This program is dedicated to the memory of

Julie L. Floch,

a leader in nonprofit accounting and finance, a thought leader in the field of

philanthropy, and Co-Chair of the Practising Law Institute’s Nonprofit

Organizations program, who passed away in September 2016. Julie was the

partner-in-charge of the Not-for-Profit Services Group at the firm EisnerAmper

LLP. She served as both founding Co-Chair and speaker for PLI’s annual

Nonprofit Organizations program, which focuses on governance, Form 990

reporting and compensation issues. Julie also served on nonprofit and accounting

boards and committees, taught nonprofit management and auditing, and

volunteered her time extensively in the nonprofit field.

TAX LAW AND ESTATE PLANNING SERIESTax Law and Practice

Course Handbook SeriesNumber D-474

To order this book, call (800) 260-4PLI or fax us at (800) 321-0093. Ask our Customer Service Department for PLI Order Number 150571, Dept. BAV5.

Practising Law Institute1177 Avenue of the Americas

New York, New York 10036

Nonprofi t Organizations 2016:

Governance, Form 990 Reporting, and Compensation

Issues

ChairSeth Perlman

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. 978-1-4024-2801-2

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The Practising Law Institute publishes over 200 Course Handbooks each year. The primary function of each Course Handbook is to serve as an educational supplement for each program and to provide practical and useful information on the subject matter covered to attorneys and related professionals.

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Distribution of the Course Handbook or individual chapters is strictly prohibited, and receipt of the Course Handbook or individual chapters does not confer upon the recipient(s) any rights to reproduce, distribute, exhibit, or post the content without the express permission of the authors or copyright holders. This includes electronic distribution and downloading of materials to an internal or external server or to a shared drive. If a firm or organization would like to arrange access for a wider audience, printed copies of the Course Handbook are available at http://www.pli.edu. In addition, PLI offers firm or company-wide licensing of our publications through our eBook library, Discover PLUS. For more information, visit http://discover.pli.edu.

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 NONPROFIT ORGANIZATIONS 2016: GOVERNANCE, FORM 990 REPORTING, AND COMPENSATION ISSUES Program New York City, December 14, 2016 CONTENTS: PROGRAM SCHEDULE ........................................................................... 9 FACULTY BIOS ...................................................................................... 15 1. Governance Practices and Reporting for Nonprofit

Organizations .................................................................................. 23 Seth Perlman Perlman & Perlman, LLP

2. Nonprofit Governance Basics ......................................................... 43

Professor Dana Brakman Reiser Brooklyn Law School

3. Nonprofit Governance: Recent State Enforcement Actions

and Regulatory Oversight ............................................................... 57 Karen I. Wu Perlman & Perlman, LLP

4. Form 990 Reporting Issues ............................................................. 69

Dahlia Balsam Doumar Patterson Belknap Webb & Tyler LLP

5. Executive Compensation: Intermediate Sanctions and

State Law Issues ............................................................................. 85 J.J. Harwayne Leitner Davis Wright Tremaine LLP

6. Nonprofit Compensation and Employment Issues .......................... 99

David G. Samuels Duval & Stachenfeld LLP

INDEX ................................................................................................... 139 Program Attorney: Ilizabeth Hempstead

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Program Schedule

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Nonprofit Organizations 2016: Governance, Form 990 Reporting, and Compensation Issues New York City and Live Webcast, www.pli.edu,December 14, 9 a.m.–12:45 p.m. Atlanta and Cleveland Groupcast Locations, www.pli.edu,December 14 Nashville Groupcast Locations, www.pli.edu,December 14, 8 a.m.–11:45 a.m.

PROGRAM SCHEDULE

9:00 Introduction Seth Perlman

9:15 Nonprofit Governance Update Dual state and federal regimes Duties of directorsConflicts of interest Impact of state law versus federal tax law on board roles and responsibilitiesWho is watching you - transparency and the changing role of regulators, watchdogs, media and stakeholdersThe growing emphasis on accountability and impact and its effect on nonprofit governance Recent regulatory changes and proposals Recent decisions and enforcement actions

Prof. Dana Brakman Reiser, Seth Perlman, Karen Wu

10:30 Networking Break

10:45 Nonprofit Reporting: Form 990 Update Recent IRS changes and activitiesSchedules L and R: related partiesSchedule D and its relationship to the financial statements Schedule F and foreign activities

Dahlia B. Doumar

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11:45 Compensation Issues for Nonprofit Organizations Recent developments Issues to consider in avoiding intermediate sanctions Proper financial reporting of compensation State law and regulatory issues New U.S. Department of Labor Fair Labor Standards Act rule and implications for nonprofit organizations Review of employment and wage and hour laws and how they impact nonprofit employment

J.J. Harwayne Leitner, David G. Samuels

12:45 Adjourn

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Chair:

Seth Perlman Perlman & Perlman, LLP New York City

Faculty:

Dana Brakman Reiser Professor of Law Brooklyn Law School New York City

Dahlia B. Doumar Patterson Belknap Webb & Tyler LLP New York City

J.J. Harwayne Leitner Davis Wright Tremaine LLP New York City

David G. Samuels Duval & Stachenfeld LLP New York City

Karen I. Wu Perlman & Perlman, LLP New York City

Program Attorney:

Ilizabeth Hempstead

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Faculty Bios

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Seth Perlman is Senior Partner at Perlman & Perlman, LLP, the country’s leading law firm serving nonprofits, fundraising professionals and social enterprises. Mr. Perlman has litigated in several state and federal jurisdictions on issues relevant to the philanthropic community. In addition, he has worked with the Hungarian Government on the initial formation of its not-for-profit sector and has been invited by Congress and State governments to advise on legal and regulatory issues relevant to philanthropy.

Mr. Perlman serves as General or Special Counsel for several nonprofit industry trade associations including the Association of Fundraising Professionals. He is a founding member of Charity Defense Council. Mr. Perlman advises a broad range of U.S. nonprofit boards and also holds international board positions with philanthropic organizations in Canada, France, and Germany.

Mr. Perlman received the Outstanding Nonprofit Lawyer Award from the American Bar Association in 2009 for distinguished service by an attorney practicing nonprofit law.

Mr. Perlman is a frequent commentator and lecturer on charitable solicitations law, cause-marketing and nonprofit law. He is a regular speaker at several philanthropic-related conferences including the Practicing Law Institute, the Association of Fundraising Professionals, the American Institute of Certified Public Accountants, and the joint conference of the National Association of Attorneys General/National Association of State Charity Officials.

Mr. Perlman is the author of Fundraising Regulation, a two-volume handbook that explains the regulatory requirements and procedures for nonprofits soliciting contributions on a state-by-state basis. He has written several articles on fundraising regulations for publications including The Nonprofit Times and The Chronicle of Philanthropy, and has authored the fundraising chapter of The Nonprofit Handbook.

Mr. Perlman is a member of the Association of Fundraising Professionals, the American Bar Association’s Exempt Organizations Committee and Business Law Committee, and the New York City Bar Association. He was admitted to the New York State Bar in 1985. He received a J.D. degree from the University of Houston Bates College of Law in 1984 and a B.S. from Beloit College in 1977. Contact Information:

Seth Perlman Perlman & Perlman, LLP 41 Madison Avenue, Suite 4000 New York, NY 10010 Phone: (212) 889-0575 Fax: (212) 743-8120 E-mail: seth@perlmanandperlman.com

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Dahlia B. DoumarPartnerdbdoumar@pbwt.comTel: 212-336-2988Fax: 212-336-2222

Dahlia Doumar concentrates her practice in tax law. Her practice is broad and sophisticated including bothdomestic and foreign for-profit companies, exempt organizations and high net worth individuals.

Ms. Doumar works extensively in the exempt organizations area counseling clients on unrelated business incometax issues, investment structuring, rules governing the maintenance of donor advised funds, reporting regardingforeign investments and grants, self dealing, intermediate sanctions and excise tax issues generally.

In the corporate area, Ms. Doumar has advised clients on numerous matters, including corporate reorganizationsand recapitalizations, restructuring of distressed companies, business acquisitions and dispositions, partnershipand limited liability company investments.

Ms. Doumar also works with members of the employee benefit and executive compensation group on tax aspectsof employee benefits. Further, Ms. Doumar has represented clients, both for-profit and not-for-profit, before theInternal Revenue Service, New York State and New York City involving audits and private letter ruling requests.

In addition, working with lawyers in the trusts and estates group, Mrs. Doumar has advised on the domesticationof foreign trusts.

Education

New York University School of Law (LL.M., 1994)Boston University School of Law (J.D., magna cum laude, 1993)Boston University (B.A., magna cum laude, 1990)

Admissions

New YorkMassachusetts

Publications

Co-Author, "Beware the life insurance tax trap," Private Asset Management (May 2016)Co-Author, "Looking Before You Leap," Private Wealth Magazine (March 2016)Co-Author, "Entering the U.S. Without Entering Its Tax System: Holding Company Structures for U.S.Operations," Bloomberg BNA's Daily Tax Report (October 2015)Co-Author, "Scholarships, Grants, and Foreign Students - Tax Compliance Tips for U.S. Institutions,"Taxation of Exempts (July/August 2014)"Exemption From PFIC Regime for Indirect Ownership Expanded,"Journal of Accountancy (August 2014)"What Donors Need to Know About Appreciated Property," Private Asset Management (June 2014)

Presentations

"Investing in the US: Tax Considerations for French Investors," (September, 2016)

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J. J. Harwayne Leitner // COUNSEL // NEW YORK

J. J. Harwayne Leitner | Davis Wright Tremaine LLP |

New York 21st Floor 1251 Avenue of the Americas New York, New York 10020-1104 212.603.6420 DIRECT

212.489.8340 FAX

jjleitner@dwt.com

J.J. Harwayne Leitner has a multi-disciplinary practice representing tax-exempt organizations of all types and sizes, including private foundations, private operating foundations, public charities, supporting organizations, "friends of" organizations, donor advised funds, social welfare organizations, and trade associations. She counsels on all tax laws pertaining to nonprofit organizations, including private foundation excise taxes, taxation of unrelated business income, private benefit and inurement, intermediate sanctions, and lobbying and political activities. J.J. also has extensive experience with the New York not-for-profit corporation law and handling transactions for New York charities that involve the oversight of the Attorney General’s Charities Bureau.

As outside general counsel to many of her clients, J.J. regularly reviews and drafts contracts, both routine and extraordinary, and she counsels those clients on a wide variety of legal issues, including employment, real estate, intellectual property, and litigation matters. J.J.'s practice also includes the formation of new organizations and obtaining federal and state tax exemptions; corporate governance matters; complex corporate transactions, including joint ventures, spin-offs, mergers, conversions, and asset sales; and nationwide state charitable solicitation issues including cause marketing and other fundraising transactions and methods.

Additional Qualifications

Skadden, Arps, Slate, Meagher & Flom LLP, New York, N.Y., 2008-2014

Holland & Knight LLP, New York, N.Y., 2001-2008

Gilbert, Segall and Young LLP, New York, N.Y., 2000-2001

LeBoeuf, Lamb, Greene & MacRae LLP, New York, N.Y., 1998-2000

Professional and Community Activities

Member, Diversity and Inclusion Committee, 2016; Member, Nonprofit Committee, 2016 – American Bar Association Business Section

EducationJ.D., Georgetown University Law Center, 1998 Award for Excellence in

“Subordination: Traditions in Thought and Experience”

Georgetown Journal on Fighting Poverty

B.A., Mathematics, Brown University, 1994

Related Practices Tax-Exempt Organizations Tax: Federal Corporate Governance Executive Compensation

Admitted to Practice New York, 1999

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Dana Brakman Reiser is Professor of Law and former Vice Dean at Brooklyn Law School, where she has taught courses in Nonprofit Law, Social Enterprise, Corporations, Property, and Trusts and Estates since 2001. Her recent scholarship focuses on law and finance for social enterprises – businesses that pursue a social mission – and has appeared in Indiana Law Journal, Boston College Law Review, Emory Law Journal, and Notre Dame Law Review, among others. Her forthcoming book, Social Enterprise Law 2.0 (with Professor Steven Dean) will be published by Oxford University Press in 2016. She also has written extensively on nonprofit accountability and governance, and the role of members and other non-fiduciary constituencies in nonprofit organizations. Professor Brakman Reiser is a member of the American Law Institute and was Associate Reporter for its project on the Principles of the Law of Nonprofit Organizations. She is also a member and past-Chair of the Section on Nonprofit and Philanthropy Law of the American Association of Law Schools. Professor Brakman Reiser is a graduate of the University of Pennsylvania and Harvard Law School.

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DAVID G. SAMUELS David G. Samuels joined Duval & Stachenfeld LLP as a partner in 2006. He is Chair of the Firm’s Tax Exempt Organizations Practice Group and a member of the Firm’s Litigation Department and its Employment Practice Group. Mr. Samuels has, since 2007, been named annually as one of the Best Lawyers and Super Lawyers in the New York metropolitan area in the category of Non-Profit/Charities Law. He has been named by Best Lawyers as its New York City Non-Profit/Charities Law Lawyer of the Year for 2016 Mr. Samuels has extensive experience representing numerous and varied public charities and private foundations, including social service agencies, grant-making foundations, mental health facilities, educational organizations, and religious institutions. His clients include New York University, Jewish Association for Services for the Aged, Atran Foundation, Gateway Counseling, Hebrew Academy for Special Children, Social Science Research Council, the Workmen’s Circle/Arbeter Ring, and the YWCA of the City of New York. Mr. Samuels is a recognized expert on a wide range of issues involving charitable organizations, including compensation, governance, fiduciary duty, self-dealing and conflict of interest. He represents targets of investigations and inquiries from government agencies (including the New York Attorney General). He frequently deals with the Attorney General on regulatory matters, including sales, mergers, dissolutions, and cy pres applications. He teaches the course on Charitable Organizations as an adjunct professor at New York Law School. Mr. Samuels is former chair and a member of the Nonprofit Organizations Committee of the New York City Bar Association. He has chaired and participated in numerous continuing legal education and accounting education programs on nonprofit issues. Mr. Samuels is the lead editor and co-author of a treatise, Nonprofit Compensation, Benefits, and Employment Law, and has written extensively on nonprofit issues. He is also an experienced civil and appellate litigator and employment lawyer. Mr. Samuels received an A.B. degree (cum laude) from Harvard College in 1974, a J.D. degree from Harvard Law School in 1978, and an LL.M. from NYU School of Law in 1985. Mr. Samuels was Deputy Chief of the New York AG’s Charities Bureau from 1987 to 1995. He was previously a partner at Perlman & Perlman and at Butler, Fitzgerald & Potter. Mr. Samuels is admitted to practice in the state and federal courts in New York.

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Karen I. Wu is a partner at Perlman & Perlman, LLP, a nationally recognized law firm based in New York City serving the philanthropic and social enterprise sector. Karen advises nonprofit organizations on corporate governance, federal tax law compliance, fundraising regulation, contract negotiations, and intellectual property matters. She also counsels a broad range of for-profit businesses, including Fortune 500 and start-up companies, on emerging issues involving corporate philanthropy and cause marketing, including corporate sponsorships, commercial co-ventures, crowd-sourced fundraising, and social media campaigns. Ms. Wu is a frequent author, blogger, and speaker on legal issues affecting the philanthropic sector. Karen is also a board member and volunteer with Open Hands Legal Services, a faith-based nonprofit organization that provides free legal services and counseling to the poor in New York City. She received the Outstanding Young Lawyers Award from the New York State Bar Association in 2012, the Nonprofit Outstanding Young Lawyer Award from the American Bar Association in 2013, and the Best Lawyers Under 40 Award from the National Asian Pacific American Bar Association (NAPABA) in 2015. These awards honor young attorneys who have a distinguished record of service within the legal profession and the community.

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Governance Practices and Reporting for Nonprofit Organizations

Seth Perlman

Perlman & Perlman, 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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IMAGINE:

You are sitting on the Board of a mental health agency with an annual budget in excess of $80m and approximately 150 employees. One of the Baord members works for a law firm that also provides paid legal ser-vices to the organzition.

The Board which consist of 25 members meets 3 times a year for no more than 90 minutes. The meetings typically consist of a report from the organization’s CEO/Executive Director.

The CEO and Chief Program Officer present a short synopsis of the foundation’s programs activities at each meeting.

The Board receives a report each quarter on the organization’s overall revenues and expenses which is also presented at each Board meeting by the CEO/Executive Director..

Once a year the Board receives and reviews a report from the organ-ization’s CFO on its annual audit. The Board reviews and then votes at the beginning of its fiscal year on a budget compiled by the CEO and CFO, in consultation with the organization’s outside auditors.

Every three years the Board elects directors and officers. All of the current Directors have been on the Board for a minimum of 3 terms. The Chairman of the Board has held that position for at least 10 years.

On rare occasions other items of business may be brought up, but for the most part the above recitation covers the proceedings of the Board meetings held during the year.

On a scale of 1-10 based on this scenario, how would you rate the effectiveness of this Board? - 1 being the synopsis above is typical of a well-run Board and 10 being these Board members are guilty of neglect, in complete violation of their fiduciary duties and should be removed.

Just to get an idea of our audience here – on a scale of 1-10 – How much involvement have you had with nonprofit Boards? 1 being you have little to no involvement as you have never attended a NPO Board meeting and 10 you are involved with numerous nonprofits and regularly attend Board meetings.

At the end of this seminar see how, if at all, you may have changed your vote on the effectiveness of this Board.

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I. GOVERNANCE AND CONFLICTS OF INTEREST BEST PRACTICES

A. The Players

B. State Regulation and Enforcement

Listed below are key governance issues and recommended actions based on enforcements, investigations, statutory changes and enun-ciated best practices undertaken by the states over the past few years. Each of these issues is a governance concern for nonprofit directors and their executive staff.

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Related Party Transactions Self-dealing Private benefit Conflicts of interest

Adopt or review the organization’s conflict of interest policy. Make sure the policy:

○ requires that the person with the conflict of interest not be present at or participate in board or committee deliberation or vote on the matter giving rise to such conflict;

○ prohibits any attempt by the person with the conflict to influence improperly the deliberation or voting on the matter giving rise to such conflict;

○ requires that the existence and resolution of the conflict be documented in the corporation’s records, including in the minutes of any meeting at which the conflict was discussed or voted upon;

○ includes procedures for disclosing, addressing, and documenting related party transactions; and

○ requires directors, officers, and key employees to submit an annual disclosure statement.

