Friday, June 27, 2008
Tax-Exempt
Organizations Seminar
The New Form 990 and Good
Governance Practices for the 21st Century
Susan M. Mussman Schwartz
Cordelia A. Glenn
Table of Contents
Tax-Exempt Organizations Presentation .................................. 1
Tax-Exempt Organizations Alert ................................................ 2
The New Form 990 at a Glance .................................................. 3
Form 990 and Form 990-EZ with Schedules ............................. 4
Resources .................................................................................... 5
Presenter Bios ............................................................................. 6
K&L Gates Tax-Exempt Organizations
The New Form 990 and Good Governance Practices for
the 21st Century: What You Need to Know
Tax-Exempt Organizations Seminar
K&L Gates
June 27, 2008
1
Seminar Overview
Good Governance and the Era of Heightened
Scrutiny
Form 990: What You Need to Know
Overview
Why You Should Prepare Now
Key Areas of Interest
Real World Scenarios
Recommendations
Q&A
2
IRS
Regulations
Form 990 & IRS
Recommendations
Corporate Law
WHAT IS
GOOD
GOVERNANCE?
Best Practices
Sarbanes-Oxley
Principles
Public Perception
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K&L Gates Tax-Exempt Organizations
Era of Heightened Scrutiny
Corporate and Accounting Scandals of 2001-2002
Enron, WorldCom, Tyco, Merrill Lynch, Smith Barney
Created environment of mistrust of public companies
Led to adoption of Sarbanes-Oxley Act in 2002
Focuses on independence and competence of audit
committees, responsibilities of auditors, certification of
financial statements, loans to insiders, disclosures,
whistle-blower protection, and document destruction
With certain exceptions, applies only to publicly traded
companies and their auditors
4
Era of Heightened Scrutiny
Nonprofit Scandals & Reform
Nonprofits not immune from scandals
Excessive costs & executive compensation
Misuse of funds
Many states have passed or are considering nonprofit
legislation containing elements of SOX
To combat mistrust, many nonprofits have voluntarily
adopted policies and altered governance practices in
response to SOX
5
Era of Heightened Scrutiny
Nonprofit Scandals & Reform
No shortage of recommendations for best practices
and even federal regulation for improving
transparency, governance, and accountability of
nonprofits
Industry-wide effort: Panel on the Nonprofit Sector (led by
Independent Sector)
IRS guidance regarding good governance
New Form 990: Legislation by form
Recommendations almost always address common
themes
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K&L Gates Tax-Exempt Organizations
What is good governance?
Common Themes
Board of directors:
Composition/independence
Duties and responsibilities
Identifying and dealing with conflicts of interest
Setting executive compensation properly
Governance and audit committees
Whistleblower and document retention policies
Transparency (disclosure of key documents,
fundraising)
7
Board of Directors Size & Composition
Not too small, not too large
At least five?
Diverse backgrounds
E.g., ethnic, racial, gender, skills (based on organization s
needs)
Preferred: uncompensated (except reimbursement of
expenses)
Preferred: at least majority independent
I.e., neither director nor family member:
Is compensated by the organization
Receives material financial benefits directly or indirectly
8
Directors Fiduciary Duties
Duty of care and duty of loyalty
Duties codified at NPCL Section 5712:
A director shall perform the duties of a director, including the
duties as a member of any committee of the board upon
which the director may serve, in good faith, in a manner
such director believes to be in the best interests of the
corporation, and with such care, including reasonable
inquiry, skill, and diligence, as a person of ordinary
prudence would use under similar circumstances.
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K&L Gates Tax-Exempt Organizations
Directors Fiduciary Duties
Fulfilling the Duty of Care
Regular attendance
Active participation
Information
Independent analysis
Understanding
Fulfilling the Duty of Loyalty
Maintain confidences
Disclose conflicts of interest and recuse
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What is a Conflict of Interest?
Common Law
Organization is considering transaction with:
One of its directors, officers, or members
A company in which one of its directors or officers
is a director or officer or has a financial interest
Internal Revenue Service
Person in a position of authority (e.g., director, officer
or manager) may benefit personally from a decision he
or she could make
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Managing Conflicts
Benefits of a Conflict of Interest Policy
Protects tax-exempt status, creates procedures to avoid
excess benefit transactions and ensure that charity
serves public, not private interests
Assists directors, officers in satisfying fiduciary duties
Demonstrates that charity acts ethically and implements
best practices
builds public confidence
Some transactions involving conflicts are illegal, some
unethical, others may be undertaken in the best interests
of the organization as long as appropriate procedures are
followed
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K&L Gates Tax-Exempt Organizations
Setting Executive Compensation
Background
Hot topic in recent years
Media reports of excessive compensation & perks and
inappropriate loans to executives
Recent IRS compliance checks
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Setting Executive Compensation
Key Principles
Charities may pay reasonable compensation for
services provided by executives and staff
amount that would be paid for like services by like
enterprises (tax-exempt or taxable) under like
circumstances
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Setting Executive Compensation
Key Principles (cont.)
Economic benefits not reported as compensation
through contemporaneous written substantiation are
automatic EBTs
reasonableness irrelevant
Requires report in W-2, Form 1099, Form 990, Form
1040, or board minutes
Expense reimbursements under accountable plan are
disregarded
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K&L Gates Tax-Exempt Organizations
Setting Executive Compensation
Process
Rebuttable Presumption
Approval in advance by authorized body
Board or authorized committee
No conflicts of interest
Based on appropriate comparability data
Formal or informal compensation surveys
Actual written offers
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Setting Executive Compensation
Process
Rebuttable Presumption (cont.)
Determination adequately documented
Details of discussion and vote
Basis for variances from comparable data obtained
Approved by appropriate body in timely manner
Report compensation appropriately
Full disclosure of all benefits on Form 990, W-2, etc.
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Setting Executive Compensation
New Developments
New categories of automatic EBTs for 509(a)(3)
supporting organizations
Loans to disqualified persons
Grants, loans, compensation, expense
reimbursement to substantial contributors
Effective July 25, 2006
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K&L Gates Tax-Exempt Organizations
Setting Executive Compensation
Best Practices
Full board should approve CEO compensation in
advance each year
Exceptions: multi-year contract, no change in
compensation except for inflation or cost-of-living
adjustment
Can be based on committee recommendation
Follow rebuttable presumption procedures
Board or appropriate committee should periodically
review staff compensation program
Salary ranges and benefits for particular positions
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Key Committees - Governance
Composition of Committee
Independent directors
Responsibilities of Committee
Annual evaluation of board & committee performance
Nomination of directors, officers, committee members
Board education and training
CEO evaluation, compensation, and succession planning
Monitoring of conflict of interest matters
Periodic review of bylaws, governance structure & practices
Existing committee could undertake function; depends on
organization size, board resources
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Key Committees - Audit Committee
Background
Audit committee is different from finance committee;
checks and balances
Audit committee is important part of SOX
Composed of independent directors
Financially literate
Sole power and authority to hire, fire, and oversee
auditor
Direct communication with auditors
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K&L Gates Tax-Exempt Organizations
Audit Committee
Application to Nonprofits
Most charities must have audited or reviewed financials
PA Charitable Solicitation Act requires audited financials
from registered charities that received gross contributions
of at least $300,000
Lower thresholds for compiled and reviewed financials
No federal law or PA law requires audit committee
Nearly all nonprofit consultants and associations
recommend them
Exception: Small organizations with limited income and
assets that do not have audited financials
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Audit Committee
Responsibilities
Oversight of:
Integrity of financial statements
Compliance with legal and regulatory requirements and
ethical standards
Effectiveness of the organization s internal controls
(finance, accounting, use of assets)
Policies and procedures for encouraging reporting of
questionable accounting or auditing matters
Retention and oversight of independent auditors
Recommend approval of audit to full board
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Whistleblower Policy
Whistleblower Basics
Contains procedures for handling employee complaints and
confidential way for employees to report inappropriate
activities in financial management
Prohibits retaliation for reports made in good faith
Application to Nonprofits
SOX makes it illegal to punish whistleblowers who report
suspected illegal activities
Auditors, employment attorneys often recommend adoption
of whistleblower policy
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K&L Gates Tax-Exempt Organizations
Whistleblower Policy
Relationship to Good Governance
Demonstrates organization s serious intent to prevent
and detect fraud and to address complaints
Provides mechanism for organization to address
potential problems in a timely manner
Could help prevent or minimize fines, lawsuits, legal
liability, or adverse publicity
Most frauds or other illegal issues are known to someone
in the organization but an employee may not report
suspicions or knowledge of illegal activity if there is no
process for receiving and addressing complaints
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Document Retention & Destruction Policy
Document Retention & Destruction Basics
Provides for retention and periodic destruction of key
documents
Addresses electronic files and voice mail
Covers back-up procedures and archiving
Prohibits destruction of documents to prevent use in an
official proceeding
Application to Nonprofits
SOX makes it illegal to alter, cover up, falsify, or destroy
documents to prevent use in an official proceeding
26
Transparency
Disclosure of Key Documents
501(c)(3)s required to disclose certain documents
Form 1023
Form 990 for past 3 years (including Form 990-T)
Determination letter and modifications thereof
Best practices (including Form 990) suggest disclosure
of additional documents
Governing documents, conflict of interest policy, financial
statements, audit report
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K&L Gates Tax-Exempt Organizations
Transparency
Responsible Fundraising
Solicitations should accurately and transparently tell
donors how and where their funds will be expended
Funds should be used consistent with donor intent
Charity should provide donors with acknowledgments
of charitable contributions
In accordance with IRS requirements and to facilitate
donors ability to take charitable income tax deduction
No percentage-based compensation of fundraisers
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Summary
Good Governance
Board not too large, not too small
Board members uncompensated
Directors at least majority independent
Board participation active, informed, thoughtful
Establish & follow conflict of interest policy
Set reasonable executive compensation based on
comparability data and report it appropriately
Establish whistleblower and document retention
policies
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Summary
Good Governance (cont.)
