for the current period. In the case of donor restrictions, the funds would not be part of the operating measure until they were released from donor restriction.
Grant Thornton perspective
• Most organizations already have an operating measure that is comparable to similar institutions, and though a degree of increased uniformity may be achieved with the proposed Standard, the fundamental changes to the treatment of interest expense, investment expense and endowment earnings might differ from the manner in which organizations view operations today.
• There would be increased complexity in presenting the details of the operating measures.
• Donor-restricted gifts and unrestricted board-designated gifts received in a prior period and spent in the current period would be moved from the nonoperating category to the operating category in a manner different from each other. Board-designated gifts would be moved to the transfer section and included in the second operating measure, while donor-restricted gifts are shown as releases from restrictions and included in the first operating measure. This presentation may differ substantively from the manner in which an organization actually conducts its activities and manages its cash flows.
• The operating measure used by bond rating agencies includes interest expense as an operating cost and a fixed percentage of total investment earnings, and eliminates nonspendable gifts. Organizations should recast their current financial statements into the proposed format to assess the potential impact on bond ratios and covenants.
Major changes would create 8 significant impacts
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3. Require the statements of activities and financial position to be presented on the basis of net assets without donor restrictions and net assets with donor restrictionsThe proposed Standard removes the existing requirement to present the change in each of the three classes of net assets on the face of a statement of activities, as well as the related net position in the statement of financial position. To replace the existing requirement, there are similar requirements for two classes of net assets: (1) with donor-imposed restrictions and (2) without donor-imposed restrictions. The current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions included in net assets is modified to (a) remove the hard-line distinction between temporary restrictions and permanent restrictions (the amount below which an organization could not spend from a donor-restricted endowment fund), and (b) focus instead on describing differences in the nature of the restrictions with an emphasis on both how and when the resources (net assets) could be used.
Grant Thornton perspective
• The immediate benefits of this new requirement would be that it would retain the focus and emphasis that the donor is the principal driver and determinant of the manner in which activities are reported, and that the use of “with donor restrictions” and “without donor restrictions” would allow the nature of the net assets included in these two categories to be inherently more understandable.
• However, the benefits of the new design would need to be evaluated with an understanding of its limitations. Specifically, the purpose of the net assets of a nonprofit could be restricted or designated as a result of other encumbrances independent of donors. Examples are bond sinking funds, quasi-endowments, other trusteed and contractual restricted funds (loan funds), and the plant fund. The significance of these other restricted and designated funds may not be apparent if the proposed net asset categories, as presently contemplated in the proposed Standard, are used. This would lead to the necessity for more — and possibly new — report disclosures.
• We believe that reporting net assets in two broad categories may result in a perceived loss of understandability of the spending limitations that may be imposed on the use of net assets without donor restrictions. We believe that financial statements are more meaningful when more information is presented on the face of the statements.
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
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4. Create a new category of transactions labeled “transfers”Nonprofits would be required to present on their statement of activities (1) all transfers in a discrete section; and (2) a subtotal of operating revenues and expenses before such transfers (intermediate measure), which is in addition to presenting an intermediate measure of operating surplus deficit after such transfers. At a minimum, nonprofits would have to present the aggregate of transfers out of operating activities separate from the aggregate of transfers into operating activities. They would also have to provide details for aggregated transfers in a note describing the purpose, amounts and types of transfers — for example, those done because of standing board policies, as one-time decisions or for other reasons. The nonprofit could choose to display all transfers as separate line items on the face of the statement of activities and provide qualitative information in a note.
Grant Thornton perspective
• Until now, transfers have been used by nonprofit organizations to move unrestricted resources between funds to reflect management or board actions taken to establish reserves and fund specific projects. These transfers have been internal and within the unrestricted net asset class and have not generally been reflected broadly on the face of the financial statements; they are standard operating activities of most nonprofit organizations. The net action — reflecting a capital gift as a nonoperating item — was all that was typically seen by the user of the financial statements.
• The intent of the proposed Standard is to more prominently highlight the significance of an organization’s board policy or action(s) and to show the movement of resources on the face of the financial statements in a section labeled “Transfers.” Ultimately, this presentation may not provide the intended insights into the nonprofit’s financial performance; we hope it ultimately provides insights worthy of the implementation and ongoing compliance effort involved.
5. Define underwater endowment accounts as a reduction of net assets with donor restrictionsCurrently, when the fair value of an individual donor-restricted endowment fund is less than the original gift amount required to be maintained by the donor or by law, that deficit is reported as part of the unrestricted net asset class. The proposed Standard allows this loss to be presented in a similar manner allowed by the Uniform Prudent Management of Institutional Funds Act, that is, losses of this nature could be charged to net assets with donor restrictions.
Grant Thornton perspective
• This enhances the understandability of the flow of funds and the balance of endowment funds.
• The proposed Standard requires nonprofits to disclose the governing board’s policy on spending from underwater endowment funds and whether this policy was followed, leading to an enhanced understanding of endowment management.
• The proposed Standard requires nonprofits to disclose the original gift amount — or level required by donor stipulations or by law to be maintained — of underwater endowment funds in the aggregate, as well as their fair value in the aggregate.
• Reporting losses resulting either from prudent spending or as a result of market fluctuations as part of net assets with donor restrictions would no longer burden the unrestricted fund.
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6. Require the reporting of expenses by functional category in a separate statement, schedule or note, or on the face of the statement of activitiesNonprofits would be required to report expenses by both their nature and function, and would have the flexibility to present them either on the face of the statement of activities, on a separate statement or within the notes.
Grant Thornton perspective
• Additional expense reporting by function and natural expense category is helpful in enhancing the understandability of a nonprofit’s operations and overall financial performance in achievement of its mission.
• Although the proposed reporting of expenses may enhance usefulness, it would not necessarily provide sufficient information to assess how successful an organization has been in achieving its mission.
7. Require the statement of cash flows to be presented using the direct method The proposed Standard requires the direct method of reporting cash flows provided (used) by operating activities. It removes the requirement to reconcile the change in net assets to net cash flow from operating activities (indirect method); in addition, it provides new definitions for operating, financing and investing cash flows.
Grant Thornton perspective
• The direct method may enhance the understandability and usefulness of an organization’s cash flow information for each reporting period.
• New definitions of operating, financing and investing cash flows may introduce complexity for users familiar with their existing definitions. Further, certain of these reclassifications may not be readily understood or align with internal budgeting activities and financial reporting processes.
• The direct method of preparing the statement of cash flows for nonprofit organizations would differ from the cash flow statements of for-profit business entities using either the direct method or the indirect method. In addition, compelling nonprofits to prepare their statements of cash flows using the direct method would further punctuate differences between the reporting styles of nonprofit organizations as compared to for-profit business enterprises.
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
Voluntary health and welfare organizations would be permitted, but no longer required, to present a separate statement of functional expenses.
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8. Require disclosure about liquidityA nonprofit would be required to provide quantitative and qualitative information useful in assessing liquidity, including a description of the time horizon it uses to manage its liquidity. Quantitative information would include the (1) total amount of financial assets; (2) amounts that, due to various limitations, were not available to meet cash needs within the nonprofit’s time horizon; and (3) total amount of financial liabilities that are due within the defined time horizon. Qualitative information includes information about how an entity manages its liquidity (e.g., the entity’s strategy for understanding entity-wide risks affecting liquidity; a policy for establishing liquidity reserves; and the rationale for determining the appropriate time horizon by which the entity manages liquidity).
Grant Thornton perspective
• While no doubt the availability of sufficient liquidity is of paramount import, particularly to smaller nonprofits or those burdened with onerous debt compliance restrictions or covenants, the new language of the proposed Standard seems to mandate that nonprofits disclose, in a relatively granular sense, their internal policies.
• It may be difficult to articulate certain internal policies, often informal, in sufficient detail to achieve the spirit of the quantitative and qualitative attributes proposed in the Standard for disclosure.
• Given the proposed Standard’s rather specific outline of the liquidity footnote, in addition to increased internal preparation time, there may be increased independent auditor effort required to address the disclosures.
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Net asset classifications are redefined. While appreciating that nonprofits are unique in their programmatic focus — e.g., grant-making, education and social services — we are generally supportive of simplifying the financial reporting model so more focus can be placed on operations. Furthermore, the more financial statements align with the design of a nonprofit enterprise, the more they will be generally understood. Net asset reporting has always been an enigma to users of business-oriented financial statements, and the changes contemplated in the proposed Standard with respect to net asset reporting should remove some of the confusion.
Nonprofits and their stakeholders should bear in mind that no matter what is presented in a nonprofit’s financial statements, the classification would not be a surrogate for retained earnings or a proxy for liquidity disclosures as reported by a for-profit business enterprise.
Current classification
• Unrestricted
• Temporarily restricted
• Permanently restricted
Proposed classification
• Net assets without donor restrictions
• Net assets with donor restrictions
Although the labels “temporarily restricted” and “permanently restricted” are eliminated and replaced with the simpler net assets with donor restrictions, nonprofits would still be required to disclose information about the nature and amounts of donor-imposed restrictions pertaining to their net assets. This disclosure focuses on both how and when resources could be used.
Nonprofits would also be required to disclose information about the amounts and purpose(s) of board-designated net assets without donor restrictions. Currently, there are no required disclosures about these funds, except as they pertain to endowment funds. The proposed Standard requires disclosures for all board-designated funds, including those earmarked for specific future expenditures, such as for the acquisition or construction of a building.
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
The challenges are always in the details
Statement of financial position
Net assets Proposed Standard
Current practice
(on face of statement or in notes)
Unrestricted
Undesignated or current operations xxxxxx
Matching funds under government loan programs xxxxxx
Debt service and other replacement funds xxxxxx
Unexpended bond proceeds xxxxxx
Net investment in plant xxxxxx
Quasi-endowment xxxxxx
Total unrestricted xxxxxx xxxxxx Without donor restrictions
Temporarily restricted* With donor restrictions
Current operations xxx
Temporarily restricted endowments* xxxxxx
Term endowments and life income agreements xxxxxx
Property, plant and equipment purposes xxxxxx
Land and buildings xxxxxx
Total temporarily restricted xxxxxx
Permanently restricted* xxxxxx xxxxxx
* No longer in the nomenclature
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There are 2 measures of operations. We applaud the FASB’s efforts to try to harmonize the definition of a performance measure within the context of nonprofit reporting. However, challenges to align this measurement across similarly designed, focused and sized nonprofits seem to be quite significant. The task becomes even more daunting when multiplied by the diversity of the entire nonprofit sector.
There appears to be limited guidance proposed to assist nonprofits in identifying which revenue-generating activities are nonoperating. While the proposed Standard addresses financing and investing activities, there is minimal guidance on other revenue-generating activities. It is unlikely that all nonprofits would analyze their unrelated business activities and know how to classify them between operating and nonoperating activities. Would renting underutilized program facilities, providing auxiliary services to students, monetizing lists of donors/members names, or operating parking facilities or gift shops be classified in the same manner across the nonprofit sector? Further, the expenses associated with unrelated business activities would require specific treatment in the statement of activities and the statement/schedule or note on functional expenses.
In organizing financial performance into operating and nonoperating categories, the proposed standard introduces two overarching principles — a mission dimension and an availability dimension.
Mission dimension
• Resources that are from, or directed at, carrying out a nonprofit’s purpose for its existence
Availability dimension
• Resources that are available for current period activities, considering both external and internal limitations
These dimensions serve as practical and sensible guidelines for an organization to parse its activities as operating and nonoperating. A risk exists that differing interpretation and application of these principles would result in less consistency within the industry and subsectors. Accordingly, nonprofits would need to carefully consider how they would apply these principles to best reflect their activities.
Under the proposed Standard, the statement of activities would be separated between operating and all other activities on the basis of two dimensions, as defined above and further described below. Since the definition of operations is principles-based, significant judgment would be required in applying the mission and availability dimensions to an organization’s activities. This is somewhat in contrast to the relatively explicit requirements for reporting of investing activities, financing activities, capital transactions, equity transfers and board appropriations.
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The proposed Standard requires all nonprofits — including business-oriented health care entities — to present in their statement of activities two measures associated with the change in their net assets without donor restrictions:
1. Operating excess (deficit) before transfers
2. Operating excess (deficit) after transfers
The current performance indicator for business-oriented health care entities is optional. These entities are nongovernmental nonprofit entities, such as dental clinics, mental health clinics and nonprofit hospitals.
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
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Categories of operating activities and nonoperating activities
Current practiceIs the proposed Standard consistent with current practice?
Operating activities
Earned and sponsored revenue Yes
Contributions Yes
Investment return in support of operations No
Only the portion from donor restricted endowment shown in operations
Net assets released from restriction Yes
Operating revenue
Functional or natural expense categories Yes
Depreciation Yes
Interest expense No Nonoperating financing activities
Operating expenses
Operating surplus or Increase (decrease) in net assets from operations
Current practiceIs the proposed Standard consistent with current practice?
Nonoperating activities
Net assets released from restrictions for facilities No
Unrestricted is in operations; then transfer-out
Net assets released from restrictions NoUnrestricted is in operations; then transfer-out
Capital gifts and other additions NoUnrestricted is in operations; then transfer-out
Net realized and unrealized gains YesBut as part of nonoperating investing activities
Net investment return designated for operation Yes
But as part of nonoperating investing activities
Change in value of split interest agreements Yes
But as part of nonoperating investing activities
Postretirement benefit expense other than net periodic benefit cost Yes
Change in fair value of interest rate swap agreements Yes
But as part of nonoperating financing activities
Adjustment of conditional asset retirement obligation and other gains Yes
Loss on disposal of capital assets Yes
Total nonoperating activities
Changes in net assets
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Investment return is reported as operating revenue.Broadly speaking, investment return is generally regarded as an activity that provides support for propelling a nonprofit’s mission forward. However, the FASB does not view the earnings from an investment portfolio as operating revenue generated from carrying out the nonprofit’s mission. Gifts invested in the portfolio would be reflected as operating revenue when received, absent explicit donor restrictions, and the choice between investing and spending those gifts is a board action. Earnings generated from that board action would be outside of the mission of the nonprofit. The earnings of the endowment portfolio and other short-term interest earnings would be reported in a section after the “Operating excess after transfers” line. This section could be titled “Investing and financing activities” or “Nonoperating activities,” or it could simply list the revenue and expense line items without titling the section. Related investment expenses would be netted against investment earnings. Investment expense could include direct internal salaries associated with managing the portfolio, as further discussed below.
When the investment return would be appropriated for spending, the amount would need to be shown as a negative in the investing nonoperating section; it would appear as a negative transfer-out and a positive transfer-in styled in one of the following two ways:
Investment appropriations pertaining to the restricted portion of the endowment
The return would be labeled as endowment appropriations and release from restrictions. It would be moved from the net assets with donor restrictions column in the investing nonoperating section to the net asset without donor restrictions column in the operating revenue and support section. Thus, the appropriation would be reflected as operating revenue and support, rather than as a transfer.
Investment appropriations on the board-designated portion of the endowment
The return would be labeled as transfer of investment return on quasi-endowment. It would be moved from the nonoperating section to a line between the subtotals for operating excess before transfers and operating excess after transfers.
Financing activities are not considered operating expenses.Interest expense and issuance costs on all types of debt — e.g., short-term borrowings, credit lines, long-term bank borrowings, bonds and financing leases — would be classified as part of nonoperating activities. The FASB considers borrowing funds instead of using endowment funds or fund balances as a policy decision of the board and not an activity related to the mission of the nonprofit. The internal costs (salaries) associated with debt, treasury and financing functions could be included as a financing expense to the extent that they are measurable. The FASB draws a distinction between fundraising activities that generate revenue directed toward carrying out the nonprofit’s mission — hence an operating expense — and borrowing activities that are directed by management to leverage internal funds.
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Capital transactions and events are considered operating activities. Gifts of long-lived assets without donor restrictions would be reported initially as part of operating revenues. Currently, these are most typically reported as part of nonoperating revenue. If the gifted long-lived asset was not monetized or was placed into service, nonprofits would report the entire amount of the asset as a transfer out of operations in the transfer section. The long-term nature of the gifted asset would make it not fully available for current operations. When the asset was placed into service, operating expenses would include the applicable annual depreciation expense.
Purpose-restricted gifts of long-lived assets and gifts of cash restricted for acquisition or construction of long-lived assets would be reported initially as revenues that increase net assets with donor restrictions. Revenues with donor restrictions would not be considered in the operating measure; all revenues with purpose restrictions would be outside of operations until released from restriction in satisfaction of relevant donor/time stipulations. When the asset was placed into service — unless there were further donor restrictions — nonprofits would report the release from donor restriction as an increase in net assets without donor restrictions within operating activities and a decrease in net assets with donor restrictions. Consistent with the treatment of gifts of long-lived assets without donor restrictions, nonprofits would then report a transfer out of operations for the entire amount of the gifted asset. Operating expenses would also include the applicable annual depreciation expense.
The option to release the donor’s restriction over an asset’s estimated useful life would be eliminated. Nonprofits currently following this approach would be required to immediately release any restricted net assets related to assets previously placed in service.
Write-off of goodwill upon the acquisition of an entity (required of nonprofits predominantly supported by contributions and investment income) would be reported on a separate expense line in operations and could not be combined with other expense and loss items. If the acquired entity was for a purpose not directed at carrying out the purpose of the acquirer’s existence, then it would be a nonoperating expense.
Accessions of noncapitalized collection items acquired with resources that were without donor restrictions would be reported as a separate expense line in operations, and deaccessions of noncapitalized collection items would be reported as a revenue in the operating section on a separate line.
Equity transfers (i.e., between a parent and a subsidiary or entities under common control) would be reported within operating activities unless they were not for the current period’s use in carrying out the reporting entity’s mission. These transfers would be reported separately from revenues, expenses, and gains and losses, but included in the operating excess (deficit) before transfers.
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
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Other nonoperating revenues and expenses continue current reporting practice. Valuation gains and losses associated with long-term assets and liabilities have traditionally been reflected as nonoperating activities. This would continue under the proposed Standard. Other items, such as the change in fair value of interest-rate swap agreements, adjustments to conditional asset retirement obligations, post-retirement benefit expense (other than net periodic benefit cost), change in value of split-interest agreements and loss on disposal of capital assets would continue to be presented outside of the operating measure.
in the notes — is a decision based on ease of understanding and transparency in conveying the relevant information and demonstrating that transfers are not being used to manipulate financial performance for the reporting period. We believe that nonprofits would need to carefully consider how to best use the autonomy provided in the reporting model to communicate financial stewardship policies and financial performance.
One of the principal changes garnering public reaction is the presentation of transfers in the newly designed statement of activities.