Adopt or review the organization’s whistleblower policy. Make sure the policy:

○ includes procedures for the reporting of violations or suspected violations of laws or corporate policies, including procedures for preserving the confidentiality of reported information;

o requires that an employee, officer or director of the corporation be designated to administer the whistleblower policy and to report to the audit committee or other committee of independent directors or, if there are no such committees, to the board; and

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○ requires that a copy of the policy be distributed to all directors, officers, employees, and to volunteers who provide substantial services to the corporation.

Organizations should establish a committee to oversee the audit of the annual financial statements, review the results of the audit, and oversee implementation of the Conflict of Interest Policy and Whistleblower Policy. Organizations with annual revenue > $1 million have additional audit oversight obligations.

Deceptive and misleading solicitations Truthfulness and

accuracy of solicitation materials and scripts used by telemarketers and others soliciting on behalf of the organization

Solicitation of restricted gifts

Cause marketing advertisements

Review all of the organization’s fundraising activities to ensure that the activities and expenses are appropriate for the organization.

Ensure proper oversight over all paid fundraisers’ activities. Consider using an RFP process before selecting a fundraiser.

Carefully review all solicitation materials on a regular basis to ensure that anyone soliciting on behalf of the organization (whether as a paid fundraiser, employee, or volunteer) is making truthful statements, and has the relevant information needed to respond to commonly asked questions.

Ensure that any complaints received regarding direct response or other fundrasing solicitations are carefully reviewed, and that an appropriate response is taken to ensure that all responsible parties are properly trained to avoid making statements that are potentially deceptive or misleading.

If solicitations are for a restricted purpose (e.g., disaster relief, to support a specific program of the organization), clearly explain how funds will be used, and disclose any material facts (e.g., if funds may be used for other disasters at the organization’s discretion).

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Review the NY AG’s “Best Practices“ for transparency in cause marketing campaigns, issued on October 18, 2012. This is a model that will be followed nationally.

Administration of charitable assets Use of funds in

accordance with the organization’s charitable purposes

Administration of restricted gifts

Proper use of restricted funds for overhead and administrative expenses

Avoid mission drift; make sure the organization’s activities are within its legally authorized purposes, and amend the purposes if necessary and appropriate.

Ensure that restricted donations are properly accounted for in the organization’s financial reports.

Review your state’s UPMIFA Guidance for specific rules governing the use and administration of restricted funds.

Consider the regulatory and public relations risks associated with having high fundraising expenses. (Note: Under SCOTUS holdings high fundraising costs are not unlawful and the states must use the least restrictive means to regulate fundraising activities, which are fully protected speech under the 1St Amendment)

Executive compensation Proper compensation

approval procedures Improper

payment/reimbursement of personal expenses

Per the New York Revitalization Act, no director, officer, or member who will benefit from compensation may be present at or otherwise participate in any board or committee deliberation or vote concerning his/her compensation; however, the board or authorized committee may request that the person who may benefit from such compensation present information as background or answer questions at a committee or board meeting prior to the commencement of deliberations or voting. N-PCL § 515.

Obtain appropriate comparability data for key organizational executives.

The independent board members should review and discuss the comparability data, and not simply rely on the summary report prepared by a professional executive compensation consultant.

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Charitable registration and compliance Failure to register prior

to soliciting donations or conducting activities

Filing of false or misleading information

Ensure that the organization and any of its paid fundraising professionals are properly registered to solicit or advise on the solicitation of funds with the state, if required.

Ensure that all applicable contracts are filed and contain the required statutory provisions.

Ensure that solicitation materials contain the required state information disclosures, where required.

See www.perlmanandperlman.com/ resources for information on the required disclosure.

Ensure that information being filed with the state, including the Form 990, is truthful and accurate. Remember: all forms and attachments are submitted “under penalties of perjury.”

C. The watchdogs and Governance

The following are voluntary standards and best practices on gov-ernance and conflicts of interest promulgated by the watch-dog group the BBB Wise Giving Alliance and the philanthropic industry asso-ciation the Independent Sector. These standards along with other practices and standards relevant to fundraising and administration matters are widely promulgated by both organizations.

a. BBB WISE GIVING ALLIANCE – Standards of Accountability

1. A board of directors that provides adequate oversight of the charity’s operations and its staff. Indication of adequate oversight includes, but is not limited to, regularly scheduled appraisals of the CEO’s performance, evidence of disbursement controls such as board approval of the budget and fund raising practices, establishment of a conflict of interest policy and estab-lishment of accounting procedures sufficient to safeguard charity finances.

2. A board of directors with a minimum of five voting members.

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3. A minimum of three evenly spaced meetings per year of the full governing body with a majority in attendance, with face-to-face participation. A conference call of the full board can substitute for one of the three meetings of the governing body. For all meetings, alternative modes of participation are acceptable for those with physical disabilities.

4. Not more than one or 10% (whichever is greater) directly or indirectly compensated person(s) serving as voting member(s) of the board. Compensated members shall not serve as the board’s chair or treasurer.

5. No transaction(s) in which any board or staff members have material conflicting interests with the charity resulting from any relationship or business affiliation. Factors that will be considered when concluding whether or not a related party transaction constitutes a conflict of interest and if such a conflict is material, include, but are not limited to: any arm’s length procedures established by the charity; the size of the transaction relative to like expenses of the charity; whether the interested party participated in the board vote on the transac-tion; if competitive bids were sought and whether the transaction is one-time, recurring or ongoing.

b. INDEPENDENT SECTOR – Principles of Self-Regulation

Principles for Facilitating Legal Compliance 1. A charitable organization should be knowledgeable about and

must comply with all applicable laws and regulations and international conventions.

2. A charitable organization must have a governing body that is responsible for reviewing and approving the organization’s mission and strategic direction, annual budget and key finan-cial transactions, compensation practices and policies and fiscal and governance policies of the organization.

3. A charitable organization must adopt and implement policies and procedures to ensure that all conflicts of interest, or the appearance thereof, within the organization and the board are avoided or appropriately managed through dis-closure, recusal, or other means.

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4. A charitable organization must establish and implement poli-cies and procedures that enable individuals to come forward with credible information on illegal practices or violations of organizational policies. This “whistleblower” policy must specify that the organization will not retaliate against indi-viduals who make such reports.

5. A charitable organization must establish and implement poli-cies and procedures to protect and preserve the organi-zation’s important documents and business records.

6. A charitable organization must make information about its operations, including its board members, finances, programs and activities, and methods used to evaluate the outcomes of work, widely available to the public. Principles for Effective Governance

7. The board of a charitable organization must meet regularly enough to conduct its business and fulfill its duties. The board should hold at least three meetings per year.

8. The board of a charitable organization should establish and review periodically its size and structure to ensure effective governance and to meet the organization’s goals and objec-tives. The board should have a minimum of five members.

9. The board of a charitable organization should include members with the diverse skills, background, expertise, and experience necessary to advance the organization’s ability to fulfill its mission. The board should include or have access to some individuals with financial literacy.

10. A substantial majority of the board of a public charity should be independent – that is, individuals (1) who are not com-pensated by the organization as an employee or independent contractor; (2) whose own compensation is not determined by individuals who are compensated by the organization; (3) who do not receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; and (4) who are not related to (as a spouse, sibling, parent or child) or do not reside with any individual described above.

11. The board must hire, supervise, and evaluate the perfor-mance of the chief executive officer of the organization, as

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well as approve annually and in advance the compensation of the chief executive officer unless there is a multi-year contract in force or there is no change in the compensation except for inflation or cost-of-living adjustment.

12. The board of a charitable organization that has paid staff should ensure that the positions of chief executive officer, board chair, and treasurer are held by separate individuals.

13. The board should establish an effective, systematic process for educating and communicating with board members to ensure that the board carries out its oversight functions and those individual members are aware of their legal and ethical responsibilities.

14. Board members should evaluate their own performance as a group and as individuals no less frequently than every three years. The board should establish clear policies and procedures on the length of terms and on the removal of board members.

15. The board must review organizational and governing instru-ments no less frequently than every three years.

16. The board should establish or review goals for implementing the organization’s mission on an annual basis and evaluate programs, goals, and activities to be sure they are consistent with the mission no less frequently than every three years.

Note: The self-evaluation of the organization’s effectiveness and impact is fast becoming the new paradigm in nonprofit gov-ernance. The following questions appear on the websites www. guidestar.org and www.independentsector.org:

○ Developed by the BBB Wise Giving Alliance, GuideStar USA, and Independent Sector, they consist of five simple questions, designed to help boards think strategically and inform their donors about plans and progress. What is your organization aiming to accomplish? What are your strategies for making this happen? What are your organization’s capabilities for doing

this? How will your organization know if you are making

progress?

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What have and haven’t you accomplished so far? It is also important to note that Charity Navigator under the guise of its revamped CN 3.0 will be using impact assessments to evaluate charities as well. Their evaluation will consist of 5 basic elements:

1) Alignment of Mission, Solicitations and Resources Fundraising materials must align with your mission and

programs. 2) Results Logic and Measures Charities need to define success, and know that their

programs can/will lead to those defined successes. 3) Validators Charities can receive credit for being members in good

standing of Validators i.e. standards, codes of conduct, or certification mechanisms or bodies that relate positively to outcome measurements and reporting.

4) Constituent Voice 5) Published Evaluation Reports Charity must develop a process to annually report on the

effectiveness of its programs 17. Board members are generally expected to serve without

compensation, other than reimbursement for expenses incurred to fulfill their board duties. Charitable organizations that pro-vide compensation to board members must make available to anyone, upon request, relevant information that will assist in evaluations of the reasonableness of such compensation.

II. GOVERNANCE REPORTING

A. Disclosures Required on the IRS Form 990

1. Independence of Board Members

a. Part VI, Question 1b, asks for the number of independent voting members of the governing body. Independence is used to determine whether a particular voting member of its

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governing body is independent at all times during the organiza-tion’s tax year for purposes of Form 990 reporting.

b. To be independent requires satisfying the following three rules: i. The member was not compensated as an officer or other

employee of the organization or of a related organization. ii. The member received no more than $10,000 of total

compensation or other payments (other than reasonable compensation and expense reimbursements for services pro-vided in the capacity as a Board member) from the organi-zation or a related organization as an independent contractor.

iii. Neither the member, nor any of his/her family members, was involved in a transaction with the organization (whether directly or indirectly through affiliation with another organization) reportable on Schedule L (Transactions With Interested Persons) for the organization’s tax year, or in a transaction with a related organization of a type and amount that would be reportable on Schedule L if required to be filed by the related organization.

c. A Board member is not considered to lack independence merely because of the following circumstances: i. The member is a donor to the organization, regardless of

the donation amount. ii. Religious exception—the member has taken a bona fide

vow of poverty and either (a) receives compensation from a religious order that is not considered taxable income under IRS rules or (b) belongs to a religious order that receives payments from the organization or related organi-zations that are not considered taxable income.

iii. The member receives financial support from the organi-zation solely as a member of the charitable or other class served by the organization in furtherance of its exempt purposes, so long as the financial benefits comply with the organization’s terms of membership.

d. Reasonable Effort Standard: The instructions are explicit that the organization need not engage in “more than a rea-sonable effort” to obtain the necessary information regarding Board member independence. For example, giving an annual

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questionnaire to each director, officer and key employee asking for the necessary information would be sufficient provided that questionnaire contained (1) the name, title, date, and sig-nature of the person reporting information; and (2) the Form 990 Glossary definitions of independent voting member of governing body, family relationship, business relationship, and key employee.

2. Size of the Board

a. Part VI, Line 1a requires you to enter the total number of members of the Board with power to vote on all matters that come before the Board as of the end of the organization’s tax year.

b. If members of the Board do not have the same voting rights, you should explain the material differences in Schedule O.

c. If the Board has delegated its authority to act to an exec-utive committee or some other committee empowered with broad authority to act and the committee held that authority at any time during the tax year, the instructions require you to describe in Schedule O: i. the composition of the committee, ii. whether any of the committee members are not on the

Board, and iii. the scope of the committee’s authority.

d. This does not include delegations of authority that are limited in scope. For example, this would not require a disclosure of the delegation of authority to an audit committee or com-pensation committee.

3. Disclosure of Material Diversion of Assets Required

a. Line 5 in Part VI asks if the organization became aware of a “material diversion of assets.”

b. Answer “Yes” if the organization became aware during the year of a material diversion of its assets, whether or not the diversion occurred during the year.

c. If “Yes,” explain the nature of the diversion, amounts or property involved, corrective actions taken to address the matter, and pertinent circumstances in Schedule O, though

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the person or persons who diverted the assets should not be identified by name.

d. Definition: A diversion of assets includes any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to an embezzlement or theft. Report diversions by the organi-zation’s officers, directors, trustees, employees, volunteers, inde-pendent contractors, grantees (diverting grant funds), or any other person, even if not associated with the organization other than by the diversion.

e. A diversion of assets does not include an authorized transfer of assets for fair market value consideration, such as to a joint venture or for-profit subsidiary in exchange for an interest in the joint venture or subsidiary.

f. For 990 reporting, a diversion is considered material if the gross value of all diversions (not taking into account res-titution, insurance, or similar recoveries) exceeds the lesser of (i) 5% of the organization’s gross receipts for its tax year, (ii) 5% of its total assets as of the end of its tax year, or (iii) $250,000.

g. A diversion of assets may in some cases constitute inurement of the organization’s net earnings. In the case of 501(c)(3) and (4) organizations, it also may be an excess benefit trans-action taxable under section 4958 and reportable in Schedule L.

4. Documentation of Meetings—Board and Committee Minutes

a. Line 8 asks if the organization contemporaneously documents its Board and committee meetings.

b. The instructions define “contemporaneously” to be the latter of the next Board or committee meeting or 60 days after the meeting.

c. The instructions specify that every meeting has to be docu-mented to answer affirmatively and documentation includes any method permitted by state law. Documentation may include approved minutes, strings of e-mails, or similar writings that explain the action taken, when it was taken, and who made the decision.

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d. If “No,” the organization must explain in Schedule O the organi-zation’s practices or policies, if any, regarding documentation of meetings and written actions of its governing body and committees with authority to act on its behalf.

e. On its face, the question reflects good management practice to keep timely records of Board action. But trouble can arise if the organization answers “no”—if the organization is relying on the “safe harbor” for compensation decisions, they must document those decisions in a timely manner under IRC 4958. In addition, if a dispute arises that hinges on whether or not certain action was taken by the Board, it could cause the valid-ity of the Board’s actions to be challenged if the organization has responded that it does not keep contemporaneous minutes on the 990.

5. Written Policies and Procedures

a. Line 12 asks whether the organization has a written conflict of interest policy. i. If yes, the organization must answer two sub-questions.

1. Does the organization require annual disclosures? 2. Does the organization regularly and consistently

monitor and enforce compliance? If yes, describe how this is done in Schedule O, including the organ-ization’s practices for monitoring proposed or ongoing transactions for conflicts of interest and dealing with potential or actual conflicts, whether discovered before or after the transaction has occurred. The description should include an explanation of which persons are covered under the policy, the level at which deter-minations of whether a conflict exists are made, and the level at which actual conflicts are reviewed. Also explain any restrictions imposed on persons with a conflict, such as prohibiting them from participating in the governing body’s deliberations and decision in the transaction.

ii. If the initial answer is “no” that there is no written con-flicts policy, it may be worthwhile for the organization to give an explanation in Schedule O as to how conflicts are disclosed and how they are addressed by the organization.

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b. Line 13 asks if the organization has a written whistle-blower policy and Line 14 asks if the organization has a written document retention and destruction policy. i. These policies are not required by federal tax law, but sev-

eral sections of Sarbanes Oxley (applicable to nonprofits) make it a crime to retaliate against a whistleblower or destroy documents with the intent to obstruct a federal investigation.

c. Line 16 asks if the organization invested or participated in a joint venture with a taxable entity. If the answer is “Yes,” the next question asks whether the organization has adopted a written policy or procedure requiring the organization to evaluate its participation in joint ventures under applicable tax law and taken steps to safeguard the organization’s exempt status with respect to such arrangements. i. For purposes of the 990, a joint venture means any joint

ownership or contractual arrangement through which there is an agreement to jointly undertake a specific business enter-prise, investment or exempt-purpose arrangement without regard to (i) whether the organization controls the venture, (ii) the legal structure of the venture, or (iii) whether the venture or arrangement is taxed as a partnership or as an association or corporation for federal income tax purposes.

ii. Some examples of safeguards include: control over the ven-ture or arrangement sufficient to ensure that the venture furthers the exempt purpose of the organization; require-ments that the venture or arrangement give priority to exempt purposes over maximizing profits or the other participants; that it not engage in activities that would jeopardize the organization’s exemption; and that all contracts entered into with the organization be on terms that are arm’s length or more favorable to the organization.

6. Review of Form 990 by Board

a. Line 11 asks if the organization has provided a copy of the Form to the Board before filing.

b. 11a requires the process, if any, used by the organization to review the 990 to be described in Schedule O.

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c. State “Yes” only if a copy of the organization’s final Form 990 (including required schedules), as ultimately filed with the IRS, was provided to each voting member of the organization’s governing body, whether in paper or electronic form, prior to its filing with the IRS.

d. The process of review, if any, has to be included in Schedule O including specifics regarding who conducted the review, when they conducted it, and the extent of any such review. If no review was conducted, state “No review was conducted.”

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Nonprofit Governance Basics

Professor Dana Brakman Reiser

Brooklyn Law School

Dana Brakman Reiser, Professor of Law, Brooklyn Law School. Materials prepared Sept. 22, 2016, to update prior materials by the same name and author prepared for prior PLI programs.

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. DUAL LEGAL REGIMES

For nonprofit organizations who are, or seek to be, exempt from federal income taxation under I.R.C. § 501(c)(3), both state organizational law and federal tax law will importantly influence governance. Many gov-ernance issues attorneys will encounter when advising tax-exempt non-profits will have implications under both state and federal law. Thus, advisors should always keep in mind this dual regime situation.

A. State Organizational Law

Every nonprofit is legally organized under state law and its internal governance will be governed by the state law of the state in which it is organized.