Establish appropriate committees (governance,
audit)
Disclose key documents regarding finances,
operations and governance
Ensure solicitation materials are accurate and
transparent and that funds are used consistent
with donor intent
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June 2008 www.klgates.com
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K&L Gates Tax-Exempt Organizations
THE NEW FORM 990
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Reasons for New Form 990
First complete overhaul in nearly 30 years
Form failed to keep pace with changes
New laws and regulations
Increasing diversity and complexity of exempt sector
Form became confusing, led to incomplete and
inaccurate responses
Changes designed to satisfy:
IRS tax compliance interests
Transparency and accountability needs of states,
public, and communities served
32
Process
Draft form and instructions released June 14, 2007
3-month comment period
IRS incorporated many comments into final draft
Final form released December 19, 2007
Revised draft instructions released April 7, 2008
Comment period expired June 1, 2008
Final instructions anticipated later in 2008
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K&L Gates Tax-Exempt Organizations
Implementation
First use: 2008 tax year (returns filed in 2009)
For non-calendar year fiscal years: tax years
beginning in 2008
Transition relief:
May file 990-EZ for:
If gross receipts are:
2008 tax year (filed 2009)
> $25,000 and < $1 million < $2.5 million
And if assets are:
2009 tax year (filed 2010)
> $25,000 and < $500,000 < $1.25 million
2010 and later tax years
> $50,000 and < $200,000 < $500,000
Also includes phase-in of new hospital and tax-exempt
bond schedules
34
Three Guiding Principles
Enhance Transparency
Key transparency tool relied on by IRS
Present realistic picture of organization
Promote Compliance
Vehicle for IRS to efficiently assess risk of
noncompliance
Minimize Burden
But burden will increase for those with complex
compensation arrangements, related entities, and
activities that raise compliance concerns
35
Structure
Old Form
9-page core form
2 schedules, 36 possible attachments
New Form
11-page core form completed by all filing orgs
Includes summary of key info on first page
16 schedules focusing on areas of interest
To be completed as needed (trigger questions)
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K&L Gates Tax-Exempt Organizations
Core Form
Parts I & II
Summary of key information & signature block
Part III
Mission, program changes, and program service
accomplishments (narrative format)
Part IV
37 trigger questions for schedules
Part V
Questions flagging other potential compliance and
filing obligations outside of Form 990
37
Core Form
Part VI
Governance, management, public disclosures
Part VII
Compensation of officers, directors, key employees,
highest compensated employees, independent
contactors
Part VIII
Statement of revenue
Part IX
Statement of functional expenses
38
Core Form
Part X
Balance sheet
Part XI
Financial statements and reporting
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K&L Gates Tax-Exempt Organizations
Schedules
A: Public Charity Status &
Public Support *
B: Contributors
C: Political Campaign and
Lobbying Activities *
D: Supplemental Financial
Statements
E: Schools *
F: Activities Outside U.S.
G: Fundraising & Gaming
H: Hospitals
I: Grants
J: Compensation Info
K: Tax-Exempt Bonds
L: Transactions with
Interested Persons *
M: Non-Cash Contributions
N: Liquidation, Dissolution *
O: Supplemental Info
R: Related Organizations
* Applies to Form 990-EZ filers
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Instructions & Appendix
General overview of each part/schedule, explanation of
who must file, and line-by-line instructions to aid in
answering each question
Glossary of key terms
More examples
Sequencing list
Compensation table
New appendices regarding group returns and
organizations with disregarded entities or joint venture
investments
41
Significant Changes
Structure and format
Unstructured attachments replaced with
formatted schedules (Schedules D, G, I, J, L, and
N)
Parts of current form and Schedule A separated
into four schedules (Schedules A, C, E, and R)
Other schedules added for foreign activities, noncash contributions, hospitals and tax-exempt
bonds to collect info not currently required
(Schedules F, H, K, M)
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June 2008 www.klgates.com
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K&L Gates Tax-Exempt Organizations
Significant Changes
Front-page summary of key financial and operating
information, including 2-year comparison of financial
data
Governance section
Revised compensation, interested person transaction
and related organization reporting to reveal potentially
problematic arrangements
For public charities, changes in method of accounting
and time period used for public support tests
Increased emphasis on narrative descriptions
43
Increased Emphasis on Narrative Descriptions
Expanded mission statement and program service
accomplishments moved to front of core form, financial
information to back
Lens through which financial and other information
will be viewed; provide opportunity to tell your story
Additional space for explanations throughout form and in
Schedule O
Careful attention should be paid to these descriptions
and explanations
44
Why start preparing now?
More like SEC disclosure document than tax return
Reponses to certain questions could:
Trigger audit or enforcement action by IRS
Provide ammunition for negative publicity or
whistleblower claims
By identifying and resolving potential problem areas
in advance, your organization can:
Adjust recordkeeping to ensure accurate reporting
Adopt/adjust policies and practices to mitigate risk of
negative publicity or unwanted AG attention
Turn Form 990 into positive PR tool
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June 2008 www.klgates.com
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K&L Gates Tax-Exempt Organizations
Mission and Achievements
Mission Statement (Core Parts I & III)
First thing reviewers will see on summary page
Should be adopted by Board
Changes in Activities (Core Part III)
Describe significant new program services, changes
in program services
Exempt Purpose Achievements (Core Part III)
Describe achievements for 3 largest program
services by expenses
46
Governance, Policies, Disclosures (Core Part VI)
Somewhat controversial
Does IRS have authority?
Could create de facto legal requirements and lead to
presumption of wrongdoing.
IRS position
Independent governing body and well-defined
governance and management policies and practices
increase the likelihood that an organization is operating
in compliance with federal law.
Form educates organizations about best practices.
Form provides opportunity to explain responses.
47
Governing Body & Management (Core Part VI.A)
Independent Directors (also in Core Part I)
How many voting directors? How many independent?
In draft instructions, independent means:
Not a compensated officer or employee of org or
related org;
Did not receive compensation or other payments
exceeding $10,000 from the org or related org as an
independent contractor;
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K&L Gates Tax-Exempt Organizations
Governing Body & Management (Core Part VI.A)
Independent Directors (also in Core Part I)
In draft instructions, independent means: (cont.)
Did not otherwise receive, directly or indirectly, material
financial benefits from the organization or related
organization ($50,000 transaction is a per se material
financial benefit); and
Did not have a family member who received
compensation or other material financial benefits from
org or related org
49
Governing Body & Management (Core Part VI.A)
Independent Directors (also in Core Part I)
Not considered to lack independence merely
because:
Major donor to organization
Receives financial benefits from the organization solely
in capacity of being a member or charitable or other
class served by the organization
Definition may be different from state law, best
practices, or standards previously adopted by the
organization.
50
Governance Policies (Core Part VI.A)
Horizontal Relationships
Identify family and business relationships among
directors, officers, or key employees
Business relationships include (draft instructions):
One person is employed by the other directly or by an
organization in which the other is a director, officer, key
employee, or greater-than-35% owner
Direct or indirect contracts of sale, leases, licenses, loans,
performance of services, or other transactions in excess of
$5,000 annually
Two persons are each a director, officer, or greater-than20% owner in the same business or investment entity
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K&L Gates Tax-Exempt Organizations
Governance Policies (Core Part VI.A)
Review of Form 990
Provided to governing body before filing?
Note: Draft asked whether the board reviewed the
Form 990 prior to filing.
Describe review process in Schedule O.
To whom is the form provided?
When it is provided?
What is the level of review?
52
Governance Policies (Core Part VI.A)
Conflict of Interest Policy
In writing?
Annual disclosure of interests?
Describe in Schedule O how you monitor and enforce
policy.
IRS wants to know how an organization actually
implements its conflicts policy.
53
Governance Policies (Core Part VI.A)
Whistleblower Policy
Does the organization have a written policy?
SOX makes it illegal to retaliate against
whistleblowers who risk their jobs by reporting
suspected illegal activities.
Policy not legal requirement but communicates
strong culture of legal compliance and ethical
integrity
Policy should provide procedures for employees to
report in confidence suspected financial impropriety
or misuse of resources.
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K&L Gates Tax-Exempt Organizations
Governance Policies (Core Part VI.A)
Document Retention & Destruction Policy
Does the organization have written policy?
SOX makes it illegal to destroy documents in
anticipation of a federal investigation.
Policy not legal requirement, but auditors and
attorneys often recommend it.
Policy should set schedule for maintenance/
destruction of documents by type and prohibit
destruction of records (including e-mail and other
electronic records) relating to potential litigation.
55
Governance Policies (Core Part VI.A)
Compensation
Does process for determining compensation of
CEO/Executive Director and/or other key employees
include:
Review and approval by independent persons
Comparability data
Contemporaneous substantiation of deliberation
and decision
Describe process(es) in Schedule O.
56
Governance Policies (Core Part VI.A)
Joint Ventures
Did organization contribute assets to, or participate in
a joint venture or similar arrangement with a taxable
entity during the year?
If yes, has the organization:
Adopted a written policy or procedure requiring
evaluation of its participation in joint ventures
under Federal tax law?
Taken steps to safeguard the organization s
exempt status?
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K&L Gates Tax-Exempt Organizations
Disclosures (Core Part VI.C)
Form 1023, Form 990, Form 990-T
Available in own website, another s website, and/or
upon request?
Note: Disclosure required by law.
Governing Documents, Conflict of Interest
Policy, Financial Statements
Describe how made available to the public.
Note: Disclosure not required by law, but promotes
transparency & inspires greater confidence in the
organization.
58
Interested Person Transactions
Many Questions (Core Part IV, IX, X & Schedule L)
Excess benefit transactions (current and prior)
Outstanding loans (to or from)
Grants or other assistance (new)
Direct and indirect business transactions
Compensation
Different questions involve different persons
Because of potential consequences, must carefully
review instructions prior to responding
59
Interested Person Transactions
Do you know who your interested persons are?
Current and certain former D&O
Key employees
Highest compensated employees
Substantial contributors
Certain committee members
Related persons
Disqualified persons
Note special rules for supporting organizations and donor
advised funds/sponsoring organizations
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K&L Gates Tax-Exempt Organizations
Related Organizations
First step in completing form should be determining
related organizations, disregarded entities, and joint
ventures for which reporting will be required.
Affects many parts of form and schedules.