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Proposed Standard, transfers depicted
Without donor restrictions
With donor restrictions
Operating revenue items
Contributions designated for endowment (3) xxxxxxx
Gifts of property, plant and equipment (1) xxxxxxx
Investment earnings on donor-restricted net assets designated for operations xxxxxxx
Release of restrictions for property and plant (2) xxxxxx (xxxxxx)
Gifts for acquisition or construction of property xxxxxx
Operating expenses (xxxxx)
Operating excess before transfers xxxxxxx
Transfers
Gifts of or for property, plant and equipment (1+2) (xxxxxx)
Investment earnings designated for operations xxxxxxx
Contributions designated for endowment (3) (xxxxxx)
Transfers to nonoperating activities (xxxxxx)
Operating excess after transfers xxx
Nonoperating revenue, expenses, gains and losses
Board-designated gifts (3) xxxxx
Investment return designated for operations (xxxxxxx) (xxxxxxx)
Net return on investments xxxxxx xxxxxxxx
Gifts of or for property, plant and equipment (1+2) xxxxxx
Interest expense and other financing costs/loss (xxxxxxx)
Transfers are a new section on the statement of activities.Surprisingly, for a principles-based reporting framework, the proposed Standard includes a great deal of discussion and intentionality in how transfers are effectuated during the period and among the affected net assets. Transfers represent the mechanism by which funds are made available for operating purposes, whether through board approval, the application of an investment spending policy, or the transfer of the excess of operating revenues over expenses to reserve funds. Determining whether transfers are shown broadly on the face of the statement of activities by their discrete nature — included in a separate schedule that complements the statement of activities or detailed
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Board designations, appropriations and similar transfers require more reporting detail. All designations, appropriations and similar transfers made by the board that affect current period operating activities (e.g., investment return appropriated for operations) would be shown as transfers in and transfers out in a separate section on the statement of activities between the two required subtotals for operating excess (deficit). The transfers could be shown individually or aggregated by transfers-in and transfers-out. If shown in the aggregate, the details would need to be disclosed in the notes. Nonprofits would be required to disclose the purpose, amounts and types of transfers (e.g., whether the transfer occurred because of board policies, a one-time decision or other reason).
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
The direct method of reporting operating cash flows would be required for all nonprofits. There would no longer be a requirement to reconcile net income (change in net assets) to net cash flows from operating activities, which is currently required for all statements of cash flows.
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The proposed Standard finally tackles one of the last bastions of meaningful nonprofit reporting — the statement of cash flows. Other than fulfilling the requirement that the cash flow statement be prepared and presented as one of the three primary statements, the preponderance of users of nonprofit financial statements don’t ascribe a tremendous amount of value and usefulness to this statement. The principal reason is that the statement is prepared by most entities using the indirect method, which starts with the change in net assets for the respective reporting period and reconciles that number to the cash balance as of the end of the reporting period. The information presented under this method is cumbersome and often difficult to relate to operations.
The proposed Standard requires that the statement of cash flows be prepared using the direct method. This would detail more specifically the sources and uses of cash for the period in the operating section of the statement. Also included are several other
substantive changes to the positioning of activities among the categories, specifically the classification of interest and dividends, and the purchase and sale of property. The repositioning of these items is intended to better align the activities of the statement of cash flows with the changes in the reporting format of the statement of activities.
An additional amendment is the classification of certain cash inflows and outflows to better align operating cash flows with the proposed definition of operations in the statement of activities.
Recategorization to operating cash flows
• Cash payments to acquire and cash proceeds from the sale of long-lived assets (currently investing)
• Cash gifts restricted for acquisition of long-lived assets (currently financing)
Recategorization from operating cash flows
• Cash receipts of interest and dividends (to investing)
• Cash payments of interest on debt (to financing)
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The statement of cash flows is redesigned
Cash flow statement, direct method
Current practiceIs the proposed Standard consistent with current practice?
From operating activities
Cash received from service recipients Yes
Cash received from donors Yes
Cash received from interest and dividends No moves to investing
Cash paid to vendors Yes
Interest paid on long-term debt No moves to financing
From investing activities
Purchases of investments Yes
Proceeds from sales of investments Yes
Purchases of property and equipment No
Proceeeds on sale of property and equipment No moves to operating
Contributions restricted for property and equipments No
From financing activities
Payments of principal on long-term debt Yes
Contributions restricted for endowment Yes
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allocation. Additionally, certain costs benefit more than one function and, therefore, would need to be allocated. For example, IT generally could be identified as benefiting various functions, such as accounting and financial reporting, HR, fundraising, and program delivery. IT costs therefore generally would be allocated among the functions receiving direct benefit, again using some rationale and systematic allocation methodology.
Presentation of investment return and expenses is required.Nonprofits would be required to report a net presentation of investment expenses against investment return on the face of the statement of activities. External and direct internal investment expenses would be required to be netted against investment return. Nonprofits would no longer be required to disclose the components of investment return (loss) and the amount of investment expenses; they would no longer have the option to report investment expenses within total expenses. The netted investment expenses would be limited to external and direct internal investment expenses incurred during a reporting period. The total amount of internal salaries and benefits netted against investment return would need to be disclosed.
All organizations, not just social services providers, as is currently the case, would be required to report all expenses in one location with operating expenses allocated by function and natural classification. No specific format is prescribed in the proposed Standard. An entity would have a choice in presentation style — on the face of the statement of activities, in a schedule in the notes, or in a separate financial statement using a reporting format commonly known as a statement of functional expenses. Financing and investing expenses, along with other nonoperating expenses and losses, would be reported by natural expense category on the face of the financial statement and in any separate statement or schedule of functional expenses; however, reporting by function would be optional for nonoperating expenses and losses.
Disclosures are required for expense allocations.Most categories of expenses are attributable to more than one program or supporting service expense category, and have traditionally been allocated accordingly. The proposed Standard requires qualitative disclosure of the methods used to allocate costs among the various functional categories. Management and general activities are defined in the proposed Standard as supporting activities that are not identifiable with one or more program, fundraising, or membership-development activity. Therefore, these expenses would require allocation on a reasonable basis that was consistently and rationally applied.
Expenses that are allocated could include depreciation and office and occupancy costs, which could be allocated on a basis of square footage (or some other rationale and systematic basis), as well as salaries and benefits, which could be allocated on the basis of time and effort studies (or some other rationale and systematic basis). Activities that represent direct conduct or direct supervision of program or support activities would also require
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
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Support costs (such as management and general, fundraising, and membership development) are considered to be incurred to carry out the nonprofit’s purpose for existence. Those costs are classified as operating activities and included in the operating excess (deficit) of a nonprofit before transfers, unless the costs are incurred for nonoperating purposes (for example, nonprogrammatic investing or financing expenses).
Reporting of expenses by nature and function is required
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Overall liquidity is another principal focus of the proposed Standard, in that infusing a nonprofit’s financial statements with more information would allow a user to make more informed judgments about overall liquidity. The prescriptive addition of fairly robust disclosures would compel an organization to share more information about how liquidity — both quantitative, such as the horizon (e.g., 30, 60, 90 days or longer) over which it manages and assesses liquidity, and qualitative. Most nonprofits have established reserve policies that consider cash flow needs on time intervals greater than 30, 60 or 90 days. Most organizations look at six-month and 12-month needs, unless there is a critical cyclical aspect to revenues or expenditures that skews monthly cash flow analysis. For example, this could include cost reimbursement contracts on delayed billings, grants and contracts with milestone payments, and collections of tuition revenue at the beginning of a semester. Liquidity management may entail the use of credit lines, endowment funds or drawdowns on reserves.
A sample note disclosure: NFP A utilizes a 60-day time horizon to assess its immediate
liquidity needs. This period of time was established based on management’s review of the typical life cycle of converting its financial assets to cash and typical payments of its trade payables. The entity invests cash in excess of daily requirements in short-term investments. Occasionally the board designates a portion of any operating surplus to its liquidity reserve. As of June 30, 20XX, the liquidity reserve
was $1,300. This is a governing board-designated fund with the objective of setting funds aside to be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities. In the event of an unanticipated liquidity need, NFP A also could draw upon $10,000 of available lines of credit (as further discussed in Note XX) or the quasi-endowment fund. The following reflects NFP A’s financial assets, amounts not available within its 60-day time horizon for managing liquidity, amounts set aside for long-term investing that could be drawn upon, and financial liabilities due within 60 days:
Financial assets $229,200 Less: Contractual or donor-imposed restrictions
making assets unavailable within 60 days ($192,413) Quasi-endowment fund ($34,628) Financial assets available within 60 days $2,159 Financial liabilities due within 60 days ($1,845) Net assets available in 60 days $314
Nonprofits would be required to define the time horizon used to manage liquidity and disclose the following quantitative and qualitative information.
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Additional liquidity disclosures would result in improved information
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Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial story?
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Quantitative information
• Total amount of financial assets
• Amounts that, due to external or internal limitations, are not available to meet cash flow needs within the defined time horizon
• Total amount of financial liabilities due within the defined time horizon
Qualitative information
• How liquidity is managed (e.g., a strategy for addressing entity-wide risks that may affect liquidity, a policy for establishing liquidity reserves or a basis for determining the time horizon used to manage liquidity)
• How investment asset allocation strategies are used to provide operating cash flows, as well as long-term investment growth
Effective date and transition are yet to be determined.The FASB did not propose an effective date. Instead, one will be determined after considering constituents’ comments. Retrospective application of the proposed changes will be required upon adoption. In the initial year of application, the annual financial statements will disclose the nature of any reclassifications or retrospective adjustments and their effects on the change in the net asset classes for each year or period presented. Interim financial statements will not need to reflect the Standard’s application in the initial year of application.
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FIND THE REPORT ONLINERead and share this information at grantthornton.com/fasbproposedstandard
We have offered our perspective on those proposed changes we believe would have the most significant impact on financial reporting for nonprofits. However, numerous fine points throughout the proposed Standard should not be overlooked; topics deserving of careful reading are cost allocations, museum collections, goodwill and acquisition transactions, split-interest gifts, sequencing assets and liabilities, and style of financial statement presentation.
On the whole, the proposed Standard may help nonprofits to better communicate their financial story, but it is a story of revenue inputs and cost outputs; and not of performance outcomes. Since the proposed Standard stops short of requiring management’s discussion and analysis of operations, it is not a reporting model for programmatic outcomes and progress in reaching financial and mission objectives. Information about programmatic outcomes and the relationship of those outcomes to cost outputs is valuable to users of financial statements. As nonprofits evaluate the proposal, consideration might be given to how to improve communication of appropriate, useful programmatic outcomes and other information outside the financial statements. We believe that as nonprofits work through implementing the Standard, insights might be gained as to how to better communicate outcomes and related information to others.
Our perspectives cover the most significant changes — But all changes rate a careful reading
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NOTES
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NOTES
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Lobbying Activity by Nonprofit Organizations
Sean Delany
Lawyers Alliance for New York
If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.
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I. FRAMING THE ISSUE
For over sixty years, federal tax law has restricted participation in legislative activity by nonprofit organizations. Premised upon a congres-sional antipathy to use of the subsidy of tax exemption not accorded to others who might seek legislative change, the Internal Revenue Code limits the extent to which those groups may directly or indirectly attempt to influence legislation. Other nonprofit organizations, such as social welfare and political organizations, are accorded more latitude by the tax code in promoting or opposing legislation and even participating in the electoral process.
Nonprofit organizations are also subject to the same regulatory systems at the state and local level that apply to others who seek to influence legislative or regulatory action. Those registration and reporting statutes do not set limits on legislative advocacy, but they do require frequent reporting with the risk of penalties for those who fail to comply.
In difficult economic times, nonprofit tax-exempt organizations are anxious to ensure that their voices will be heard on the issues that are important to their missions without jeopardizing their tax-exempt status or get into other legal trouble. Nonprofits’ legislative activities could present problems if the organization exceeds the limits on legislative advocacy that are permitted for nonprofit tax-exempt organizations.
II. LOBBYING
A. Rules Restricting Lobbying Activities by 501(c)(3) Organizations A public charity may be recognized as exempt from taxation under
§501(c)(3) of the Internal Revenue Code if “no substantial part” of its activities consists of carrying on propaganda or otherwise attempt-ing to influence legislation. First added to the Code in 1934 without the benefit of Congressional hearings, the impetus for the restriction was blurred from the outset: the legislative history quotes one Senator on the amendment’s intent to limit “partisan politics” and to deny deductibility of a contribution as a charitable gift “if it is a selfish one made to advance the personal interests of the giver of the money.”1 After much subsequent legislative tinkering, the requirement
1. 78 Cong. Rec. 5861 (1934). The language of the amendment was modified to delete
the reference to “partisan politics” prior to its enactment, but the language defining the prohibition otherwise survives today in its original form.
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today serves to restrict – but not to prohibit – certain kinds of legislative activity by exempt public charities. 1. “Legislation” defined for IRC purposes:
a. Legislation includes actions by Congress, state legislative bodies, local legislative authorities, as well as public votes in regard to referenda, ballot initiatives, and constitutional amendments.2
b. Legislation includes confirmation of a federal judicial nominee by the U.S. Senate, as “resolutions” or “similar items.”3
c. Legislation includes proposals for the enactment or amendment of international law.4
d. Legislation excludes administrative rulemaking or other action, executive action not subject to federal or state legislative approval, local actions by special bodies such as zoning or school boards.
2. “Lobbying” defined for IRC purposes: a. “Direct lobbying” is an attempt to influence legislation
by communication with the legislator or legislative body regarding specific legislation or proposed legislation. i. Direct lobbying includes communications with
government employees such as legislative aides as well as contacts with members of the legislative body.5
ii. With regard to ballot initiatives and public referenda, communications with members of the general public in the jurisdiction where the vote will occur are considered direct lobbying.6 Note, therefore, that a specific encouragement to vote or advocate for or
2. IIRC§ 4911(e)(2); Treas. Reg. §53.4945-2(d)(2)(iii)(defining the term for purposes
of the “expenditure” test); Treas. reg. §1.501(c)(3) - 1(c)(3)(ii) (defining the term for purposes of the “substantial part” test).
3. IRC §4911(e)(2); Treas. Reg. §56.4911-2(b)(4)(ii)(B). 4. See Rev. Rul. 73-440, 1973-2 C.B. 177. 5. Treas. Reg. §56.4911-2(b)(1). 6. Treas. Reg. §56.4911-2)b)(1)(iii).
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against such an initiative (a “call to action”) is not a necessary element.
iii. Direct lobbying includes only communications which refer to specific legislation or proposed legislation.7
iv. The communications must express a view on the legislation or proposed legislation; neutral references are excluded.8
b. “Grass roots” lobbying is an attempt to influence legislation by encouraging others to take action with regard to that legislation. i. Grass roots lobbying includes only communications
which refer to specific legislation or proposed legislation.9
ii. The communication must express a view on the legislation.10
iii. The communication must encourage the recipient to take action with regard to the legislation, such as an explicit appeal to contact legislators or an implicit inducement by identifying a specific legislator’s position (other than a neutral reference to a legis-lator as a sponsor).11 A “call to action” may be
7. Treas. Reg. §56.4911-2(b)(1)(ii). Note that not every communication referring to
and discussing legislation will be lobbying, given the exception for nonpartisan analysis, study and research.
8. Treas. Reg. §56.4911-2(b)(1)(ii). 9. Id. 10. Id. 11. The IRS has indicated that it intends, by this approach, to draw a distinction between
lobbying that is limited by §501(c)(3) and advocacy communications between exempt organizations and the public that do not attempt to influence legislation. “This is part of the Service’s attempt to maintain a careful balance between the statutory limits on electing public charities’ lobbying expenditures and the desire of those organizations to involve themselves in the public policy making process to the greatest extent consistent with those statutory limits.” 55 Fed. Reg. 35580 (Aug. 31, 1990). The “call to action” requirement is eliminated in the special case of paid mass media advertisements on the subject of pending legislation that are broadcast or published within two weeks prior to the legislative action. Those com-munications will be considered grass roots lobbying if the advertisement reflects a view on the subject of the legislation and either refers to the legislation or
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inferred from communications which provide the names and addresses of legislators or provide peti-tions, postcards, or telephone numbers to enable the recipient to advocate to the legislators or their staffs.
c. The exceptions: what is not lobbying according to the IRS i. Communications which are nonpartisan analysis,
study, or research are not lobbying.12 To qualify for this exception, a communication must provide a sufficiently full and fair exposition of the facts to enable a member of the general public to form an independent opinion, and be made available to at least a segment of the general public or to a non-partisan cross-section of the legislative body.
ii. Providing technical advice or assistance to a gov-ernmental body, in response to a written request by that body or subdivision thereof, is not lobbying.13 Communications in response to a request from a single legislator on his or her own behalf do not qualify for this exception, and the information must be made available to all members of the legislative body.
iii. Appearances before, or communications to, a legis-lative body regarding legislation which might affect the existence of the exempt organization or its affiliates, its powers, duties, exempt status, or the
encourages the public to contact legislative representatives about the general subject of the legislation. Treas. Reg. §56.4911-2(b)(5).
12. IRC §4911(d)(2)(A); Treas. Reg. §56.4911-2(c)(1). However, the expense of preparing materials subsequently used in lobbying activities will not be counted if the primary purpose of the materials was not for lobbying or the expenditures were paid more than six months before the subsequent use. In those instances where the subsequent lobbying use is by an independent organization, there must also be “clear and convincing evidence” of collusion between the two groups to prepare and disseminate the materials for lobbying purposes or the expenditures incurred in preparation will not be counted as lobbying expenditures. Treas. Reg. §56.4911-2(b)(2)(v).
13. IRC §4911(d)(2)(B); Treas. Reg. §56.4911-2(c)(3).
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deductibility of contributions to the organization, are not lobbying.14 This “self-defense” exception applies only to direct lobbying and does not apply to communications that would be considered grass roots lobbying.
iv. Communications with government officials and employees, the purpose of which is not to influence legislation, are not lobbying.15
v. Communications which are “primarily” between an exempt organization and its bona fide members with regard to legislation of interest to them, so long as members are not directly encouraged to either influence legislation themselves or urge non-members to do so.16
vi. Communications which are “examinations and discussions of broad social, economic, and similar problems,” if no call to action is included, are not lobbying.17
d. Exceptions to the Exceptions i. Subsequent Use Rule. If a nonprofit subsequently
uses nonlobbying communications or research mate-rials in a grass roots campaign, it must treat the original communications and research materials as grass roots lobbying communications. All of the original and subsequent expenses of preparing and distributing the material must be treated as grass roots expenditures. Materials would become grass roots communications when they are subsequently
14. IRC §4911(d)(2)(C); Treas. Reg. §56.4911-2(c)(4). 15. IRC §4911(d)(2)(E). 16. IRC §4911(d)(2)(D). The communication would be considered direct lobbying or
grass roots lobbying depending upon which of the latter two requirements were not satisfied. Treas. Reg. §56.4911(c) and (d). Generally, an individual is considered to be a bona fide member if he or she contributes more than a nominal amount of time or money to the organization, and communications “primarily” to those members would include communications of which at least 50% are directed to members. See Treas. Reg. §56.4911-5(f)(1)-(4).
17. Treas. Reg. §56.4911-2(c)(2).
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distributed with a direct encouragement to action, or “call to action.”18
The rule applies only to expenditures paid less than six months before the first subsequent “grass roots lobbying” use of the materials.