1. Organizational Form

A nonprofit may be organized as a nonprofit corporation, charitable trust, or unincorporated association.1 a. Nonprofit Corporations. Most formally organized nonprofits

are nonprofit corporations.2 Nonprofit corporations under state law are formed similarly to their for-profit cousins. Founders must file articles of incorporation with the Secretary of State, draft bylaws to describe the operations of the entity, and name a board of directors.3 Directors manage the nonprofit corpo-ration 4 primarily through decision-making conducted at meetings and by delegation to officers and employees. It is notable that, unlike a for-profit, directors of a nonprofit corporation may be self-perpetuating; they may nominate and elect their own

1. See MARION E. PHELAN, NONPROFIT ENTERPRISES: CORPORATIONS, TRUSTS AND ASSOCIATIONS § 1:03 (West 2000). Nonprofits not yet formally organized often function as unincorporated associations, which are governed by agency law. See id.

2. Id. 3. See MARION R. FREMONT-SMITH, GOVERNING NONPROFIT ORGANIZATIONS 152-53

(2004). 4. See, e.g., REVISED MODEL NONPROFIT CORP. ACT §8.01(b) (1987) [hereinafter

RMNCA]. At most recent count, the RMNCA was adopted by 23 states, and thus its provisions are used here for illustrative purposes. See FREMONT-SMITH, supra note 3, at 152, 514–17 tbl.3 (providing analysis of model act adoptions).

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successors.5 A nonprofit may opt to empower a membership constituency to elect directors instead, but few do.6

b. Charitable Trusts. Alternatively, formally organized nonprofits may be charitable trusts. A charitable trust requires no filing with state officials and may be created very informally.7 It is governed by a charitable trustee or trustees, and founders have great flexibility to arrange governance in this form. Thus, the charitable trust can be attractive to those wishing to form swiftly and to establish a greater level of founder control. Despite these potential advantages in particular situations, the remainder of this outline will address only the more popular nonprofit cor-poration form.

B. Federal Tax Law

Nonprofits who wish to obtain federal tax benefits must qualify to do so under federal tax law and will need to continue to meet vari-ous statutory and regulatory criteria in order to maintain their favored tax status. Some of these requirements impact nonprofit governance.

1. Income Tax Exemption

Nonprofits desiring exemption from federal income tax must comply with I.R.C. § 501(c)(3). a. To qualify for exemption, § 501(c)(3) requires an entity to be:

“organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational pur-poses, or to foster national or international amateur sports com-petition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or indi-vidual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing

5. See FREMONT-SMITH, supra note 3, at 159. 6. See id. 7. See id. at 134.

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or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”8

2. Eligibility to Receive Tax-Deductible Contributions

Nonprofits desiring to offer donors tax-deductible contributions must also comply with I.R.C. § 170(c). Eligibility to receive deduct-ible contributions is limited to domestic entities essentially meeting the criteria of § 501(c)(3).9

3. Additional Federal Regulation

Voluminous Treasury Regulations amplify the requirements of §§ 501(c)(3) and 170(c). In addition, Congress has enacted various other statutory frameworks that apply to tax-exempt nonprofits, and additional regulations implement them. For the purposes of this discussion, the excess-benefit transaction rules10 and the private foundation rules, which limit self-dealing, jeopardizing investments, and certain other actions by directors, officers, and foundation man-agers,11 are the most important of these additional federal schemes.

C. Enforcement

Public regulation and prosecution are the main enforcement mecha-nisms for nonprofit law at both the state and federal levels.

8. I.R.C. § 501(c)(3). 9. Section §170(c)(2) allows a deduction for contributions to domestic entities: “(B)

organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals; (C) no part of the net earnings of which inures to the benefit of any private shareholder or individual; and (D) which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candi-date for public office.”

10. See I.R.C. § 4958 (imposing penalties on nonprofit insiders who engage in transactions with their nonprofits from which the insiders receive excess benefits). These rules will be addressed in greater detail by another presenter.

11. See I.R.C. §§ 4941–45 (authorizing penalty taxes for violations).

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1. Litigating Breaches of Duty Under State Law

In general, breaches of nonprofit directors’ fiduciary duties may be challenged only by fellow directors and the state attorney gen-eral.12 Commentators frequently bemoan the lack of resources for state attorneys general to engage in optimal enforcement.13 Courts occasionally allow donors or individuals with a “special interest” to challenge director conduct, but such cases are rare.

2. Enforcement Against Violations of Federal Tax Law

The IRS can enforce against violations of federal tax law through various means, including assessing penalty taxes, disqualifying nonprofits from eligibility either for exemption or to receive tax-deductible contributions, or pursuing various other administrative or adjudicative remedies.

3. Disclosure

Disclosure is a major enforcement technique under both state and federal law. The IRS and state attorneys general require non-profits under their jurisdiction to register and provide annual reports on their finances and activities. The main IRS disclosure for non-profits, the Form 990, is a public document and is widely available on the Internet.14

D. Nondistribution Constraint

The nondistribution constraint15 is one example of the dual regime situation in which nonprofits and their advisors operate. Nonprofits may not distribute profits to individuals or entities maintaining control positions within them.16 This prohibition can be found in both state

12. See FREMONT-SMITH, supra note 3, at 328–38 (describing standing law and proposals for reform).

13. See, e.g., id. at 443-48. 14. See GUIDESTAR, http://www.guidestar.org (last visited Aug. 11, 2014) (providing

free access to current Forms 990 to registered users). Other presenters will discuss the Form 990 in greater detail.

15. See Henry B. Hansmann, The Role of Nonprofit Enterprise, 89 YALE L.J. 835, 838 (1980) (coining the term “nondistribution constraint” to describe this prohibition).

16. Please note that this statement, and this outline generally, relates to charitable nonprofits and does not address the special issues and legal differences relevant to non-charitable nonprofits.

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organizational law, for example in statutory prohibitions on distri-butions by nonprofit corporations,17 and in federal tax law’s prohibition of private inurement.18 State attorneys general and the federal Internal Revenue Service, respectively, can enforce against violations.

II. DUTIES OF NONPROFIT DIRECTORS

State law imposes fiduciary duties on nonprofit corporate directors.19

A. Duty of Care

The duty of care demands that a nonprofit director utilize ordi-nary prudence and skill in performing his or her directorial functions.20

1. Careful Director Action

Nonprofit directors should attend meetings regularly, review reports and documents provided to them with care, and make deci-sions deliberately. They need not, however, become experts on everything. Nonprofit directors may delegate to committees and rely on reports by those committees or others, when it would be reasonable to do so.21

2. Business Judgment Rule

The business judgment rule, by which courts will defer to deci-sions made by informed directors acting in good faith and without a conflict of interest, is often (but not always) applied to nonprofit directors. 22 Thus, although nonprofit directors are instructed to

17. See, e.g., RMNCA §§ 13.01–.02. 18. See I.R.C. § 501(c)(3). 19. Although the conduct of tax-exempt nonprofit directors is seriously constrained

by federal tax law, these issues will be covered by other presenters. The remainder of this outline focuses on duties of nonprofit directors under state law.

20. See, e.g., RMNCA § 8.30(a)(2). 21. See, e.g., RMNCA §§ 8.30, 8.25 (relating reliance on reports and the use of board

committees, respectively). 22. See RMNCA § 8.30 cmt. 3 (“While the application of the business judgment rule

to directors of nonprofit corporations is not firmly established by the case law, its use is consistent with section 8.30. Moreover, in the nonprofit context the business judgment rule should apply to discretionary matters voted upon by the board of directors and not just those that can be characterized as “business” decisions.”); FREMONT-SMITH, supra note 3, at 209–11 (noting support for the rule by

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act with the ordinary care of a prudent, similarly-situated indi-vidual, they may not be held liable even when they fail to do so. Attorneys can provide significant assistance to nonprofits by advising their directors to ensure they always act in an informed manner and, when possible, to avoid conflicts of interest.

B. Duty of Loyalty

The duty of loyalty demands that a nonprofit director act in the best interests of the nonprofit, and not for his or her own personal interests.23

1. Self-Dealing

The archetypal violation of the duty of loyalty is the self-dealing transaction, such as if a nonprofit director purchases property from his or her nonprofit at a below-market price. a. Statutory Approaches. Most state nonprofit statutes provide pro-

cedural mechanisms for nonprofits to pre-validate transactions in which directors have a conflict of interest. 24 Such pre-validation might be secured by a vote of disinterested directors or a committee of disinterested directors, attorney general approval, or both.25 Use of pre-validation measures does not entirely preclude the potential for liability, but substantially reduces it.

2. Other Forms of Loyalty Breach

It is important to remember, however, that a self-dealing trans-action is far from the only way that a nonprofit director may breach his or her duty of loyalty. Misusing the nonprofit’s information,

commentators and courts, as well as jurisdictions where the question remains “unsettled”) and 226–27 (noting numerous state codifications of the business judgment rule).

23. See, e.g., RMNCA § 8.30. 24. See, e.g., RMNCA § 8.31; see also Fremont-Smith, supra note 3, at 218–25

(cataloging such statutes); Deborah A. DeMott, Self-Dealing Transactions in Nonprofit Corporations, 59 BROOK. L. REV. 131, 137–39 (1993) (describing the RMNCA’s use of the pre-validation technique).

25. See, e.g., RMNCA § 8.31. Please note that conflicts of interest will be dealt with in greater detail by another presenter.

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taking a business opportunity that should have been offered to the nonprofit, competing with the nonprofit, and many other possible disloyal actions can also ground liability for breach.

C. Duty of Obedience

The duty of obedience requires a nonprofit director to obey both the law and the mission of the nonprofit for which he or she serves.26

1. Identifying Mission

Organizational mission can be identified through the nonprofit’s expression of its purposes in its articles of incorporation or other documents, but can also be drawn from a review of the nonprofit’s actions and programs.27

2. Can Mission Evolve?

In order to remain relevant and meet the needs of changing societies, charities must evolve.28 The duty of obedience does not prohibit this evolution, even of fundamental mission. It does, how-ever, require directors to consider such momentous decisions seri-ously, including consideration of the value of preserving original mission.29

26. See DANIEL L. KURTZ, BOARD LIABILITY: A GUIDE FOR NONPROFIT DIRECTORS 84-85 (1989); Jill S. Manny, Governance Issues for Non-Profit Religious Organi-zations, 40 CATH. LAW. 1, 20 (2000).

27. See Dana Brakman Reiser, Enron.org: Why Sarbanes-Oxley Will Not Ensure Comprehensive Nonprofit Accountability, 38 U.C. DAVIS L. REV. 205, 212–213 (2004).

28. See JACK B. SIEGEL, A DESKTOP GUIDE FOR NONPROFIT DIRECTORS, OFFICERS, AND ADVISORS 84 (2006).

29. See, e.g., Manhattan Eye, Ear & Throat Hosp. v. Spitzer, 715 N.Y.S.2d 575, 593, 595 (Sup. Ct. 1999) (explaining that although financial circumstances may make it appropriate, in some cases, for a nonprofit to dispose of all of its assets and assume a new mission, “the duty of obedience . . . mandates that a Board, in the first instance, seek to preserve its original mission.”).

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3. A Separate Duty?

Some commentators argue the idea of fidelity to mission is contained within the duty of care or loyalty rather than a separate duty of obedience.30 However it is characterized, the idea that a nonprofit’s mission should ordinarily be obeyed and be changed only by legitimate means is fundamental to understanding nonprofit directors’ obligations.

D. Limits on Directorial Liability

Statutory or contractual immunity or indemnification from suit, as well as the availability of directors’ and officers’ liability insur-ance, all impact the ultimate liability nonprofit directors will face.

1. Immunity

Many states have enacted legislation allowing nonprofits to elimi-nate or limit the monetary liability of their directors for violations of the duty of care by amending their articles of incorporation.31

2. Indemnification

Indemnification also may be available for nonprofit directors sued or held liable for breaches of the duty of care.32

3. Insurance

Nonprofits can purchase insurance to cover the costs of indem-nification as well as to provide coverage for personal liability of directors, in certain circumstances.33

30. See FREMONT-SMITH, supra note 3, at 225–26 (describing obedience to mission as falling within duty of loyalty); Harvey J. Goldschmid, The Fiduciary Duties of Nonprofit Directors and Officers: Paradoxes, Problems, and Proposed Reforms, 23 J. CORP. L. 631, 641 (1998) (commenting that obedience can be seen as part of the duty of care).

31. See, e.g., RMNCA § 2.02(b)(5) (providing an opt-in limitation of liability pro-vision); see also Evelyn Brody, The Limits of Charity Fiduciary Law, 57 MD. L. REV. 1400, 1453-55, 1454 nn.247-48 (1998) (describing the origins of this trend in Delaware law and its migration to other jurisdictions); FREMONT-SMITH, supra note 3, at 227 (counting the number of states where such a provision is available at nineteen in 2003).

32. See id. at 227–29.

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E. Additional Issues to Bear in Mind

1. No Figurehead Directors

Courts and attorneys general have made clear that fiduciary duties apply to ALL nonprofit directors. A nonprofit director cannot escape liability by claiming he or she served on the board solely as a figurehead.34 Attorneys should advise nonprofits that director duties are significant and should neither be bestowed upon nor undertaken lightly by someone unlikely to carry them out with the appropriate energy.

2. Stricter Standards?

Some critics have called for stricter fiduciary standards for non-profit directors in view of the relatively weak enforcement in this area and the moral and social importance of nonprofits’ missions.35

3. Director Compensation

Nonprofit directors typically serve voluntarily. Indeed, in some types of nonprofits, director donations are a significant source of organizational funds. Director compensation can come up, however, particularly as a means to encourage directors to pay sufficient attention to their duties. While rarely legally prohibited under state law,36 director compensation should be approached with caution. It is likely to be perceived quite negatively by the media and the public, who see funds spent on director compensation as inappro-priately taken from pursuit of a nonprofit’s mission.

4. New York Non-Profit Revitalization Act

This major revision of the New York nonprofit corporation statute was enacted in 2013 and clarified by a set of 2015 amend-ments. Some provisions in this legislation removed concepts unique to New York’s prior statute, such as its categorization of

33. See id. at 229. 34. See id. at 162. 35. See id. at 233-37 (summarizing reform proposals). 36. Note that state nonprofit corporate law does quite often prohibit loans to nonprofit

directors or officers. See, e.g., RMNCA § 8.32.

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not-for-profit corporations into four “Types.” Other provisions, however, touch on governance issues that may be taken up by other jurisdictions, such as enhancing the disclosure and vetting process for conflict of interest transactions, requiring nonprofit entities to maintain policies on conflicts of interest and whistle-blowing, as well as authorizing nonprofit boards to take many actions electronically.

5. Social Enterprise Legislation

In the past few years, over 30 U.S. states have enacted statutes creating specialized organizational forms designed to house for-profit entities that pursue traditionally charitable purposes. The particulars of these statutes vary across states, including in their governance requirements, and are as yet untested in the courts. Despite sometimes confusing names, these new forms, including Delaware’s public bene-fit corporation, are for-profit entities; they do not impose a non-distribution constraint and should not be confused with nonprofit entities.

6. For-profit Philanthropic Vehicles

The announcement in late 2015 of the formation of the Chan-Zuckerberg Institute (CZI) has increased interest in for-profit phil-anthropic vehicles. Facebook founder and CEO Mark Zuckerberg and his wife Priscilla Chan pledged 99 percent of their Facebook shares to CZI, which they described as devoted “to advance[ing] human potential and promot[ing] equality.” 37 Relatively little information regarding the structure of CZI has been released, but it is a limited liability company and is not a nonprofit. The founders opted to use an LLC to pursue their philanthropic goals to enhance their flexibility to use a range of tools – including investments in for-profit ventures and political activities – without the restrictions imposed on tax-exempt, nonprofit entities.38 Other individual and corporate philanthropists have also experimented with for-profit philanthropy. It remains to be seen whether this trend will increase and whether reduced regulation over these efforts will have net positive or negative effects for philanthropy.

37. Chan-Zuckerberg Initiative, FAQs, at http://chanzuckerberg.com/faq/. 38. See id.

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Nonprofit Governance: Recent State Enforcement Actions and Regulatory Oversight

Karen I. Wu

Perlman & Perlman, 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) RECENT ENFORCEMENT ACTIONS INVOLVING GOVERNANCE PROBLEMS

a) FTC, 50 States, and D.C. v. Cancer Fund of America, Inc., et al.1: In May 2015, the Federal Trade Commission, all 50 states, and the District of Columbia brought a federal action against four cancer charities and their key executives, who were all members of the same extended family. The case focused on fraudulent and misleading chari-table solicitations by these cancer charities, as well as their high fundraising expenses and low program expenses. However, a sig-nificant part of the investigation also focused on numerous conflicts of interest, excessive compensation, and failed board governance.

The complaint stated the following: Defendants’ advertised charitable causes were simply the mechanisms through which they created employment opportunities for themselves, their friends, and their family members, and funded other private benefits. The Corporate Defendants operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.

All four charities have been shut down. James Reynolds, Sr., the president of two of the four charities, was held jointly and severally liable for $75 million, the amount donated between 2008 and 2012. The judgment against Reynolds will be suspended upon surrender of certain personal assets.

b) In the Matter of the Investigation by the Attorney General of Educational Housing Services, Inc.: The Attorney General con-ducted an investigation of Educational Housing Services, Inc. (EHS), a major nonprofit provider of student housing in New York City. The AG’s press release2 dated December 10, 2012 stated the following:

The Charities Bureau’s investigation determined that, beginning in 2003, Educational Housing Services, Inc. (EHS) President George Scott and his wife siphoned off millions of dollars from EHS through a company, Student Services, Inc. (SSI), that Scott set up to provide cable, internet

1. See https://www.ftc.gov/system/files/documents/cases/150519cancerfundcmpt.pdf (last visited September 30, 2016).

2. See http://www.ag.ny.gov/press-release/ag-schneiderman-obtains-55-million-settlement-self-dealing-leading-not-profit-provider (last visited September 30, 2016).

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and phone service to EHS’ dorm rooms. SSI was not a genuine telecom company, however, but just a shell Scott created to serve as a middleman between EHS and legitimate cable companies. The shell company offered EHS nothing that EHS could not have done on its own; yet for these unnecessary services, SSI made millions of dollars in profits that otherwise would have remained with EHS.