Financial information and activities of disregarded
entities and JVs taxed as partnerships must be
reported as those of parent (in whole or in part,
depending on ownership)
Compensation reporting
Schedules H and R
61
Related Organizations
Related organization includes:
Parent/subsidiaries
Brother/sister organizations
Supporting/supported organizations
Control is key factor
For nonprofits: power to remove and replace majority
of directors or management overlap
For other entities: more than 50% ownership
May be indirect
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Related Organizations
Schedule R Disclosures
For disregarded entities and related organizations:
Name, address, EIN
Primary activity
Tax status and direct controlling entity
Filing organization s ownership, share of income and
assets
For transactions with related organizations:
Type of transaction (18 listed types)
Amount involved
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K&L Gates Tax-Exempt Organizations
Related Organizations
Schedule R Disclosures
For unrelated organizations taxable as partnerships
through which organization conducted more than 5%
of its activities:
Name, address, EIN
Primary activity
Whether partners are 501(c)(3) organizations
Filing organization s share of end-of-year assets
Whether there were disproportionate allocations
UBI amount specified on Schedule K-1
Whether filing organization is general or managing partner
64
Compensation (Core Part VII, Schedule J)
Big changes in reporting of compensation of
directors, officers, key employees, highest
compensated employees & independent contractors
Consolidated and expanded
Use of Form W-2 and Form 1099 data to reduce
subjectivity and provide more consistent and
comparable reporting
$100,000 threshold for five HCEs, five HCICs
New definitions for related organization, key
employee
65
Compensation (Core Part VII, Schedule J)
Additional detail required in Schedule J for following
persons:
Former officers, key employees, and HCEs who received
more than $100,000 in reportable compensation from org
and related orgs
Former directors who received more than $10,000
Current D&O, key employees, and HCEs who received
more than $150,000
All current and certain former D&O, key employees, or
HCEs who received or accrued compensation from an
unrelated org for services provided to the reporting org
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K&L Gates Tax-Exempt Organizations
Compensation (Core Part VII, Schedule J)
Schedule J disclosures include:
Information regarding compensation practices that
may raise compliance concerns
first-class, charter, or companion travel, gross-up
payments, discretionary spending account, housing
allowance/personal residence, club dues, personal
services (e.g., maid or chef services)
Methods of establishing compensation of CEO
67
Compensation (Core Part VII, Schedule J)
Schedule J disclosures include (cont.):
Severance, change of control, supplemental
retirement, and equity-based compensation
Compensation contingent on revenues or net
earnings and other non-fixed payments
More detailed breakdown of compensation and
comparison to prior year compensation
68
Audit & Audit Committee (Core Part XI)
Independent Accountant
Compilation, review, or audit of financial statements
performed by independent accountant?
Definition of independent accountant to be clarified
in final instructions.
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K&L Gates Tax-Exempt Organizations
Audit & Audit Committee (Core Part XI)
Audit Committee
Does the organization have a committee responsible
for oversight of audit, review, or compilation of
financial statements and selection of independent
accountant?
Required by some states under certain
circumstances (e.g., CA).
70
Public Charity Status (Schedule A)
Schedule A now focuses exclusively on public
charity status of 501(c)(3) orgs
Significant changes for orgs required to use
mathematical public support test include:
Use of same method of accounting used elsewhere
in form (shift from required cash method)
Testing period increased to five years
Additional disclosures for supporting organizations,
tied to PPA requirements
71
Fundraising (Schedules G, M)
Criticism that fundraising is misreported
Lack of transparency on use of funds raised
Concern about overvalued non-cash contributions
Professional fundraising services
$15,000 in expenses, must disclose:
If more than
Methods of solicitation
Details of agreements with professional fundraisers
List of states in which organization is licensed to
solicit funds or has been notified that it is exempt
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K&L Gates Tax-Exempt Organizations
Fundraising (Schedules G, M)
Fundraising events If more than $15,000 in
revenues, must disclose:
Details of revenues and expenses from two largest
events individually and all other events collectively
($5,000 threshold in draft instructions)
73
Fundraising (Schedules G, M)
Gaming If more than $15,000 in revenues, must
disclose:
Details of revenue, expenses, percentage of
volunteer labor used
States in which gaming activities are conducted and
whether the organization is licensed to operate
gaming activities in such states.
Details regarding arrangements with gaming
managers and third parties conducting gaming
activities on behalf of the organization
74
Fundraising (Schedules G, M)
Non-cash contributions If organization receives
$25,000 in non-cash contributions or contributions
of art, historical treasures, or other listed assets,
disclosures include:
Details of such contributions
Whether the organization has a gift acceptance policy
requiring review of non-standard contributions.
** New reporting requirements may result in new
recordkeeping practices and additional burden.
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K&L Gates Tax-Exempt Organizations
U.S. Grantmaking (Schedule I)
Trigger: Paid more than $5,000 in grants to U.S.
organizations or individuals
New disclosures:
Whether org maintains records to substantiate grant
amounts, eligibility, and selection criteria
Description of process used to monitor use of grants
Additional detail of each grant over $5,000 to an
organization
Additional detail of each type of grant to individuals
76
Foreign Activities (Schedule F)
If received revenues or expenses of more than
$10,000 from activities outside U.S.
Whether org maintains records to substantiate grant
amounts, eligibility, and selection criteria
Description of process used to monitor use of grants
Details on activities by geographic region
Number of offices and employees
Type of activities conducted
Total expenditures
77
Foreign Activities (Schedule F)
If paid more than $5,000 in grants to organizations
organized outside the U.S.
Detail of each grant over $5,000
Total number of organizations recognized by the
foreign country as charities or for which 501(c)(3)
equivalency letter was obtained
If paid more than $5,000 in grants to individuals
living outside the U.S.
Detail of each type of grant to individuals
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K&L Gates Tax-Exempt Organizations
Hospitals (Schedule H)
Significant new burden
Most info not required on current form
New or modified recordkeeping systems likely will be
required
Phase-in provided
Data compiled is likely to be used by Congress and/or
the IRS to assess the need for legislative or regulatory
changes regarding the manner in which hospitals qualify
for and maintain exemption
79
Hospitals (Schedule H)
Must be completed by organizations operating one or
more hospitals
Hospital = facility that is required to be licensed or certified in its
state as hospital, whether operated directly or indirectly through
a disregarded entity or joint venture taxed as a partnership
Facility = a campus, building, structure, or other physical
location or address at which the organization provides medical
or hospital care, including a hospital, outpatient facility, surgery
center, urgent care clinic, or rehab facility, regardless of whether
operated directly by filing organization or indirectly through a
disregarded entity or joint venture taxed as a partnership
80
Hospitals (Schedule H)
Charity Care and Community Benefits
Disclosures regarding:
Content of charity care policy
Preparation and availability of community benefit
report
Charity care and certain other community benefits, to
be reported at cost
Use most accurate costing methodology
Worksheets provided
81
June 2008 www.klgates.com
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K&L Gates Tax-Exempt Organizations
Hospitals (Schedule H)
Community Building Activities
Include physical improvements and housing, econ
development, community support, environmental
improvements, community leadership development
and training, coalition building, community health
improvement advocacy, workforce development
If such activities are conducted:
Provide data regarding persons served, revenues, and
expenses
Describe how such activities provide community benefit and
promote health of community.
82
Hospitals (Schedule H)
Bad Debt, Medicare, and Collection Practices
Bad Debt report aggregate bad debt expense (at cost),
provide estimate of bad debt expense attributable to persons
qualifying for assistance under charity care policy, and provide
rationale for what portion should constitute community benefit
Medicare report aggregate Medicare reimbursements and
aggregate allowable costs (to show surplus or shortfall), and
provide rationale for what portion of shortfall should constitute
community benefit
Collection practices Is there a written debt collection policy?
Does it contain provisions regarding patients known to qualify
for charity care or financial assistance?
83
Hospitals (Schedule H)
Management Companies and Joint Ventures
Must list and disclose ownership percentages of:
Joint ventures providing medical care or property used to
provide medical care that are owned:
In part by the organization; and
At least 10% by organization s current D&O, key employees, and
physicians with staff privileges (collectively)
Management companies providing management services used
by the organization in providing medical care that are owned:
At least 10% by organization s current D&O, key employees, and
physicians with staff privileges (collectively)
84
June 2008 www.klgates.com
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K&L Gates Tax-Exempt Organizations
Hospitals (Schedule H)
Facility Information
Only portion required for 2008
For each facility operated directly or indirectly by the
filing organization, disclose:
Name and address
Type of facility
85
Tax-Exempt Bonds (Schedule K)
Significant new burden expected
Created to address perceived non-compliance with
respect to tax-exempt bonds
Phase-in provided
Reporting not required for:
Pre-2003 bond issues
Bond issues with less than $100,000 outstanding
86
Tax-Exempt Bonds (Schedule K)
Identifying information regarding bond issues is
required for 2008
No significant changes to existing requirements
New information (not required for 2008) includes:
Disclosures regarding investment of and
expenditures from bond proceeds
Disclosures regarding private use of bond-financed
facilities
Information regarding arbitrage reporting
87
June 2008 www.klgates.com
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K&L Gates Tax-Exempt Organizations
Three Guiding Principles
How does new form enhance transparency?
Summary page provides snapshot of key financial and
operating info, including comparison information
Re-ordered core form (with description of program service
accomplishments up front) and increased opportunity for
narrative explanations provide context for information
being reported
Checklist of Required Schedules provides quick view of
whether organization is conducting activities that raise
compliance concerns
Structure makes disclosures easier to locate
88
Three Guiding Principles
How does new form promote compliance?
Use of formal schedules promotes uniform and complete
reporting of requested info
Questions alert organizations to other filing obligations
Changes to reporting of compensation and related
organization activities will provide more complete info
about complex arrangements that may raise inurement,
excess benefit, and private benefit concerns
New schedules for foreign activities, hospitals, and taxexempt bonds will provide new info about how
organization conducts activities consistent with exempt
purpose
89
Three Guiding Principles
How does new form minimize burden?
Moves questions applicable to only certain segments of
the exempt organization community from the core form
into topic-specific schedules
But burden will increase for those with complex
compensation arrangements, related entities, and
activities that raise compliance concerns
90
June 2008 www.klgates.com
30
K&L Gates Tax-Exempt Organizations
Scenario # 1
CEO compensation package includes:
$200,000 base salary
Bonus of 0 -15% of base salary based on performance
criteria: (1) specified increase in gross revenue and
(2) specified increase in net earnings
Supplemental nonqualified retirement plan
Health insurance benefits, life insurance, business
expense reimbursement under accountable plan
Business club membership
91
Scenario # 1
Will show up in new Form 990 as follows:
Core Part VI, Line 15 Method of determining compensation.