The rule only turns nonlobbying expenditures into grass roots lobbying expenditures; not direct lobbying expenditures.
ii. Mass Media Communications. Mass media commu-nications often do not constitute grass roots com-munications because they do not (i) refer to specific legislation; (ii) reflect a view on such legislation; and (iii) encourage the recipient to take action with respect to such legislation.19 However, under special circumstances, such communications are deemed to be grass roots lobbying:
If, within two weeks before a vote of a legis-lative body, or a committee (but not a sub-committee), an organization pays for a mass media advertisement on a highly publicized piece of legislation, the paid advertisement will be treated as a grass roots lobbying commu-nication, if – the paid advertisement reflects a view
on the general subject of the legislation; and
– either refers to the highly publicized legislation OR encourages the public to communicate with legislators on the general subject of such legislation.20
The presumption can be rebutted by demon-strating that the paid advertisement is a type of communication regularly made by the
18. Treas. Reg. §56.4911-2((b)(2)(v). 19. Treas. Reg. §56.2911-2(b)(5). 20. Treas. Reg. §56.2911-2(b)(5)(ii).
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organization in the mass media without regard to the timing of the legislation or that the timing was unrelated to the upcoming legislative action.21
“Mass media” means television, radio, bill-boards and general circulation newspapers.22
“Paid advertisement,” where the election charity is itself a mass media publisher or broadcaster, refers to all portions of the organization’s mass media publications or broadcasts, except for specific portions paid for by another person.23
“Highly publicized” means frequent coverage on television and radio, and in general circu-lation newspapers, during the two weeks preceding the vote by the legislative body or committee.24
2. Measuring the limitations on lobbying activity a. “Substantial part” test
i. Whether a “substantial part” of an organization’s activities are lobbying is a factual determination, and inevitably a subjective question.25
ii. The analysis to determine what is “substantial” is not exclusively quantitative, but requires an exami-nation of the activity in the context of the organi-zation’s activities as a whole.26
21. See id. 22. Treas. Reg. §56.2911-2(b)(5)(iii)(A). 23. Treas. Reg. §56.2911-2(b)(5)(iii)(B). 24. Treas. Reg. §56.2911-2(b)(5)(iii)(C). 25. In considering amendments adding the expenditure test, one Congressional Commit-
tee reported, “Many believe that the standards as to the permissible level of activities under present law are too vague and thereby tend to encourage subjective and selec-tive enforcement.” S. Rep. No. 94-938 (Part 2), 94th Cong., 2d Sess. (1976), at 80.
26. Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849, 855 (10th Cir. 1972); cert. denied 414 U.S. 864 (1973); but see Seasongood v. Commissioner,
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b. Lobbying “expenditures” test – the 501(h) election i. Enacted in 1976, the expenditures test is a
mechanical test which provides a safe harbor to eliminate the uncertainties inherent in the substan-tial part test while continuing to prohibit legislative activity as a primary focus of charitable exempt organizations.27
ii. Nontaxable levels of total lobbying expenditures (direct plus grass roots) are: 20% of a charity’s first $500,000 in “exempt purpose expenditures,” plus 15% of the next $500,000, 10% of the next $500,000, and 5% of any remaining “exempt purpose expenditures”, up to a maximum of $1 million to be spent on lobbying. Within those overall lobbying limits, the grass roots lobbying limit is 25% of the nontaxable amount.28
iii. “Exempt purpose expenditures” do not include amounts spent by the charity on the expenses of a separate fundraising unit, do not include amounts paid or incurred (or taxes imposed and paid) in connection with a trade or business unrelated to the charity’s purpose, and do not include amounts transferred to members of an affiliate in order to artificially inflate its exempt purpose expenditures (in relation to the affiliate’s lobbying expenditures).29
iv. The election is not available to private foundations, churches, or organizations formed to support labor unions, trade associations, or social welfare organi-zations.30
v. The Internal Revenue Service has attempted to allay any concerns about increased audit exposure from making the 501(h) election. By so electing, a charity
227 F.2d 907, 912 (6th Cir. 1955)(Five per cent of an organization’s “time and effort” devoted to lobbying did not constitute a substantial part of its activities).
27. IRC §501(h). 28. IRC § 4911(c)(2) and (3); Treas. Reg. 56.4911-1(c)(1) and (2). 29. IRC §4911 (e)(1)(C); Treas. Reg. §56.4911-4(c). 30. IRC §501(h)(4) and (5); Treas. Reg. §1.501(h)-2(b),(e).
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“can take advantage of specific, narrow definitions of lobbying and clear, dollar-based safe harbors that generally permit significantly more lobbying than the ‘no substantial part’ rule.”31
3. To elect or not elect under §501(h) a. Effect of election
i. Direct or grass roots lobbying within the statutory limits will not result in either taxes or jeopardy to exempt status.
ii. Election is a one time event, retroactive to begin-ning of the tax year designated in the election filing, and continuing in all subsequent years unless and until revoked by exempt organization.
iii. Revocation is effective only prospectively, begin-ning with the next tax year after revocation filing.
b. Mechanics of making the election i. Make the election on form 5768 (One page, no fee). ii. Make a revocation also on form 5768 (Again, no
fee). ii. Report expenditures for lobbying activity in Part II
of Schedule C of Form 990; no additional reporting to the IRS is required.
4. Sanctions a. Revocation of exempt status
i. Exempt charities which have not made a §501(h) election are subject to revocation of exempt status if a substantial part of their activities are lobbying. They may be designated “action organizations” and exempt status may be denied or revoked.32 A §501(c)(3) organization which loses its exemption by reason of substantial lobbying may not qualify
31. “General Interest Letter” dated June 26, 2000 from the Internal Revenue Service
to Charity Lobbying in the Public Interest, a project of Independent Sector. 32. Treas. Reg. §1.501(c)(3)-1(c)(3)(ii) and (iv).
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for exemption as a “social welfare organization” under §501(c)(4).33
ii. Electing charities which exceed either the direct lobbying or grass roots lobbying §501(h) nontaxable limits by 150% or more over on average over a four year period (the “lobbying ceiling”) are subject to revocation of exempt status.34 They are not then able to convert to a tax-exempt §501(c)(4) organization.35
b. Taxes i. Exempt charities which have elected under §501(h)
but who have exceeded its nontaxable lobbying limits are subject to a 25% tax on the amounts of lobbying expenditures in excess of those limits.36
ii. Nonelecting charities whose exempt status has been revoked by reason of substantial lobbying are also subject to a tax in the amount of all lobbying expenditures during that year, and an additional tax of 5% of that amount may be imposed on the responsible organization manager, “knowing that such expenditures are likely to result” in the revo-cation of exempt status, unless the manager’s actions were not willful and were due to reasonable cause.37
33. IRC §504(a). 34. IRC §501(h)(1) and (2); Treas Reg. §1.501(h)-3(b). 35. IRC §504; Treas. Reg. §1.504-1 and 2. 36. IRC §4911(a); Treas. Reg. §§56.4911-1(a), 1.501(h)-1(a)(3). 37. IRC §4912. The burden of proof is on the IRS in attempting to impose the tax on
the manager, and may not be inferred from the imposition of the tax upon the organization. See H. Rep. 100-495, 100th Cong., 1st Sess.at 1024 (1987).
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B. Lobbying by Private Foundations 1 Lobbying is prohibited
a. Any amount paid or incurred by a private foundation to carry on propaganda, or otherwise attempt to influence legislation is considered a taxable expenditure.38
b. The tax on the private foundation will be 10% of the lobbying expenditure paid or incurred.39
c. The prohibition includes attempts to influence legislation either through communications with government officials or through attempts to affect the opinion of the general public with regard to a particular item of pending or proposed legislation.40
2. Exceptions a. Communications with government officials regarding a
program jointly funded by the government and the private foundation are not lobbying.41
b. Nonpartisan analysis, study or research that is made generally available to the public or to government officials is not lobbying.42
c. Technical assistance or advice provided to a governmen-tal body or committee, in response to a written request from a representative of that body or committee, is not lobbying.43
d. Communications with legislative bodies with regard to issues that may affect the private foundation’s existence, its powers and duties, its tax exempt status, or the
38. IRC §4945(d)(1). Thus, there is no “substantiality” requirement for private
foundations. 39. Id. 40. IRC §4945(e). 41. Treas. Reg. §53.4945-2(a)(3). 42. IRC §4945(e). 43. IRC §4945(e)(2).
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deductibility of donations to the private foundation are not lobbying.44
e. Examinations and discussions of broad social, economic and similar issues, are not lobbying, so long as the discussions do not take a view of particular legislation and do not directly encourage the recipients to advocate for or against the legislation.45
3. Grant making Considerations a. If a private foundation designates a grant to a public
charity as being for lobbying purposes, it will also be treated as a lobbying expenditure by the private foun-dation; “earmarking” is taxable.46
b. Making a general support grant that is not earmarked to a public charity that engages in lobbying will not create a presumption that the grant will be used for lobbying, and the private foundation does not have a duty to make prior inquiry as to its use.47
c. A private foundation grant to a public charity for a special project that has a lobbying component will not be deemed a lobbying expenditure by the private foun-dation so long as the amount of the grants from any one foundation for that project do not exceed the nonlobby-ing portion of the budget prepared for the project by the grantee public charity.48
C. Lobbying by Other Tax-Exempt Organizations 1. 501(c)(4) civic leagues and social welfare organizations
a. Civic leagues and social welfare organizations may engage in lobbying and qualify for exempt status under §501(c)(4) even if :
44. IRC §4945(e). Private foundations are also authorized to propose legislation, without
taxation, concerning such “self-defense” issues. Treas. Reg. 53.4945-2(d)(3)(i). 45. Treas. Reg. §53.4945-2(d)(4). 46. Treas. Reg. §53.4945-2(a)(6)(i). 47. Id. 48. Treas. Reg. §53.4945-2(a)(6)(ii).
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i. a substantial part of their activities consist of lobbying, or
ii. their primary activity is lobbying, if their main objective may be achieved only by legislative action (as an “action organization”).49
b. However, a §501(c)(3) organization which loses its exemption by reason of “substantial lobbying” or lobbying in excess of the elective lobbying ceiling may not qualify for §501(c)(4) status.50
2. 501(c)(5) labor unions a. Labor organizations may engage in lobbying if within
their stated purposes. b. Members’ dues from payroll deductions may be limited
if grass roots lobbying activity is substantial.51 3. 501(c)(6) trade associations and business organizations
a. The IRS has recognized legislative lobbying as a valid function of nonprofit trade associations and business organizations.52
b. However, business expense deduction rules operate to limit this activity. Although membership dues or contri-butions to a 501(c)(6) organization are generally deducti-ble as a business expense, certain expenditures are not deductible, whether incurred by the individual or by the trade association, paid for by dues: e.g., expenditures for direct legislative lobbying at the federal and state (but not local) level and grass roots communications – includ-ing communications with members (who are considered a segment of the general public for this purpose), communications with certain Executive branch officials and political campaign activity are not deductible.53
49. See Treas. Reg. §1.501(c)(4)-1(b)(ii). 50. IRC §504(a). 51. See IRC § 162(e). 52. Rev. Rul. 61-177, 1961-2C.B. 117. 53. IRC §162(e)(2)(B); Rev. Rul. 78-113, 1978-1 C.B. 43; Rev. Rul. 78-114, 1978-
1C.B. 44.
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D. Registration and Reporting of Lobbying Activity 1. The Federal Lobbying Disclosure Act54
a. The Lobbying Disclosure Act of 1995 requires lobbyists (including nonprofit organizations) to register and file semi-annual financial disclosure reports with the Secretary of the Senate and the Clerk of the House of Representa-tives if i. the lobbying individual has made at least two
legislative contacts and has spent at least 20% of his or her time on lobbying activity in a quarterly period; and
ii. the organization employing the lobbying individual spent at least $12,500 on lobbying during that quarterly period.
b. The Act does not cover state, local, or grass roots lobbying, but does include contacts with federal legislators and certain “covered” federal executive officials.55
2. The New York State Lobbying Act56 a. Amended March 26, 2007 by the Public Employees
Ethics Reform Act of 2007. The Joint Commission on Public Ethics (“JCOPE”) enforces the NYS Lobbying Act.
b. The New York State Lobbying Act defines “lobbying” activity as “any attempt” to influence: i. The passage or defeat of any legislation by either
house of the state legislature; or ii. The approval or disapproval of any legislation by
the governor; or
54. 104 P.L. 65 §4(a)(1995). 55. However, those activities are also regulated at the federal level by Revised
Circular No. A-122 from the Office of Management and Budget. See OMB Revised Circular No. A-122 (Transmittal Memorandum No. 4, May 1997).
56. Ch. 1040 of the Laws of 1981, as amended by Ch. 946 of the Laws of 1983 and Ch. 937 of the Laws of 1997; Legislative Law Ch. 32 of the Consolidated Laws of New York, Article 1, §§1-15.
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iii. The adoption or rejection of any rule or regulation having the force and effect of law or the outcome of any rate making proceeding by any state agency; or
iv. The passage or defeat of any local law, ordinance or regulation by any municipality or subdivision thereof; or
v. The adoption or rejection of any rule or regulation having the force and effect of a local law, ordinance or regulation or any rate making proceeding by municipality or subdivision thereof.
vi. Any determination by a public official or by an officer or employee of the unified court system, or by a person or entity working in cooperation with a or by a person or entity working in cooperation with a public official or unified court system related to a governmental procurement.
vi. The adoption, issuance, rescission, modification of any terms or rejection of any gubernatorial executive order or an executive order issued by the chief executive officer of a municipality (e.g., NYC’s Mayor).
vii. Approval, disapproval, implementation of any State agreement or action relating to Class II gaming.
c. “Lobbying” activity includes administrative as well as legislative advocacy.
d. Procurement Lobbying i. The following are excluded from the definition of
“lobbying”:
responding to an RFP or IVB
formal contacts with designated procurement officials permitted under procurement rules, such as agency organized conferences, ques-tions and responses submitted through formal methods (i.e., all Q&A is disseminated to all offerors who expressed an interest in the RFP) and certain ordinary course
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communications to negotiate the terms of a contract once awarded.
ii. According to the Commission, lobbying begins when the agency has made a “determination of need.” Ask the agency whether there has been a determination of need.
iii. “Restricted Period” under the New York State Lobbying Act:
During the restricted period, there is a prohibition against engaging in lobbying activi-ties relating to procurement contracts with certain agencies and governmental entities.
Applies only to procurement contracts with state agencies, the unified court system, industrial development agencies and public benefit corporations. Notably, the restricted period does not apply to procurement contracts with municipal agencies, such as NYC Depart-ment of Youth and Community Development, NYC Department of Education and other New York City agencies.
The “restricted period” begins when the earliest written notice or advertisement of an RFP or any other method of soliciting a response from an offeror that are intended to result in a procurement contract is issued, and ending with final contract award and approval.
iv. Procurement contracts are those with estimated annual expenditure greater than $15,000; grants are not considered procurement contracts and neither are contracts between not-for-profit corporations and state executive agencies.57
e. Member Items/Discretionary Funds: Nonprofits should treat requests for member item funding from state
57. NYS Finance Law Article XI-B.
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legislators as lobbying communications, as those funds are itemized in budget legislation.
f. The act applies to grass roots (or “indirect”) lobbying, as well as direct lobbying. A “call to action” is required.58
g. The Act applies to local lobbying as well as State gov-ernment lobbying. Therefore an organization must report local lobbying in reports filed with the Commission.
h. The Act requires registration with the New York State Joint Commission on Public Ethics on a biennial and periodic financial disclosure reporting.
i. The Act applies to lobbyists and employers of lobbyists who receive or expend, as applicable, more than $5000 in reportable compensation and/or expenses for lobbying.
j. Nonprofit organizations, even when acting solely on their own behalves and not paid by outside sources, are required to register as lobbyists and report.59 Unpaid volunteers (other than Board members) receiving only reimbursement for travel and lodging expenses, however, are not required to register because those reimburse-ments are not “reportable expenses.”60
k. Lobbyists are required to file bi-monthly reports; lobbying clients continue to file semi-annual reports.
l. Public Monies Disbursement Reports i. All registered lobbyists that spend at least $5,000
in a given year seeking “public monies” from the state in excess of $15,000 in a given year are required to separately report that activity in a Public Monies Disbursement Report.
58. NY State Temporary Commission on Lobbying, Op. 21 (1979); Op. 27 (1979);
Op. 36 (1982); Op. 39 (1997); Op. 43 (2000); Op. 44 (2000); See also Hip Hop Summit Action Network, et al v. NY Temporary State Commission on Lobbying, et al (03 CIV 5553, SDNY)(challenging the application of the lobbying act to public rallies on First Amendment grounds).
59. Police Conference of New York, Inc. v. Kreutzer, 91 A.D. 2d 735 (3d. Dept. 1982). Note that the Act does not contain a “self-defense” exception, so even inquiries about an organization’s own funding would constitute lobbying.
60. NY State Temporary Commission on Lobbying, Op. 10 (1978).
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ii. “Public monies” are defined as “funds that have been appropriated as part of the State’s Annual Enacted Budget; which are designated for programs, grants or are discretionary funds, but which have not been allocated to specific recipients.”61
iii. Contracts covered under the procurement lobbying law, and county or local funds, are not included in the definition of “public monies,” and the pursuit of such funding need not be included on a Public Monies Disbursement Report.
m. Penalties–The Joint Commission on Public Ethics may impose civil penalties for “knowing and willful” violations of the Act, and may impose late filing penalties of $10 per day for first time filers and late filing penalties of $25 per day for others. i. The Commission has to give notice to newly
registered lobbyists and clients that it will assess a penalty for a first-time “knowing and willful” violation of the Act and give the lobbyist or client 15 days to submit the form.
ii. Prior to imposing a civil penalty for a knowing and willful violation the Commission must consider as a mitigating factor that the lobbyist or client has not previously been required to register and to consider as an aggravating factor the fact that the lobbyist or client has had fines or penalties in the past. The Commission must also consider the pro-portionality of the penalty to the amount the lobbyist or client expends or receives.
iii. Knowingly and willfully engaging in prohibited procurement lobbying during the Restricted Period will subject a lobbyist or client to a fine of up to $10,000 and if the Commission finds two violations of the ban on procurement lobbying within a four-year period, the Commission may increase the penalty to $25,000 and may ban the lobbyist or
61. JCOPE, Guidelines to the NYS Lobbying Act, p. 48.
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client from lobbying on procurement contracts for a period of four years. Lobbying during the four-year prohibition can result in penalties up to $50,000.
iv. Any assessment of a penalty under these new provisions will only be made after the Commission sends a notice by certified mail of the intent to assess a penalty, the basis for the penalty and offers the party an opportunity to appear, present evidence and be heard at a hearing on the merits.
n. The New York State Lobbying Act contains an exception for requests for information from government bodies, but responding to those requests will nevertheless be defined as lobbying if: i. The informant volunteered more information than
was sought in the request; ii. The informant provided requested information in a
manner that clearly attempted to influence the passage or defeat of legislation, rules, or regulations;
iii. The informant instigated the request from the government official; or
iv. The informant “otherwise engaged in lobbying” on the subject matter in question.62
o. Consequences of being listed as a lobbyist i. Public disclosure: JCOPE makes lobbying reports
available online, so anyone registered as a lobbyist under either system will be publicly identified as such. In addition, home address and spouse must be reported to JCOPE, although this information is not public.
ii. Gifts: The general rule is that lobbyists registered with New York State and their clients may not give anything of more than nominal value to public
62. NY State Temporary Commission on Lobbying, Op. 22 (1979).
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officials.63 However, certain types of gifts with de minimis value are permitted, such as:
complimentary tickets to an organization’s charitable events.64
complimentary attendance at a conference widely attended by people other than public officials, so long as the event is related to the official’s job.65
awards, plaques and other ceremonial items that are publicly presented.66
pens, t-shirts and the like that promote the organization and have little resale value.67
iii. Volunteer Lobbying: While volunteer lobbyists usually are not required to register as a lobbyist, JCOPE may require a person listed as an addi-tional lobbyist on one organization’s registration to register and report regarding any lobbying he does on a volunteer basis for any other organization.68
p. Source of funding disclosure i. Registered lobbyists whose lobbying activity is
performed on their own behalf, and clients of registered lobbyists, must disclose each source of funding over $5,000 used for such lobbying if they have spent at least $50,000 and 3% of their total expenditures in the last year on lobbying in New York State.69 The report must be made on the organization’s Client Semi-Annual Report.