The Attorney General’s investigation also found that the directors on EHS’s board breached their fiduciary responsibilities by approving Scott’s self-dealing activity without proper diligence or oversight. In addition, throughout the period that Scott was siphoning off millions of dollars, the Board rewarded Scott with high executive compensation as well as numerous other expensive perks, including the cost of his travel between New York and the Scotts’ second home in Aspen, Colorado and a housing allowance to pay for a luxury Brooklyn Heights penthouse.

The organization and directors entered into a settlement agreement with the AG, which included the following:

• $5.5 million total settlement

• President & his company were required to pay restitution of $4.5 million

• The directors were required to pay $1 million ($850,000 in damages for breaches of their fiduciary duty, and $25,000 per director “to disgorge unreasonable payments received from EHS”)

• Settlement funds will be used by EHS to reduce students’ rent payments and upgrade the services and amenities EHS pro-vides to students pursuant to guidelines to be approved by the AG’s office. All board members of the organization were required to be changed. The President and directors were per-manently barred from serving as a director, trustee, or officer at any New York not-for-profit corporation.

• EHS was also required to “adopt and amend its by-laws to include new policies, acceptable to the OAG (Office of the Attorney General), concerning (a) conflicts of interest, (b) interested-party transactions, (c) the structure and compo-sition of the Board and committees thereof, and (d) executive compensation.”

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2) RECENT REGULATORY CHANGES IN NONPROFIT GOVERNANCE

a) California Nonprofit Integrity Act of 2004 i) Audits:3 Charitable corporations4 with gross revenues of

$2 million or more must prepare annual financial statements audited by an independent certified public accountant (CPA), and must also establish and maintain an audit committee with independent committee members.

ii) Compensation Review:5 Charitable corporations and unin-corporated associations must have their governing board or authorized board committee review and approve the compen-sation of the Chief Executive Officer or President, and the compensation of the Chief Financial Officer or treasurer, to ensure that the payment is “just and reasonable.” The review and approval must occur at the time of initial hiring, when the term is renewed or extended, and when the compensation is modified.

b) Florida’s Amended Solicitation of Charitable Contributions Act (2014) i) Conflicts of Interest:6 Florida amended its Solicitation of

Charitable Contributions Act effective July 1, 2014. All chari-table organizations soliciting donations that are required to be registered in Florida must adopt a conflict of interest policy. An annual certification of compliance with the policy signed by all directors, officers and trustees of the organization must be filed with the annual renewal registration.

3. Cal. Gov. Code section 12586(e). 4. The mandatory audit requirement and audit committee requirement apply to

California nonprofit public benefit corporations as well as foreign corporations (those formed under the laws of other states) doing business or holding property in California for charitable purposes. The California Attorney General’s office has defined “doing business” charities soliciting for contributions in California. See https://oag.ca.gov/charities/faq#n1 (last visited September 30, 2016).

5. Cal. Gov. Code section 12586(g). 6. Fla. Stat. § 496.4055.

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c) New York Nonprofit Revitalization Act (2014) i) Audit Committee Oversight:7 Every organization required to

submit an independent CPA audit report must perform certain audit duties, including: (1) overseeing the accounting and financial reporting processes of the organization and the audit of its financial statements; (2) annually retaining an independent auditor; and (3) reviewing the results of the audit and any related management letter with the auditor. For organizations with revenues over $1 million, the audit committee must comply with the following additional requirements: (1) review the scope of audit with the auditor before the audit begins; (2) discuss material risks and weaknesses in internal controls identified by auditor; (3) annually consider the auditor’s performance; and (4) report activities to board (unless performed by inde-pendent directors on the board).

ii) Conflicts of Interest and Related Party Transactions: All New York not-for-profit corporations and charitable trusts must adopt a conflict of interest policy with specific procedures for reviewing and approving conflict of interest transactions.8 The Nonprofit Revitalization Act also defined related party trans-actions,9 and established additional requirements for approval of such transactions, which are typically incorporated into the conflict of interest policy. The Attorney General was also empowered to void transactions that failed to follow the correct procedural requirements.10

iii) Compensation Review: Any officer, director, or member who may benefit from compensation from the organization may not be present at, or otherwise participate in, any board or committee deliberation or vote concerning his/her own com-pensation. However, this does not prohibit the board or com-mittee from requesting that the person present information as background or answer questions at a committee or board

7. N-PCL § 712-a; E-PTL § 8-1.9. 8. NY N-PCL § 715-a;NY E-PTL § 8-1.9. 9. NY N-PCL § 715. 10. NY N-PCL § 715(f).

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meeting prior to the commencement of the deliberations or voting related thereto.11

iv) Whistleblower Policy:12 All New York not-for-profit corpo-rations and charitable trusts with 20+ employees and annual revenues over $1 million must adopt a whistleblower policy and implement procedures that protect individuals who report suspected improper conduct. The policy must: (1) provide that no director, officer, employee or volunteer of the organization who in good faith reports any action or suspected action taken by or within the organization that is illegal, fraudulent or in violation of any adopted policy of the organization will suffer intimidation, harassment, discrimination or other retaliation or, in the case of employees, adverse employment consequence; (2) provide procedures for reporting violations or suspected violations and preserving confidentiality; (3) designate a person to administer and report on the policy to the board or appro-priate committee; and (4) be distributed to directors, officers, employees and any volunteers that provide substantial services to the organization.

3) GOVERNANCE OVERSIGHT THROUGH STATE CHARITABLE REGISTRATION PROCESS

a) As part of the state registration process for charities registering to solicit funds or hold property or assets in a state, many states ask specific questions relating to an organization’s governance, including: i) whether any members of the board or officers are related to

one another; ii) whether any directors, officers, or employees have a financial

interest, directly or through family, with any fundraising professionals with which the charity does business, or other vendors providing goods or services to the organization;

11. NY N-PCL § 515. 12. N-PCL § 715-b; E-PTL § 8-1.9. The New York Attorney General’s office issued

additional guidance regarding the whistleblower policy requirements, which are available here: https://www.charitiesnys.com/pdfs/Charities_Whistleblower_Guidance. pdf (last visited September 30, 2016).

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iii) whether the organization has a conflict of interest policy; and iv) certification that all board members have complied with the

conflict of interest policy.

4) A CLOSER LOOK AT CONFLICTS OF INTEREST THROUGH THE LENS OF THE NEW YORK NONPROFIT REVITALIZATION ACT

The conflict of interest policy and related party transaction requirements in the New York Nonprofit Revitalization Act only legally apply to not-for-profit corporations incorporated in New York and New York chari-table trusts, however, they are a helpful way to understand some of the problems that arise in conflict of interest situations. The policy and pro-cedural requirements go beyond the provisions in the IRS’s sample conflict of interest policy in a number of ways, and aim to address problems that have arisen in some of the New York Attorney General’s enforcement actions involving conflicts of interest.13

1. Mandatory Conflict of Interest Policy

The Act requires all New York not-for-profit corporations and charitable trusts to adopt a conflict of interest policy that: (1) defines the circumstances that constitute a conflict of interest; (2) provides procedures for disclosing a conflict of interest to the board; (3) pro-hibits the person with the conflict of interest from being present at or participating in deliberations on the matter; (4) prohibits any attempt by the person with the conflict of interest to improperly influence deliberation or voting on the matter; (5) requires that the existence and resolution of the conflict be documented in corporate records; and (6) provides procedures for disclosing, addressing and documenting related party transactions.14

The organization must also require every director to submit an annual disclosure statement to the board (new directors should submit prior to initial election), identifying any relationships or transactions which may give rise to, or constitute, a conflict of interest.

13. The IRS’s sample conflict of interest policy is on page 25 of the instructions to the Form 1023 Application for 501(c)(3) tax-exempt status, and is available at www. irs.gov/pub/irs-pdf/i1023.pdf (last visited September 30, 2016).

14. NY N-PCL § 715-a; NY E-PTL § 8-1.9.

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2. Related Party Transactions

All New York not-for-profit corporations and charitable trusts are prohibited from entering into any related party transaction unless the transaction is determined by the board to be fair, reasonable and in the organization’s best interest at the time of such determination.15 A “related party” is any director, officer or key employee of the

organization or any affiliate of the organization, any relative of any of the preceding, or an entity in which any of those indi-viduals has a 35% or greater ownership interest.

A “related party transaction” is any transaction in which a related party has a financial interest and in which the organization or any affiliate of the organization is a participant.

• Any director, officer, or key employee with an interest in a related party transaction must disclose in good faith to the board all the material facts concerning such interest.

• No related party may participate in deliberations or voting relating to the related party transaction, other than presenting information as requested by the board prior to deliberations and voting on the matter.

• The following additional requirements apply to all New York charitable corporations and charitable trusts (non-charitable corporations are exempt from this additional require-ment) in which the related party has a substantial16 financial interest. Prior to approving a related party transaction, the organization’s board or a committee thereof must: (1) con-sider alternatives to the extent available; (2) approve the transaction by majority vote of the directors or committee members present at the meeting; and (3) contemporaneously document the basis for the approval, including consideration of alternatives.

• Any officer, director, or member who may benefit from com-pensation from the organization may not be present at, or otherwise participate in, any board or committee

15. NY E-PTL § 8-1.9; NY N-PCL § 715. 16. The Nonprofit Revitalization Act does not define what constitutes a “substantial

financial interest.”

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deliberation or vote concerning his/her own compensation. However, this does not prohibit the board or committee from requesting that the person present information as back-ground or answer questions at a committee or board meeting prior to the commencement of the deliberations or voting related thereto.17

Comment: The Nonprofit Revitalization Act does not ban related party transactions, but rather, seeks to ensure that organizations only engage in such transactions when they are in the organi-zation’s best interests. If the financial interest is not substantial, or the organization is a non-charitable corporation, a board deter-mination that the transaction is fair, reasonable, and in the cor-poration’s best interest suffices to permit the transaction. If the financial interest is substantial, boards should follow the additional steps outlined above. Documentation of the approval process is par-ticularly important because the Act gives the Attorney General power to void and rescind improper related party transactions and assess financial penalties. Related party transactions for which reasonable alternatives are not readily available should be carefully documented.

3. Additional Guidance on Conflicts of Interest from the New York Attorney General’s Charities Bureau

The New York Attorney General’s Charities Bureau issued sup-plemental guidance on conflicts of interest in April 2015.18 The Guid-ance clarifies that the Revitalization Act gives the Board discretion to define the circumstances that constitute a “conflict of interest,” including the discretion to define exceptions (i.e., situations that are not covered by or subject to the policy). These exceptions include certain de minimis transactions and ordinary course of business transactions.

“De minimis transactions”: Whether a transaction is de minimis will depend on the size of the organization’s budget and assets and the size of the transaction. As such, a transaction that merits review by the Board of a smaller corporation might not merit review by the Board of a larger organization.

17. NY N-PCL § 515. 18. See https://www.charitiesnys.com/pdfs/Charities_Conflict_of_Interest.pdf (last

visited September 30, 2016).

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Ordinary course of business transactions: The Attorney General guidance states that “[a] transaction or activity is in the ordinary course of business if it is consistent either with the corporation’s con-sistently applied past practices in similar transactions or with common practices in the sector in which the corporation operates.”

• The guidance provides several examples of ordinary course of business transactions, including the following: The library of a nonprofit university buys a book written by

a member of the board, pursuant to a written library acqui-sitions policy.

The curatorial department of a museum has a paid summer intern selection process involving resume review and evalu-ation and group interviews. The daughter of a board member is selected pursuant to the process as a summer intern.

A board member is the sole owner of a fuel delivery company. In the ordinary course of business, the facilities department of a nonprofit housing project puts out a written request for proposals for fuel supply for its properties, evaluates, and documents the selection of the board member’s company based upon cost and service.

Previously, there was concern among nonprofit law practitioners that the Revitalization Act’s broad definition of “related party trans-actions” could require Boards to review even minor financial trans-actions in accordance with the full procedures set forth in the conflict of interest policy, just because a related party was involved. For-tunately, the Attorney General’s clarification eases that concern by permitting organizations to establish a threshold for transactions that should be reviewed in accordance with the organization’s conflict of interest policy. Nevertheless, even small related party transactions should be disclosed, and the related party should not be involved in the approval process.

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Form 990 Reporting Issues

Dahlia Balsam Doumar

Patterson Belknap Webb & Tyler 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. FORM 990 REPORTING ISSUES – BACKGROUND

A. The 2008 Form 990 Revisions (Part VI) added questions on gov-ernance policies and practices, board composition, and board inde-pendence, including the Schedules L (“Transactions with Interested Persons”) and R (“Related Organizations and Unrelated Part-nerships”). The IRS’s stated goal was to allow the IRS to collect infor-mation, modify behavior and inform the public about these practices. The IRS also developed a Governance Check Sheet (Appendix A) which is currently used by IRS revenue agents in their exami-nations of public charities that follows the questions of Part VI of the Form 990. The results from these exams show a significant cor-relation between certain governance practices and tax compliance, including having a written mission statement, using comparability data in compensation decisions, monitoring proper use of assets for charitable purposes, having a monitored conflict-of-interest policy and having the Form 990 reviewed by the entire board. Organi-zations with control concentrated in a single person or small select group of individuals appear less likely to be tax compliant.

B. Schedules F and I and the required reporting of grantmaking activi-ties demonstrate the continuing interest of the IRS in the movement and use of charitable assets.

C. Schedule D and its reporting on donor advised funds is particularly relevant with the continued focus of these types of planned giving vehicles.

II. DONOR ADVISED FUNDS

A. Definition 1. A donor advised fund (“DAF”) is a fund generally maintained

by a public charity “sponsoring organization,” which is sepa-rately identified by reference to contributions of a donor or donors and where the donor generally retains advisory privi-leges regarding the distribution and or investments of the funds

2. The sponsoring organization is the owner of the funds and has legal control over them

3. Funds that support a single identified organization are not DAFs even if a donor retains certain advisory rights

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4. It is important for all 990 filers to review agreements with donors, both oral and written, and evaluate whether they main-tain DAFs

B. What to Look for on Schedule D 1. Number of funds 2. Contributions during the year 3. Grants provided from the funds during the year 4. Part V of the core form of the 990 also contains a question

regarding DAFs - asks whether DAFs had excess business holdings

III. RELATED PARTY REPORTING ON FORM 990

A. Questions throughout the Form 990 1. Part IV has numerous questions regarding Schedule J, L and R

• In 2015, the instructions to Schedule L clarify that an filer should only answer “Yes” to the core form Part IV, Lines 28a, 28b or 28c if the party to the transaction was both an interested person as defined in the Schedule L instructions and the threshold amounts described in the Schedule L instructions are met.

2. Part VI of the Form asks about relationships among directors, officers and key employees

3. Part VII has questions relating to compensation paid by related and unrelated organizations

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4. Challenge is that each section and schedule may have slightly different definitions beyond the definitions in the glossary so all need to be checked carefully

Core Form Part VI - Governance Management, and Disclosure on the Core Form of the 990:

Relationship to other organizations and/or each other: 5. Family & Business Relationships “Did any officer, director, trustee or key employee have a family

relationship or a business relationship with any other officer, director, trustee or key employee?”

6. Conflict of Interest Policy “Did the organization have a written conflict of interest policy?”

B. Related Parties – Schedule L Disclosures 1. Definition The definition of “Interested Persons” was modified in 2014.

There is now one definition that applies to Loans, Grants and business transactions with some special rules applying only to grants and business transactions. New in 2014, Creator/ Founder was added as an interested person.

2. Transactions with interested persons a) Excess benefit transactions b) Loans to or from Interested Persons c) Grants or assistance benefiting Interested Persons d) Business transactions involving Interested Persons

3. Part II: Loans “Interested persons” are current or former officers, directors,

trustees, and key employees listed in Form 990, Part VII, Section A, former officers, directors, trustees and key employees within the last five years even if not listed, creator or founder, sub-stantial contributor, family member and 35% controlled entities of the listed individuals. a) no dollar threshold for reporting loans; and b) must report these loans if outstanding at year-end.

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Part III: Grants c) Definition of Interested Persons

1) A member of the organization’s grant selected committee

2) Creator or founder of organization 3) A substantial contributor 4) A person required to be listed in Form 990, Part VII,

Section A as a current or former officer, director, trustee or Key Employee

5) A family member of any of the organization’s current or former officers, directors, trustees, or key employ-ees listed in Form 990, Part VII, Section A, sub-stantial contributors, creator or founder, or member of the organization’s grant selection committee

6) A 35% controlled entity of any of the individuals or organizations listed in 1 -5, above.