Core Part VIII, Part A Basic compensation info: name and title,
average hours per week, reportable compensation from org and
related orgs, and estimated amount of other compensation from
org and related orgs.
Schedule J, Part I, Line 1 Disclosures regarding club dues.
Schedule J, Part I, Line 2 Disclose whether substantiation of
club dues was required.
Schedule J, Part I, Line 3 Additional questions re: methods
used to establish compensation.
92
Scenario # 1
Will show up in new Form 990 as follows (cont.):
Schedule J, Part I, Line 4 Disclose participation in
supplemental nonqualified retirement plan.
Schedule J, Part I, Lines 5-7 Disclosures/descriptions of
payments contingent on revenues and/or net earnings and nonfixed payments.
Schedule J, Part II Breakdown of compensation into 5
categories and comparison of total compensation to total
compensation reported in prior Form 990.
93
June 2008 www.klgates.com
31
K&L Gates Tax-Exempt Organizations
Scenario # 2
Charity started new public education campaign.
Engaged outside PR firm to assist.
PR firm is 50% owned by spouse of a former board
member, who resigned from the board 2 years ago.
Charity paid $15,000 to PR firm for the services
provided.
94
Scenario # 2
Will show up in new Form 990 as follows:
Core Part III, Line 2 Check box for new significant program
service and describe it in Schedule O.
Core Part III, Line 4 Program service and exempt purpose
achievement disclosures, including grants and allocations to
others, expenses and revenues.
Schedule L, Part IV Disclosure regarding relationship of PR
firm to the charity, amount of transaction, type of transaction,
and whether the firm shared in charity revenues.
NOTE: If compensation excessive, charity would have an
excess benefit transaction subject to disclosure on Schedule L,
Part I.
95
Scenario # 3
Charity held first annual golf outing to raise funds.
Ticket price included greens fees and dinner.
Event included silent auction of donated items.
Gross revenues were $200,000.
Expenses included $16,000 paid to independent
consultant who assisted in planning, preparing
materials, and soliciting sponsorships and
contributions of auction items.
96
June 2008 www.klgates.com
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K&L Gates Tax-Exempt Organizations
Scenario # 3
Will show up in new Form 990 as follows:
Core Part V, Line 7 Compliance with charitable contribution
substantiation and disclosure requirements.
Core Part VIII, Lines 1c and 8a Contribution revenue from
special events and gross income from special events.
Core Part IX, Line 11e Professional fundraising expenses.
Schedule G, Part I Methods of solicitation, details of contract
with consultant, states in which organization is registered to
solicit funds or has been notified that it is exempt from
registering.
Schedule G, Part II Breakdown of revenue and expenses from
event.
97
Recommendations
Educate board and management
Consider trial run to identify & correct potential
problem areas, develop explanations
Will expose areas needing additional recordkeeping
and policies that should be adopted or modified
Consider involving legal counsel
Work on mission statement, program descriptions
Will set the stage for all info in Form 990
98
Recommendations (cont.)
Identify related organizations and joint ventures for
which reporting will be required.
Work with legal counsel to develop written policy regarding
involvement in joint ventures and identify potential compliance
issues.
Identify and review financial arrangements with
disqualified and other interested persons
Work with legal counsel to restructure problematic
arrangements, if possible
Update list of disqualified and other interested persons on an
annual basis.
99
June 2008 www.klgates.com
33
K&L Gates Tax-Exempt Organizations
Recommendations (cont.)
Examine board independence
Examine and formalize Form 990 review process
Prepare and present policies to Board for approval
Conflict of Interest
Whistleblower
Document retention and destruction
Compensation review
Joint ventures
Gift acceptance
100
Recommendations (cont.)
Consider public disclosure practices Consider
formation of Audit Committee & examine
relationship with auditor
For organizations conducting solicitations and
gaming in connection with fundraising, ensure
compliance with appropriate state laws
For grantmaking organizations, ensure that
adequate procedures are in place to monitor use of
grant funds and that appropriate records are
maintained
101
Recommendations (cont.)
OVERALL GOAL:
Present as good a public profile as possible.
102
June 2008 www.klgates.com
34
Tax-Exempt Organizations Alert
June 2008
Author:
Cordelia A. Glenn - Pittsburgh
412.355.6701
cordelia.glenn@klgates.com
Other Tax-Exempt Organizations
Services contacts:
Lance W. Behnke - Seattle
206.370.8380
lance.behnke@klgates.com
Kathryn G. Henkel - Dallas
214.939.5475
kathryn.henkel@klgates.com
Susan Mussman Schwartz - Pittsburgh
412.355.8658
susan.schwartz@klgates.com
Tamara L. Watts - Seattle
206.370.8396
tamara.watts@klgates.com
www.klgates.com
A New Era of Reporting for
Exempt Organizations
Preparing to File the Revised Form 990
In one of the most significant developments for exempt organizations in recent years, the
IRS has issued a completely revised Form 990, the information return filed annually by
501(c)(3) public charities and other tax-exempt organizations. The new Form 990 requires
substantial new disclosures regarding virtually every aspect of an exempt organization’s
operations and will serve as a key tool used by the IRS, state charity officials, and the public
to evaluate exempt organizations.
Most exempt organizations will need to undertake significant work to be prepared for filing
the new form. Because of the form’s extensive disclosures and its availability to the public,
responses to certain questions could trigger audit or enforcement action from the IRS or
state attorneys general, or provide people unfriendly to the organization with ammunition for
negative publicity or a whistleblower suit. By identifying and resolving potential problem
areas in advance, however, exempt organizations can mitigate the risk of such problems and
turn the Form 990 into a positive public relations tool.
New Format
K&L Gates comprises approximately 1,500
lawyers in 25 offices located in North
America, Europe and Asia, and represents
capital markets participants, entrepreneurs,
growth and middle market companies,
leading FORTUNE 100 and FTSE 100
global corporations and public sector
entities. For more information, please visit
www.klgates.com.
The IRS had three goals in redesigning the Form 990: (1) to provide the IRS, state officials,
and the public with a more transparent picture of the filing organization and its operations;
(2) to promote compliance and enable the IRS to efficiently assess the organization’s risk
of non-compliance; and (3) to minimize the burden on filing organizations by facilitating
complete and accurate reporting. The form’s new structure and more comprehensive
instructions are expected to play a key role in furthering those goals.
The new Form 990 consists of an 11-page core form that must be completed by all filing
organizations and 16 topic-specific schedules that must be completed only by organizations
conducting activities described in certain trigger questions. One of the most significant
changes is the increased emphasis on narrative descriptions and explanations. In direct
response to comments from the exempt organization community, the IRS has moved the
expanded mission statement and program service descriptions to the front of the core form
and has provided additional space throughout the form for narrative explanations, all of
which will serve as the lens through which the financial and other information in the form
is viewed. The increased attention on narrative descriptions and explanations means that
organizations should be deliberate in drafting their responses for the Form 990.
To promote uniform reporting and help filing organizations report accurate and complete
information, the more comprehensive line-by-line instructions (to be finalized later in
2008) feature a comprehensive glossary of key terms used in the form and more examples
to illustrate definitions and new requirements or to clarify items that may be confusing. The
instructions also include a sequencing list to assist organizations in determining the order
in which to fill out the form and a compensation table to help organizations determine how
and where to report specific items of compensation and benefits.
Tax-Exempt Organizations Alert
Areas of Interest
The information required in the new Form 990 falls
within several different areas of interest, many of
which are summarized below.
Governance, Management, and Public Disclosures.
The IRS believes that the existence of an independent
governing body and well-defined governance and
management policies and practices increase the
likelihood that an organization is operating in
compliance with federal law. Accordingly, the new
Form 990 places significant emphasis on corporate
governance matters and will require each filing
organization, among other things, to:
• Disclose the number of voting governing
body members that are “independent” (i.e.,
do not receive material financial benefits from
the organization).
• Disclose whether the Form 990 was provided to
the governing body prior to filing and describe
the process, if any, by which the directors,
officers, trustees, committee members or
management reviewed the Form 990.
•D isclose whether the filing organization’s
conflict of interest policy requires directors,
officers, trustees, and key employees to make
an annual disclosure of interests that could
give rise to a conflict and describe how the
organization regularly and consistently monitors
and enforces compliance with the policy.
•D isclose whether the organization has a
whistleblower policy and document retention
and destruction policy.
• Describe the processes used to determine
compensation of its top management official,
officers, and key employees and, specifically,
whether such processes include review and
approval by independent persons, use of
comparability data, and contemporaneous
substantiation of the deliberation and decision.
•If an organization invested or participated in one
or more joint ventures with a taxable entity or
individual, disclose whether the organization has
adopted a written policy or procedure requiring
negotiation of terms designed to protect the
organization’s exempt status and has actually
taken steps to safeguard such exempt status.
•Provide information on its disclosure practices
with respect to its Form 990, Form 990-T, and
Form 1023 or 1024 and disclose how (if at
all) it makes its governing documents, conflict
of interest policy, and financial statements
available to the public.
Compensation. Consolidated and expanded
compensation disclosures will increase the
transparency of compensation information for all
exempt organizations and provide the IRS with
more information to assess the reasonableness of
compensation. All filers (including non-charitable
exempt organizations) now must report in the core
form compensation for all current and certain former
directors, officers, trustees, key employees, the five
highest compensated employees, and the five highest
compensated independent contractors. To reduce
subjectivity, compensation is now reported for the
calendar year ending with or within the organization’s
tax year based on Forms W-2 and 1099, although
fiscal year institutions will still use the fiscal year
methodology to report aggregate compensation on the
statement of expenses.
In addition, if certain triggers are met, the filing
organization must complete Schedule J, which requires
significant new disclosures regarding the organization’s
compensation and expense reimbursement practices, as
well as a more detailed breakdown of compensation
and benefits received by certain individuals.
Organizations required to complete Schedule J are
likely to experience additional burdens in reporting the
required information.
Fundraising. In response to concerns regarding
misreporting of fundraising activities, the IRS has
introduced Schedule G, which requires expanded
disclosures regarding relationships with outside
fundraising counsel and professional solicitors and
compliance with state charitable solicitation laws.
Organizations that receive more than $15,000 from
gaming activities (e.g., bingo, Texas hold’em and other
card games, raffles, and casino nights) also will be
subject to disclosures regarding their compliance with
state gaming laws. The disclosures on Schedule G are
June 2008 | 2
Tax-Exempt Organizations Alert
likely to be of interest to state officials responsible for
enforcing charitable solicitation and gaming laws.