63. NYS Lobbying Act § 1-m. 64. NYS Lobbying Act § 1-c(j)(i). 65. NYS Lobbying Act § 1-c(j)(ii). 66. NYS Lobbying Act § 1-c(j)(iii). 67. NYS Lobbying Act § 1-c(j)(v). 68. NY Temp. State Commiss. on Lobbying, Op. No. 10 (78-10), http://www.jcope.ny.
gov/advice/lob/opinio10.htm; NY Temp. State Commiss. on Lobbying, Op. No. 47 (02-2), http://www.jcope.ny.gov/advice/lob/opinio47.htm.
69. NYS Lobbying Act, §§ 1-h(c)(4), 1-j(c)(4).
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ii. Organizations with 501(c)(3) status that are regis-tered with the Attorney General’s Charities Bureau under article 7-A of the Executive Law are exempt.
iii. Organizations with 501(c)(4) status that are regis-tered with the Attorney General’s Charities Bureau under article 7-A of the Executive Law may be exempted if “their primary activities concern any area of public concern that would create a substantial likelihood that such disclosure would lead to harm, threats, harassment, or reprisals.”
q. Reportable business relationships i. Lobbyists registered with New York State, and their
clients, must disclose to JCOPE certain business relationships with state officers and employees.70 Covered relationships include those in which the lobbyist or client organization pays, gives or prom-ises goods, services or anything of value, in excess of $1,000 in a calendar year, to a state officer or employee. Transactions that are not covered include:
The sale of goods or services that are generally available to, and offered on the same terms and conditions as, the general public or a segment thereof;
Campaign contributions;
The transfer of something of value from a state officer or employee (or an entity in which he has the requisite involvement); and
The delivery of medical, dental, mental health and certain types of legal services are exempted from the definition of a reportable business relationship.71
ii. The relationship is reportable if the recipient is:
70. NYS Lobbying Act, §§ 1-c(w), 1-e(c)(8)(i)-(iii), 1-j(b)(6)(i)-(iii). 71. JCOPE, Reportable Business Relationship Guidelines, http://jcope.ny.gov/about/
lob/Reportable%20Business%20Relationships%20Guidelines.pdf.
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an individual whom the lobbyist has reason to know is a state officer or employee,
a non-governmental entity for which the lob-byist or client has reason to know that a state officer or employee is proprietor, partner, director, officer or manager or controls 10% or more of the stock (1% in the case of a publicly traded entity), or
a third party at the direction of a state officer or employee (or an entity in which the state officer or employee has the requisite involve-ment) in exchange for goods, services or anything of value provided by the state officer or employee (or an entity in which the state officer or employee has the requisite involvement).
iii. A client organization will be deemed to have a reportable business relationship if any of its pro-prietors, partners, directors, or executive manage-ment has such a relationship.
iv. If a reportable business relationship exists, it must be reported on the lobbyist’s Statement of Regis-tration Form, and a Business Relationship Form must be submitted to JCOPE biennially. If there are no reportable business relationships, then Business Relationship Forms do not need to be submitted.72
3. The New York City Lobbying Act73 a. The New York City Act defines “lobbying” activity as
“any attempt” to influence: i. The passage or defeat of any local law or resolu-
tion by the city council; ii. The approval or disapproval of any local law or
resolution by the mayor;
72. JCOPE, Reportable Business Relationship Instructions (April 2013), p. 5, http:// www.jcope.ny.gov/rbr/2012-05-20%20RBR%20INSTRUCTIONS%20FINAL.pdf.
73. NYC Admin. Code Title 3, §3-211 et seq.
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iii. Any determination made by an elected city official or an officer or employee of the city with respect to the procurement of goods, services, or construction;
iv. Zoning or land use determinations by the mayor, city council, city planning commission, a borough president, a borough board or community board;
v. Determinations as to the disposition or lease of real property by the city or with respect to a franchise concession or revocable consent;
vi. The adoption, amendment or rejection of any agency rule having the force of law;
vii. The outcome of any ratemaking proceeding before a city agency; or
viii. Any determination of a board or commission. b. The New York City Act applies to both individual
lobbyists and their employers. Nonprofits must register as lobbyists and report. Registration and reporting must be done on-line.
c. The compensation/expenditure threshold trigger is $5000 in a calendar year.
d. Activity is considered lobbying even before a bill or rule has been introduced. Lobbying includes an attempt to affect the introduction or amendment of legislation, the mayor’s decision to support or oppose legislation, and an agency’s decision to propose a rule.
e. Lobbying includes an attempt to influence an agency’s decision to hold or the timing of a rate making proceed-ing, the agenda of a board or commission, and a deter-mination regarding the calendaring or scope of any city council oversight hearing.
f. Lobbying includes an attempt to influence “any deter-mination made by an elected city official or an officer or employee of the city to support or oppose any state or federal legislation, rule or regulation.” This applies even if the legislation or rule has not yet been formally introduced or proposed.
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g. Registration and periodic and annual financial disclosure reporting with the Clerk of the City of New York.
h. Grants of discretionary funding from city legislators (member items) are announced at the time of the finali-zation of the City budget, and any communications seeking such funding prior to that announcement should be considered lobbying communications.
i. Lobbyists’ reports are required to be filed bi-monthly, and lobbying organizations’ reports are required to be filed semi-annually. However, organizations that spend between $5,000 and $10,000 solely on lobbying on their own behalf must file just two lobbyist periodic reports each year, in lieu of the current six lobbyist periodic reports.
j. The Clerk’s office is mandated to conduct random audits, can refer matters for investigation by Department of Investigation.
k. Registration statements must list the names, addresses and phone numbers of (a) the registered lobbyist, (b) any employee of officer “who engages in any lobbying activity” (emphasis added), (c) employees and officers employed in an organization’s division that engages in lobbying activities and (d) the spouse or domestic partner and unemancipated children of the foregoing. i. Registration statements are publicly available. How-
ever, the names of unemancipated children on state-ments of registration, unless a campaign contribution is made in the name of the child, are not disclosed, and the City Clerk is required to keep confidential all home address information provided on regis-tration statements and all names, home and business addresses of spouses, domestic partners and uneman-cipated children.
l. Local law numbers, procurement contracts, etc. on which the lobbyist expects to lobby are required on registration statements. The Clerk’s Office, by rule, has directed that the reporting periods will conform to those used by the Joint Commission on Public Ethics.
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m. Late fees & penalties i. The Clerk’s Office may assess penalties for late
filed reports that will accrue daily ($10/day for each report for first time filers, and $25/day for each report for all other filers).
ii. The City Clerk has discretion to reduce or waive late fees in appropriate cases.
iii. Penalties for knowing and willful violation of the Lobbying Law can reach $30,000.
n. Persons required to be listed on statements of registration are prohibited from giving or offering a gift to any public servant. i. The Conflicts of Interest Board has adopted rules
relating to the gift ban, to define prohibited and permitted gifts, including de minimis gifts, such as “pens and mugs, gifts that public servants may accept as gifts to the city and gifts from family members and close personal friends on family or social occasions.”
ii. Included among permissible exceptions to the gift ban rule is giving complimentary tickets to elected or other city officials.
o. The Campaign Financing law by preventing the matching of contributions by lobbyists or other persons required to be included in a statement of registration to candidates participating in the city’s optional public financing program.
p. Registered lobbyists, including not-for-profit organiza-tions, are required to file periodic reports called fund-raising and/or political consulting reports, in which the lobbyist must report the political fundraising and paid political consulting of the lobbyist, any person listed on its registration statement and their unemancipated children. i. The City Clerk’s office interprets this provision of
the law to require nonprofits to ask the individuals listed on their registration statements about the political fundraising and paid political consulting
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in which they engage, even though it is conducted in their private lives during off-work hours.
ii. The registered organization lobbyist has to report details about this activity, including for whom funds were raised, and report it periodically along with lobbyist reports and then cumulatively in an annual report due on January 15 of each year, for the previous year.
q. Guidance form the New York City Clerk clarifies two of the issues that had been unclear in applying the Lobbying Law. i. Lobbying activity by uncompensated volunteers,
including volunteer Board members are required to be reported if the lobbying organization had pre-viously crossed the $2,000 registration threshold for lobbying organizations or does so by expendi-tures associated with the volunteer’s lobbying activity, and the volunteer will be required to report that activity as a lobbyist if the volunteer had pre-viously crossed the $2,000 threshold for lobbyists or does so by expenditures associated with that activity (alternatively, it may be reportable on an organization’s lobbyist’s report as activity by an “additional lobbyist”).74
ii. Lobbying organizations that engage in legislative advocacy through coalitions or associations must report that activity in filings in their own names if they pay any part of a lobbyist’s compensation directly, but need not report those activities if the compensation is paid by a separate entity formed or maintained to act on behalf of the coalition or association. Reporting by any member of a coali-tion or association must also identify the other
74. New York City Clerk; Lobbying Bureau, Advisory Opinion 2012-1.
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coalition or association members on whose behalves the lobbying expenditures were made.75
4. NYC Campaign Finance Board Independent Expenditure Dis-closure Rules76 a. Both 501(c)(3) and 501(c)(4) organizations must report
independent expenditures supporting or opposing a ballot proposal.
b. 501(c)(4) organizations must also report independent expenditures supporting or opposing a candidate for a NYC election. 501(c)(3) organizations are exempt from this requirement because they are prohibited by their tax status from supporting or opposing a candidate for public office.
c. A communication will be considered an independent expenditure if it is either: i. express advocacy communication, which contains
phrases that can have no reasonable meaning other than to advocate for or against a ballot proposal or candidate; or
ii. electioneering communication, which refers to a ballot proposal or candidate within 30 days of a primary election or within 60 days of a general election.
d. If an organization spends $1,000 or more to influence a candidate election (501(c)(4)s only) or a ballot initiative (both 501(c)(4)s and 501(c)(3)s) in NYC, that organi-zation must: i. Report all expenditures of $100 or more to the
Campaign Finance Board. ii. Clearly label certain communications as “paid for
by” the organization or individual.
75. “Instruction Involving the Proper Method of Filing Lobbyist Reports for Asso-
ciation, Coalition and/or Third Party Filers;” New York City Clerk, Lobbying Bureau, http://www.cityclerk.nyc.gov/downloads/pdf/proper-method.pdf.
76. http://www.nyccfb.info/act-program/independent_expenditures.aspx.
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iii. Disclose all contributions from other organizations and contributions of $1,000 or more from indi-viduals, once cumulative spending reaches $5,000.
iv. Reports must be filed electronically with the Cam-paign Finance Board, and only in election years. Reports are due approximately every two months during elections, and more frequently just before and after an election.
142
NOTES
143
NOTES
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7
Lobbying Activity by Nonprofit Organizations (PowerPoint slides)
Sean Delany
Lawyers Alliance for New York
If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.
145
146
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4
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)5
151
Sp
eci
al
Cir
cum
stan
ces:
Su
bse
qu
en
t U
se R
ule
Bas
ic R
ule
:M
ater
ials
pre
par
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or
non-l
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purp
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s ar
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subje
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o lobbyi
ng lim
its
If e
xem
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org
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non-l
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within
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ter
pay
men
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a gra
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the
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esea
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gra
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bbyi
ng e
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a lobbyi
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6
152
Sp
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Cir
cum
stan
ces:
Mass
Med
ia C
om
mu
nic
ati
on
s
A r
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pre
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f gra
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lobbyi
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crea
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•W
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tw
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7
153
Sp
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icati
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mak
e a
contr
ibution o
f m
ore
than
a
nom
inal
am
ount
of
tim
e or
money
, or
–be
one
of
a lim
ited
num
ber
of honora
ry m
ember
s
8
154
Ho
w m
uch
lo
bb
yin
g c
an
yo
u d
o?
501(c
)(3)
org
aniz
atio
ns
hav
e a
choic
e bet
wee
n t
wo
test
s:
Lobbyi
ng m
ay n
ot
be
a “s
ubst
antial
par
t” o
f ex
empt
org
aniz
atio
n’s
act
ivitie
s
Saf
e har
bor
thro
ugh 5
01(h
) el
ection (
exci
se t
axes
if
org
aniz
atio
n e
xcee
ds
limits)
Subst
antial
par
t te
st
Exp
enditure
s te
st
9
155
Su
bst
an
tial
Part
Test
•A “
fact
s an
d c
ircu
mst
ance
s” t
est
–not
quan
tita
tive
•
Ass
esse
d in lig
ht
of
the
org
aniz
atio
n’s
act
ivitie
s as
a
whole
(in
cludin
g v
olu
nte
ers)
•N
eces
sarily
subje
ctiv
e in
its
applic
atio
n –
crea
tes
unce
rtai
nty
•The
def
ault t
est:
applie
s if e
xem
pt
org
aniz
atio
n
does
not
elec
t th
e Exp
enditure
s Tes
t•
Churc
hes
exe
mpt
from
fili
ng a
n I
RS 9
90 A
nnual
Ret
urn
mu
st u
se t
his
test
10
156
Exp
en
dit
ure
s Test
: H
ow
it
Wo
rks
•20%
of
a ch
arity'
s firs
t $500,0
00
•15%
of
the
nex
t $500,0
00
•10%
of
the
nex
t $500,0
00
•5%
of
any
rem
ainin
g lobbyi
ng e
xpen
diture
s•
up t
o a
max
imum
of
$1 m
illio
n in lobbyi
ng
expen
diture
s
NO
TE:
Within
thes
e lim
its,
only
25%
can
be
gra
ssro
ots
lobbyi
ng e
xpen
diture
s
See
the
char
t in
FAQ
s About
Nonpro
fit
Org
aniz
atio
ns
and L
obbyi
ng
11
157
Exp
en
dit
ure
s Test
: H
ow
it
Wo
rks
(co
nt’
d)
•Can
lobby
up t
o 1
50%
ove
r lim
its
without
jeopar
diz
ing e
xem
pt
stat
us;
but
pay
exc
ise
taxe
s if e
xpen
diture
s ex
ceed
the
limit
•Exc
ise
taxe
s ca
lcula
ted o
n e
xces
s, n
ot
tota
l ex
pen
diture
s
•Rolli
ng 4
-yea
r av
erag
ing o
f al
l lo
bbyi
ng
expen
diture
s
•N
o a
dditio
nal
rep
ort
ing r
equirem
ents
–re
port
on
Form
990,
Sch
edule
C
12
158
Exp
en
dit
ure
s Test
: C
alc
ula
tin
g L
ob
byin
g E
xp
en
ses
•S
taff
time
–ov
erhe
ad–
prep
tim
e –
incl
udin
g re
sear
ch o
r stra
tegy
pl
anni
ng if
the
prim
ary
purp
ose
is lo
bbyi
ng
•P
hoto
copy
ing
or m
ailin
g co
sts
•Tr
avel
, lod
ging
& fo
od•
Out
side
ven
dors
13
159
Exp
en
dit
ure
s Test
:
Ho
w t
o C
ho
ose
It
•501(h
) el
ection is
a one-
tim
e ev
ent,
just
file
Form
5768 (
1
pag
e, n
o fee
)
•Ele
ctio
n is
retr
oac
tive
to t
he
beg
innin
g o
f th
e re
port
ing p
erio
d
in w
hic
h it
is file
d
14
160
San
ctio
ns
•Rev
oca
tion o
f ex
empt
stat
us
for
“subst
antial
” lo
bbyi
ng
•Exc
ise
tax
on t
ota
l lo
bbyi
ng e
xpen
diture
s during
report
ing p
erio
d
•N
o r
evoca
tion o
f ex
empt
stat
us
unle
ss
expen
diture
s ex
ceed
150%
of
limits
Both
tes
ts:
5%
tax
on o
rgan
izat
ion m
anag
ers
who
“know
[ ]
that
exp
enditure
s ar
e lik
ely
to r
esult in
revo
cation”
Su
bst
an
tial
part
test
Exp
en
dit
ure
s te
st
15
161
San
ctio
ns
(co
nt’
d)
Both
tes
ts:
A 5
01(c
)(3)
that
lose
s its
exem
ption b
ecau
se o
f su
bst
antial
lo
bbyi
ng o
r lo
bbyi
ng in e
xces
s of
501(h
) lo
bbyi
ng c
eilin
g c
annot
qual
ify
for
501(c
)(4)
stat
us
16
162
Ho
w t
o R
ep
ort
IRS
990
IRS
990
-EZ
17
163
Lo
bb
yin
g b
y P
rivate
Fo
un
dati
on
s•
Priv
ate
Foundat
ion a
re p
rohib
ited
form
en
gag
ing in lobbyi
ng
•Pr
ivat
e Fo
undat
ion a
re p
rohib
ited
fro
m
earm
arki
ng
gra
nts
for
lobbyi
ng a
ctiv
ity
•Pr
ivat
e fo
undat
ions
may
mak
e gen
eral
su
pport
gra
nts
that
are
use
d f
or
lobbyi
ng
activi
ty•
Priv
ate
foundat
ions
may
mak
e gra
nts
for
spec
ific
pro
ject
s th
at incl
ude
lobbyi
ng
activi
ty,
if t
he
gra
nt
is n
o lar
ger
than
the
non-l
obbyi
ng p
art
of
the
pro
ject
budget
18
164
Lo
bb
yin
g b
y o
ther
tax-e
xem
pt
org
an
izati
on
s
Cer
tain
typ
es o
f ta
x ex
empt
org
aniz
atio
ns
can e
ngag
e in
unlim
ited
lobbyi
ng
& s
om
e par
tisa
n p
olit
ical
act
ivity:
•501(c
)(4)
civi
c le
ague
or
soci
al w
elfa
re
org
aniz
atio
n
•501(c
)(6)
busi
nes
s le
ague
or
pro
fess
ional
as
soci
atio
n
19
165
Lo
bb
yin
g b
y o
ther
tax-e
xem
pt
org
an
izati
on
s (c
on
t’d
)
A 5
01(c
)(3)
org
aniz
atio
n C
AN
be
affilia
ted
with a
(c
)(4)
or
(c)(
6)
CA
N h
ave
•ove
rlap
pin
g b
oar
ds
•sh
ared
sta
ff•
shar
ed p
hys
ical
spac
e
CA
N’T
hav
e•
contr
ol
•su
bsi
diz
atio
n20
166
Rep
ort
ing
an
d D
iscl
osu
re
Law
s
Don’t lim
itlo
bbyi
ng –
only
re
quire
regis
trat
ion a
nd
dis
closu
re o
f lo
bbyi
ng a
ctiv
ity
No p
enal
ty f
or
over
-rep
ort
ing
Req
uire
report
ing o
f so
me
activi
ties
that
don’t c
ount
tow
ards
IRS lim
it
21
167
Fed
era
l Lo
bb
yin
g D
iscl
osu
re A
ct
Only
applie
s if:
1)
Org
aniz
atio
nem
plo
ying t
he
lobbyi
ng indiv
idual
sp
ent
at lea
st $
12,5
00 o
n f
eder
al lobbyi
ng
during a
quar
terly
per
iod,
an
d2)
Lobbyi
ng indiv
idual
a) m
ade
at lea
st t
wo leg
isla
tive
conta
cts
an
db)
spen
t at
lea
st 2
0%
of
his
/her
tim
e on
lobbyi
ng in t
hat
quar
terly
per
iod.
Does
n’t c
ove
r st
ate,
loca
l, g
rass
roots
lobbyi
ng
22
168
NY
S L
ob
byin
g A
ct
Applie
s to
all
lobbyi
ng
org
aniz
atio
ns
spen
din
g,
and
lobbyi
sts
rece
ivin
g,
$5,0
00+
an
nual
ly for
lobbyi
ng b
efore
NYS
or
NYC
Feder
al lobbyi
ng d
oes
n’t c
ount
23
169
NY
S –
Wh
at
Is L
ob
byin
g?
Att
empting t
o influen
ce C
ity
or
Sta
te:
•le
gis
lation (
incl
udin
g intr
oduct
ion o
f le
gis
lation)
–budget
leg
isla
tion &
mem
ber
item
s co
unt!