7) An employee (or child of an employee) of a sub-stantial contributor or of a 35% controlled entity of a substantial contributor, but only if the employee (or child of an employee) received the grant or assistance by the direction or advice of the sub-stantial contributor or 35% controlled entity, or under a program funded by the substantial contributor that was intended primarily to benefit such employ-ees (or their children)

d) Excluded from the definition of Interested Persons are 501(c)(3) organizations

e) must report all grants given at any time during the year (certain exceptions for employer based grants)

4. Part IV: Business Transactions a) Definition of Interested Persons b) Report the following transactions

1) All payments during the tax year between the organi-zation and the interested person exceeded $100,000;

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2) All payments during the tax year from a single trans-action between such parties exceeded the greater of $10,000 or 1% of the filing organization’s total revenue for the tax year;

3) Compensation payments during the tax year by the organization to a family member of a current or former officer, director, trustee, or key employee of the organization listed in Form 990, Part VII, Section A, exceeded $10,000; or

4) In the case of a joint venture with an interested per-son, the organization has invested $10,000 or more in the joint venture, whether or not during the tax year

5. Part IV: Reasonable Effort Required a) Organizations need no provide information that they are

unable to secure after having made a reasonable effort to obtain the information

b) Reasonable effort includes distributing questionnaires to collect required information

C. Schedule R Disclosures 1. Definition: Generally speaking related parties include a parent, subsidiary,

sibling, or supported/supporting organization. 2. Control: Look to the definition of control in Schedule R to define those

relationships. This definition for purposes of Schedule R is somewhat complicated. a) Control of a nonprofit organization: One or more persons (whether individuals or organiza-

tions) control a nonprofit organization if: 1) They have the power to remove and replace (or

appoint, elect, or approve or veto the appointment or election of, if such power includes a continuing power to appoint, elect, or approve or veto the appointment or election of, periodically or in the

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event of vacancies) a majority of the nonprofit organization’s directors or trustees, or a majority of the members who have the power to elect a majority of the nonprofit organization’s directors or trustees;

2) The power can be exercised directly by a (parent) organization through one or more of the (parent) organization’s officers, directors, trustees, or agents, acting in their capacity as officers, directors, trustees, or agents of the (parent) organization; or

3) A majority of a subsidiary’s directors or trustees are trustees, directors, officers, employees, or agents of the parent

b) Control of a commercial entity: One or more persons (whether individuals or organi-

zations) control a stock cooperation if they own more than 50% of the stock (by voting power or value) of the corporation

c) Control of a partnership or limited liability company: 1) They own more than 50% of the profits interests or

capital interests in the partnership (including a limited liability company treated as a partnership or disregarded entity for federal tax purposes, regard-less of the designation under state law of the own-ership interest as stock, membership interest, or otherwise);

2) The person is a managing partner or managing member of a partnership or limited liability com-pany which has three or fewer managing partners or managing members (regardless of which partner or member has the most actual control); or

3) The person is a general partner in a limited part-nership which has three or fewer general partners (regardless of which partner has the most actual control). For these purposes, a “managing partner” is a partner designated as such under the part-nership agreement, or regularly engaged in the man-agement of the partnership

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d) Control of a trust with beneficial interests: One or more persons control a trust if they own more

than 50% of the beneficial interest in the trust. A person’s beneficial interest in a trust shall be determined in pro-portion to that person’s actuarial interest in the trust as of the end of the tax year

IV. SCHEDULES F AND I: GRANTMAKING ACTIVITIES

A. Grants 1. Includes awards, prizes, contributions, noncash assistance,

cash allocations, stipends, scholarships, fellowships, research grants, and similar payments made during the tax yea

2. Also includes grants and assistance to DOMESTIC individ-uals or organizations for providing grants to DESIGNATED foreign beneficiaries

3. Reporting is based on geographic regions 4. Threshold of > $5,000 individual grant must be reported 5. Purpose, dollar amount, manner of disbursement, fair market

value (non-cash) must be reported 6. Monitoring process should be described

B. Investments 1. Reported separately on a region by region basis 2. Region is determined by legal domicile

a) No reporting of foreign domiciled company traded on a U.S. Stock Exchange

b) Additional filings may be required in connection with investment including Form 926, 8865, and 5471.

V. SCHEDULE O DISCLOSURES

A. Uses of Schedule O

• There are a number of places that direct filers to add dis-closure on Schedule O, but this schedule can also be used by

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filers who want to explain an “yes” or “no” answer in a nar-rative form. Given the public nature of the Form 990, it can be important to add such a narrative so that readers more clearly understand the facts.

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APPENDIX A

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Executive Compensation: Intermediate Sanctions and State Law Issues

J.J. Harwayne Leitner

Davis Wright Tremaine 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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FOCUS ON REASONABLE COMPENSATION

Who is watching? – IRS – State regulators – Whistleblowers – Media

Main concern of all parties is the misuse of charitable assets Challenge of compliance with overlapping regimes

OVERSIGHT REGIMES

Federal – Inurement – Intermediate Sanctions – Self-Dealing

State – New York Not-for-Profit Corporation Law – New York Non-Profit Revitalization Act (and its

amendments…) – Executive Order 38

BEFORE INTERMEDIATE SANCTIONS

Prohibition on Private Inurement – No part of the organization’s net earnings may inure to the

benefit of any private shareholder or individual – Private Benefit vs. Private Inurement – Inurement is raised in connection with excessive compensa-

tion to insiders – Penalty for violation of inurement prohibition was revocation

of exemption – Still prohibited of course…

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INTERMEDIATE SANCTIONS

Section 4958 of the Internal Revenue Code – Enacted in 1996 – Established ‘intermediate’ means of sanctioning misuse of

charitable assets by insiders Previously, IRS only had the remedy of revocation

– Inappropriately severe – Rarely sought by IRS

Intermediate Sanction = less severe penalty – Penalty corresponds to degree of misuse

Prohibition on Inurement Still in Place – Can be applied together with intermediate sanctions

There still is a procedure for revocation of exemption in connection with violations of Section 4958

Applies to Section 501(c)(3) public charities, Section 501(c)(4) social welfare organizations and Section 501(c)(29) qualified non-profit health insurers – Private Foundations must comply with prohibition against

self-dealing

• In reality, private foundations sometimes look to inter-mediate sanctions rules to comply with prohibition against self-dealing, especially in connection with setting compensation

PENALTIES UNDER INTERMEDIATE SANCTIONS

Taxes Imposed on “Disqualified Persons” – 25% of the excess benefit (first-tier tax) – 200% of the excess benefit if not corrected within the taxable

period (second-tier tax) Tax on Organization Managers who knowingly approve

– 10% of the excess benefit (up to maximum of $20,000)

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– Manager must have participated knowing transaction was excess benefit transaction

– Exception if participation was not willful and was due to reasonable cause

DISQUALIFIED PERSONS

Organization “Insiders” Any person exercising “substantial influence” over the organi-

zation’s affairs at any time during the five-year period ending on the date of the transaction

Family member of a person with substantial influence 35-percent controlled entities

– Entities in which persons with substantial influence and their family members own more than 35 percent of the voting power, profits interest or beneficial interest

DISQUALIFIED PERSONS – SPECIAL RULES

Supporting Organizations – A disqualified person of a supporting organization is also a

disqualified person of the supported organization Donor Advised Funds

– Donors, donor advisors and their family members – 35% controlled entities of such persons

DAF Sponsoring Organization – Investment advisors and their family members – 35% controlled entities of such persons

SUBSTANTIAL INFLUENCE

Automatically deemed to have substantial influence – Board members – Presidents, CEOs, COOs and others with similar managerial

authority over administration or operations

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– Treasurers, CFOs and others with ultimate responsibility for managing the organization’s finances

Automatically excluded – Employees not described above who make less than $120,000

and who are not substantial contributors

SUBSTANTIAL INFLUENCE – FACTS AND CIRCUMSTANCES

Factors indicating substantial influence: – Organization founder – Substantial contributor – Receives compensation primarily based on revenues derived

from activities that the person controls – Has authority over substantial portion of the organization’s

capital expenditures, operating budget or compensation for employees

– Has managerial authority over a segment or activity of the organization representing a substantial portion of the organi-zation’s activities, assets, income or expenses

EXCESS BENEFIT TRANSACTION

Transaction in which the disqualified person receives an economic benefit from the organization that exceeds the value of the ser-vices, property or payment the organization receives from the disqualified person in return

Classic Examples – Payment of unreasonable, excessive compensation – Purchasing property from a disqualified person at a price

greater than fair market value

ECONOMIC BENEFITS BROADLY DEFINED

– Cash and non-cash compensation – Bonuses, severance and deferred compensation – Fringe benefits

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– Use of organization automobile – Housing – Travel expenses – Interest-free loans – Use of organization’s credit cards without documentation

“AUTOMATIC” EXCESS BENEFIT TRANSACTIONS

Failure to treat an economic benefit provided to a disqualified person as compensation will result in an “automatic” excess benefit transaction: – Penalties assessed without regard to whether the economic

benefit provided is reasonable – Can avoid this result with “contemporaneous written sub-

stantiation” of intent to treat benefit as compensation

• By organization on Form 990, Form W-2, Form 1099

• By disqualified person on Form 1040 – Reimbursements through accountable plan

SPECIAL RULES FOR DAFS AND SUPPORTING ORGANIZATIONS

Automatic Excess Benefit Transactions include a grant, loan, com-pensation or similar payment from: – DAF to donor, donor advisor, their family members or 35%

controlled entities – SO to a substantial contributor, his or her family members or

his or her 35% controlled entities Penalty applies to all amounts, not just excessive amounts, regard-

less of reasonableness

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CORRECTING EXCESS BENEFIT TRANSACTIONS

If “corrected” during “taxable period,” second-tier 200% tax will not apply – Taxable period: begins on transaction date and ends on earlier

of mailing date of notice of deficiency and date on which first-tier tax is assessed

– Correction: undoing the excess benefit and taking additional measures to restore organization’s financial position

• e.g., repayment of (excess) funds plus interest – Prompt correction is key

PREVENTING EXCESS BENEFIT TRANSACTIONS

Know the organization’s disqualified persons Ensure organization is paying to such persons reasonable com-

pensation determined according to a fair and disinterested process Follow steps needed to establish the “rebuttable presumption of

reasonableness”

REBUTTABLE PRESUMPTION OF REASONABLENESS

Shifts to the IRS the burden of proving that transaction was excess benefit transaction (i.e., that it was “unreasonable”)

Rebuttable presumption established if transactions involving dis-qualified persons are approved in advance by a Board or committee that: – Is an “authorized independent body”, i.e., composed of indi-

viduals unrelated to and not subject to the control of the disqualified persons;

– Obtains and relies on appropriate data as to comparability or value; and

– Adequately and contemporaneously documents the basis for its determination.

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AUTHORIZED INDEPENDENT BODY

An authorized body means: – The Board – A Committee of the Board – To the extent permitted under State law, other parties author-

ized by the Board to act on its behalf following procedures specified by the Board

Must be composed entirely of people who have no conflict of interest with respect to the compensation arrangement – A conflict includes where person’s compensation is deter-

mined by the individual whose compensation is under review

RELIANCE ON COMPARABILITY DATA

Appropriate data includes – Data from similarly-situated organizations (can also include

for-profits) – Salaries for functionally comparable positions under like

circumstances – Availability of similar services in geographic area – Current independent compensation surveys – Actual written offers competing for services of disqualified

person Special rule for small organizations

– Compensation paid by three comparable organizations in the same or similar communities for similar services

ADEQUATE AND CONTEMPORANEOUS DOCUMENTATION

Authorized body must take minutes documenting decision, including: – Terms of transaction approved – Date of approval – Members of authorized body present during debate and vote – Comparability data obtained and source of data

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– Any actions or recusal by persons with a conflict of interest – If outside the range of comparability data, the basis for such

deviation Minutes must be complete and accurate

REPORTING COMPENSATION

Core Form 990 – all current officers, directors, and trustees, regardless of com-

pensation ; up to 20 “key employees”; and five current highest compensated employees (TDOKE)

Schedule J Completion is triggered by one of three of the following: – If the organization reported any former TDOKE or highest

compensated employee as having received $100,000 or more; – If the sum of reportable and other compensation paid by the

organization and related organizations to any individual listed exceeded $150,000; or

– If the organization participated in an arrangement in which compensation was paid by an unrelated organization to at least one TDOKE or highest compensated employee for services provided to the organization.

Related Organizations – Generally a parent, subsidiary, sibling under common control,

or a supporting or supported organization. Amounts reported based on calendar year amounts reported on

Form W-2 or Form 1099. Reportable compensation

– compensation reported on the employee’s Form W-2, or on a non-employee’s Form 1099

– other compensation (not reportable, i.e., deferred compensation not currently reportable on Form W-2 and certain nontaxable benefits)

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NEW YORK NOT-FOR-PROFIT CORPORATION LAW

NPCL Section 717 Duty of Care – Care that an ordinarily prudent person would exercise in a like

position and under similar circumstances Duty of Loyalty

– Act in good faith and in the best interests of the organization – Put organization’s interests first and refrain from conduct det-

rimental to the best interests of the organization NPCL Section 515

– Organization may pay reasonable compensation to members, directors or officers for services rendered

NON-PROFIT REVITALIZATION ACT

New NPCL Section 515 Requirement – No person who may benefit from a compensation arrangement

may be present at or otherwise participate in any Board or committee deliberation or vote concerning the person’s compensation

– EXCEPT that the Board or committee may request that the person present information as background or answer questions at a Board or committee meeting prior to the commencement of deliberations or voting

– 2015 Amendment to NPRA: sentence added to NPCL §515(b):

• no director will be prohibited from participation regarding compensation for board service that is to be provided to all directors on the same or substantially similar terms.

NEW YORK LAW: EXECUTIVE ORDER 38

Issued on January 18, 2012 Governs payment of executive compensation and administrative

expenses by entities that receive funding from New York State to provide services

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Directed commissioners of 13 state agencies to promulgate regu-lations that: – Cap administrative expenses at 15% of State funds or State-

authorized payments; and – Limit to $199,000 executive compensation paid by organi-

zations receiving State funds or State-authorized payments. Applies to “Covered Provider” – Entity or Individual:

– That received annual amount of greater than $500,000 in State funds or State-authorized payments to render services for the benefit of members of the public pursuant to an agreement with one or more agencies; and

– At least 30% of whose annual New York State revenues were from State funds or State-authorized payments.

NEW YORK LAW: EXECUTIVE ORDER 38

Executive Compensation Limits – Covered Provider may not use State funds or State-author-

ized payments for annual compensation of covered executive in excess of $199,000 (unless waiver is obtained)

– Covered Provider may not pay such compensation with ANY funds unless

• Waiver obtained; OR

• Compensation is not greater than the 75th percentile of compensation provided to comparable executives at com-parable providers AND compensation was reviewed and approved by the Board (including at least two inde-pendent directors)

Annual reports required Failure to comply: loss of payments, termination of contracts,

“other lawful actions or penalties” Regulations provide multiple opportunities for correction

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Updated Guidance Document issued October 2015 – Breakdown of definitions: Covered Provider, Program Services,

Reporting Period, Covered Executive, State Funds, State-Authorized Payments

– Worksheets to determine applicability of regulations

PRACTICAL GUIDANCE

Identify Applicable Law – Public charity? Inurement, intermediate sanctions – Private Foundation? Inurement, self-dealing – New York not-for-profit? NPCL fiduciary law (as amended

by NPRA) – Covered Provider? EO 38

Within each regime, develop methodology for determining: – Whose compensation is covered? – Who reviews compensation of covered individuals? – What procedures are required?

Review methodology from time to time Ensure that Board or committee understands rules

– Routine training, including mew member orientation – Counsel, if necessary – Reminder of requirements at beginning of comp review

Helpful to have calendar of key dates – Form 990 filing – EO 38 Report; EO 38 Waiver – Compensation review timeline

CONTACT INFORMATION

J.J. Harwayne Leitner | Davis Wright Tremaine LLP 1251 Avenue of the Americas, 21st Floor | New York, NY 10020

Tel: (212) 603-6420 | Fax: (212) 489-8340 Email: jjleitner@dwt.com | Website: www.dwt.com

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Nonprofit Compensation and Employment Issues

David G. Samuels

Duval & Stachenfeld 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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PART ONE

NONPROFIT COMPENSATION AND PRIVATE INUREMENT

INTRODUCTION/PUBLIC CONCERN ABOUT EXECUTIVE COMPENSATION

A. Historical Concern/United Way: United Ways throughout the United States suffered serious reductions in revenue in the aftermath of the public attention devoted to the conduct of William Aramony, whose forced departure as president of the United Way of America in 1992 was widely noted both in the national media and in the charitable community. Mr. Aramony’s departure was precipitated by “reports that he had misused the charity’s money to pay for vacations, luxury apartments and other benefits for himself and his teen-age girlfriend, and his earnings of $463,000 in salary and benefits took some by surprise.

B. Historical Concern/Adelphi University: New York state officials questioned the compensation paid to the president of Adelphi Univer-sity, a relatively small nonprofit institution on Long Island. One of their concerns was the reported compensation of over $500,000 per year paid to the president, making him the second highest paid uni-versity president in the country. The New York State Board of Regents, which regulates educational institutions such as Adelphi Uni-versity in the State of New York, in 1997 ultimately held lengthy hearings and replaced 18 of the 19 members of the school’s board of trustees. The new trustees installed by the Board of Regents thereafter terminated the president and initiated action to, in part, recover the allegedly excessive payments which he had received.

2. FEDERAL STATUTORY FRAMEWORK FOR ANALYSIS OF COMPENSATION

A. Internal Revenue Code (“IRC”) Section 501(c)(3)/Private Inurement Doctrine: A 501(c)(3) organization must be organized and operated so that no part of its net earnings inures to the benefit of any private shareholder or individual.

B. Thus, to obtain and retain 501(c)(3) status, charitable organizations must function in such a manner that “no part of the net earnings ... inures to the private benefit of any private shareholder or indi-vidual...” It has long been held by the federal courts that “the

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payment of reasonable salaries by an allegedly tax-exempt organi-zation does not result in the inurement of net earnings to the benefit of private individuals.”1

C. Section 501(c)(3) requires that “‘no part of an organization’s net earnings inure to the benefit of a private shareholder or individual; therefore, the amount or extent of such benefit is not determinative.”2 If an executive’s salary is found to be excessive and unreasonable, inurement would result so as to disqualify the organization as tax-exempt.3 The test is qualitative, not quantitative, and technically any amount of private inurement can result in the revocation of tax-exempt status.

D. Whether salaries are reasonable is a question of fact, and “an organi-zation’s net earnings may inure to the benefit of private individuals in ways other than by the actual distribution of dividends or payment of excessive salaries.”4 Such inappropriate expenditures could include the granting of loans or charging of rent at less than fair market value or the payment of unwarranted expenses unrelated to the organization’s business. Examples of reimbursement for unwar-ranted expenses would include payments for personal trips or other expenses incurred by a spouse, child, or other relative or friend who is not employed by the organization.

E. As a practical matter, inurement is “most likely to arise when an ‘insider’ relationship exists between the person benefitted and the organization. Generally, an organization’s officers, directors, founders and their families are considered insiders.”5

F. The concept of private inurement reflects both the special nature of charitable assets (which exist for the benefit of ultimate charitable beneficiaries and cannot be misappropriated by charities officials) and the special treatment and protection which is therefore afforded

1. Founding Church of Scientology v. U.S., 412 F.2d 1197, 1200 (Ct. Claims, 1969),

cert. denied, 397 U.S. 1099 (1970). 2. Unitary Mission Church, 74 T.C. 507, 512-13 (1980), aff’d, 647 F.2d 163 (2d Cir.

1981), citing Founding Church of Scientology. 3. Mabee Petroleum Corp. v. U.S., 203 F.2d 872 (5th Cir. 1953). 4. Founding Church of Scientology, 412 F.2d at 1200. 5. ”Reasonable Compensation” by Jean Wright and Jay H. Rotz, p. 195, IRS Exempt

Organizations Continuing Professional Education Technical Instruction Program For 1993 (not to be “used or cited as authority for setting or sustaining a technical position”).