Organizations that receive more than $25,000 in noncash contributions or contributions of specified types of
property (including items donated for auction) should
take note of new reporting requirements in Schedule
M, which are likely to result in more burdensome
recordkeeping practices for such organizations.
U.S. Grantmaking. Reporting of U.S. grantmaking
activities remains largely unchanged, although
organizations that make more than $5,000 in grants
to organizations or individuals in the U.S. must
describe their procedures for monitoring the use of
grant funds.
Foreign Activities. The new Schedule F requires
significant new disclosures regarding the activities of
organizations with more than $10,000 in aggregate
revenues or expenses from grantmaking, fundraising,
and/or programs in foreign countries. Large
organizations with operations in multiple areas of
the world likely will be required to implement more
extensive recordkeeping practices regarding their
foreign activities (including tracking of expenditures by
region) in order to comply with the new requirements,
although the reporting thresholds will minimize the
impact on smaller organizations that simply make
limited grants outside the U.S.
Interested Persons and Related Organizations. The
IRS shows continued interest in transactions involving
insiders and related organizations. The new form
consolidates in Schedule L the reporting of most
relationships and transactions involving insiders (i.e.,
current and former directors, officers, trustees, key
employees, and other disqualified persons). The new
Schedule R requires more extensive reporting with
respect to (1) related organizations, their activities,
ownership/control, and the filing organization’s share
in the income and assets of such related organizations
and (2) certain unrelated partnerships through which
the organization conducted significant activities. These
new disclosures are likely to require organizations filing
Schedule R to institute new recordkeeping practices.
Tax-Exempt Bonds.
To address perceived
noncompliance with respect to tax-exempt bonds,
the IRS has introduced Schedule K, which requires
substantial new disclosures regarding the investment of
and expenditures from bond proceeds, as well as private
use of bond-financed facilities. The new reporting
requirements are expected to impose significant
additional reporting burdens on organizations that
have borrowed through the use of tax-exempt bonds
and other forms of tax-exempt debt.
Hospitals. Organizations operating hospitals must
complete the new Schedule H, which requires
significant data regarding charity care, community
benefits, and community building activities, as well as
narrative descriptions of how they assesses the health
care needs of the communities that they serve, how
they inform patients regarding their charity care policy
and eligibility for government assistance, and how they
promote the health of the communities they serve.
Disclosures regarding bad debt, Medicare payments,
collection practices, management companies, and joint
ventures are also required. It is likely that Congress
and/or the IRS will use the data compiled in Schedule
H to assess the need for legislative or regulatory
changes regarding the manner in which hospitals may
qualify for and maintain exemption, an issue which has
garnered significant attention in recent years.
Transition Relief
In recognition of the significant changes brought by the
new Form 990 and the modifications to recordkeeping
practices that may be necessary, the IRS has provided
for the following phase-in periods that will permit
certain small organizations to file the simpler Form
990-EZ for tax years beginning in 2008 and 2009.
May file Form 990-EZ for:
If gross receipts are:
And if assets are:
2008 tax year (filed in 2009)
> $25,000 and <$ 1 million
< $2.5 million
2009 tax year (filed in 2010)
> $25,000 and <$500,000
< $1.25 million
2010 and later tax years
> $50,000 and <$200,000
< $500,000
June 2008 | 3
Tax-Exempt Organizations Alert
Transition relief also exists for organizations required
to complete the new schedules for hospitals (Schedule
H) and tax-exempt bonds (Schedule K). For tax years
beginning in 2008, filing organizations are required
to provide only certain identifying information, with
completion of the entire schedules required for tax
years beginning in 2009.
Recommendations
To properly position themselves for the first filing of
the revised Form 990, exempt organizations should
start preparing now by taking the following steps:
1. E ducate the governing board and management
regarding the new requirements imposed by the
Form 990. Develop and formalize a process for the
preparation and review of the Form 990.
2. Consider a trial run using 2007 data to expose
areas requiring additional recordkeeping, identify
potential problem areas, and determine where new
or revised narrative descriptions are needed. This
is particularly important for hospitals and other
complex organizations that are likely to experience
a substantial additional burden in preparing the
new form.
3. Identify related organizations and joint ventures for
which reporting will be required. Work with legal
counsel to develop a written policy regarding the
organization’s involvement in joint ventures.
4. Identify and review financial arrangements with
disqualified and other interested persons and
restructure problematic arrangements, if possible.
Work with legal counsel to develop a process
for evaluating such arrangements to ensure
that appropriate safeguards and best practices
are implemented.
5. Prepare and ask your governing body to approve
a conflict of interest policy, whistleblower policy,
and document retention and destruction policy. If
such policies are already in place, review and update
them as necessary to ensure that they reflect current
best practices. Also ask the board to determine
the organization’s position with respect to public
disclosure of the organization’s application for
exemption, Form 990, governing documents, conflict
of interest policy, and financial statements.
6. For organizations engaged in fundraising, work
with legal counsel to assess compliance with state
charitable solicitation and gaming laws.
7. For grantmaking organizations, ensure that adequate
procedures are in place to monitor the use of
grant funds.
The goal of each filing organization should be to use
the new Form 990 to present as good a public profile
as possible. Taking the foregoing steps will go a long
way toward turning the Form 990 from a document
that invites unwanted attention to one that serves as a
positive public relations tool for your organization.
If you have questions about the new Form 990 and
what your organization should do to prepare for the
first filing, please contact your K&L Gates lawyer for
more information and guidance.
K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name Kirkpatrick & Lockhart Preston Gates Ellis LLP
qualified in Delaware and maintaining offices throughout the U.S., in Berlin, in Beijing (Kirkpatrick & Lockhart Preston Gates Ellis LLP Beijing
Representative Office), and in Shanghai (Kirkpatrick & Lockhart Preston Gates Ellis LLP Shanghai Representative Office); a limited liability partnership
(also named Kirkpatrick & Lockhart Preston Gates Ellis LLP) incorporated in England and maintaining our London and Paris offices; a Taiwan general
partnership (Kirkpatrick & Lockhart Preston Gates Ellis) which practices from our Taipei office; and a Hong Kong general partnership (Kirkpatrick &
Lockhart Preston Gates Ellis, Solicitors) which practices from our Hong Kong office. K&L Gates maintains appropriate registrations in the jurisdictions
in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or
relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
Data Protection Act 1998—We may contact you from time to time with information on Kirkpatrick & Lockhart Preston Gates Ellis LLP seminars and
with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please e-mail london@klgates.
com if you would prefer not to receive this information.
©1996-2008 Kirkpatrick & Lockhart Preston Gates Ellis LLP. All Rights Reserved.
June 2008 | 4
The New Form 990 at a Glance
June 2008
www.klgates.com
CORE FORM
Parts I & II
Summary and Signature Block
One-page snapshot of key information regarding activities,
independence of governing body, number of employees and
volunteers, unrelated business income, revenues, expenses, and net
assets.
Includes 2-year comparison of summary financial data.
Part III
Statement of Program Service
Accomplishments
Narrative descriptions of mission, program changes, and exempt
purpose achievements. 501(c)(3) and 501(c)(4) organizations also
must report the expenses and revenues of their three largest program
services.
Provides context for information in remainder of form.
Part IV
Checklist of Required Schedules
Trigger questions for schedules.
Provides quick view of whether the organization is conducting
activities that raise compliance concerns.
Part V
Statements Regarding Other IRS Filings and
Tax Compliance
Questions flagging other potential compliance and filing obligations
outside of the Form 990.
Alerts organization to obligations and collects important
compliance information in one place.
Part VI
Governance, Management, and Disclosures
Disclosures regarding governance practices, organizational policies,
and public disclosure of key documents.
Reveals likelihood that an organization is operating in compliance
with federal law.
Part VII
Compensation of Officers, Directors,
Trustees, Key Employees, Highest
Compensated Employees, and Independent
Contractors
Disclosures regarding compensation of current and former officers,
directors, trustees, key employees, and highest compensated
employees, as well as highest compensated independent contractors.
Provides compensation information necessary for tax compliance
and transparency purposes, particularly with respect to private
inurement, excess benefit, and private benefit.
Part VIII
Statement of Revenue
Combines current statement of revenues with analysis of income
producing activities and eliminates certain unstructured attachments
required on current form.
Part IX
Statement of Functional Expenses
No material changes from current form.
Part X
Balance Sheet
Some changes to existing balance sheet, including elimination of
certain unstructured attachments.
Part XI
Financial Statements and Reporting
Disclosures regarding compilation, review, or audit of financial
statements by independent accountant, as well as audit committee and
audits required pursuant to a federal award.
The New Form 990 at a Glance
SCHEDULES
Schedule A – Public Charity Status and Public Support
Must complete if organization:
Is a 501(c)(3) public charity or a 4947(a)(1) nonexempt
charitable trust
Requires:
-- Reason for public charity status and information
supporting such status (e.g., public support
computation)
Schedule B – Schedule of Contributors
Must complete if organization:
Received contributions exceeding certain amounts
(generally $5,000) from a single contributor
Requires:
-- Name, address, and aggregate contributions of
each such contributor
Schedule C – Political Campaign and Lobbying Activities
Must complete if organization:
Engaged in political campaign and/or lobbying activities
Requires:
-- Description of activities and expenditures
Schedule D – Supplemental Financial Statements
Must complete if organization:
- Maintained donor advised funds
- Received or held a conservation easement
- Maintained art collections, historical treasures, or
similar assets
- Provided credit counseling or debt management services
or served as custodian for certain assets
- Held assets in term, permanent, or quasi-endowments
- Reported in balance sheet amounts for land/bldg/
equipment, non-publicly traded securities, programrelated investments, or “other” assets and/or liabilities
- Received an audited financial statement
Requires:
-- Supplemental financial information regarding
certain balance sheet items (replacing unstructured
attachments in current form)
-- New and currently required information regarding
donor advised funds, conservation easements,
escrow accounts, endowment funds, certain art
and museum collections, and financial statement
reconciliations.
Schedule E – Schools
Must complete if organization:
Operates a school
Requires:
-- Information regarding non-discriminatory
practices and policies.