•ag
ency
rule
s, r
egula
tions,
and
pro
cure
men
t
•ad
min
istr
ativ
e ag
ency
act
ion (
“hav
ing t
he
forc
e an
d e
ffec
t of
law
”)
24
170
NY
S –
Wh
at
Is L
ob
byin
g?
(co
nt’
d)
Applie
s to
•direc
t lo
bbyi
ng a
nd
gra
ssro
ots
(“i
ndirec
t”)
lobbyi
ng:
req
uires
a “
call
to a
ctio
n”
•ap
pro
val or
veto
of
any
legis
lation b
y th
e gove
rnor
•ex
ecutive
ord
er b
y G
ove
rnor
or
May
or
25
171
NY
S –
Wh
at
Is N
ot
Lo
bb
yin
g?
•Tal
king t
o a
public
off
icia
l w
ithout
an “
ask”
in
volv
ing leg
isla
tion,
rule
s or
pro
cure
men
t
•Pa
rtic
ipat
ing in t
he
public
pro
ceed
ings
of
a gove
rnm
ent
agen
cy
•Res
pondin
g t
o a
req
ues
t fo
r in
form
atio
n(i
ncl
udin
g leg
isla
tive
tes
tim
ony
if y
ou w
ere
spec
ific
ally
invi
ted b
y th
e co
mm
itte
e)
26
172
NY
S &
NY
C –
Calc
ula
tin
g
Lo
bb
yin
g E
xp
en
ses
•S
taff
time
–in
clud
ing
over
head
•P
rep
time
–in
clud
ing
rese
arch
or s
trate
gy
plan
ning
if th
e pr
imar
y pu
rpos
e is
lobb
ying
•P
hoto
copy
ing
or m
ailin
g co
sts
•O
utsi
de v
endo
rs
Unl
ike
IRS
lim
it, d
on’t
need
to in
clud
e tra
vel,
lodg
ing,
food
for r
egis
tere
d lo
bbyi
sts
27
173
NY
S –
Mech
an
ics
of
Fil
ing
•Lo
bbyi
sts
and c
lients
reg
iste
r onlin
e w
hen
th
ey r
easo
nab
ly a
ntici
pat
e ex
ceed
ing
$5,0
00 in e
xpen
ses
for
stat
e an
d loca
l lo
bbyi
ng
•M
ost
nonpro
fits
whose
em
plo
yees
lobby
regis
ter
as b
oth
clie
nt
and lobbyi
stif m
ore
th
an o
ne
per
son lobbie
s
**Reg
iste
r w
ith &
rep
ort
to t
he
Join
t Com
mis
sion
on P
ublic
Eth
ics
(JCO
PE)*
*28
174
NY
S –
Mech
an
ics
of
Fil
ing
(c
on
t’d
)
•Set
up o
nlin
e ac
count
•Fi
le c
lient
report
in J
anuar
y an
d J
uly
Cli
en
ts
29
175
NY
S –
Mech
an
ics
of
Fil
ing
(c
on
t’d
)
•Reg
iste
rev
ery
2 y
ears
: L
ist
org
aniz
atio
n a
s lo
bbyi
st,
list
indiv
idual
em
plo
yees
as
additio
nal
lo
bbyi
sts.
–2015-2
016 r
egis
trat
ion w
as d
ue
Januar
y 1,
2015,
or
within
15 d
ays
of
when
lobbyi
ng
star
ts
•Rep
ort
ever
y 2 m
onth
s.
Lo
bb
yis
ts
30
176
NY
S –
En
forc
em
en
t &
P
en
alt
ies
•La
te f
ees
of
up t
o $
10/$
25 p
er d
ay f
or
each
rep
ort
due
(can
be
reduce
d/w
aive
d)
•Civ
il pen
alties
for
know
ing a
nd w
illfu
l vi
ola
tion c
an r
each
$50,0
00
•M
ost
com
mon r
easo
ns
for
audit:
–m
ism
atch
ing c
lient
and lobbyi
st r
eport
s,
–co
mpla
int
from
the
public
, or
–ra
ndom
audit
31
177
NY
C L
ob
byin
g A
ct
•$5,0
00 a
nnual
fili
ng t
hre
shold
(up fro
m
$2,0
00):
only
NYC a
ctiv
itie
s co
unt
(not
stat
e &
fed
eral
)
•As
of 2014,
City
Cle
rk c
an e
xerc
ise
dis
cret
ion in a
sses
sing lat
e fe
es
•Ther
e is
a 6
-month
am
nes
ty J
an.-
June
2016 (
JCO
PE h
as a
sim
ilar
amnes
ty)
32
178
NY
C –
Wh
at
Is L
ob
byin
g?
•City
lobbyi
ng o
nly
; st
ate
and f
eder
al
don’t c
ount
•Cove
rs e
very
typ
e of
activi
ty t
hat
st
ate
cove
rs:
leg
isla
tion,
adm
inis
trat
ive,
pro
cure
men
t•
Als
o c
ove
rs:
zonin
g,
land u
se,
dis
posi
tion o
f City’
s re
al p
roper
ty,
det
erm
inat
ion o
f Boar
d o
r Com
mis
sion
33
179
NY
C –
Wh
at
Is L
ob
byin
g?
Tim
ing:
It’s
lobbyi
ng e
ven b
efore
a
bill
/rule
has
bee
n intr
oduce
d,
if
you’re
tryi
ng t
o influen
ce
–In
troduct
ion/a
men
dm
ent
of
legis
lation,
–M
ayor’s
dec
isio
n t
o s
upport
or
oppose
leg
isla
tion,
–Agen
cy’s
dec
isio
n t
o p
ropose
a r
ule 34
180
NY
C –
Wh
at
Is L
ob
byin
g?
Hea
ring:
It’s
lobbyi
ng if
you’re
tryi
ng t
o influen
ce
–Agen
cy’s
dec
isio
n t
o h
old
or
tim
ing
of
rate
mak
ing p
roce
edin
g–
Agen
da
of
Boar
d o
r Com
mis
sion
–Cal
endar
ing o
r sc
ope
of
any
City
Counci
l ove
rsig
ht
hea
ring
35
181
NY
C –
Wh
at
Is L
ob
byin
g?
Sta
te o
r fe
der
al leg
isla
tion:
It
’s lobbyi
ng if yo
u’re
tryi
ng
to influen
ce d
ecis
ion b
y ci
ty
elec
ted o
ffic
ial or
emplo
yee
to s
upport
/oppose
sta
te o
r fe
der
al r
ule
or
regula
tion
36
182
NY
C –
Ho
w t
o F
ile
•En
roll
in e
-fili
ng s
yste
m b
efore
lobbyi
ng s
tart
s•
Fil
e a
nnual
rep
ort
by
Jan.
15
•R
eg
iste
r by
Jan.
15 (
or
when
ever
you
reas
onab
ly a
ntici
pat
e ex
ceed
ing $
5k
thre
shold
) •
Rep
ort
eve
ry 2
month
s at
som
e poin
t, t
his
will
be
reduce
d t
o 2
rep
ort
s a
year
for
org
aniz
atio
ns
that
lobby
on t
hei
r ow
n b
ehal
f &
spen
d les
s th
an $
10k
**Reg
iste
r w
ith &
rep
ort
to N
YC C
lerk
’s L
obbyi
ng B
ure
au**
Clie
nts
Lobbyi
sts
& C
lient/
Lobbyi
sts
37
183
Ap
ply
ing
fo
r G
overn
men
t Fu
nd
ing
Subm
itting a
gra
nt
applic
atio
n o
r re
spondin
g t
o a
n R
FP t
hro
ugh a
fo
rmal
pro
cess
is
not
lobbyi
ng
(NYC &
NYS)
38
184
Co
nta
ctin
g a
leg
isla
tor
or
ag
en
cy o
ffic
ial
to s
eek
fun
din
g
Som
etim
es lobbyi
ng,
som
etim
es n
ot.
•M
em
ber
item
: C
onta
ctin
g leg
isla
tor
about
a m
ember
ite
m is
lobbyi
ng (
NYC &
N
YS)
•O
ther
bu
dg
et
item
s: Att
empt
to
influen
ce incl
usi
on o
f fu
ndin
g in t
he
Sta
te
or
City
budget
is
lobbyi
ng (
NYC &
NYS)
39
185
Co
nta
ctin
g a
leg
isla
tor
or
ag
en
cy o
ffic
ial
to s
eek
fun
din
g (
con
t’d
)
Att
em
pti
ng
to
in
flu
en
ce a
pro
cure
men
t co
ntr
act
: •
Issu
ed b
y an
exe
cutive
agen
cy:
–If
fundin
g is
not
open
to f
or-
pro
fit
entities
, it is
no
t lo
bb
yin
g–
If f
undin
g is
open
to f
or-
pro
fit
entities
& w
ort
h
$15k+
, it i
s lo
bb
yin
g
•Is
sued
by
county
or
loca
l gove
rnm
ent
is
lob
byin
g (
NYC &
NYS)
40
186
Co
nta
ctin
g a
leg
isla
tor
or
ag
en
cy o
ffic
ial
to s
eek
fun
din
g (
con
t’d
)
Gra
nts
: S
eeki
ng t
o influen
ce a
gra
nt
•is
lobbyi
ng f
or
NYC
•is
not
lobbyi
ng f
or
NYS
41
187
Part
icip
ato
ry B
ud
geti
ng
•Pr
obab
ly n
ot
lobbyi
ng
if y
ou d
on’t
enco
ura
ge
peo
ple
to v
ote
for
or
agai
nst
a p
articu
lar
initia
tive
:–
Enco
ura
gin
g p
eople
to p
artici
pat
e in
PB
pro
cess
–H
elpin
g o
rgan
ize
PB–
Ser
ving a
s a
del
egat
e
•Pr
obab
ly lobbyi
ng
–Enco
ura
gin
g p
eople
to v
ote
for
or
agai
nst
a
par
ticu
lar
initia
tive
42
188
NY
S R
est
rict
ed
Peri
od
Once
a s
tate
RFP
iss
ues
, until th
e co
ntr
act
is
awar
ded
, lo
bbyi
ng f
or
pro
cure
men
t co
ntr
acts
can
only
be
direc
ted t
o a
gen
cy’s
“d
esig
nat
ed c
onta
ct”
Exc
eptions
•Exe
cutive
agen
cy c
ontr
acts
open
only
to
nonpro
fits
and g
ove
rnm
ent
agen
cies
•G
rants
•County
or
munic
ipal
contr
acts
•Cer
tain
conta
cts
in n
orm
al c
ours
e of
RFP
pro
cess
(e
.g.
bid
der
s’ c
onfe
rence
s)43
189
Bo
ard
Mem
bers
•N
YC:
Lobbyi
ng a
ctiv
ity
by
volu
nte
er b
oar
d m
ember
s m
ust
be
report
ed i
fth
e org
aniz
atio
n is
a re
gis
tere
d lobbyi
st
•N
YS:
Rule
s ar
e le
ss c
lear
, but
pro
bab
ly d
on’t h
ave
to r
eport
44
190
Co
ali
tio
ns
Gen
eral
rule
: Rep
ort
all
expen
ses
incu
rred
by
your
ow
n o
rgan
izat
ion.
•Fe
der
al g
ove
rnm
ent,
NYS &
NYC e
ach
hav
e ve
ry s
pec
ific
rule
s ab
out
how
to
report
lobbyi
ng in a
coal
itio
n•
The
rule
s va
ry d
epen
din
g o
n w
het
her
th
e co
alitio
n is
a le
gal
ly s
epar
ate
org
aniz
atio
n,
reta
ins
an o
uts
ide
lobbyi
st,
or
mem
ber
s do a
ll th
e lo
bbyi
ng 45
191
ULU
RP
NYC’s
Uniform
Lan
d U
se R
evie
w P
roce
dure
is
how
maj
or
zonin
g &
oth
er lan
d u
se
dec
isio
ns
are
mad
e in
NYC.
–Fi
le A
pplic
atio
n–
Cer
tific
atio
n by
Dep
artm
ent o
f City
Pla
nnin
g–
Com
mun
ity B
oard
Rev
iew
–B
orou
gh P
resi
dent
Rev
iew
–C
ity P
lann
ing
Com
mis
sion
Rev
iew
–C
ity C
ounc
il R
evie
w–
May
oral
Rev
iew
46
192
ULU
RP
•N
YC:
Try
ing t
o influen
ce a
ny
stag
e of
ULU
RP
is lobbyi
ng
exce
pt
Dep
artm
ent
of City
Plan
nin
g
Cer
tifica
tion
–This
incl
udes
Com
munity
Boar
d R
evie
w!
•N
YS:
Try
ing t
o influen
ce C
ity
Counci
l or
May
ora
l re
view
is
pro
bab
ly
lobbyi
ng;
all oth
er s
tages
are
not
47
193
Wh
at
Els
e M
ust
R
eg
iste
red
Lo
bb
yis
ts D
o?
•C
on
trib
uti
on
sto
NYC c
ampai
gns
are
limited
; N
YC C
ampai
gn F
inan
ce B
oar
d w
on’t m
atch
co
ntr
ibutions
(NYC)
•Rep
ort
po
liti
cal
fun
dra
isin
g a
nd p
aid
po
liti
cal
con
sult
ing
(NYC)
•Can
’t m
ake
gif
ts t
o p
ublic
ser
vants
(but
–de
min
imis
exce
ption)
(NYC &
NYS)
Inte
ract
ion
s w
ith
can
did
ate
s,
ele
cted
s&
go
vern
men
t em
plo
yees
48
194
Wh
at
Els
e M
ust
Reg
iste
red
Lo
bb
yis
ts D
o?
Wh
ich
tra
nsa
ctio
ns
are
co
vere
d?
•Pa
yor:
A c
lient
or
lobbyi
st (
incl
udin
g d
irec
tors
or
exec
utive
man
agem
ent)
•Pa
ys w
hat
: W
ithin
12 m
os.
, pay
s $1k+
for
goods,
ser
vice
s, o
r an
ythin
g o
f va
lue
•To w
hom
:
–Sta
te o
ffic
ial/
emplo
yee
or
–O
ther
entity
in w
hic
h s
tate
off
icia
l/em
plo
yee
is
a pro
priet
or,
par
tner
, direc
tor,
off
icer
or
man
ager
, or
ow
ns/
contr
ols
10%
+ o
f th
e st
ock
(1
% f
or
public
ly t
raded
com
pan
ies)
or
–Som
eone
at t
he
direc
tion o
f a
stat
e off
icia
l or
stat
e em
plo
yee
NY
S R
ep
ort
ab
le B
usi
ness
Rela
tio
nsh
ips
49
195
Wh
at
Els
e M
ust
Reg
iste
red
Lo
bb
yis
ts D
o?
Wh
ich
tra
nsa
ctio
ns
are
no
t co
vere
d?
•m
edic
al,
den
tal an
d m
enta
l hea
lth s
ervi
ces
and t
reat
men
t.•
legal
ser
vice
s re
inve
stig
atio
n o
r pro
secu
tion
by
law
enfo
rcem
ent
auth
orities
, ban
kruptc
y or
dom
estic
rela
tions
mat
ters
•co
mm
erci
ally
ava
ilable
consu
mer
and
busi
nes
s lo
ans
or
lines
of
cred
it in o
rdin
ary
cours
e•
goods
& s
ervi
ces
off
ered
to g
ener
al p
ublic
on
subst
antial
ly s
ame
term
s
50
NY
S R
ep
ort
ab
le B
usi
ness
Rela
tio
nsh
ips
196
Wh
at
Els
e M
ust
Reg
iste
red
Lo
bb
yis
ts D
o?
Wh
at
mu
st c
lien
ts &
lo
bb
yis
ts d
o?
–Tra
ck o
rgan
izat
ion’s
rel
atio
nsh
ips
–Surv
ey e
xecu
tive
sta
ff &
boar
d
–D
iscl
ose
Lobbyi
sts
dis
close
on b
iennia
l re
gis
trat
ions;
cl
ients
dis
close
on s
emi-
annual
rep
ort
s
NY
S R
ep
ort
ab
le B
usi
ness
Rela
tio
nsh
ips
51
197
Wh
at
Els
e M
ust
Reg
iste
red
Lo
bb
yis
ts D
o?
Whet
her
or
not
an a
ctiv
ity
counts
as
lobbyi
ng,
a re
gis
tere
d lobbyi
st m
ust
file
this
rep
ort
if:
(1)
the
lobbyi
st a
ntici
pat
es s
pen
din
g in e
xces
s of
$5k
(2)
to influen
ce t
he
allo
cation o
f m
ore
than
$15k
(3)
that
the
stat
e le
gis
latu
re h
as incl
uded
in t
he
stat
e budget
, an
d d
esig
nat
ed for
pro
gra
ms,
gra
nts
or
dis
cret
ionar
y fu
nds,
without
allo
cating
it t
o a
par
ticu
lar
reci
pie
nt
(“lu
mp s
um
ap
pro
priat
ion”)
This
is
a se
par
ate
form
, file
d b
i-m
onth
ly f
or
any
per
iod d
uring w
hic
h
cove
red a
ctiv
itie
s ar
e co
nduct
ed o
r co
mpen
sation is
pai
d
NY
S D
isb
urs
em
en
t o
f P
ub
lic
Mo
nie
s R
ep
ort
52
198
Wh
at
Els
e M
ust
R
eg
iste
red
Lo
bb
yis
ts D
o?
•S
ou
rce o
f Fu
nd
ing
Dis
clo
sure
(N
YS)
Org
aniz
atio
n t
hat
spen
ds
at lea
st $
50k
and 3
% o
f its
tota
l ex
pen
diture
s on lobbyi
ng in N
YS m
ust
dis
close
eac
h s
ourc
e of
fundin
g o
ver
$5k
use
d f
or
lobbyi
ng
does
n’t a
pply
to 5
01(c
)(3)’
s
•M
ay n
eed t
o r
eport
lobbyi
ng t
hat
lobbyi
st
per
form
s as
a v
olu
nte
er
(NYS)
•Rep
ort
lobbyi
ng t
hat
bo
ard
mem
bers
per
form
on b
ehal
f of
org
aniz
atio
n (
NYC)
•D
iscl
osu
re o
f re
gis
trati
on
in
form
ati
on
(N
YC &
N
YS)
53
199
Pra
ctic
al
Tip
s
•D
eter
min
e w
het
her
your
clie
nt
or
org
aniz
atio
n c
ross
es e
ach t
hre
shold
•If
you r
egis
ter,
do it
for
the
whole
ca
lendar
yea
r (o
r hav
e a
reas
on t
o
regis
ter
mid
-yea
r)
•Pu
t a
syst
em in p
lace
to:
–co
llect
lobbyi
ng a
ctiv
ity
info
rmat
ion f
rom
sta
ff
who a
re lobbyi
ng,
–co
llect
rep
ort
able
busi
nes
s re
lationsh
ips
info
rmat
ion f
rom
boar
d a
nd m
anag
emen
t, a
nd
–re
port
on a
tim
ely
bas
is54
200
NOTES
201
NOTES
202
8
Nonprofit Governance Materials
Submitted by: Shveta Kakar Attachment c: ©1996–2016 Davis Wright Tremaine LLP. ALL RIGHTS RESERVED.
If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.