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to such assets. By incorporating as a charity, an organization and its managers and insiders accept important limitations, including the prohibition of private inurement, in return for operating an organi-zation which enjoys the dual benefits of exemption from taxation and the ability to receive contributions which can be deductible to the donors.

G. The prohibition against private inurement is closely linked with the concept of the “nondistribution constraint,” as defined by Professor Henry Hansmann in his influential work, “The Role of Nonprofit Enterprise.”6 The nondistribution constraint is Professor Hansmann’s phrase for the principle which bars charitable organizations from dis-tributing its profits or earnings to any controlling individual, even though the charitable organization itself can consistently experience an operating profit or surplus. He describes the nondistribution con-straint as follows:

“A nonprofit organization is, in essence, an organization that is barred from distributing its net earnings, if any, to individuals who exercise con-trol over it, such as members, officers, directors, or trustees...; in general, a nonprofit is free to pay reasonable compensation to any person for labor or capital that he provides, whether or not that person exercises some control over the organization. It should be noted that a nonprofit organi-zation is not barred from earning a profit. Many nonprofits in fact consist-ently show an annual accounting surplus. It is only the distribution of the profits that is prohibited. Net earnings, if any, must be retained and devoted in their entirety to financing further production of the services that the organization was formed to provide.... [T]his prohibition on the distribution of profits ... I shall call ... the “nondistributional constraint.”7

3. REASONABLE COMPENSATION UNDER FEDERAL LAW

A. Factors Considered by the IRS i. Factors relating to the employee: the arm’s length relationship

between the employee and employer, the extent of domination of the charity by the founder or a particular family, the availa-bility of comparable services from a third party, the nature of the employee’s duties, the employee’s background and expe-rience, the employee’s salary history, the employee’s

6. 89 Yale Law J. 835, 838 (1980). 7. Id. at 840.

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contribution to the organization’s success, and the time devoted by the employee to the job.

ii. Factors relating to the organization: the salary scale of others in the same line of business, the size of the organization, the salary scale for employees generally within that organization, and the amount of the organization’s income devoted to compensation.

iii. Factors relating to the compensation itself: the criteria for compensation, the existence or absence of abrupt increases in compensation (which, if abrupt, are viewed with suspicion), whether a salary is fixed many years in advance (which would suggest control by the employee over the organization), and the existence of records by which the organization can sub-stantiate the duties performed and the salary paid.

B. Private Inurement versus Private Benefit i. Factors giving rise to findings of private inurement: the lack

of evidence that necessary services have been performed,8 the payment of compensation on an irregular basis,9 and payments that reflect not a contractual compensation arrangement, but rather a trustee’s need for funds.10

ii. Improper receipt of percentage of charity’s earnings or profits: The Internal Revenue Service and the courts have repeatedly found that board members, officers, or other insiders who receive a percentage of the net earnings of a not-for-profit cor-poration have improperly received private inurement, thereby jeopardizing the tax-exempt status of the organization.

iii. General factor: payment must be for services actually performed.

4. REGULATION OF PRIVATE FOUNDATIONS

In its enactment of legislation authorizing the imposition of intermediate sanctions with respect to public charities, Congress explicitly excluded private foundations from the scope of the new statute. This exclusion

8. Unitary Mission Church, 74 T.C. at 507. 9. Lefkowitz v. Commissioner, 46 T.C.M. (CCH) 485 (1983). 10. Kermit Fischer Found., 59 T.C.M. (CCH) 898 (1990).

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stemmed not from a lack of concern with private foundations, but rather, from a recognition that private foundations are already closely regulated by the Internal Revenue Service under the Internal Revenue Code. Fur-thermore, the Service has the authority and the flexibility, under longstanding statutory provisions, to impose the types of less severe sanctions – such as excise taxes – which could not previously be imposed on public charities prior to the legislation authorizing intermediate sanctions.

5. STATE STATUTORY SCHEME FOR ANALYSIS OF COMPENSATION ISSUES

A. Introduction: Role of Board Members: board members of non-profit organizations in the various states have a fiduciary duty to preserve the organizations’ charitable assets, to supervise and oversee the administration of the organizations’ assets, and to establish mecha-nisms designed to protect against the squandering or misuse of such assets.

B. The Concept of a Fiduciary: Directors of a corporation are fidu-ciaries.11 Directors, as fiduciaries, have “two paramount obligations: responsibility and loyalty.”12

C. The Duty of Care: “The duty of care concerns the director’s com-petence in performing directorial functions and typically requires him to use the ‘care that an ordinarily prudent person would exercise in a like position and under similar circumstances.’”13 “Directors must exercise their responsibilities in good faith and with a certain degree of diligence, attention, care, and skill.”14

D. The Duty of Loyalty: Directors of nonprofit organizations “owe a duty of loyalty to the corporation on whose board they serve. This duty requires them to act in a manner that does not harm the corporation.”15 “The duty of loyalty requires the director’s faithful pursuit of the interests of the organization he serves rather than the

11. Billings v. Shaw, 209 N.Y. 265, 282 (1913). 12. Bayer v. Beran, 49 N.Y.S.2d 2, 5 (Sup. Ct. N.Y. Co. 1944). 13. Kurtz, Board Liability, p. 21 (Moyer Bell, (c) 1988 by the Association of the Bar

of the City of New York). 14. Fishman and Schwarz, Nonprofit Organizations, 4th ed. at p. 136-37 (The

Foundation Press, Inc., 2010). 15. Fishman and Schwarz, Nonprofit Organizations at p. 163.

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financial or other interests of the director or of another person or organization.”16 That is, the duty of loyalty requires that directors act unselfishly17 and subordinate their individual and private interests to their duty to the corporation whenever the two conflict.18 The interests of the corporation are paramount, and directors must be guided by no consideration other than the corporation’s welfare.19 The duty of loyalty “further requires directors to avoid using their position to obtain improperly a personal benefit or advantages which might more properly belong to the corporation.”20 “To satisfy the duty of loyalty, the corporate director must act in ‘good faith’ and ‘in a manner he reasonably believes to be in the best interests of the corporation.’”21

E. Attorney General’s Remedies When Boards Authorize Excessive Compensation: In New York, the attorney general has broad author-ity, including, for example, the right to bring an action or special proceeding to (1) annul the corporate existence or dissolve a cor-poration that has exceeded its authority, (2) annul the corporate existence or dissolve any corporation that has not been duly formed, (3) dissolve a corporation under article 11 where the nonprofit “has forfeited its charter, or carried on, conducted or transacted its business in a persistently fraudulent or illegal manner,”22 or (4) compel the directors or officers of a dissolved corporation to account for its assets.23

F. Remedies of Officers and Directors: Under the New York Not-For-Profit Corporation Law (“N-PCL”), an individual officer or director of a nonprofit corporation has the authority to bring an action on behalf of the corporation against one or more directors or officers of a corporation to procure a judgment for various forms of relief, including (1) to compel the defendant to account for his official conduct in certain cases, (2) to set aside “an unlawful conveyance,

16. Kurtz, Board Liability at p. 21. 17. Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y. 185, 193 (1919). 18. Bayer v. Beran, 49 N.Y.S.2d at 5. 19. Fitzgerald v. National Rifle Assoc., 383 F. Supp. 162, 165 (D.N.J. 1974)

(applying New York law to a New York not-for-profit corporation). 20. Fishman and Schwarz, Nonprofit Organizations at p. 163. 21. Note, Developments In the Law – Nonprofit Corporations, 105 Harv. L. Rev. at

1593. 22. N-PCL §1101. 23. N-PCL §112.

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assignment or transfer of corporate assets, where the transferee knew of its unlawfulness,” or (3) to “enjoin a proposed unlawful convey-ance, assignment or transfer of corporate assets, where there are reasonable grounds for belief that it will be made.”24 Such relief may also be sought by a “receiver, trustee in bankruptcy, or judgment creditor” of the nonprofit corporation.25 An individual director can also bring an action to “procure a judgment removing an officer for cause”26 and may, in a corporation having no members, bring an action “against third parties to obtain a judgment in favor of the corporation.”27

G. Historical Examples of Excessive or Questionable Compensation (NY charities) i. The Spingold Foundation: The New York AG obtained a civil

judgment of approximately $11.3 million in the mid 1990s against James R. Halperin, where it was alleged that he received millions of dollars in excess compensation and made improper expenditures

ii. The Levitt Foundation: The New York AG obtained an $11 million consent judgment in the late 1980s against William J. Levitt, the famous builder and the primary benefactor of the William J. Levitt Foundation, for allegedly illegally removed millions of dollars from the Foundation through a variety of ruses.

6. SUMMARY: GENERAL CONSIDERATIONS IN FIXING COMPENSATION

A. Decision by an Independent Board of Directors at Arm’s Length B. Board Minutes Reflecting Criteria and Basis for Fixing Compensation C. Compensation Reflecting Fair Market Value of Employee’s

Services D. Possible Reliance on Independent Survey

24. N-PCL §720. 25. N-PCL §720(b)(2). 26. N-PCL §714(c). 27. N-PCL §720(c).

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PART TWO

INTERMEDIATE SANCTIONS WITH RESPECT TO CHARITABLE ORGANIZATIONS

1. INTRODUCTION: PASSAGE OF LEGISLATION IN 1996

A. Public Law 104-168, H.R. 2337 (104th Congress, 2d session, July 30, 1996)

B. Requested by the Department of the Treasury C. Provides the Internal Revenue Service with increasingly flexible

sanctions “to curb financial abuse among charities and other tax-exempt groups, which have grown rapidly and with little regulation.”

D. Known as Taxpayer Bill of Rights 2 (Internal Revenue Code Section 4958)

E. Has resulted in increased scrutiny by the IRS of executive compensation

2. APPLICATION OF LEGISLATION

A. Applies to transactions involving charitable organizations which have obtained tax-exempt status pursuant to IRC Section 501(c)(3) and to transactions involving social welfare organizations which have obtained tax-exempt status pursuant to IRC Section 501(c)(4)

B. Does not apply to private foundations, which are already strictly regulated pursuant to other provisions of the Code

C. Authorizes the imposition of excise taxes on certain insiders (defined in the statute as “disqualified persons”) and on organization managers

D. Does not provide any additional remedy with respect to charities themselves

E. Does not supersede or alter the existing remedy of revoking an organization’s tax-exempt status

F. Intermediate sanctions can be imposed either in lieu of, or in addition to, the revocation of a charity’s tax-exempt status

G. Legislation is designed to make it easier for the public to obtain copies of the informational tax returns filed by charities with the IRS

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3. RATIONALE FOR INTERMEDIATE SANCTIONS LEGISLATION

IRS has the authority to seek to deny or revoke an organization’s tax-exempt status in instances of “private inurement” resulting from exces-sive or unreasonable compensation. Such an extreme remedy is rarely sought or imposed by the Service

4. EFFECTIVE DATE OF INTERMEDIATE SANCTIONS LEGISLATION

Generally applies to excess benefit transactions occurring on or after September 14, 1995.

5. FLEXIBILITY OF INTERMEDIATE SANCTIONS LEGISLATION

A. Wall Street Journal reported: “the IRS for the first time will be able to fine many executives at nonprofit groups who receive excessive salaries and benefits, as well as the officials who approve such arrangements. Previously, the IRS had only a single, and largely impractical tool at its disposal: revoking the tax-exempt status of the organization.”28

B. The Journal quoted Marcus Owens, director of the agency’s Exempt Organization division: “We only had an atomic bomb before.... Now we’ll have less severe weapons.”29

C. The Journal also quoted Mr. Owens’ explanation of the flexibility of the new legislation. “‘For example, if an agent found $200,000 in unaccounted-for expenditures in a $1 billion organization, we had no real means to sanction this because it would be inappro-priate to revoke the tax status of such a large charity,’ Mr. Owens explained. ‘Now we will be able to attack this kind of activity.”30

D. Supporters of the legislation had sought more severe weapons than those ultimately passed by Congress, such as a ban on loans to officials of charities.

E. Legislation does not prevent the various states from enforcing or enacting more stringent limitations on expenditures of charitable

28. Wall Street Journal, August 7, 1996, p. B2. 29. Id. 30. Id.

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assets than those contained in the new legislation authorizing the imposition of intermediate sanctions (such as New York’s prohibi-tion on charities making loans to their officers and directors).

6. EXCISE TAX FOR EXCESS BENEFITS

A. Statute permits IRS to impose an excise tax “equal to 25 percent of the excess benefit” on a “disqualified person” with respect to each “excess benefit transaction.”

B. In any case where the initial 25 percent tax is imposed on a dis-qualified person “and the excess benefit involved in such transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 200 percent of the excess benefit involved,” with such additional amount to be paid by the disqualified person

C. The initial 25 percent excise tax is considered the first-tier tax, while the 200 percent tax is a second-tier tax.

7. EXCESS BENEFIT TRANSACTION

A. Defined by the statute as “any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the con-sideration (including the performance of services) received for providing such benefit.”

B. “[A]n economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to so treat such benefit.”

C. An “economic benefit” could include a wide variety of benefits derived by a disqualified person from a nonprofit organization. As the Wall Street Journal observed at the time the legislation was passed, “Areas to be scrutinized under the new law include, among others: fringe benefits, purchases of automobiles, payments of country-club dues, use of apartments, interest-free loans, travel expenses, use of charity credit cards without documentation, and blanket amounts to spend on expenses.”31

31. Wall Street Journal, August 7, 1996, p. B2.

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D. The statute’s definition of “excess benefit transaction” is concep-tually consistent with the concept of “private inurement,” which prohibits a person from benefitting personally from an organization’s charitable assets but further allows the payment by charitable organi-zations of reasonable compensation to their officers and employees. i. Places the burden on the charity to “clearly” indicate its intent

to treat an economic benefit as consideration for the perfor-mance of services.

ii. In the absence of an indication by the charity of its intent to treat an economic benefit as consideration for the performance of services, the IRS is more likely to view the conferring of such an economic benefit as private inurement.

iii. However, the legislative intent is not to alter the existing treatment of certain revenue sharing arrangements which have been determined not to constitute private inurement under present law.

8. EXCESS BENEFIT

A. Statute defines an “excess benefit” as merely the excess benefit paid to a disqualified person.

B. The concept of a disqualified person, which is well-known to indi-viduals familiar with the law applicable to private foundations, has now been applied in the new statute, in somewhat different form, to charities which are not private foundations.

9. DISQUALIFIED PERSON

A. In essence, a “disqualified person” is an insider or someone with a particular relationship to an insider of a charitable organization.

B. The statute defines a “disqualified person” as a person who, with respect to any transaction of the organization, “was, at any time during the 5-year period ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the organization.”

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C. The definition of a “disqualified person” also applies to “a member of the family of an individual” who is in a position to exercise such control32 and to a “35-percent controlled entity.”

D. Family members are defined by reference to Section 4946(d) of the Code, which pertains to private foundations. i. Section 4946(d) provides that “the family of any individual

shall include only his spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren.”

ii. In order to close a loophole that still exists with respect to this definition of family members for purposes of determining who is a disqualified person in the context of a private foundation, the new provision further provides that “such members also shall include the brothers and sisters (whether by the whole or half blood) of the individual and their spouses.”

E. “35-percent controlled entity” means (i) “a corporation in which persons [who were, at any time during the 5-year period ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the organization] or [who were family members as defined above] own more than 35 percent of the total combined voting power” of the corporation, or (ii) “a partnership in which such persons own more than 35 percent of the profits interest,” or (iii) “a trust or estate in which such persons own more than 35 percent of the beneficial interests.”

F. Intent of legislation: to apply the new intermediate sanctions to “any individual who is in a position to exercise substantial influence over the affairs of the organization, whether by virtue of being an organization manager or otherwise.” i. The Congressional intent is to focus on the actual influence

and control exercised by the individual, rather than on the nominal title which the person might possess.

ii. Thus, “[a] person having the title of ‘officer, director, or trustee’ does not automatically have the status of a disqualified person.”

32. § 4958(f)(1)(B).

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iii. Conversely, in certain circumstances, an individual might be deemed a disqualified person even if the person is not a paid employee of the organization.

G. Final regulations were issued by IRS in 2002 (see below)

10. SECOND-TIER TAX WHERE PROBLEM NOT CORRECTED

A. Power of IRS to impose a 200 percent tax on any disqualified person who is involved in an excess benefit transaction, where the IRS has imposed a 25 percent tax on such person and “the excess benefit ... is not corrected within the taxable period.”

B. This second-tier tax is not applicable “to any benefit arising from a transaction pursuant to any written contract which was binding on September 13, 1995, and at all times thereafter before such trans-action occurred.” i. The term “taxable period” is defined, with respect to an excess

benefit transaction, as “the period beginning with the date on which the transaction occurs and ending on the earliest of” the “date of mailing a notice of deficiency under section 6212 with respect to the tax imposed” or the date on which such tax is assessed.

ii. The term “correction” is defined, with respect to an excess benefit transaction, as “undoing the excess benefit to the extent possible, and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards.”

C. Thus, a disqualified person who the IRS finds to have received an excess benefit should promptly correct the problem, or risk being subject to a larger confiscatory tax.

11. EXCISE TAX ON ORGANIZATION MANAGER

A. IRS authorized to impose a 10 percent excise tax on any “organi-zation manager” who has participated in an excess benefit transaction “knowing that it is such a transaction, ... unless such participation is not willful and is due to reasonable cause.”

B. An “organization manager” is defined, “with respect to any appli-cable tax-exempt organization, [as] any officer, director, or trustee

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of such organization (or any individual having powers or respon-sibilities similar to those of officers, directors, or trustees of the organization).”

C. The tax on an organization manager may only be imposed in instances where a 25 percent tax is being imposed on a disqualified person involved in an excess benefit transaction.

D. The 10 percent tax is computed as a percentage of the excess ben-efit received by the disqualified person, and that tax “shall be paid by any organization manager who participated in the excess benefit transaction.” i. The maximum tax on an organization manager is $10,000

(raised in legislation enacted in 2006 to $20,000). ii. To the extent that the tax on an organization manager is designed

to curb instances of private inurement, it is less effective in more egregious cases where the cap applies.

12. AVAILABILITY OF REBUTTABLE PRESUMPTION OF REASONABLENESS

A. House Ways and Means Committee Report (“House Committee Report”) provides that the new law permits nonprofits to “take certain actions in order to obtain a ‘presumption’ that compensation is reasonable.”