Schedule F – Activities Outside the United States
Must complete if organization:
- Received revenues or incurred expenses of more than
$10,000 from activities outside the U.S. (including
grantmaking, fundraising, business, and program service
activities)
- Provided grants/assistance of more than $5,000 to any
organization located outside the U.S.
- Provided more than $5,000 in aggregate grants/
assistance to individuals located outside the U.S.
Requires:
-- Disclosures regarding the process for making
non-U.S. grants and a description of the process
for monitoring the use of such grant funds.
-- Disclosures of activities and expenditures by
region.
-- Detail regarding grants made outside the U.S.
June 2008 | 2
The New Form 990 at a Glance
Schedule G – Supplemental Information Regarding Fundraising and Gaming Activities
Must complete if organization:
- Reported more than $15,000 of professional fundraising
expenses
- Reported more than $15,000 of income from
fundraising events or gaming activities
Requires:
-- Detail regarding arrangements with professional
fundraisers and gaming managers.
-- Disclosures regarding state registrations to solicit
funds and state licensure to operate gaming
activities.
-- Revenues and expenses from fundraising events
and gaming activities.
Schedule H – Hospitals
Must complete if organization:
Operated one or more facilities licensed or certified as
a hospital under state law, either directly or through a
disregarded entity or joint venture taxed as a partnership
Requires disclosures regarding:
-- Charity care policy and valuation of community
benefits.
-- Community building activities.
-- Bad debt, Medicare & collection practices.
-- Management companies and joint ventures in
which the hospital and its directors, officers, key
employees, or staff physicians own interests.
-- Facilities at which the organization provides care.
-- Community needs assessments, patient education
regarding eligibility for assistance, and roles of
affiliates in promoting health of community.
Schedule I – Grants and Other Assistance to Organizations, Governments, and Individuals in the U.S.
Must complete if organization:
Made more than $5,000 of grants to organizations or
individuals in the U.S.
Requires:
-- Disclosures regarding the process for making
grants and a description of the process for
monitoring the use of grant funds.
-- Details of each grant to an organization over
$5,000.
-- Details of each type of grant to individuals.
Schedule J – Compensation Information
Must complete if:
Organization and/or any related organization:
- Paid more than $150,000 in reportable or other
compensation to any officer, director, trustee, or
key employee, or any of its five highest compensated
employees
- Paid more than $100,000 of reportable compensation to
a former officer, key employee, or highest compensated
employee
- Paid more than $10,000 of reportable compensation to a
former director or trustee.
Requires:
-- Disclosures regarding compensation practices,
including types of compensation provided,
expense reimbursement policies, and methods for
determining compensation.
--Detailed compensation information for certain
individuals and comparison of total compensation
reported in previous year.
Certain directors, officers, trustees, or employees received
or accrued compensation from an unrelated organization
for services provided to the reporting organization.
June 2008 | 3
The New Form 990 at a Glance
Schedule K – Supplemental Information on Tax Exempt Bonds
Must complete if organization:
- Had a tax-exempt bond issue greater than $100,000 that
was issued after December 31, 2002
- Invested proceeds of tax-exempt bonds beyond a
temporary period exception
- Maintained an escrow account (other than a refunding
escrow) to defease any tax-exempt bonds
- Acted as an “on behalf of” issuer
Requires:
-- Basic information regarding each outstanding
bond issue.
-- Disclosures regarding investment of and
expenditures from bond proceeds.
-- Disclosures regarding private use of bond-financed
facilities.
-- Information regarding arbitrage reporting.
Schedule L – Transactions with Interested Persons
Must complete if:
Organization:
- engaged in an excess benefit transaction or became
aware that it engaged in an excess benefit transaction in
a prior year
- engaged in a loan transaction with a current or
former officer, director, trustee, key employee, highly
compensated employee, or disqualified person, which
was outstanding at end of year
- provided grant or other assistance to an officer, director,
trustee, key employee, substantial contributor, or related
person
Requires disclosures regarding:
-- Excess benefit transactions (including
identification of parties, description of transaction,
status of correction, and tax imposed).
-- Loans to and from certain interested persons.
-- Grants or assistance benefiting certain interested
persons.
-- Direct or indirect business transactions with
certain interested persons exceeding $10,000.
Any current or former officer, director, trustee, or
key employee: (1) had a direct or indirect business
relationship with the organization, or (2) served in any
of such capacities for an entity doing business with the
organization.
Schedule M – Non-Cash Contributions
Must complete if organization received:
- More than $25,000 in non-cash contributions
- Contributions of art, historical treasures, similar assets
or qualified conservation contributions
Requires disclosures regarding:
-- Types of non-cash contributions received and
method for determining value.
-- Property that must be held for 3 years.
-- Use of third parties or related organizations to
solicit, process, or sell non-cash contributions.
Schedule N – Liquidation, Termination, Dissolution, or Significant Disposition of Assets
Must complete if organization:
- Liquidated, terminated, dissolved, or ceased operations
- Made a significant disposition of assets (more than 25%
of its net assets)
Requires:
-- Details regarding distributions of assets or
transaction expenses paid, including valuation
of assets, identity of recipients, and state attorney
general notice.
-- Disclosure of relationships of officers, directors,
trustees, or key employees to successor or
transferee organization.
June 2008 | 4
The New Form 990 at a Glance
Schedule O – Supplemental Information
Must complete if:
Organization needs additional space to provide
explanations and narratives required elsewhere on the
Form 990 or wants to provide supplemental information.
Includes:
-- Blank form for explanations and narrative
responses.
Schedule R – Related Organizations and Unrelated Partnerships
Must complete if organization:
- Owned 100% of a disregarded entity
- Was related to another tax-exempt or taxable entity as
a parent/subsidiary, brother/sister entity, or supporting/
supported organization
- Conducted more than 5% of its exempt activities
through an unrelated organization that is taxed as a
partnership
- Made a transfer to an exempt non-charitable related
organization (501(c)(3) filers only)
Requires:
-- Identification of disregarded entities and related
organizations, their activities, and the filing
organization’s share of income and assets
-- Disclosures regarding transactions with related
organizations.
-- Disclosures regarding involvement with certain
unrelated partnerships.
Copies of the new Form 990, including schedules, draft instructions, background information, and answers to frequently
asked questions regarding the Form can be found on the IRS website at http://www.irs.ustreas.gov/charities/index.html.
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Delaware and maintaining offices throughout the U.S., in Berlin, in Beijing (Kirkpatrick & Lockhart Preston Gates Ellis LLP Beijing Representative Office), and in
Shanghai (Kirkpatrick & Lockhart Preston Gates Ellis LLP Shanghai Representative Office); a limited liability partnership (also named Kirkpatrick & Lockhart Preston
Gates Ellis LLP) incorporated in England and maintaining our London and Paris offices; a Taiwan general partnership (Kirkpatrick & Lockhart Preston Gates Ellis)
which practices from our Taipei office; and a Hong Kong general partnership (Kirkpatrick & Lockhart Preston Gates Ellis, Solicitors) which practices from our Hong
Kong office. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for
inspection at any K&L Gates office.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
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©1996-2008 Kirkpatrick & Lockhart Preston Gates Ellis LLP. All Rights Reserved.
June 2008 | 5
Tax-Exempt Organizations Seminar: The New Form 990
Resources
IRS Governance and Related Topics - 501(c)(3) Organizations
http://www.irs.gov/pub/irs-tege/governance_practices.pdf
Panel on the Nonprofit Sector, Principles for Good Governance
and Ethical Practice: A Guide for Charities and Foundations
http://www.independentsector.org/issues/accountability.html
Copies of the new Form 990, including schedules, draft
instructions, background information, and answers to frequently
asked questions regarding the Form
http://www.irs.ustreas.gov/charities/index.html
Governance and Related Topics - 501(c)(3) Organizations
The Internal Revenue Service believes that a well-governed charity is more likely to
obey the tax laws, safeguard charitable assets, and serve charitable interests than one
with poor or lax governance. A charity that has clearly articulated purposes that
describe its mission, a knowledgeable and committed governing body and management
team, and sound management practices is more likely to operate effectively and
consistent with tax law requirements. And while the tax law generally does not mandate
particular management structures, operational policies, or administrative practices, it is
important that each charity be thoughtful about the governance practices that are most
appropriate for that charity in assuring sound operations and compliance with the tax
law. As a measure of our interest in this area, we ask about an organization’s
governance, both when it applies for tax-exempt status and then annually as part of the
information return that many charities are required to file with the Internal Revenue
Service.
Some of the policies and practices we commend for your consideration are divided into
the topics below. Although the discussion that follows is generally directed to public
charities, private foundations and other exempt organizations should also consider
these topics. Depending on an organization’s specific situation, some of the
recommended policies and practices will be more appropriate than others. References
to Form 990, Return of Organization Exempt From Income Tax, are to the 2008 Form
990.
Mission
Organizational Documents
Governing Body
Governance and Management Policies
Financial Statements and Form 990 Reporting
Transparency and Accountability
1. Mission
The Internal Revenue Service encourages charities to establish and review regularly the
organization’s mission. A clearly articulated mission, adopted by the board of directors,
serves to explain and popularize the charity’s purpose and guide its work. It also
addresses why the charity exists, what it hopes to accomplish, and what activities it will
undertake, where, and for whom. Organizations required to file Form 990 may
describe their mission in Part I, Line 1 and are required to describe their mission in Part
III, Line 1.
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2. Organizational Documents
Regardless of whether a charity is a trust, corporation, unincorporated association, or
other type of organization, it must have organizational documents that provide the
framework for its governance and management. State law often prescribes the type of
organizational document and its content. The organizational document of a trust is
usually the trust agreement or declaration of trust, and of a corporation, its articles of
incorporation. State law may also require corporations to adopt bylaws. The Internal
Revenue Service requires the submission of organizational documents and bylaws, if
adopted, with an application for exemption under section 501(c)(3), and will review
these documents to ensure that the applicant is organized exclusively for exempt
purposes and that the applicant’s proposed or actual activities are consistent with those
documents. Organizations required to file Form 990 will find that Part VI, Section A,
Line 4 requires organizations to report significant changes to their organizational
documents since the prior Form 990 was filed.
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3. Governing Body
The Internal Revenue Service encourages an active and engaged board believing that it
is important to the success of a charity and to its compliance with applicable tax law
requirements. Governing boards should be composed of persons who are informed
and active in overseeing a charity’s operations and finances. If a governing board
tolerates a climate of secrecy or neglect, we are concerned that charitable assets are
more likely to be diverted to benefit the private interests of insiders at the expense of
public and charitable interests. Successful governing boards include individuals who
not only are knowledgeable and engaged, but selected with the organization’s needs in
mind (e.g. accounting, finance, compensation, and ethics).