203
204
RIGHT FROM THE START:RESPONSIBILITIES of DIRECTORS of N0T-FOR-PROFIT CORPORATIONS
Attorney GeneralERIC T. SCHNEIDERMAN
Charities Bureauwww.charitiesnys.com
Guidance Document 2015 - 6, V. 1.0Issue date: May 15, 2015
Attorney General Eric T. Schneiderman’s Charities Bureau drafted this guidance to assist current and future boards of directors of not-for-profit corporations and trustees of charitable trusts to understand and carry out their fiduciary responsibilities to the organizations they serve. The information in this booklet reflects changes to the Not-for-Profit Corporation Law that were included in the Nonprofit Revitalization Act of 2013.
Charitable organizations contribute enormously to our society. They educate our children, care for the sick, find cures for disease, preserve our literature, art and music for us and future generations, house the homeless, protect the environment and much more. The fiduciaries of those charitable organizations are responsible for managing and preserving the charitable assets that benefit all of us. Whatever their mission or size, all organizations should have policies and procedures established so that (1) members of their boards understand their fiduciary responsibilities, (2) assets are managed properly and (3) the charitable purposes are carried out. A failure to meet these obligations is a breach of fiduciary duty and can result in financial and other liability for the board of directors.
Please read this booklet carefully. It contains general information to assist current and prospective members of nonprofit boards. It outlines some of the duties of board members and points out questions to ask and information to look for when considering and/or fulfilling the responsibilities of board membership. The Charities Bureau also publishes other guidance containing more detailed information on managing a charitable organization and overseeing its assets. That guidance and other publications of interest to board members are posted at www.charitiesnys.com.
1
205
This guidance is designed to assist board members by providing them with basic information. It is not a substitute for more detailed information or advice from anattorney, independent certified public accountant or other professional.
. WHO MAY JOIN A BOARD?
Board members come from all backgrounds, bringing many different talents to the organizations they serve. Anyone over eighteen is legally qualified to serve on a board.
WHAT SHOULD A PROSPECTIVE BOARD MEMBER KNOW BEFOREJOINING A BOARD?
Anyone thinking about joining a board should consider doing the followingbefore joining:
Read the organization's certificate of incorporation, application for federal income tax exemption, by-laws and board and committee minutes for at least the last year to learn about its purposes, activities and concerns.
Obtain a current list of board and committee members and find out from the board chair and the organization's chief executive and financial officers what is expected of board members.
Talk to current and recent former board members to learn about what the board does. In addition, make sure that the board and committee meetings are usually well-attended.
If you know of any board members who recently left the board, see if you canfind out why.
Review the organization's Internal Revenue Service Form 990, 990EZ or 990 PF and, if it has an outside auditor, its audited financial statements for at least the last two years as well as its current internal financial reports to see how the organization uses its assets and to evaluate its financial health. Ask some questions - Is its auditor's report on its financial statements unqualified? Has the auditor sent the organization a management letter identifying issues of concern? Has the Internal Revenue Service recently audited the organization? If so, what was the result to the audit?
Obtain an understanding of the internal control structure of the organization and the processes in place to monitor it.
Find out if the organization is required to register with the Attorney General's Charities Bureau and, if so, whether it has registered and filed all required reports. Find out if it has filed required reports with the IRS and any other government agencies.
2
206
Understand the organization's mission, learn about its programs, read its publications, visit its program sites, look at its website and talk to key staff and major donors. Find out about its reputation in the community.
Review the organizational chart and understand the accountability structure of the organization. Find out about the employee evaluation and compensation processes and due diligence procedures for entering into material contracts.
Make sure there is a conflict of interest policy and that it is provided to and signed by new directors and before they join the organization, and annually to directors, officers, and employees for review and signature annually. Find out how the organization addresses actual or potential conflicts.
Find out what committees the board has established and decide which (if any) to join. Make sure the committees appear to be sufficient (audit, investment, budget, finance, compensation, human resources, nominating, governance, etc.). Under New York's Not-for-Profit Corporation Law, corporations required to file an audit with the Attorney General's Charities Bureau must have an audit committee made up of independent directors or the board must assume that function with only independent members participating. Independent directors are members of the board who are not paid by the organization and neither they nor their family members have any financial relationship with the organization.1
Find out if materials to be considered by the board or its committees are distributed in advance of meetings and whether they provide sufficient information necessary to be part of the stewardship process. Find out how the meetings are structured: by consent agenda or other means.
Obtain the current year's budget and cash flow projections. Find out how they compare to actual income and expenses and what processes are in place to monitor these comparisons.
Find out whether the insurance coverage appears to be appropriate, including Directors’ and Officers' liability and employee fidelity insurance. The latter is particularlyimportant - it is surprising how often embezzlement is discovered.
Most important, make sure you are able to devote the time expected of a board member. Understand any responsibilities for fundraising, personal giving commitments and other functions expected of board members. Joining a board without sufficient timeto devote to its business is often at the root of troubles faced by boards. A decision to
1 1 Section 102(a)(21) of the Not-for-Profit Corporation Law sets forth the definition of Independent Director.
3
207
decline an invitation to join a board because you don’t have the time to devote to the board should be respected.
Learn what training (if any) is provided to board members.
WHAT ARE THE DUTIES OF BOARDS OF DIRECTORS?
Most nonprofit organizations are created to achieve a specific purpose or purposes, such as making grants to operating charities, setting up a soup kitchen, teaching children to read, providing health care, supporting cultural institutions, preserving the environment, assisting senior citizens or one of the many thousands of other charitable activities conducted in our state and our country. Those purposes, or the mission of the organization, may be described in its certificate of incorporation, by-laws or other constituent document.
If an organization's purposes are not already clearly included in one of its organizational documents, one of the first activities of the board should be to draft a clear mission statement which should correspond to the purposes described in its certificate of incorporation and application for tax exemption submitted to the Internal Revenue Service. Everyone involved with the organization - directors and officers, employees, volunteers, fundraising professionals, and other professionals – should be familiar with and understand its mission. Those individuals plan its future, conduct its programs, raise its funds, make it known to the public, present its financial records to regulatory agencies and others and give it professional advice.
Unless they fully understand why the organization was formed and what it plans to accomplish, board members will not be able to perform their respective tasks appropriately. The mission should be periodically re-assessed and evaluated and amended as needed. Periodic review of an organization's structure, procedures and programs will assist board members in determining what is working well and what practices the organization might want to change in order to be more efficient, effective or responsible.
While the board is not usually involved in the day-to-day activities of the organization, it is responsible for managing the organization and must make decisions crucial to the life and direction of the organization, such as adding or removing board members, hiring and firing key officers and employees, engaging auditors and other professionals and authorizing significant financial transactions and new program initiatives. In carrying out those responsibilities, members of a board of directors must fulfill fiduciary duties to the organization and the public it serves.
Those primary legal duties are commonly referred to as the duties of care, loyalty and obedience. If the organization has affiliates or subsidiaries, the legal duty ofimpartiality and the duty of fairness to all the charitable interests, may also come into play.
4
208
Duty of Care
The duty of care requires a director to be familiar with the organization's finances and activities and to participate regularly in its governance. In carrying out this duty, directors must act in "good faith" using the "degree of diligence, care and skill" which prudent people would use in similar positions and under similar circumstances. In exercising the duty of care, a responsible board of directors should, among other things, do the following:
The directors as a group, and the officers of the corporation, should exercise their responsibility to undertake reasonable efforts to assure that the organization is operating in compliance with the law. For directors, this means assuring that there is an effective compliance program reporting ultimately to the directors, that there is a policy for protection of whistleblowers which has been communicated to employees, that there are effective internal controls, that there is an effective external audit by an independent auditor, and that allegations of violations of law are investigated and addressed.(Although New York law only requires organizations with over 20 employees and over $1 million in revenue to have a whistleblower policy, smaller organizations might find it helpful to adopt such a policy as well.)
Attend board and committee meetings and actively participate in discussions and decision-making, such as setting of policies. Carefully read the material prepared for board and committee meetings prior to the meetings and note any questions they raise. Allow time to meet without senior management present.
Read the minutes of prior meetings and all reports provided, including financial statements and reports by employees. Do not hesitate to suggest corrections, clarification and additions to the minutes or other formal documents.
Make sure to get copies of the minutes of any missed committee or board meeting, read them timely and suggest any changes that may be appropriate.
Make sure there is a clear process for approval of major obligations such as fundraising, professional fees (including auditors), compensation arrangements and construction contracts.
Make sure that board minutes reflect any dissenting votes in action taken by the board or that any dissenting vote is expressed in writing by letter to the board. Such records are necessary in order for a board member to disclaim responsibility for any particular decision. Absent board members must do this promptly in writing.
Read literature produced as part of the organization's programs.
5
209
Make sure that monthly financial reports prepared for management are available to the board or finance and audit committees, and that they are clear and communicate the information needed for proper stewardship. Make sure there is an ongoing actual to budget comparison with discrepancies explained.
Participate in risk assessment and strategic planning discussions for the future of the organization.
Ensure that the organization has addressed the sufficiency of its written internal financial controls and written policies that safeguard, promote and protect its assets and that they are updated regularly, and has considered an employees’, officers’ and directors’ fidelity bond to protect the organization from embezzlement.
Assure that the organization has a background check policy for prospective employees.
Determine whether or not the organization indemnifies its officers and directors from liability and has directors' and officers' liability insurance. If it does, find out what is covered and what is not. If it does not, find out why.
Encourage diversity among board members. Diversity will help insure a board committed to serve the organization's mission with a range of appropriate skills and interests.
Be involved in the selection and periodic review of the performance of the organization's Chief Executive Officer, Chief Financial Officer and other key employees responsible for the day-to-day activities of the organization. The board is responsible for ascertaining whether these individuals have the appropriate education, skills and experience to assume a key position; communicating duties, expectations and goals; and then evaluating their performance at least annually, first in an executive session and then with the officer directly.
Duty of Loyalty
Directors are charged with the duty to act in the interest of the corporation. This duty of loyalty requires that any conflict of interest, real or possible, be disclosed in advance of joining a board and when they arise. So that all members are aware of - and avoid - transactions in which the nonprofit's interests are not primary, New York law requires nonprofits to have a written "conflicts of interest" policy. Among the provisions that should be included in such policies are provisions that:
Define the circumstances that constitute a conflict of interest;
Set forth procedures for disclosing a conflict of interest to the audit committee or the board;
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210
Prohibit anyone with a conflict of interest from being present during or participating in the deliberation, voting on the issue that resulted in the conflict, or influencing the deliberation or vote on the issue that resulted in the conflict;
Require the nonprofit to document the existence and resolution of each conflict;
Require directors to sign annually a statement that identifies entities in which they serve as an officer, director, trustee, member, or employee and with which thecorporation has a relationship; as well as any transaction of the nonprofit in which the director might have a conflicting interest.
Duty of Obedience
A board has a duty of obedience to ensure that the organization complies with applicable laws and regulations, its mission and its internal governance documents and policies, including:
Dedicating the organization's resources to its mission.
Ensuring that the organization carries out its purposes and does not engage in unauthorized activities.
Complying with all appropriate laws, including registering and filing annual financial reports with the Attorney General's Charities Bureau in New York State, complying with similar laws in other states in which it conducts activities and\or solicits contributions, filing required financial reports with the State Worker's Compensation Board, the State Department of Taxation and Finance and the Internal Revenue Service; and paying all taxes such as Social Security, income tax withholding (federal, state and local) and any unrelated business income tax. Board members may be personally liable for failing to pay employees' wages and benefits, and for failing to withhold, escrow and pay over to state and federal authorities withholding taxes on employees' wages.
Providing copies of its applications for tax-exempt status (IRS Form 1023), federal reports (IRS forms 990, 990 PF, 990 EZ) and its financial reports filed with the Attorney General's Charities Bureau to members of the public who request them. Many organizations post their annual reports and other information on the Internet.
MONITOR FUNDRAISING CONDUCTED ON BEHALF OF THE ORGANIZATION
Many organizations contract with outside organizations or individuals to raise funds on their behalf. Since the fundraiser represents the organization to the public, the selection of a fundraising professional is extremely important. Establishing and following procedures for selection of a fundraiser can avoid future problems. Board members
7
211
should assess whether management has undertaken reasonable procedures to protect the organization, including:
Obtaining bids from several fundraising professionals before entering into a contract. Services and fees differ, and comparing bids will aid in the selection of the best contractor for the organization.
Checking with the Attorney General’s Charities Bureau to see if the fundraising professionals being considered are registered and have filed all required contracts and financial reports.
Asking the Charities Bureau for copies of the fundraising professional'scontracts with other charities to determine the services performed for and the fees charged to those charities.
Asking the fundraising professional for references. Reputable fundraising professionals should be happy to provide a potential client with the contact information for some of its clients.
Contacting some of the fundraising professional's other clients to see if theywere satisfied with the services received.
Finding out whether the organization's fundraising contracts contain the clauses required by Article 7-A of the Executive Law.
Reviewing written solicitations and scripts used by the fund raisingprofessional to make sure that solicitations appropriately describe the organization and its activities, include the name of the organization as registered with the Attorney General and advise potential contributors that they may obtain the organization's financial report from the organization itself or from the Attorney General.
Requiring, as mandated by New York law, that the fundraising professional and any of its representatives ("professional solicitors") disclose the name of the specific professional solicitor and the employing fundraising professional and state that the solicitor is being paid to raise funds.
When considering engaging a fundraiser to solicit via the telephone, reviewing Pennies for Charity, the Attorney General's annual report on telemarketing by professional fundraisers, to see the results of those fundraisers' campaigns.
MAKE USE OF AVAILABLE RESOURCES
In carrying out their responsibilities, board members should realize that they need not do it alone. Board members should consider the need for advice from professionals or experts to assist them in the performance of their duties, and make appropriate requests
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for such advice. There are many other resources available to assist nonprofit organizations in fulfilling their fiduciary duties.
Following are some of those resources:
The Attorney General's Web site – www.charitiesnys.com - posts all forms and instructions for registration and annual filing with the Charities Bureau and publications of interest to nonprofit organizations, including guidance on the Nonprofit Revitalization Act of 2013.
Contact Us - If the material on the Attorney General's web site does not answer your particular questions -
For questions about nonprofit organizations, contact:[email protected] or (212) 416-8401
For questions about fundraising professionals, contact:[email protected] or (518) 776-2160
Other Helpful Web Sites - Many more resources are available on the Internet and in communities around the state. Links to some of those resources are posted on the Attorney General's web site – www.charitiesnys.com Please note that inclusion of any particular entity should not be construed as an endorsement by the Attorney General of that entity or the services it renders.
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N E W YO R K S TAT E O F F I C E
AT T O R N E YG E N E R A L
of the
120 BroadwayNew York, NY 10271
(212) 416-8400
www.charitiesnys.com
Internal Controls and FinancialAccountability for
Not-for-Profit Boards
Charities Bureau
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INTERNAL CONTROLS AND FINANCIAL ACCOUNTABILITY FOR NOT-FOR-PROFIT BOARDS
Attorney GeneralERIC T. SCHNEIDERMAN
Charities Bureau120 Broadway
New York, NY 10271
(212) 416-8401http://www.charitiesnys.com
New York State Attorney General Eric T. Schneiderman is pleased to offer this booklet toassist current and future boards of directors of New York not-for-profit corporations tounderstand and carry out their fiduciary responsibilities to the organizations they serve.
The booklet contains general information concerning internal controls for the protectionand oversight of charitable assets. It is not a substitute for advice from a qualified lawyer,independent public accountant or other professional. The Attorney General publishes anotherbooklet, Right From the Start - Responsibilities of Directors of Not-for-Profit Corporations,which describes basic responsibilities of boards of not-for-profit corporations. That booklet andother publications of interest to directors may be found at http://www.charitiesnys.com.
I. INTERNAL CONTROLS
A primary responsibility of directors is to ensure that the organization is accountable forits programs and finances to its contributors, members, the public and government regulators. Accountability requires that the organization comply with all applicable laws and ethicalstandards; adhere to the organization’s mission; create and adhere to conflict of interest, ethics,personnel and accounting policies; protect the rights of members; prepare and file its annualfinancial report with the Internal Revenue Service and appropriate state regulatory authorities andmake the report available to all members of the board and any member of the public who requestsit. The development of proper internal controls helps organizations ensure accountability.
What are Internal Controls?
Internal controls are systems of policies and procedures that protect the assets of anorganization, create reliable financial reporting, promote compliance with laws and regulationsand achieve effective and efficient operations. These systems are not only related to accountingand reporting but also relate to the organization’s communication processes, internally andexternally, and include procedures for (1) handling funds received and expended by theorganization, (2) preparing appropriate and timely financial reporting to board members and
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officers, (3) conducting the annual audit of the organization’s financial statements, (4) evaluating
staff and programs, (5) maintaining inventory records of real and personal property and their
whereabouts, and (6) implementing personnel and conflicts of interest policies.
II. IMPLEMENTATION AND MONITORING OF INTERNAL FINANCIAL
CONTROLS
A. Procedures for Monitoring Assets
Every organization should have procedures to monitor and record assets received, held
and expended. These financial controls should be described in an accounting policies and
procedures manual. The manual should be reviewed with and given to all directors and officers,
trustees, employees and volunteers. It should include procedures for:
� Preparing an annual income and expense budget and periodic reports - at least
quarterly, preferably monthly - comparing actual receipts and expenditures to the
budget with timely variance explanations.
� Writing and signing checks or vouchers and receiving, recording, securing and
depositing cash and other receipts. Such procedures should ensure that no single
individual is responsible for receiving, recording and depositing funds or writing
and signing checks, and thus to make embezzlement more difficult.
� Ensuring that grants and contributions received are properly recorded, accountings
required as a condition of any grant are completed, and restrictions on the use of
funds, such as contributions given for a restricted purpose or prohibitions on the
use of the principal of an endowment, are obeyed.
� Requisitioning, authorizing, verifying, recording and monitoring all expenditures,
including payment of invoices, petty cash and other expenditures. Such
procedures should ensure that no single individual is permitted to request,
authorize, verify and record expenditures. For example, the same person should
not be responsible for cash disbursements and bank reconciliations. These
functions should be assigned to different individuals.
� Accessing, inputting and changing electronic data maintained by the organization.
Preserving electronic records and ensuring data compatibility when systems
change and creating an appropriate records retention policy are part of this
process.
� Providing for regular oversight by an audit committee or, if there is no audit
committee, by the executive committee or by the board of directors itself.
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� Reporting to the audit committee or board by employees and volunteers of
allegations of fraud or financial improprieties.
� Ensuring that timely and appropriate financial reports are distributed to all
directors and officers and reviewed by them, as well as the president, chief
executive officer, treasurer and chief financial officer.
� Providing procedures for approving contracts to which the organization is a party,
including securing competitive bids from vendors.
� Making clear the responsibilities of all individuals involved with the organization,
including directors, officers, employees, volunteers and consultants, and
maintaining an organizational chart and updating such information as necessary.
� Preparing for the annual audit process in a timely manner.
� Developing a prudent investment strategy and providing proper oversight of the
investment assets.
� Complying with governmental and other reporting requirements, including
watchdog agencies.
� Complying with obligations to members, employees and the public, including
their right to a copy of the organization’s annual financial report.
B. Various Roles in the Organization
There should be written job descriptions for directors, officers, employees, volunteers and
consultants. The work of the organization will be more easily accomplished and problems will
be avoided if all involved understand what is expected of them and the limits of their authority.
A comprehensive description of the chief executive officer’s job should make clear his or
her responsibilities in the day-to-day activities of the organization and set forth exactly what
information is expected by the board and when it must be communicated. For example, if the
board expects monthly financial reports and bi-monthly programmatic reports, making those
expectations clear from the beginning will avoid ambiguity and will clarify the responsibility for
accountability to the board.