B. First requirement to obtain rebuttable presumption of reasonableness: The board must be composed entirely of individuals unrelated to and not subject to the control of the disqualified person(s) involved in the arrangement. This is consistent with the traditional principle that compensation of charities officials should ideally be fixed at arm’s length by an independent board of directors.

C. Second requirement to obtain rebuttable presumption of reason-ableness: The board which fixed the compensation must have obtained and relied upon appropriate data as to comparability (e.g., compensation levels paid by similarly situated organizations, both taxable and tax-exempt, for functionally comparable positions; the location of the organization, including the availability of similar spe-cialties in the geographic area; independent compensation surveys by nationally recognized independent firms; or actual written offers from similar institutions competing for the services of the dis-qualified person).

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D. Third requirement to obtain rebuttable presumption of reasona-bleness: The board which fixed the compensation must have ade-quately documented the basis for its determination (e.g., the record includes an evaluation of the individual whose compensation was being established and the basis for determining that the individual’s compensation was reasonable in light of that evaluation and data).

E. The House Committee Report provides that, “[i]f these three criteria are satisfied, penalty excise taxes could be imposed under the pro-posal only if the IRS develops sufficient contrary evidence to rebut the probative value of the evidence put forth by the parties to the transaction (e.g., the IRS could establish that the compensation data relied upon by the parties was not for functionally comparable posi-tions or that the disqualified person, in fact, did not substantially perform the responsibilities of such position).”

13. SIGNIFICANCE OF INTERMEDIATE SANCTIONS

A. These intermediate sanctions represent “an attempt to gain more oversight of the burgeoning nonprofit sector, whose 1.2 million organizations now constitute 11% of the U.S. economy.”33 Despite the United Way scandal, “pay and perks at the nation’s nonprofit agencies continue to rise. As a result, the IRS asked Congress for additional enforcement measures.”34

B. The new statute has been described as “probably the most important legislation affecting charities in 20 years. It will change the way in which charities fix compensation and the way they engage in transactions with those top officials.”35

14. FINAL IRS REGULATIONS

A. Issued effective January 23, 2002 (the “Final Regulations”) B. Replaced temporary regulations issued in January of 2001 (the

“Temporary Regulations”), which in turn replaced proposed regu-lations issued by the IRS on July 30, 1998.

33. Wall Street Journal, August 7, 1996, p. B2. 34. Id. 35. Wall Street Journal, July 17, 1996, p. 1 (quoting Howard Schoenfeld of Price

Waterhouse in Washington).

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C. The Final Regulations restate, in certain respects, what is contained in the statute and legislative history. Certain significant portions of the Final Regulations which amplify or clarify the statutory pro-visions and legislative history, as reflected in the House Committee Report, are addressed here.

[1] ‘53.4958-1T: Taxes On Excess Benefit Transactions

There are three taxes which may be imposed pursuant to the intermediate sanctions legislation: the first and second tier taxes on disqualified persons, and the tax on an organization manager.

The 25 percent first-tier tax is imposed on insiders who receive excess benefits, and is calculated as 25 percent of the value of such excess benefits.

The 200 percent second-tier tax on a disqualified person may be imposed if the excess benefit is not corrected within the taxable period (defined as the period beginning on the date the transaction occurs and ending on the earlier of the date of mailing a notice of deficiency for the 25 percent first-tier tax or the date on which the 25 percent tax is assessed). The means of “correction” are described in Section 53.4958-7 of the Final Regulations.

The 10 percent tax on an organization manager may not be imposed if the participation in the excess benefit transaction “was not willful and was due to reasonable cause.” An organization manager is “any officer, director, or trustee of such organization, or any indi-vidual having powers or responsibilities similar to those of officers, directors, or trustees of the organization, regardless of title.” If an organization manager properly relies on the advice of an “appropriate professional” (such as a qualified attorney, certified public account-ant, or independent valuation expert) in participating in an excess benefit transaction, participation in such transaction will ordinarily not be considered knowing or willful and will ordinarily be considered due to reasonable cause. However, managers who seek to rely on pro-fessional advice as a defense to a claim that they participated in an excess benefit transaction may do so only if they received such advice in a reasoned written opinion of that professional with respect to elements of the transaction within the professional’ expertise.

If more than one person is liable for any taxes imposed with respect to an excess benefit transaction, all persons with respect to whom a particular tax is imposed are jointly and severally liable for that tax.

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The statute of limitations for IRC section 4958 excise taxes begins to run as of the date the applicable tax-exempt organization files its return (Form 990) for the year in which the excess benefit transaction occurred.

[2] ‘53.4958-2T: Definition Of Applicable Tax-Exempt Organization

An applicable tax-exempt organization is “any organization that, without regard to any excess benefit, would be described in section 501 (c)(3) or (4) and exempt from tax under section 501(a).” It also includes “any organization that was described in section 501(c)(3) or (4) and was exempt from tax under section 501(a) at any time during a five-year period ending on the date of an excess benefit transaction (the lookback period).” With respect to “any excess benefit transaction occurring before September 14, 2000, the lookback period ... begins on September 14, 1995, and ends on the date of the transaction.” It does not include private foundations, which were already governed by an extensive range of applicable excise taxes set forth in the Internal Revenue Code. It also does not include, as first clarified in the Tem-porary Regulations, government entities such as state colleges and hospitals.

[3] ‘53.4958-3T: Definition Of Disqualified Person

A disqualified person shall include any individual who (a) serves “on the governing body of the organization who is entitled to vote on any matter over which the governing body has authority,” (b) “regard-less of title, has ultimate responsibility for implementing the decisions of the governing body or for supervising the management, admin-istration, or operation of the organization. A person who serves as president, chief executive officer or chief operating officer has this ultimate responsibility unless the person demonstrates otherwise,” or (c) has the power or responsibilities of treasurer or chief financial officer, with “ultimate responsibility for managing the finances of the organization,” or (d) has a “material financial interest in a provider-sponsored organization.” Whether other persons have substantial influ-ence over the organization, and are therefore deemed disqualified persons, shall be determined based on a facts and circumstances test. The key consideration is the person’s actual powers and respon-sibilities, and not his or her title.

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Among the facts or circumstances tending to show substantial influence are that a person (i) founded the organization, (ii) is a sub-stantial contributor, (iii) receives compensation based on revenues derived from activities of the organization which the person controls, (iv) has authority to control or determine a significant portion of the organization’s capital expenditures, operating budget, or compensation for employees, (v) “manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization,” or (vi) owns a controlling interest in a corporation, partnership, or trust that is a disqualified person. An independent contractor, such as an attorney, accountant, or investment manager or advisor, acting in that capacity, would not ordinarily be deemed to have substantial influence over the affairs of an organization unless the person will Aeconomically benefit either directly or indirectly.”

The originally proposed regulation concerning the definition of a disqualified person was widely criticized as overinclusive. For example, while a disqualified person is one who has substantial influence over an organization, the proposed regulation would have extended to the contract with a newly hired executive, even though such individual was not an insider with substantial influence over the organization at the time the contract was executed. However, the provision was omitted from the Temporary Regulations and the Final Regulations. Thus, “[t]he law will not apply to fixed payments made under a first contract, regardless of whether the I.R.S. might otherwise consider the payment excessive.”36 However, an excessive payment to an outsider could still be deemed a private benefit and provide a basis

36. The Chronicle Of Philanthropy, January 25, 2001, p. 39. A 1999 decision of

the Seventh Circuit Court of Appeals criticizing the efforts of the IRS to revoke the tax-exempt status of a 501(c)(3) organization based on private inurement, because of the charity’s relationship with an outside fund raiser which the court found was not an insider, was also cited by critics as indirectly rejecting the IRS’ efforts in its proposed regulations to include outside fund raisers as insiders for purposes of the intermediate sanctions legislation. United Cancer Council, Inc. v. Commissioner of Internal Revenue, 165 F.3d 1173 (7th Cir. 1999). The Temporary Regulations (and by extension, the Final Regulations) essentially incorporate [this] ... decision” by providing that “[t]he law will not apply to fixed payments made under a first contract, regardless of whether the I.R.S. might otherwise consider the payment excessive. It will apply to flexible payments and later contracts with the same party, even under the same terms....” Id.

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for depriving an organization of its tax-exempt status under IRC Section 501(c)(3).

[4] ‘53.4958-4T: Excess Benefit Transaction

An excess benefit transaction is one in which the benefit pro-vided to a disqualified person “exceeds the value of the consideration (including the performance of services) received for providing the benefit.” For purposes of determining whether compensation is an excess benefit, it is necessary to include “all economic benefits pro-vided ... in exchange for the performance of services, including “salary, fees, bonuses, severance payments, and deferred and noncash compensation.”

An economic benefit is not treated as consideration for the per-formance of services unless the organization clearly indicates its intent to treat the benefit as compensation when the benefit is paid. Thus, any economic benefit which is provided as compensation for services rendered should be reported contemporaneously, such as with respect to the payment (e.g., Form W-2 or 1099) or with respect to the organi-zation (e.g., Form 990) in documents which are “filed prior to the commencement of an Internal Revenue Service examination of the applicable tax-exempt organization or the disqualified person for the taxable year in which the transaction occurred.”

The IRS’ proposed blanket exclusion of payment for spousal travel as a reasonable expense has been omitted from the Temporary Regulations and the Final Regulations. That blanket exclusion had been criticized when it appeared in the proposed regulations on the grounds that, in some instances, a spouse might be traveling to fur-ther interests of the charitable organization.

A benefit provided to a disqualified person which that person receives solely as a volunteer for an organization is not an excess benefit if it is provided to members of the public in exchange for a membership fee of $75 or less per year.

[5] ‘53.4958-5T: Transaction In Which Amount Of Economic Benefit Determined In Whole Or In Part By The Revenues Of One Or More Activities Of The Organization [Reserved]

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[6] ‘53.4958-6T: Rebuttable Presumption That Transaction is Not An Excess Benefit Transaction

The Final Regulations elaborate on the three requirements which must be satisfied in order for there to be a rebuttable presumption that payments under a compensation arrangement between a charitable organization and a disqualified person are reasonable.

[a] First Requirement: Compensation Fixed By An Independent Board

With respect to the requirement that the compensation arrange-ment be approved by an authorized body of the organization com-posed entirely of individuals who do not have a conflict of interest with respect to the arrangement or transaction, the Final Regulations make it clear that “an individual is not included on the authorized body when it is reviewing a transaction if that individual meets with other members only to answer questions, and otherwise recuses himself or herself from the meeting and is not present during debate and voting on the compensation arrangement or property transfer.”

Thus, despite suggestions to the contrary in the House Report, it appears that the rebuttable presumption is available even if insiders serve on the board of an organization, so long as they recuse them-selves from the debate and actual vote on the compensation arrangement.

The Final Regulations also provide that a member of the author-ized body does not have a conflict of interest with respect to a compensation arrangement or transaction if the member (A) is “not a disqualified person participating in or economically benefitting from the compensation arrangement or property transfer, and is not a member of the family of any such disqualified person;” (B) is “not in an employment relationship subject to the direction or con-trol of any disqualified person participating in or economically benefitting from the compensation arrangement or property trans-fer;” (C) does “not receive compensation or other payments subject to approval by any disqualified person participating in or economi-cally benefitting from the compensation arrangement or property transfer;” (D) has “no material financial interest affected by the compensation arrangement or property transfer;” and (E) does “not approve a transaction providing economic benefits to any dis-qualified person participating in the compensation arrangement or

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property transfer, who in turn has approved or will approve a transaction providing economic benefits to the member.”

[b] Second Requirement: Reliance On Appropriate Data As To Comparability

With respect to the requirement that the authorized body obtain and rely upon appropriate data as to comparability prior to making its determination, the Final Regulations specify that the relevant information upon which the authorized body may rely “includes, but is not limited to, compensation levels paid by similarly situated organizations, both taxable and tax-exempt, for functionally com-parable positions; the availability of similar services in the geo-graphic area of the applicable tax-exempt organization; current compensation surveys compiled by independent firms; and actual written offers from similar institutions competing for the services of the disqualified person. In the case of property, relevant infor-mation includes, but is not limited to, current independent appraisals of the value of all property to be transferred; and offers received as part of an open and competitive bidding process.”

The Final Regulations also provide a special rule for com-pensation paid by small organizations (that is, “with annual gross receipts ... of less than $1 million”). Under this rule, when the authorized body reviews compensation arrangements, it will be con-sidered to have appropriate data as to comparability if it has data on compensation paid by three comparable organizations in the same or similar communities for similar services. The IRS was urged to, but declined to, increase this threshold, such as to $5 million, to “capture ... relatively small tax-exempt organizations that lack the extra resources to hire an independent compensation firm but [which] would be compelled to engage such a firm in order to satisfy this requirement.”37

[c] Third Requirement: Adequately Document Basis For Determination Of Compensation

With respect to the requirement that the authorized body ade-quately document the basis for its determination concurrently with

37. Chronicle, January 28, 1999 at p. 24, quoting Independent Sector, which “also

suggested that the threshold be adjusted for inflation in future years.”

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making that determination, the Final Regulations require that the authorized body note (A) the “terms of the transaction that was approved and the date it was approved,” (B) the “members of the authorized body who were present during debate on the transaction that was approved and those who voted on it; (C) the “compa-rability data obtained and relied upon by the authorized body and how the data was obtained;” and (D) any “actions taken with respect to consideration of the transaction by anyone who is otherwise a member of the authorized body but who had a conflict of interest with respect to the transaction.” It is also provided in the Final Regu-lations that, “[i]f the authorized body determines that reasonable compensation for a specific arrangement or fair market value in a specific property transfer is higher or lower than the range of com-parability data obtained, the authorized body must record the basis for its determination. For a decision to be documented concurrently, records must be prepared before the later of the next meeting of the authorized body or 60 days after the final action or actions of the authorized body are taken. Records must be reviewed and approved by the authorized body as reasonable, accurate and com-plete within a reasonable time period thereafter.”

[7] ‘53.4958-7T: Correction

A “correction” is defined as “undoing the excess benefit to the extent possible, and taking any additional measures necessary to place the applicable tax-exempt organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards.”

The form of correction of “an excess benefit [is] only by making a payment in cash or cash equivalents, excluding payment by a prom-issory note, to the applicable tax-exempt organization equal to the correction amount.” In making a correction, a “disqualified person may, with the agreement of the applicable tax-exempt organization, make a payment by returning specific property previously transferred in the excess benefit transaction,” although an additional cash pay-ment would be required if the value of the property being returned is less than the correction amount. The “correct amount” equals “the sum of the excess benefit ... and interest on the excess benefit.”

If the organization no longer exists, or is no longer tax-exempt, at the time the correction is to be made, the correction may be accom-plished through payment to another tax-exempt organization. The

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200 percent tax will not be assessed, or will be abated, if the cor-rection is made within 90 days after the mailing of a notice of deficiency.

[8] §53.4958-8T: Special Rules

The excise taxes imposed by the intermediate sanctions legis-lation do “not affect the substantive statutory standards for tax exemp-tion under section 501(c)(3) or (4), including the requirements that the organization be organized and operated exclusively for exempt purposes, and that no part of its net earnings inure to the benefit of any private shareholder or individual.” The IRS has pointed out that, whether or not a transaction is subject to potential intermediate sanctions, “existing principles and rules may be implicated, such as the limitation on private benefit.” Thus, a transaction not covered by the intermediate sanctions legislation and regulations “may, under certain circumstances, jeopardize the organization’s tax-exempt status.”

15. THE 15-POINT CHECKLIST

In order to facilitate the compliance by charities and charities officials with the law and regulations, and in particular to obtain the benefits of the rebuttable presumption of reasonableness, the IRS’ Director, Exempt Organizations, Steven T. Miller, wrote an article in 2001 and appended a 15-point checklist of factors for a board to consider in making decisions on compensation. This checklist, which is merely suggestive and not official policy, includes: Name of disqualified person Position under consideration Elements of compensation (contract term, salary, bonus, fringe

benefits, insurance, etc.) Description of types of comparability data relied upon Sources and amounts of comparability data Office or file where comparability data kept Total proposed compensation Maximum total compensation per comparability data Compensation package approved by authorized body Date compensation approved by authorized body Members of the authorized body present (with indication of how

they voted) Comparability data relied upon by approving body/how data was

obtained

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Names of and actions (if any) by members of authorized body with conflict of interest

Date of preparation of this documentation Date of approval of this documentation by Board

A diligent attorney, accountant, or other professional can assist a charity by identifying the risk of intermediate sanctions, helping to compile and maintain the required information, and providing appropriate infor-mation (such as salary history, financials, and corporate documents) to an attorney, valuation expert, or other professional retained to advise the charity and its board.

IRS’ FINAL REGULATIONS ON INTERMEDIATE SANCTIONS AND STANDARDS FOR EXEMPTION (SUPPLEMENTING 2002 REGULATIONS)

The final regulations issued by the IRS on March 28, 2008 shed light on the process that the IRS will go through in deciding whether to merely impose the intermediate sanctions allowed by Internal Revenue Code Section 4958, or to go so far as to drop its “atomic bomb” and revoke an organization’s tax exempt status. Specifically, the 2008 regulations list five non-exhaustive factors that the IRS will consider in making this determination: (a) The size and scope of the organization’s regular activities before

and after the excess benefit transaction(s) occurred; (b) The size and scope of the excess benefit transaction(s);

(c) Whether the organization has been involved in multiple38 excess benefit transactions;

(d) Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and

(e) Whether the excess benefit transaction has been “corrected” (as defined in the statute and described above) or the organization has made a good faith effort to seek correction.

The implementation of safeguards to prevent excess benefit trans-actions, and the initiation of corrective action will be viewed more

38. The word “multiple” refers to both repeated instances of the same transaction or

several instances of different transactions.

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favorably by the IRS if undertaken before the Service discovers the excess benefit transaction.

IRS’ CHANGES IN DISCLOSURES IN FORM 990s BY NONPROFITS WITH RESPECT TO COMPENSATION PRACTICES BEGINNING WITH 2008 FISCAL YEAR

Beginning with fiscal years beginning on or after January 1, 2008, the Form 990 which must be filed annually by public charities with the IRS was expanded to require additional and more detailed disclosures with respect to compensation paid to nonprofit executives.

Key points with respect to the expanded disclosure include the following: 1. The revised form consists of an 11-page core form completed by all

filers, with supporting schedules to be completed when the answers trigger the need for more detail.