Attention should also be paid to the size of the board ensuring that it is the appropriate
size to effectively make sure that the organization obeys tax laws, safeguards its
charitable assets, and furthers its charitable purposes. Very small or very large
governing boards may not adequately serve the needs of the organization. Small
boards run the risk of not representing a sufficiently broad public interest and of lacking
the required skills and other resources required to effectively govern the organization.
On the other hand, very large boards may have a more difficult time getting down to
business and making decisions. If an organization’s governing board is large, the
organization may want to establish an executive committee with delegated
responsibilities or advisory committees.
Irrespective of size, a governing board should include independent members and
should not be dominated by employees or others who are not, by their very nature,
independent individuals because of family or business relationships. The Internal
Revenue Service reviews the board composition of charities to determine whether the
board represents a broad public interest, and to identify the potential for insider
transactions that could result in misuse of charitable assets. The Internal Revenue
Service also reviews whether an organization has independent members, stockholders,
or other persons with the authority to elect members of the board or approve or reject
board decisions, and whether the organization has delegated control or key
management authority to a management company or other persons. Organizations that
file Form 990 will find that Part VI, Section A, Lines 1, 2 ,3, and 7 ask questions about
the governing body.
If an organization has local chapters, branches, or affiliates, the Internal Revenue
Service encourages it to have procedures and policies in place to ensure that the
activities and operations of such subordinates are consistent with those of the parent
organization. Organizations that file Form 990 will find that Part VI, Section A, Line 9
asks about such procedures and policies.
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4. Governance and Management Policies
Although the Internal Revenue Code does not require charities to have governance and
management policies, the Internal Revenue Service will review an organization’s
application for exemption and annual information returns to determine whether the
organization has implemented policies relating to executive compensation, conflicts of
interest, investments, fundraising, documenting governance decisions, document
retention and destruction, and whistleblower claims.
A. Executive compensation. A charity may not pay more than reasonable
compensation for services rendered. Although the Internal Revenue Code does not
require charities to follow a particular process in determining the amount of
compensation to pay, the compensation of officers, directors, trustees, key employees,
and others in a position to exercise substantial influence over the affairs of the charity
should be determined by persons who are knowledgeable in compensation matters and
who have no financial interest in the determination. Organizations that file Form 990 will
find that Part VI, Section B, Line 15 asks whether the process used to determine the
compensation of an organization’s top management official and other officers and key
employees included a review and approval by independent persons, comparability data,
and contemporaneous substantiation of the deliberation and decision. In addition, Form
990, Part VII and Form 990, Schedule J, solicit compensation information for certain
officers, directors, trustees, key employees and highest compensated employees.
The Internal Revenue Service encourages a charity to rely on the rebuttable
presumption test of section 4958 of the Internal Revenue Code and Treasury
Regulation section 53.4958-6 when determining compensation of its executives. Under
this test, compensation payments are presumed to be reasonable if the compensation
arrangement is approved in advance by an authorized body composed entirely of
individuals who do not have a conflict of interest with respect to the arrangement, the
authorized body obtained and relied upon appropriate data as to comparability prior to
making its determination, and the authorized body adequately documented the basis for
its determination concurrently with making the determination.
Comparability data generally involves looking to compensation levels paid by similarly
situated organizations for functionally comparable positions. One method is to obtain
compensation surveys or studies from outside compensation consultants for this
purpose. The Internal Revenue Service will look to the independence of any
compensation consultant used, and the quality of any study, survey, or other data, used
to establish executive compensation. Once that test is met, the Internal Revenue
Service may rebut the presumption that an amount of compensation is reasonable only
if it develops sufficient contrary evidence to rebut the probative value of the
comparability data relied upon by the authorized governing body.
The Internal Revenue Service has observed significant errors or omissions in the
reporting of executive compensation on the IRS Form 990 and other information returns
(e.g., Form W-2 and employment tax returns). Organizations should take steps to
ensure accurate and complete compensation reporting on these forms, and to also
ensure that appropriate income and employment taxes are withheld and deposited with
the Internal Revenue Service. Executive compensation continues to be a focus point in
our examination program.
B. Conflicts of interest. The directors of a charity owe it a duty of loyalty. The
duty of loyalty requires a director to act in the interest of the charity rather than in the
personal interest of the director or some other person or organization. In particular, the
duty of loyalty requires a director to avoid conflicts of interest that are detrimental to the
charity. Many charities have adopted a written conflict of interest policy to address
potential conflicts of interest involving their directors, trustees, officers, and other
employees.
The Internal Revenue Service encourages a charity’s board of directors to adopt and
regularly evaluate a written conflict of interest policy that requires directors and staff to
act solely in the interests of the charity without regard for personal interests; includes
written procedures for determining whether a relationship, financial interest, or business
affiliation results in a conflict of interest; and prescribes a course of action in the event a
conflict of interest is identified.
The Internal Revenue Service encourages organizations to require its directors,
trustees, officers and others covered by the policy to disclose, in writing, on a periodic
basis any known financial interest that the individual, or a member of the individual’s
family, has in any business entity that transacts business with the charity. The
organization should regularly and consistently monitor and enforce compliance with the
conflict of interest policy. Instructions to Form 1023 contain a sample conflict of interest
policy. Organizations are urged to tailor the sample policy to their own particular
situations and needs, with the help of competent counsel if necessary. Organizations
that file Form 990 will find that Part VI, Section B, Line 12 asks whether an organization
has a written conflict of interest policy, and whether it regularly and consistently
monitors and enforces compliance with the policy.
C. Investments. The governing body or certain other persons may be required
either by state law or by the organizational documents to oversee or approve major
investments made by the organization. Increasingly, charities are investing in joint
ventures, for-profit entities, and complicated and sophisticated financial products or
investments that require financial and investment expertise and, in some cases, the
advice of outside investment advisors.
The Internal Revenue Service encourages charities that make such investments to
adopt written policies and procedures requiring the charity to evaluate its participation in
these investments and to take steps to safeguard the organization’s assets and exempt
status if they could be affected by the investment arrangement. The Internal Revenue
Service reviews compensation arrangements with investment advisors to see that they
comply with federal tax law. Organizations that file Form 990 will find that Part VI,
Section B, Line 16 asks whether an organization has adopted procedures and policies
regarding participation in a joint venture or similar arrangement with a taxable entity. In
addition, Form 990, Schedule D, asks detailed information about certain investments.
D. Fundraising. Charitable fundraising is an important source of financial
support for many charities. The Internal Revenue Service encourages charities to adopt
and monitor policies to ensure that fundraising solicitations meet federal and state law
requirements and solicitation materials are accurate, truthful, and candid. Charities are
encouraged to keep their fundraising costs reasonable and to provide information about
fundraising costs and practices to donors and the public. Organizations that file Form
990 will find that Schedules G and M solicit information about fundraising activities,
revenues and expenses.
E. Governing body minutes and records. The Internal Revenue Service
encourages the governing bodies and authorized sub-committees to take steps to
ensure that minutes of their meetings, and actions taken by written action or outside of
meetings, are contemporaneously documented. Organizations that file Form 990 will
find that Part VI, Line 8 asks whether an organization contemporaneously documents
meetings or written actions undertaken during the year by its governing body and each
committee with authority to act on behalf of the governing body.
F. Document retention and destruction. The Internal Revenue Service
encourages charities to adopt a written policy establishing standards for document
integrity, retention, and destruction. The document retention policy should include
guidelines for handling electronic files. The policy should cover backup procedures,
archiving of documents, and regular check-ups of the reliability of the system. For more
information, see IRS Publication 4221, Compliance Guide for 501(c)(3) Tax-Exempt
Organizations, available on the IRS website. Charities are required by the Internal
Revenue Code to keep books and records that are relevant to its tax exemption and its
filings with the Internal Revenue Service. Organizations that file Form 990 will find that
Part VI, Section B, Line 14, asks about whether an organization has a written document
retention and destruction policy.
G. Ethics and whistleblower policy. The public expects a charity to abide by
ethical standards that promote the public good. The organization’s governing body
bears the ultimate responsibility for setting ethical standards and ensuring they
permeate the organization and inform its practices. The Internal Revenue Service
encourages a charity’s board or trustees to consider adopting and regularly evaluating a
code of ethics that describes behavior it wants to encourage and behavior it wants to
discourage. A code of ethics will serve to communicate and further a strong culture of
legal compliance and ethical integrity to all persons associated with the organization.
The Internal Revenue Service encourages the board of directors to adopt an effective
policy for handling employee complaints and to establish procedures for employees to
report in confidence any suspected financial impropriety or misuse of the charity’s
resources. Such policies are sometimes referred to as whistleblower policies. The
Internal Revenue Service will review an organization to determine whether insiders or
others associated with the organization have materially diverted organizational assets.
Organizations that file Form 990 will find that Part VI, Section B, Lines 5 and 13 ask
whether the organization became aware during the year of a material diversion of its
assets, and whether an organization has a written whistleblower policy.
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5. Financial Statements and Form 990 Reporting
Directors are stewards of a charity’s financial and other resources. The Internal
Revenue Service encourages the board, either directly or through a board-authorized
committee, to ensure that financial resources are used to further charitable purposes
and that the organization’s funds are appropriately accounted for by regularly receiving
and reviewing up-to-date financial statements and any auditor’s letters or finance and
audit committee reports.
A. Financial Statements. Some organizations prepare financial statements
without any involvement of outside accountants or auditors. Others use outside
accountants to prepare compiled or reviewed financial statements, while others obtain
audited financial statements. State law may impose audit requirements on certain
charities, and a charity must ensure that it abides by the requirements of state law.
Many organizations that receive federal funds are required to undergo one or more
audits as set forth in the Single Audit Act and OMB Circular A-133. However, even if an
audit is not required, a charity with substantial assets or revenue should consider
obtaining an audit of its financial statements by an independent auditor.