Likewise, all other employees should have written job descriptions and be advised of
what is expected of them. Volunteers are no exception. They should be given job descriptions
that clearly describe what is expected of them. For many organizations, volunteers are the only
people who conduct programs and have contact with the public. If they do not understand their
responsibilities or do not act professionally, the organization could be at risk.
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Resources available to nonprofit organizations are posted on the Attorney General’s Internet site at1
http://www.oag.state.ny.us.
4
C. Personnel Policies
Personnel policies, including vacation and sick leave, health insurance and other benefits,
evaluations, ordinary and overtime compensation, conflicts of interest and code of ethics, and
grievance procedures (including protections for “whistle blowers”) should be in writing and
given to all employees prior to hiring, with changes in policies communicated on a regular basis.
D. Training
Appropriate training should be arranged for all involved. New directors, officers,
employees and volunteers should be trained by those who are familiar with the organization and
its operations. There are many organizations that provide free or low-cost training for board
members and others within the organization, and there are numerous resources that provide
guidance in developing training. For all involved, familiarity with the organization’s internal1
controls is essential. Training is a wise investment!
E. Conflicts of Interest Policies and Code of Ethics
Directors, officers, trustees and others who serve a nonprofit organization should not have
any personal or business interest that may conflict with their responsibilities to the organization.
To avoid such conflicts, it essential that the board adopt and follow a “conflicts of interest
policy” that clearly states the procedures to be followed if a board member’s personal or financial
interests may be advanced by an action of the board.
The conflicts of interest policy should require an individual to fully disclose any interest
the individual and/or the individual’s family has in any entity that does business with the
organization and that any change in the information concerning potential conflicts should be
provided to the organization immediately. The policy may be set forth in the organization’s by-
laws. The policy must require that such individual may not participate in any decision to
approve doing business with the individual or any entity in which the individual has an interest,
and such decision must be made by a disinterested majority of the board of directors or trustees.
The organization should also have a code of ethics addressing issues such as transparency,
disclosure in fund-raising solicitations, integrity in governance and diversity.
There are many examples of written policies regarding conflicts of interest and other
ethical matters available. All board members, employees, volunteers and consultants should be
given copies of both policies and sign a statement acknowledging that they have read them and
agreed to follow them.
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F. The Audit Committee
Crucial to the governance of a not-for-profit organization is the establishment of an audit
committee. Typically, an audit committee is composed of members of the board of directors who
are independent of any financial interest in the organization and at least one of whom has
expertise in accounting. The audit committee acts as a liaison to the organization’s independent
external auditor who is a certified public accountant (“CPA”) or firm of CPAs. (See section G for
a discussion of the role of the CPA.) The audit committee’s responsibilities should include the
following:
� Selection and review of the independent external auditors and review of the
annual fees to be paid for services rendered by them and each proposed audit plan
developed by management and the external auditors.
� Review with the independent external auditors the organization’s annual financial
statements and reports. Consider whether they are complete and consistent with
information understood by the committee members.
� Review and evaluate the management letter received from the independent
external auditors and discuss recommendations for any changes necessary to
remedy problems identified in the letter.
� Maintain communication between the board and independent external auditors by
meeting on a regularly scheduled basis with an opportunity for the auditors and
the audit committee to meet without management present. At the completion of
the audit, review the audit fieldwork process with the auditors. Obtain an
understanding of their evaluation of management and whether they encountered
any difficulties or had any disagreements with management during their audit.
Review all journal entries proposed by the auditors.
Audits are a key factor in providing proper financial management oversight of an
organization. The audit committee (or the board if there is no audit committee) should interact
with management to implement and monitor the internal control structure and to take steps that
insure that the possible risks of fraud or embezzlement are mitigated. In order for an audit
committee to function properly, it should be comprised only of directors who are independent of
any financial interest in the organization.
In addition to the audit committee’s role in the preparation of the audit, its responsibilities
include the following:
� Ensuring that proper federal and state tax filings are completed timely, including
payroll taxes, sales taxes and unrelated business income taxes.
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� Understanding the organization’s internal controls and having policies in place to
update them as needed.
� Periodically reviewing the organization’s insurance coverage and determining its
adequacy.
� Making recommendations necessary to improve the organization’s efficiency
and/or remedy problems identified by the committee or others.
� Identifying and monitoring related party transactions and reviewing the conflict of
interest, ethics and related party disclosure policies periodically and updating as
needed.
� Monitoring any legal matters that could impact the financial health and reporting
of the organization.
� Instituting and overseeing any special investigatory work as needed.
In organizations with small boards, the entire board may serve the function of the audit
committee. For larger organizations, it is more appropriate to create a separate audit committee
that can devote its attention to this area.
Whatever form the audit committee takes, at least one member of the committee should
have a functional understanding of financial matters and should be comfortable reviewing
financial reports and other financial records. No member of the audit committee should ever be
involved in any conflict of interest transaction, and no member of the audit committee should be
compensated in any manner by the organization other than director’s fees paid generally to all
directors, if any.
The audit committee should be familiar with the organization’s internal controls and
report to the board as appropriate the adequacy of the internal controls and any concerns raised
by the staff or outside auditors.
G. Independent Certified Public Accountants
In New York, nonprofit organizations that solicit contributions from the public and are
required to register with the Attorney General’s Charities Bureau must file with the Charities
Bureau an annual audit report certified by a CPA if they have gross receipts over $250,000 and
solicit contributions from the public. Such reports may also have to be filed with other
governmental agencies and other funders.
It is important that the organization have procedures in place to ensure that the CPA it
engages has a good reputation in the marketplace, is qualified to perform the necessary work,
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commits to appropriate timeliness and offers a competitive fee. Before engaging a CPA, an
organization should ask for a list of the CPA’s clients and contact some of them for references.
The organization should find out whether the firm offers training and provides information to its
clients on issues and events of importance to not-for-profit organizations. In addition, the
organization should request a copy of the CPA firm’s peer review report.
The organization’s CPA should be a resource for assistance with concerns about financial
and other matters that arise during the year, not just during the audit fieldwork. The organization
should make sure that its engagement with the CPA includes an expectation that the CPA may be
called upon to provide such service.
The audit committee or the board should communicate regularly with the CPA firm,
making it aware of any problems and/or concerns with regard to the management of the
organization or its assets, whether there are steps that should be taken to ensure compliance with
the existing internal control structure, or creation of new controls.
In addition to certifying the financial statements as part of the audit process, the CPA
prepares a management letter to be sent to the board, which discusses internal controls or other
issues identified during the audit that concern the financial management of the organization.
Since the management letter is not a comprehensive evaluation and opinion on the internal
controls (but rather just a by-product of the audit process), the board must decide whether further
outside evaluation of the systems and procedures is warranted, and if so, by whom. It is also
important that issues arising from prior year’s management letters be revisited to make sure they
have been addressed to the CPA’s satisfaction.
Before releasing the opinion on the financial statements, a CPA will request a signed
management representation letter (typically signed by both a board officer, such as the chair or
the treasurer, and the chief executive officer or the chief financial officer). This letter describes
the responsibility to provide financial information that is assumed by the organization. Before
signing the letter, officers should be comfortable with the representations it contains.
In many circumstances, the CPA also prepares the tax filings for the organization based
on information provided by management. The IRS Form 990 is a public document, and as much
of the information disclosed is not a result of the audit process, but rather informational in nature,
care must be taken to ensure that the filing truly represents the organization appropriately. These
documents should be carefully reviewed before they are signed by management.
H. Review of the Organization’s Governance Structure, Procedures and Programs
Periodic review of an organization’s structure, procedures and programs will assist board
members in determining what is working well and what practices the organization might want to
change in order to be more efficient, effective or responsible.
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III. MAKE USE OF AVAILABLE RESOURCES
In carrying out their responsibilities, board members should realize that there are many
resources available to assist them. The Attorney General’s Web site, http://www.oag.state.ny.us,
has publications on a variety of subjects, as well as forms and instructions for registration and
annual filing with the Charities Bureau. It also has links to other web sites that provide resources
for not-for-profit boards.
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03.06.15
By Shveta Kakar and Dan Kurtz
In a striking decision earlier this year, the 3rd Circuit Court of Appeals affirmed a jury’s
findings of liability for breach of fiduciary duties and ‘deepening insolvency,’ and the
award of $2.25 million in compensatory damages, jointly and severally, against former
directors and officers of The Lemington Home for the Aged, a Pennsylvania not-for-profit
that is in Chapter 11 bankruptcy.
The court’s decision in In re Lemington Home for the Aged, No.13-2707, 2015 WL
305505 (3d Cir. Jan. 26, 2015) (“Lemington III”) demonstrates the need for proper
corporate governance for financially troubled organizations, but more importantly, that
governing boards of not-for-profits who have actual knowledge of mismanagement by the
officers of the corporation and choose to ignore it and/or not take appropriate action, can
be held financially liable for breach of their fiduciary duty of care. The decision carries
special weight because it turns on its head the long-held assumption that nonprofit
directors are insulated from financial exposure, barring personal involvement in
corruption, venality or fraud. This should be a wake-up call to nonprofits about the very
real perils of inattention or inaction.
Background The Lemington Home for the Aged, a not-for-profit Pennsylvania corporation (“the Home”)
was established in 1883 and provided residential elder care services in Pittsburgh,
Pennsylvania. In 1997 the Home hired an administrator and in 2000, the Home hired a
chief financial officer (collectively the “officers”). The Home had been beset with financial
troubles for years and by 1999 was insolvent, but by the early 2000s its financial
problems became particularly acute and it received going concern warnings. The Home’s
financial and billing records were in deplorable condition. Employee insurance premiums
were not paid even though payroll deductions had been made for that purpose, over
$400,000 of Medicare receivables went unbilled for a year, and the CFO failed to maintain
a general ledger.
The Home was also cited for three times the deficiencies of the average nursing home
operating in the state in 2001, and an independent review of the Home recommended
that due to the Home’s continued citations for health violations, the administrator should
be replaced with a seasoned nursing home administrator. Although the Board sought and
obtained a grant to fund the search for a new administrator, the funds were never used
find a replacement for the administrator, who remained at the Home despite increasing
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Directors of Nonprofit Held Financially Liable for Relying on Incompetent Officers and Lack of Oversight
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evidence that her performance was poor, and who worked part-time in violation of state
law requirements, while collecting her full salary. In 2004, the Home’s problems came to a
head when two residents died due to neglect.
During this period, the Board itself was in disarray. The Board did not maintain proper
minutes of meetings, attendance at Board meetings was often less than 50 percent and it
did not provide meaningful oversight of the Home’s financial operations. The position of
treasurer remained unfilled and a finance committee was not set up—even though the by-
laws required it—and the Board continued to rely on the CFO, even after learning that he
did not maintain customary financial records. The Board also continued to employ and
rely on the administrator, despite being aware of the numerous citations, her poor
performance and part-time status.
In January 2005, the Board voted to close the Home and not admit any more residents,
and sent letters to residents and state agencies informing them of its decision. However,
the Board did not approve the filing of a Chapter 11 bankruptcy for another three months.
During this interim period, the Board declined to pursue a viability study upon which a
loan option was conditioned, and discussed plans to transfer the Home’s principal asset
to an affiliated entity whose directors were also the Home’s board members. Meanwhile,
the officers continued to contract with vendors, the CFO failed to collect over $400,000 in
Medicare receipts, and sent a proposal for the Home’s sale to an organization where he
would then be its president and CEO.
The Board also failed to disclose its pre-bankruptcy decision to close and wind down
affairs to creditors or the bankruptcy court, and failed to disclose in its monthly debtor-in-
possession bankruptcy filings that the Home had received a $1.4 Nursing Home Assessment Tax in May 2005. At a bankruptcy status conference in June 2005, no one
expressed any interest in funding or acquiring the Home and consequently, the
Bankruptcy Court approved the Home’s closure.
Subsequently, the Official Committee of Unsecured Creditors (the “Committee”)
commenced an adversary proceeding on behalf of the Home, against the officers and all
15 former directors of the Home, alleging breach of fiduciary duty of care and loyalty and
‘deepening insolvency’. The officers and directors moved for summary judgment and the
district court granted the motion, finding that the business judgment rule and the doctrine
of in pari delicto applied to preclude the committee’s breach of fiduciary duty claims, and
that the committee would be unable to show there was fraud necessary to support a
deepening insolvency claim. The committee appealed and the 3rd Circuit Court of
Appeals vacated the district court’s grant of summary judgment in favor of the officers and
directors, finding that there were genuine issues of material facts in dispute on all claims
and remanded for trial. See In re Lemington Home for the Aged, 659 F.3d 282 (3d Cir.
2011) (“Lemington I”).
The case proceeded to a six-day jury trial in February 2013. At the close of plaintiffs’ case
-in-chief, the district court granted the director defendants’ motion for judgment as a
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matter of law on the breach of fiduciary duty of loyalty claim, but denied it as to the breach
of fiduciary duty of care and deepening insolvency. Following the close of defendants’
case-in-chief, the court granted plaintiff’s unopposed motion for judgment as a matter of
law as to the defense of in pari delicto. After three days of deliberation, the jury returned a
compensatory damages verdict against the CFO, administrator and 13 of the directors
(the “directors”), jointly and severally for $2.25 million. The jury also awarded punitive
damages in the amount of $350,000 individually against five of the directors, and punitive
damages in the amount of $1 million against the CFO and $750,000 against the
administrator. Following the verdict, the officers and directors (the “defendants”) filed a
motion for judgment as a matter of law, a new trial, or remitturer. The district court denied
the motion in entirety, and an appeal followed. See Official Committee of Unsecured
Creditors on behalf of the Estate of Lemington Home for the Aged, No. 10cv800, 2013
WL 2158543 (W.D. Pa.. May 17, 2013) (“Lemington II”).
The 3rd Circuit decision – Lemington IIIOn appeal, the 3rd Circuit Court of Appeals affirmed the jury’s liability findings of breach
of the fiduciary duties of care and loyalty and ‘deepening insolvency’ against the officers
as well as the award of punitive damages against them. The court also affirmed the
breach of the fiduciary duty of care and ‘deepening insolvency’ against the directors, but
vacated the punitive damages award against the five director defendants1 as there was
insufficient evidence that their actions were of such an “outrageous” nature to
demonstrate intentional, willful, wanton or reckless conduct.
Breach of fiduciary duty of care by directorsFiduciary duties of care and good faith owed by directors and officers of a Pennsylvania
not-for-profit are defined by statute. See 15 Pa. Cons. Stat. Ann. §5712(a)-(c). A director
must perform his/her duties “in good faith in a manner he[/she] reasonably believes to be
in the best interest of the corporation and with such care, including reasonable inquiry,
skill and diligence, as a person of ordinary prudence would use under similar
circumstances” and he/she is “entitled to rely in good faith on information, opinions,
reports or statements, including financial statements and other financial data” prepared by
employees or experts. However, “[a] Director shall not be considered to be acting in good
faith if he[/she] has knowledge concerning the matter in question that would cause his
[/her] reliance to be unwarranted.” Id.
Pennsylvania recognizes directors’ and officers’ liability for negligent breach of fiduciary
duty. See Lemington I, 659 F.3d at 292, n.5. However, “a non-profit may restrict the
circumstances under which a director may have personal liability for negligent acts by
adoption of an appropriate by-law, see 15 Pa.C.S. § 5713(a), in which event a director
may be liable for a breach of fiduciary duties or failure to perform the duties of the office
only if ‘the breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness.’ 15 Pa.C.S. § 5713(a)(2).” Id (emphasis added). The Home, in fact, had
such a by-law provision.
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The 3rd Circuit held that the evidence supported the jury’s findings that the directors did
not exercise reasonable prudence and care in continuing to employ the administrator and
CFO and breached their fiduciary duty of care by failing to take action to remove them
once the results of their mismanagement became apparent. The Board knew that the
CFO had not been maintaining proper financial records but continued to rely on him. It
also kept the administrator in her role for six years in the face of abnormally high
deficiency findings and allowed her to continue even after she ceased working full time in
violation of state law and even after receiving several independent reports documenting
her shortcomings and urging that she be replaced. As the court noted, “[t]his [was] not a
case where directors, acting in good-faith reliance on ‘information, opinion, reports or
statements’ prepared by employees or experts, made a business decision to continue to
employ an Administrator whose performance was arguably less than ideal. 15 Pa.C.S.
§5712(a).” The directors in this case had “actual knowledge of [] mismanagement, yet
stuck their heads in the sand in the face of repeated signs that residents were receiving
care that was severely deficient.”
Given the provision in the Home’s bylaws, implicit in the 3rd Circuit’s decision, therefore,
is the finding that there was sufficient evidence for a jury to find that the directors acted
recklessly. As the district court in Lemington II opined, the Board’s actions were reckless
as it relied on incompetent officers and evidence of the Board’s recklessness also was
supported by their lack of oversight of the Officers. 2013 WL 2158543 at *7. “The Board
had sufficient reason to know that they should have questioned the reports the officers
made at the Board meeting.” Moreover, “the extent of the Officers’ [] deficiencies may not
have been known because appropriate actions were not taken, i.e., setting up a finance
committee as required by the bylaws. Violating the Home’s bylaws [went] even beyond
basic negligence and me[t] the recklessness standard.” Id.
Deepening insolvencyThe 3rd Circuit re-affirmed its earlier position in Lemington I, that it continues to be bound
by its own precedents to recognize a ‘deepening insolvency’ cause of action under
Pennsylvania law even though the Pennsylvania’s highest court has not yet spoken on
the issue. The court predicted that Pennsylvania courts would recognize the tort of
deepening insolvency and define it as “‘an injury to the Debtors’ corporate property from
the fraudulent expansion of corporate debt and prolongation of corporate life’”. Lemington
III, 2015 WL 305505 at * 6 (citing Official Comm. Of Unsecured Creditors v. R. F. Lafferty
& Co., 267 F.3d 340, 347 (3d Cir. 2001)). And, “‘[e]ven when a corporation is insolvent, its
corporate property may have value’ which can be damaged by ‘[t]he fraudulent and
concealed incurrence of debt.’” Id. (citing Lafferty, 267 F.3d at 349).2
The 3rd Circuit found that there was sufficient evidence to support the jury’s verdict that
the defendants deepened the Home’s insolvency. The evidence against the directors
included the concealment for over three months of the Board’s January 2005 decision to
close the Home and deplete the patient census before filing for bankruptcy3, which
resulted in a “slow death” of the Home’s ability to generate revenue, and the Board’s
failure to disclose in its monthly operating reports the receipt of a $1.4 million nursing
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home assessment tax which would which would have increased the Home’s chances of
finding a buyer. Not “‘establish[ing] a sale process that is customarily done in Chapter 11
cases’” with ‘“[n]obody having an opportunity to bid’” and ‘“no meaningful financial
records”, summed up the “mismanagement of the bankruptcy process”. See Lemington
III, 2015 WL 305505 at * 6 (citing an email from the Home’s bankruptcy attorney). As to
the officers, the evidence included the mismanagement of finances, inattention to record
keeping and patient billing and the failure to collect close to $500,000 in Medicare
reimbursements, as well as the CFO’s failure to maintain a general ledger and refusal to
meet with a consultant hired by the Home’s major creditors and make available
information about the Home’s financial condition to potential buyers. “All of this conduct
damage the Home’s financial viability after it had already become insolvent.” Id. at 7.
The 3rd Circuit’s decision is a warning to Boards of not-for-profits that placing undue
reliance on officers of the corporation and a lack of appropriate oversight may have
financial consequences, not just for the corporation, but for directors themselves.
FOOTNOTES
1 Documentary evidence showed they were aware of the CEO’s poor performance, received more
correspondence relating to the closure of the Home deficiencies than the other directors against whom
liability was imposed, and may have had actual notice of the deficiencies.