2. The IRS wants to know not only what the compensation is, but also what process and procedure is used for fixing compensation.

3. Question 15 in Part VI asks whether “the process for determining compensation of the [specified] persons” include (a) “a review and approval by independent persons,” (b) “comparability data,” and (c) “contemporaneous substantiation of the deliberation and decision.” These questions are asked with respect to (i) the CEO, executive director, or top management official, and (ii) “other officers or key employees of the organization.”

4. If the organization does have a process for determining com-pensation, it must be described in narrative form in Schedule O of the 990.

5. There is a Part VII in the core form entitled “Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors This form requires the following disclosures: a. All of the organization’s current officers, directors, trustees

(whether individuals or organizations), regardless of amount of compensation

b. All of the organization’s current key employees (Note: Current key employees are those who (a) earn more than $150,000, (b) have a certain level of responsibility as defined in the IRS’

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instructions and (c) were among the top 20 highest paid persons who satisfied both the $150,000 and the responsibility tests.)

c. The organization’s five current highest compensated employees (other than an officer, director, trustee, or key employee) who received reportable compensation of more than $100,000 from the organization and any related organizations

d. The organization’s former officers, key employees, and highest compensated employees who received more than $100,000 of reportable compensation from the organization and any related organizations

e. The organization’s former directors or trustees that received, in the capacity as a former director or trustee of the organi-zation, more than $10,000 of reportable compensation from the organization and any related organizations

f. The organization’s five highest paid independent contractors and the total number who were paid over $100,000

g. These listings must include name and title, average hours worked per week, and total compensation from both the filing organi-zation and related organizations.

6. If there are individuals listed in Part VII that meet certain criteria, more detail on compensation must be provided on Schedule J (includ-ing answering certain yes/no questions about whether certain benefits are provided, such as first-class travel, discretionary spending accounts, housing allowances, health club dues, and chauffeur services).

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ADDENDUM JULY 2015 CASE FILED BY NEW YORK ATTORNEY GENERAL’S CHARITIES BUREAU CITING, IN PART,

UNWARRANTED COMPENSATION (FROM ATTORNEY GENERAL’S WEBSITE)

A.G. Schneiderman Sues Children’s Leukemia Charity For Deceiving Donors And Using Vast Majority Of $10 Million Raised

For Non-Charitable Purposes Brooklyn-Based National Children’s Leukemia Foundation Allegedly Raised Money From Donors Across America By Touting Non-Existent And Defunct Programs; Bulk Went to Fundraisers; Less than 1% To

Helping Children Suffering From Cancer NEW YORK – Attorney General Eric T. Schneiderman today

announced that his office has filed a court action to shutter the National Children’s Leukemia Foundation (NCLF), and to hold accountable its founder, its president, its vice president, who is the founder’s son, and its auditor. The lawsuit comes after an investigation by the Attorney Gen-eral’s Charities Bureau allegedly revealed that the NCLF, which touted itself as a leading organization in the fight against leukemia, did not conduct most of the programs advertised on its website and in its solicitations – including claims it operated a bone marrow registry and fulfilled the last wishes of dying children - and flouted critical filing obligations required of it under New York law. The court papers charge that, despite claims it had a board of directors and other significant finan-cial and scientific controls, the two-decade-old organization was largely a one-man operation, run by founder Zvi Shor, 64, out of the basement of his Brooklyn home. NCLF’s president and vice president are alleged to have breached their duties to the organization and to have aided and abetted Shor in running the organization; the auditor is accused of making false filings.

“Nothing is more shameful than pocketing millions of dollars donated by good-hearted people who just wanted to help children afflicted with a terminal illness,” said Attorney General Eric Schneiderman. “My office will continue to identify, investigate, and shutter so-called charities that use legitimate-sounding names to exploit the generosity of New Yorkers and betray the public’s trust. Those charitable organizations that do help our most vulnerable citizens, and put donors’ money to its intended use, are an essential part of the fabric of our state. I urge New Yorkers to continue giving to the neediest among us, but to give wisely.”

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The lawsuit alleges that between 2009 and 2013, the NCLF raised $9.7 million from donors across America by:

Repeatedly lying about having a bone marrow registry, an umbilical cord blood banking program, and its own cancer research center; and telling donors it had filed a patent application for a new life-saving treatment for leukemia when it had not;

Lying when it told potential donors that funds raised would be used to “fulfill wishes of terminally sick children,” including sending these children to Disney World, when NCLF had not done so in years;

Making false official filings, including annual financial filings sub-mitted to the Attorney General’s Office, by reporting individuals as directors of the organization without their knowledge, and falsely reporting a large portion of fundraising expenses as public edu-cation about cancer;

Filing false audit reports, when no audits were in fact conducted. As the petition charges, between April 2009 and March 2013, NCLF

collected approximately $9.7 million in revenue from thousands of donors across the country. Of that, $8.9 million was solicited by professional fundraisers hired by Shor, who were in turn paid approximately $7.5 million – or 83% – of the money raised. Of the remaining funds, according to the organization’s filings, the organi-zation spent less than 1% percent – $57,541 – of its income on direct cash assistance to leukemia patients and transferred another 5% – $655,000 – to a shell organization in Israel run by Shor’s sister, allegedly for research purposes. Over the same time period, Shor was paid a salary of nearly $600,000, and awarded himself another $600,000 in deferred compensation. (emphasis added)

AG’s Press Release on Settlement of Case (December 2015) A.G. Schneiderman Announces $1 Million Settlement With Officials Of So-Called Children’s Leukemia Foundation And Their Auditor

Foundation To Close Permanently, Defendants To Be Banned From Working In The Non-Profit Sector

Former Officials Admit To Financial Misconduct And To Years Of Fundraising Abuses And Misrepresentations, Including Falsifying Audit Reports

NEW YORK – Attorney General Eric T. Schneiderman today announced that his office has reached a settlement agreement resolving a lawsuit brought against the Brooklyn-based National Children’s Leukemia

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Foundation (“NCLF”), its founder and leader Zvi Shor, its president Yehuda Gutwein, the founder’s son, Shlomo Shor, and its auditor, Shlomo Donn. The Attorney General had filed a nine-count petition to shut down NCLF in July 2015 in Kings County Supreme Court.

Through this settlement, NCLF will be permanently closed, its former officers barred from serving as fiduciaries of any New York charity, with nation-wide bans for the founder and his son. The former officers will also be barred from soliciting funds on behalf of any charity. The Attorney General will also recover $380,000 dollars, most of which will be directed to charities helping children with leukemia. Shor, age 64 and a resident of Brooklyn, New York, forfeited claims to an additional $612,844 in back-pay, in addition to a claim to a life-time pension and other benefits. NCLF’s former accountant and auditor must report the identities of any non-profit clients to the Attorney General’s Charities Bureau for the next three years. The settlement is subject to approval by the court.

“My office will continue to go after so-called charities that cynically assume a sympathetic name and then deceive generous New Yorkers into making generous donations for persons in need,” said Attorney General Schneiderman. “We are committed to ensuring that funds contributed by donors reach their intended recipients.”

The defendants in the Attorney General’s suit admitted to their misconduct, including the following:

Contrary to NCLF’s fundraising solicitations, which represented that it had medical expertise to provide significant services to sick and terminally ill children, NCLF did not operate a bone marrow registry; it did not bank umbilical cord blood; and it did not operate a cancer research center. In addition, NCLF heavily promoted a “Make A Dream” program for terminally ill children, but in fact NCLF did little more in several years than donate one laptop com-puter to one child and send another child to Disney World. Over the five years of the Attorney General’s investigation, from 2009 through 2013, NCLF’s actions had the effect of deceiving donors, who contributed a total of $9.7 million – 85% of which NCLF spent on fundraising costs.

NCLF pretended to meet its obligation to have a functioning board of directors by falsely listing as board members persons who in fact had no involvement with the organization.

Gutwein, who is a Certified Public Accountant, admitted that he was only a “straw” president and that Shor continued to lead NCLF

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even after Shor’s resignation. Shor relinquished the title of president when his 1999 criminal conviction for bank fraud became public. Demonstrating that he had no actual role at NCLF, Gutwein admit-ted that he had little or no knowledge of NCLF’s programs, and that he never even visited NCLF’s office. Gutwein admitted that NCLF made representations in its solicitations about programs that it did not conduct, and that Shor approved of the falsehoods.

Donn, a C.P.A. who worked for Gutwein, was responsible for auditing NCLF’s finances. Donn prepared and submitted reports that pur-ported to represent valid audits, but, in fact, Donn’s reports did not meet basic auditing standards.

Shlomo Shor, Zvi Shor’s son, became an officer and director of NCLF merely for the purpose of signing official checks and contracts at his father’s behest. Despite his title of vice-president, Shlomo Shor was ignorant of the organization’s finances and its programs.NCLF further deceived donors by filing with the Charities Bureau required annual reports that minimized its fundraising expenses and that created a false appearance that it was spending substantially more on programs than it did.

**** The investigation into NCLF developed from the Bureau’s annual

Pennies for Charities report, which reveals that charitable donations obtained by many professional fundraisers are largely spent on fund-raising and administrative expenses, with only a small fraction left for charitable work.

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PART THREE

EMPLOYMENT LAW UPDATE

1. Both federal and New York State agencies have been increasingly strict in insisting that nonprofits and other organizations properly categorize individuals as employees rather than independent contrac-tors (as organizations sometimes improperly treat full or part-time employees as independent contractors to avoid responsibility for unemployment compensation, workmen’s compensation, and other benefits.) a. For federal employment tax purposes, the usual common law

rules are applicable to determine if a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. You should consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories – Behavioral Control, Finan-cial Control, and the Relationship of the Parties. (See website of US Department of Labor)

b. Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

c. Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes: i. The extent to which the worker has unreimbursed

business expenses ii. The extent of the worker’s investment in the facilities or

tools used in performing services iii. The extent to which the worker makes his or her

services available to the relevant market iv. How the business pays the worker, and v. The extent to which the worker can realize a profit or

incur a loss

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d. Relationship of the Parties covers facts that show the type of relationship the parties had. This includes: i. Written contracts describing the relationship the parties

intended to create ii. Whether the business provides the worker with employee-

type benefits, such as insurance, a pension plan, vaca-tion pay, or sick pay

iii. The permanency of the relationship, and iv. The extent to which services performed by the worker

are a key aspect of the regular business of the company 2. New York State, at least partly in response to the Fight for $15

movement across the country (pressing for a $15 minimum wage for workers), saw a significant development through legislation signed by Governor Cuomo on April 4, 2016. a. The 2016/2017 state budget includes a historic increase in the

minimum wage, ultimately reaching $15 an hour for all workers in all industries across the state.

b. For workers in New York City employed by large businesses (those with at least 11 employees), the minimum wage would rise to $11 at the end of 2016, then another $2 each year after, reaching $15 on 12/31/2018.

c. For workers in New York City employed by small businesses (those with 10 employees or fewer), the minimum wage would rise to $10.50 by the end of 2016, then another $1.50 each year after, reaching $15 on 12/31/2019.

d. For workers in Nassau, Suffolk and Westchester Counties, the minimum wage would increase to $10 at the end of 2016, then $1 each year after, reaching $15 on 12/31/2021.

e. For workers in the rest of the state, the minimum wage would increase to $9.70 at the end of 2016, then another .70 each year after until reaching $12.50 on 12/31/2020 – after which it will continue to increase to $15 on an indexed schedule to be set by the Director of the Division of Budget in consultation with the Department of Labor.

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3. Non-profit corporations and charitable trusts with 20 or more employ-ees and annual revenue of over $1 million must now, under New York Law, adopt a whistleblower policy to protect persons who report suspected improper conduct. a. This requirement is imposed by the Nonprofit Revitalization

Act of 2013 (Section 715-b of the Not-for-Profit Corporation Law).

b. This new requirement appears to go well beyond the whis-tleblower protections afforded by prior New York law

c. It provides protection for directors, officers, employees, or volunteers who in good faith report any action or suspected action that is illegal, fraudulent, or in violation of company policy.

d. Intimidation, harassment, discrimination, or retaliation (including terminating or disciplining employees) is forbidden.

e. There must be a procedure for preserving the confidentiality of reported information.

f. Notice of the policy must be provided to all officers, directors, and employees, and to volunteers who provide substantial ser-vices to the organization.

g. It is not inconsistent with the Act to infer that, if a purported whistleblower is not acting in good faith, adverse employment consequences might be appropriate.

h. The audit committee (if there is one) or the full board must oversee implementation of and compliance with the whis-tleblower policy.

4. There are grounds for concern that this new whistleblower pro-tection can be relied on by an executive, or even by the New York Attorney General upon receipt of a complaint from such executive, as a basis for raising questions about a proposed dismissal of a poorly performing or insubordinate executive. a. An executive who is aware that there are issues with his or her

performance might file a purported whistleblower complaint (such as with the Attorney General’s Charities Bureau) and assert that a subsequent adverse employment action by the employer violates the whistleblower law.

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b. The employer might properly indicate that, because a termi-nated employee had severe performance issues, or acted in bad faith (or did not tell the truth) in making a complaint, the employee was not terminated or disciplined in violation of the whistleblower statute.

c. However, a terminated or disciplined employee could assert otherwise.

d. To complicate matters, although N-PCL 715-b does not explic-itly confer on the Office of the New York Attorney General (“OAG”), the right to take legal action against a nonprofit which it believes has retaliated improperly against a whistleblower, the OAG has been known to express concerns to the subject of a whistleblower complaint about whether the employer might take action against the employee/complainant. i. If a whistleblower is subject to improper retaliation, the

OAG could use its dissolution power where the organi-zation has thereby violated social policy.

ii. The Charities Bureau could also rely on N-PCL Section 112, which gives the Attorney General’s office broad authority to step in the shoes of an officer or director and take legal action requiring a corporation to follow its own rules (which would include complying with its own whistleblower policy and not engaging in improper retaliation).

5. The federal overtime provisions contained in the Fair Labor Stand-ards Act (FLSA) provide that employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. a. There is no limit in the Act on the number of hours employees

aged 16 and older may work in any workweek. b. The Act does not require overtime pay for work on Saturdays,

Sundays, holidays, or regular days of rest, unless overtime is worked on such days.

c. The Act applies on a workweek basis. An employee’s work-week is a fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods. It need not coincide with the calendar week, but may begin on any day and at any hour

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of the day. Different workweeks may be established for different employees or groups of employees.

d. There is concern that many employers try to evade overtime requirements by misclassifying employees as exempt “execu-tives” or “professionals,” even though the employees’ respon-sibilities would not entitle them to such a classification

6. The Department of Labor in June 2015 announced a proposed rule (final rule published on May 18, 2016, effective on December 1, 2016) that would extend overtime protections to nearly 5 million white collar workers within the first year of its implementation. It raises the level below which an employee can NOT be deemed exempt from the overtime a. Failure to update the overtime regulations had left an excep-

tion to overtime eligibility originally meant for highly-com-pensated executive, administrative, and professional employees applying to workers earning as little as $23,660 a year.

b. The new regulation raises that threshold to $47,476 per year. c. This means that the salary threshold needed to qualify for

the overtime exemption increases from $455/week ($23,660 per year) to $913/week ($47,476/year). THE BOTTOM LINE IS THAT A PERSON EARNING LESS THAN $47,476 PER YEAR CANNOT BE CLASSIFIED AS AN EMPLOYEE EXEMPT FROM THE OVERTIME RULES IRRESPEC-TIVE OF HIS OR HER DUTIES AND RESPONSIBILITIES (AND WILL THEREFORE BE ELIGIBLE FOR OVERTIME NO MATTER HOW THE EMPLOYER TRIES TO CLAS-SIFY HIM OR HER.)

d. The final rule also establishes a mechanism for automatically updating the salary and compensation levels every three years. The future automatic updates at three year intervals will begin on January 1, 2020.

e. In issuing its final rule, the Department of Labor pointed out that “[n]either the FLSA nor the Department’s regulations provide an exemption from overtime requirements for non-profit organizations. While some non-profits may not be cov-ered under the FLSA, it is likely that many employees of non-profits are entitled to FLSA protections.”

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7. As originally enacted, the Nonprofit Revitalization Act provided that no employee may serve as the chair of the board of a nonprofit corporation (a reasonable limitation whatever the status of current law.) Subsequent legislation deferred this limitation, which now takes effect January 1, 2017. Section 713(f), to take effect in 2017, provides: “No employee of the corporation shall serve as chair of the board or hold any other title with similar responsibilities.”

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NOTES

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NOTES

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I - 1

Index

E

Executive Compensation intermediate sanctions and state law

issues, 87–97

F

Faculty Bios Dahlia B. Doumar, 18 Dana Brakman Reiser, 20 David G. Samuels, 21 J. J. Harwayne Leitner, 19 Karen I. Wu, 22 Seth Perlman, 17

Form 990 Reporting Issues appendix A, governance check list,

81–82 background, 71 donor advised funds, 71–72 related party reporting, 72–77 Schedule O disclosures, 77–78 Schedules F and I, 77

G

Governance Practices and Reporting for Nonprofit Organizations

governance and conflicts of interest best practices, 26–34

governance reporting, 34–40 imagine, 25

N

Nonprofit Compensation and Employment Issues

employment law update, 131–136 intermediate sanctions with respect

to charitable organizations 15-point checklist, 123–126 addendum, 127–130 application of legislation, 108 disqualified person, 111–113 effective date, 109 excess benefit, 111

excess benefit transaction, 110–111

excise tax for excess benefits, 110

excise tax on organization manager, 113–114

final IRS regulations, 115–123 intermediate sanctions

legislation, flexibility, 109–110 introduction, 108 rationale, 109 rebuttable presumption of

reasonableness, 114–115 second-tier tax where problem

not corrected, 113 significance, 115

private inurement federal law, 103–104 federal statutory framework,

101–103 introduction/public concern

about executive compensation, 101

regulation of private foundations, 104–105

state statutory scheme, 105–107 summary, 107

Nonprofit Governance directors duties, 49–54 dual legal regimes, 45–49 governance oversight through state

charitable registration process, 63–64

New York Nonprofit Revitalization Act, conflicts of interest, 64–67

recent enforcement actions, governance problems, 59–60

recent regulatory changes, 61–63

P

Program Schedule compensation issues for nonprofit

organizations, 12 nonprofit governance update, 11 nonprofit reporting: form 990

update, 11

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