2 In Lemington I, the 3rd Circuit confirmed that fraud is a necessary to support a claim for deepening
insolvency and that under Pennsylvania law fraud included affirmative statements intended to deceive as
well as less direct intentional conduct. See 659 F.3d at 294 (“‘fraud consists in anything calculated to
deceive, whether by single act or combination ,or by suppression of truth, or a suggestion of what is false,
whether it be by direct falsehood or by innuendo, by speech or silence, word of mouth, or look or gesture.’”)
(citations omitted).
3 In Lemington I, the 3rd Circuit held that this evidence would suggest to a jury that “although the Board
knew that its actions would cause further deterioration of the Home’s finances to the detriment of its
creditors, by its silence, the Home consciously defrauded the Home’s creditors by implementing these
policies and delaying the filing of bankruptcy . . .” 659 F.3d at 295.
Disclaimer
This advisory is a publication of Davis Wright Tremaine LLP. Our purpose in publishing
this advisory is to inform our clients and friends of recent legal developments. It is not
intended, nor should it be used, as a substitute for specific legal advice as legal counsel
may only be given in response to inquiries regarding particular situations.
©1996-2016 Davis Wright Tremaine LLP. ALL RIGHTS RESERVED. Attorney Advertising. Prior results do not guarantee a similar outcome.
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CAPACITY BUILDING AND OVERSIGHT BEST PRACTICESNOT-FOR-PROFIT VENDOR REVIEWS
MAYORS OFFICE OF CONTRACT SERVICES
1) Not-for-profit organization has effective and dynamic governance structure a) At least two-thirds of the Board is comprised of independent directors who are not
compensated as employees or independent contractors, do not receive any material benefits from the organization, except as a member of the charitable class served by the organization, and are not related or reside with any person described above. If an employee does serve as a Director on the Board, they do not vote on their compensation or benefits.
Staff members can legally serve on boards, however Board Source recommends that no more than one staff person serves as a voting member of the board and should not serve as the chair or treasurer.
All directors of nonprofit organizations have a “duty of loyalty” to put the best interest of the nonprofit above their own interest. The Panel on the Nonprofit Sector suggests that individuals who have a personal financial interest are less likely to give unbiased consideration to important decisions they must make on behalf of the organization.
b) The Board of Directors meets regularly; the number of meetings per year is not less than the number of meetings stated in the by-laws of the corporation. In order to provide regular oversight, the Board of Directors is recommended to meet a minimum of 4 meetings during a 12 month period.
Board Source notes that the amount of meetings should be based on the amount of work to be done and how efficiently the meetings are organized. Additional judgments can be based on organizational size, and the amount of committee work being done.
The Panel on the Nonprofit Sector states that while many charitable organizations find it prudent to meet at least three times a year, some with strong committee structures hold only one or two meetings of the full board each year.
c) A quorum is in attendance at all board meetings. If members participate by conference call or a form of online communication that allows all members to hear and be heard by all other participants the governing documents should specify that such alternative methods of holding meetings are permitted.
Idealist notes that it is good practice for a board to have at least 1-2 in person meetings per year with a quorum. Additionally boards that meet and/or pass resolutions through conference call, web conferencing, etc should have a policy or made a resolution to do so.
d) A Board of Directors has enough members to deliberate effectively on organizational matters. Board members have the diverse backgrounds, experience and organizational and financial skills necessary to advance the organization’s mission. It is recommended that boards include Directors with programmatic experience, legal and management backgrounds, and at least one Director has financial and/or accounting expertise.
The Panel on the Nonprofit Sector emphasizes the need for diverse boards that are able to fully deliberate on organizational matters and suggests that the Board should have at least five members, in most cases.
One of the “Standards for Charitable Accountability” published by the Better Business Bureau Wise Giving Alliance is a board of directors with a minimum of five voting members.
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Community Works states organizations should maintain diverse boards that are able to carry out the needs of the organization.
e) Board minutes are written and circulated to board members for their review and comments following a board meeting and are approved by a vote at the following meeting of the Board of Directors. Minutes record actions of the Board and dissenting votes.
The Attorney General’s document “Right from the Start” for Directors and Officers of not-for-profit organizations recommends that directors should read the minutes of prior board meetings and confirm that his or her votes are accurately recorded, particularly dissenting votes, in order to properly exercise their duty of care.
Board Source recommends that organizations should share their minutes before meetings in order to inform absent board members and increase effectiveness of meetings.
f) All board officers have been oriented to their legal and ethical responsibilities as nonprofit directors. If needed, organizations should locate and provide specialized training or advice on legal and financial issues and responsibilities.
The association for leadership notes that board members carry legal responsibilities upon becoming board members. It is in a board members interest to request information (if not given) on the organizations finances and records before agreeing to join.
The Panel on the Nonprofit Sector states that an effective board orientation process enables board members to carry out their oversight functions effectively by providing oral and written instruction regarding the governing documents, finances, program activities and governing policies and practices of the organization.
g) The compensation of any board member is approved by a majority of the entire board of directors. The number of compensated board members is minimal and members compensated beyond expense reimbursement do not serve as the chair/president or treasurer.
The Better Business Bureau Wise Giving Alliance standards include that not more than one or 10% (whichever is greater) directly or indirectly compensated person(s) should serve as voting member(s) of the board and compensated members should not serve as the board’s chair or treasurer.
Board Source notes that less then 2% of non profits give any compensation to board members. Board compensation of any kind is permissible only if the board has voted on it or if the by-laws specifically allow for it.
The Panel on the Nonprofit Sector states that Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their board duties. A charitable organization that provides compensation to its board members should use comparability data to determine the amount to be paid, document the decision and provide full disclosure of the amount and rationale for the compensation.
2) Not-for-profit organization has appropriate internal controls a) Organization has an effective policy or written procedure governing financial transactions
including writing and depositing checks, handling petty cash and overseeing the use of credit cards, that are reviewed and provided to all directors, trustees, employees and volunteers that include the following provisions:
(1) Two original signatures are required on checks over a certain amount or in situations where oversight is lacking.
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Risk Digest notes that independent auditors will often recommend nonprofits adopt a two-signature rule, especially when volunteers are handling checks. When establishing a new account or when changing signature authorizations on existing accounts, banks require account holders to sign a waiver that releases the bank from any liability for paying a check with only one signature. Organizations that wire money and/or have electronic accounts are not protected through a two-signature rule and should consider additional controls if substantial transactions are done by such means.
(2) The amount of petty cash that can be withdrawn in a specified period is restricted, and receipts are required to be submitted for all petty cash expenditures and credit card purchases.
The Alliance for Nonprofit Management recommends that nonprofit organizations set up a fund for petty cash that lasts for a period of one month. Operation of petty cash accounts should require receipts and have a maximum withdrawal amount.
(3) The Board of Directors approves the opening and closing of corporate credit cards, and savings, checking and investment accounts.
The Alliance for Nonprofit Management notes that the approval/dismissal of bank and investment accounts should be voted on by the board of directors, this practice allows the board to have proper oversight over the financial operations of the organization.
(4) Organization reconciles its bank accounts and credit cards on a monthly basis.
The New York State Charities Bureau document “Internal Controls and Financial Accountability” states that receipts and expenditures should be compared with the budget on a monthly basis, highlighting the importance of monthly reconciliations.
The Panel on the Nonprofit Sector argues that complete, current and accurate financial records are essential for not-for-profit boards to exercise appropriate fiscal oversight.
b) Organization uses an automated payroll service or system.
Having an automated system is a best practice. It increases efficiency, frees up personnel to work on more strategic initiatives and generally provides a more reliable audit trail.
The Community Resource Exchange recommends hiring a payroll service to ensure that employee withholding taxes are paid on time and the required quarterly reports are filed with the IRS and the state.
c) Financial records are securely kept and are backed up off-site.
It is a best practice that financial information is handled only by those who are authorized i.e. blank checks and ledgers should not be accessible. Small organizations without large amounts of space can lock these documents and create restrictive access to documents that are kept electronically. This practice ensures accountability of those who handle the documents and prevents possible fraud and misuse from others.
d) Responsibilities for recordkeeping and authorization for each transaction are performed by separate people.
Guide Star notes that those who are in charge of recording transactions on accounts should not execute or authorize them.
The Panel on the Nonprofit Sector recommends that no one person bears the sole responsibility for receiving, depositing, and spending its funds.
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3) Board conducts careful operational and financial oversight a) Organization’s current budget was approved by a quorum of the Board and is sufficiently
detailed as to projected income and expenses for major program activities, fundraising and administration so as to allow Board members to understand the finances of the organization.
The Better Business Bureau Wise Giving Alliance standards include a board-approved budget for the current fiscal year, outlining projected expenses for major program activities, fundraising, and administration.
The Free Management Library states that nonprofit boards should approve yearly budgets and financial statements, approving a set of fiscal policies (guidelines for managing the nonprofit's finances), reviewing results of a yearly audit conducted by an outside auditor, review financial reports during board meetings, co-sign checks that are over certain limits, and approve contracts. The board’s oversight increases an organization’s system of accountability.
b) Board members review required forms and reports including IRS Form 990, NYS CHAR 500, etc. and ensure the organization is in legal compliance with filing requirements.
The Attorney General’s document “Internal Controls and Financial Accountability for Not-for-Profit Boards,” states that care must be taken to ensure that the annual IRS 990 truly represents the organization and the filing should be carefully reviewed before they are signed by the management.
c) Board has a finance committee and if the budget is larger than $1 million, Board has an independent audit committee or functional equivalents.
The Attorney General’s document “Internal Controls and Financial Accountability for Not-for-Profit Boards,” states that an audit committee is crucial to the governance of a not-for-profit organization and should be composed of directors who are independent of any financial interest in the organization and at least one of whom has expertise in accounting. The audit committee is responsible for selecting and reviewing the independent external auditor and the reports produced by the CPA; reviewing the management letter and discussing recommendations to address anything identified in the letter; understanding and evaluating the organization’s internal controls; and monitoring any legal matters and/or investigations that may affect the organization.
Finance committees are established to ensure organizations are in good financial health. The Guide to Nonprofit Corporate Governance notes that organizations of a “substantial size” will benefit by having an audit committee. Other board members will have enhanced knowledge from the committee which will be able to deeply understand the financial workings of the organizations.
d) Finance committee tracks and reports budget performance and cash flow at each committee meeting.
Board source notes that Finance committees should “monitor implementation of the approved budget on a regular basis and recommend proposed budget revisions; recommend to the Board appropriate policies for the management of the Corporation's assets” The finance committee has the responsibility of helping the entire board to fulfill its fiduciary duties and to also assist the executive director in review of the organizations financial strength. Tracking reports, budget performance and cash flow helps fulfill this responsibility.
e) Treasurer reports to the Finance Committee and presents the budget performance and cash flow statements to the Board of Directors at each meeting. Treasurer and President have financial expertise.
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The Alliance for Nonprofit Management notes that finance committees often serves as a consultative committee for nonprofit board treasurers. Having the committee serve this function allows the committee to receive information efficiently and assist the treasurer with needed preparation of documents for the entire board.
f) Board evaluates the performance and approves the compensation package of the chief executive.
“Board Structure and Executive Compensation in Nonprofits” notes that there are strong links between the powers of executives to determine their own salaries and pay rates. As a result, organizations should institute board approval as a standard for oversight purposes.
The Panel on the Nonprofit Sector and should conduct such an evaluation prior to any change in that officer’s compensation, unless there is a multi-year contract in force or the change consists solely of routine adjustments for inflation or cost of living.
The Panel of the Nonprofit Sector recommends that the governing documents of an organization require the full board to hire, oversee and evaluate the performance of the chief executive officer of the organization, and to approve the compensation of the chief executive in the context of comparable organizations’ compensation of such executives. Evaluation and compensation reviews should generally be annual, and should take place in advance of any change in compensation, unless there is a multi-year contract in force or the change consists solely of routine adjustments for inflation or cost of living.
The National Nonprofit Network suggests the board evaluate the executive director according to the organization’s strategic plan or as addressed in the previous evaluation. The Network states that annual reviews allow the board to gather information needed to reward or re-align performance standards and uncover emerging issues.
The Attorney General’s document “Right from the Start” states that board members should be involved in the selection and periodic review of the organization’s Chief Executive Officer, Chief Financial Officer, and other key employees in order to exercise their duty of care.
g) Board oversees the chief staff person’s expense account.
The Alliance for Non-profit Management recommends that executives submit expense reports for all allocated expenses on a timely basis. Special accounts are not recommended for an executive without oversight on the account.
The detailed guidance provided in IRS Publication 463: Travel, Entertainment, Gift and Car Expenses should serve as a guide in avoiding lavish, extravagant or excessive expenditures.
h) Transactions in which any board or key staff member has a conflict of interest are fully identified as to the nature of the conflict, the transaction is approved by a quorum of the board and the Board or staff member with the conflict recuses themselves from the vote.
The Attorney General’s document “Right from the Start” for Directors and Officers of not-for-profit organizations recommends that the board should have a written “conflict of interest” policy that provides for written disclosure of anticipated or actual conflicts, or the appearance of such, in order to properly exercise the duty of loyalty. The board has the responsibility to examine any transaction that is not fair and reasonable, and transactions involving conflicts should be fully documented in the board’s minutes. The board should make sure there is a conflict of interest and code of ethics policy in place and that it is updated annually.
The Panel on the Nonprofit Sector recommends that organizations establish and enforce a conflict-of-interest policy that requires full disclosure of all potential conflicts of interest that
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applies to any person who has the ability to influence decisions of the organizations. All board and senior staff members should be required to sign it and disclose any material conflicts of interest, both at the time they join the organization and at the beginning of each fiscal year. Board members with a material conflict of interest should be required to recuse themselves from board discussions and votes regarding those matters, other than to respond to requests for information.
i) A policy controlling the employment and compensation of family members of directors and key employees.
The hiring and compensation of family members could be an actual or perceived conflict of interest. The Minnesota Council of Nonprofits notes that nationally it may not be illegal to hire or compensate family members as directors; however this should be stipulated in an organization’s By-Laws or conflict of interest policy. The council also notes that the majority of board members should be unrelated.
A policy prohibiting the hiring of any individual if a member of that individual’s immediate family is employed in an administrative capacity in the organization or is a member of the governing board is legally required in any organization that receives Federal discretionary grants, including Head Start discretionary grants, under the HDS Grants Administration Manual.
j) The not-for-profit has a policy or procedure to ensure loans are repaid if the organization provides loans to line staff between pay periods. Loans to employees over a significant dollar value are reported to or approved by the Board of Directors. Organizations do not loan funds to key employees, directors, officers, or trustees.
The Chronicle of Philanthropy notes that organizations should not give loans disproportionate to their charitable expenditures. The chronicle also recommends that organizations should not carry significant debt as a result of loans to employees. Board members and executives should not receive loans from their respective organizations in most circumstances.
The Panel on the Nonprofit Sector agrees that loans to directors, officers, trustees and executives have created both real and perceived problems for charities. When an organization deems it necessary to provide a loan to an employee, the Panel recommends that the terms be clear, approved by the Board and reported on the 990.
The “intermediate sanctions” excise tax provisions under Section 4958 of the Internal Revenue Code impose steep penalties on transactions, including loans, which provide excess benefits to disqualified people, who have substantial control over the organization.
k) Organization has implemented a whistleblower policy and designated a Board Committee or member who can be contacted and informed of any misconduct.
The Panel on the Nonprofit Sector recommends that organizations should establish and implement policies and procedures that enable individuals to report information on illegal practices or violations of organizational policies. Policies should specify the board and staff members within the organization or outside parties to whom such information can be reported without threat of retaliation.
The Attorney General’s document “Right from the Start” suggests that boards should have a policy regarding disclosure and identification of fraud and should make sure that a policy for records retention and whistleblower protection is in place in order to exercise their duty of care.
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NOTES
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I - 1
Index
F
Faculty Bios Amarah Sedreddine, 20 Dennis J. Morrone, 19 Jason R. Lilien, 18 Pamela A. Mann, 15 Sean Delany, 16 Shveta Kakar, 17
FASB’s Changes to the Nonprofit Financial Reporting Model
help you tell your financial story, 91–92 8 significant impacts, 93–97 additional liquidity disclosures,
107–108 challenges are always in the
details, 98–104 our perspectives cover the most
significant changes, 109 reporting of expenses, 106 statement of cash flows is
redesigned, 105
L
Lobbying Activity board members, 190 coalitions, 191 framing issue, 115 Internal Revenue Code
Direct vs. Grassroots lobbying, 150
exceptions, 151 how much lobbying, 155
expenditures test, 157–160 substantial part test, 156
how to report, 163 legislation, 149 sanctions, 161–162 special circumstances, 152–154
lobbying other tax-exempt organizations,
126–127, 165–166 private foundations, 125–126, 164
registration and reporting activity Federal Lobbying Disclosure
Act, 128, 168 New York City Lobbying
Act, 136–141, 178 applying for government
funding, 184 contacting a legislator or
agency official, 185–187
how to file, 183 lobbying, definition,
179–182 participatory budgeting,
188 New York State Lobbying
Act, 128–136, 169 calculating expenses, 173 enforcement & penalties,
177 lobbying, definition,
170–172 mechanics of filing,
174–176 NYC campaign finance
board independent expenditure disclosure rules, 141–142
rules restricting, 115–124 NYS restricted period, 189 practical tips, 200 registered lobbyists do,
194–199 ULURP, 192–193
N
New York Nonprofit Revitalization Act nonprofits, reducing burdens
independent financial audits, financial thresholds, 41
new procedures for mergers, asset sales, dissolutions, and certificate of incorporation changes, 41
239
I - 2
permitting electronic notices and voting and use of videoconferencing, 42
real property transactions, 43 streamlined incorporation
procedures, 42 strengthening board oversight and
accountability Attorney General enforcement
powers, 40 independent board leadership, 40 interest policy, mandatory
conflict, 39 mandatory whistleblower policy,
39–40 new financial audit oversight
responsibilities, 35–37 related party transactions, new
requirements, 38 Nonprofit Financial Statements and Audits
unique accounting concepts contributions, 64–76 expense reporting, 84–87 financial statements, 63–64 investments, 82–84 net assets, 76–81
Nonprofit Governance Materials capacity building and oversight best
practices appropriate internal controls,
232–233 effective and dynamic
governance structure, 231–232 operational and financial
oversight, 234–236 incompetent officers and lack of
oversight background, 225–227 breach of fiduciary duty of care
by directors, 227–228 deepening insolvency, 228–229
internal controls and financial accountability for not-for-profit boards available resources, making use,
224 implementation and monitoring,
218–223 internal controls, 217–218
responsibilities of directors, 205–206 available resources, use,
212–213 duties, 208–211 membership, 206 monitor fundraising, 211–212 prospective board member know
before joining a board, 206–208
P
Private Foundations foreign grant-making, 55–57 general, 49–50 impact investing, 59 investment rules, 57–58 self-dealing, 50–55
Program Schedule federal and state governance rules
applicable to nonprofit organizations, 10
nonprofit organizations: formation and startup issues, 9
political activity and lobbying: limitations on nonprofit organizations, 10
private foundations: basic principles and new developments, 9
understanding nonprofit financial statements and audits, 10
update on the Nonprofit Revitalization Act, 9
S
Starting a Nonprofit 501(c)(3) organization, 24 entity formation and registration,
25–26 exempt organizations, categories,
23–24 further information / resources,
27–28 introduction, 23 ongoing compliance, 27 recognition of tax-exemption,
application, 26–27 threshold considerations, 24–25
New York Nonprofit (Cont’d)
240