The board may establish an independent audit committee to select and oversee an
independent auditor. An audit committee generally is responsible for selecting the
independent auditor and reviewing its performance, with a focus on whether the auditor
has the competence and independence necessary to conduct the audit engagement,
the overall quality of the audit, and, in particular, the independence and competence of
the key personnel on the audit engagement teams. The Internal Revenue Service
encourages all charities to take steps to ensure the continuing independence of any
auditor that conducts an audit of the organization. Organizations that file Form 990, will
find that Part XI, Line 2, asks whether the organization’s financial statements were
complied or reviewed by an independent accountant, audited by an independent
accountant, and subject to oversight by a committee within the organization. And, Part
XI, Line 3 asks whether, as a result of a federal award, the organization was required to
undergo an audit as set forth in the Single Audit Act and OMB Circular A-133.
B. Form 990. Although not required to do so by the Internal Revenue Code, some
organizations provide copies of the IRS Form 990 to its governing body and other
internal governance or management officials, either prior to or after it is filed with the
Internal Revenue Service. Practices differ widely as to who sees the form, when they
see it, and the extent of their input, review, or approval. Some, especially smaller
organizations, may provide a copy of the Form 990 to the full board for review or
approval before it is filed. Others provide a copy of the form to a portion of the
governing body, or to a committee or top management officials, before it is filed. Still
others provide a copy to the board, a committee or top management officials, but not
until after it is filed. Organizations that file Form 990 will find that Part VI, Section A,
Line 10 asks whether the organization provides a copy of Form 990 to its governing
body, and requires the organization to explain any process of review by its directors or
management.
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6. Transparency and Accountability
By making full and accurate information about its mission, activities, finance, and
governance publicly available, a charity encourages transparency and accountability to
its constituents. The Internal Revenue Code requires a charity to make its Form 1023
exemption application, Form 990, and Form 990-T, available for public inspection. The
Internal Revenue Service encourages every charity to adopt and monitor procedures to
ensure that its Form 1023, Form 990, Form 990-T, annual reports, and financial
statements, are complete and accurate, are posted on its public website, and are made
available to the public upon request. Organizations that file Form 990 will find that Part
VI, Section C, Lines 18 and 19, ask whether and how an organization makes its Form
1023, Form 990 and Form 990-T, governing documents, conflict of interest policy, and
financial statements available to the public.
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Date posted: February 4, 2008
Principles for Good Governance and Ethical Practice:
A Guide for Charities and Foundations
EXECUTIVE SUMMARY
Preserving the soundness and integrity of the nonprofit community must strike
a careful balance between prudent legal mandates to ensure that organizations
do not abuse the privilege of their exempt status, and well-informed selfgovernance and mutual awareness among nonprofit organizations. The Panel
on the Nonprofit Sector has been committed to formulating effective, broadly
applicable methods of self-regulation since its inception in 2004. This work has
proceeded from a belief—among lawmakers and their staffs no less than
among charitable organizations—that the best bulwark against misconduct will
always be a well-informed vigilance by members of the nonprofit community
themselves, including a set principles they could adopt, promote
sector-wide, and improve over time. Widespread use of such principles
would enable organizations to improve their operations by learning from each other.
Nonprofit organizations have long embraced the need for standards of ethical practice that preserve and
strengthen the public’s confidence. Many such systems in fact already exist, though none have applied to
the entire range of American charitable organizations. The pages that follow therefore set forth a
comprehensive set of principles to inform the field. In developing these principles, the Panel called
together 34 leaders from charities, foundations, academia, and oversight agencies; commissioned two
studies of self-regulation regimes already in use; and conducted a detailed review of principles and
standards drawn from more than 50 such systems, including selections from both the nonprofit and forprofit sectors. Guidance and encouragement from two rounds of public comment further strengthened
the Panel’s final set of principles.
With this document, the Panel sets forth principles of sound practice that should be considered by every
charitable organization as a guide for strengthening its effectiveness and accountability. The 33 principles
are organized under four main categories:
1.
2.
3.
4.
Legal Compliance and Public Disclosure,
Effective Governance,
Strong Financial Oversight, and
Responsible Fundraising.
The Panel strongly recommends that an organization’s board conduct a thorough discussion of the
complete set of principles, and determine how the organization should apply each to its operations. It is
possible that after this review, a board may conclude certain principles do not apply to its organization.
Developing a transparent process for communicating how the organization has addressed the principles,
including the reasons that any of the principles are not relevant, is likely to foster a greater appreciation
of the diverse nature of the sector and deeper respect for the board’s good stewardship.
Legal Compliance and Public Disclosure
1. A charitable organization must comply with all applicable federal laws and regulations, as well as
applicable laws and regulations of the states and the local jurisdictions in which it is based or
operates. If the organization conducts programs outside the United States, it must also abide by
applicable international laws, regulations and conventions that are legally binding on the United
States.
2. A charitable organization should have a formally adopted, written code of ethics with which all of its
directors or trustees, staff and volunteers are familiar and to which they adhere.
3. A charitable organization should adopt and implement policies and procedures to ensure that all
conflicts of interest, or the appearance thereof, within the organization and the board are
appropriately managed through disclosure, recusal, or other means.
4. A charitable organization should establish and implement policies and procedures that enable
individuals to come forward with information on illegal practices or violations of organizational
policies. This “whistleblower” policy should specify that the organization will not retaliate against,
and will protect the confidentially of, individuals who make good-faith reports.
5. A charitable organization should establish and implement policies and procedures to protect and
preserve the organization’s important documents and business records.
6. A charitable organization’s board should ensure that the organization has adequate plans to protect
its assets—its property, financial and human resources, programmatic content and material, and its
integrity and reputation—against damage or loss. The board should review regularly the
organization’s need for general liability and directors’ and officers’ liability insurance, as well as take
other actions necessary to mitigate risks.
7. A charitable organization should make information about its operations, including its governance,
finances, programs, and activities, widely available to the public. Charitable organizations also should
consider making information available on the methods they use to evaluate the outcomes of their
work and sharing the results of those evaluations.
Effective Governance
8. 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 financial
transactions, compensation practices and policies, and fiscal and governance policies.
9. The board of a charitable organization should meet regularly enough to conduct its business and
fulfill its duties.
10. The board of a charitable organization should establish its own size and structure and review these
periodically. The board should have enough members to allow for full deliberation and diversity of
thinking on governance and other organizational matters. Except for very small organizations, this
generally means that the board should have at least five members.
11. The board of a charitable organization should include members with the diverse background
(including, but not limited to, ethnic, racial, and gender perspectives), experience, and organizational
and financial skills necessary to advance the organization’s mission.
2
12. A substantial majority of the board of a public charity, usually meaning at least two-thirds of the
members, should be independent. Independent members should not: (1) be compensated by the
organization as employees or independent contractors; (2) have their compensation determined by
individuals who are compensated by the organization; (3) receive, directly or indirectly, material
financial benefits from the organization except as a member of the charitable class served by the
organization; or (4) be related to anyone described above (as a spouse, sibling, parent, or child) or
reside with any person so described.
13. The board should hire, oversee, and annually evaluate the performance of the chief executive officer
of the organization, and should conduct such an evaluation prior to any change in that officer’s
compensation, unless there is a multi-year contract in force or the change consists solely of routine
adjustments for inflation or cost of living.
14. The board of a charitable organization that has paid staff should ensure that the positions of chief
staff officer, board chair, and board treasurer are held by separate individuals. Organizations without
paid staff should ensure that the positions of board chair and treasurer are held by separate
individuals.
15. The board should establish an effective, systematic process for educating and communicating with
board members to ensure that they are aware of their legal and ethical responsibilities, are
knowledgeable about the programs and activities of the organization, and can carry out their
oversight functions effectively.
16. Board members should evaluate their performance as a group and as individuals no less frequently
than every three years, and should have clear procedures for removing board members who are
unable to fulfill their responsibilities.
17. The board should establish clear policies and procedures setting the length of terms and the number
of consecutive terms a board member may serve.
18. The board should review organizational and governing instruments no less frequently than every five
years.
19. The board should establish and review regularly the organization’s mission and goals and should
evaluate, no less frequently than every five years, the organization’s programs, goals and activities to
be sure they advance its mission and make prudent use of its resources.
20. Board members are generally expected to serve without compensation, other than reimbursement for
expenses incurred to fulfill their board duties. A charitable organization that provides compensation
to its board members should use appropriate comparability data to determine the amount to be paid,
document the decision and provide full disclosure to anyone, upon request, of the amount and
rationale for the compensation.
Strong Financial Oversight
21. A charitable organization must keep complete, current, and accurate financial records. Its board
should receive and review timely reports of the organization’s financial activities and should have a
qualified, independent financial expert audit or review these statements annually in a manner
appropriate to the organization’s size and scale of operations.
3
22. The board of a charitable organization must institute policies and procedures to ensure that the
organization (and, if applicable, its subsidiaries) manages and invests its funds responsibly, in
accordance with all legal requirements. The full board should review and approve the organization’s
annual budget and should monitor actual performance against the budget.
23. A charitable organization should not provide loans (or the equivalent, such as loan guarantees,
purchasing or transferring ownership of a residence or office, or relieving a debt or lease obligation)
to directors, officers, or trustees.
24. A charitable organization should spend a significant percentage of its annual budget on programs
that pursue its mission. The budget should also provide sufficient resources for effective
administration of the organization, and, if it solicits contributions, for appropriate fundraising
activities.
25. A charitable organization should establish clear, written policies for paying or reimbursing expenses
incurred by anyone conducting business or traveling on behalf of the organization, including types of
expenses that can be paid for or reimbursed and the documentation required. Such policies should
require that travel on behalf of the organization is to be undertaken in a cost-effective manner.
26. A charitable organization should neither pay for nor reimburse travel expenditures for spouses,
dependents or others who are accompanying someone conducting business for the organization
unless they, too, are conducting such business.
Responsible Fundraising
27. Solicitation materials and other communications addressed to donors and the public must clearly
identify the organization and be accurate and truthful.
28. Contributions must be used the purposes consistent with the donor’s intent, whether as described in
the relevant solicitation materials or as specifically directed by the donor.
29. A charitable organization must provide donors with specific acknowledgements of charitable
contributions, in accordance with IRS requirements, as well as information to facilitate the donors’
compliance with tax law requirements.
30. A charitable organization should adopt clear policies, based on its specific exempt purpose, to
determine whether accepting a gift would compromise its ethics, financial circumstances, program
focus or other interests.
31. A charitable organization should provide appropriate training and supervision of the people soliciting
funds on its behalf to ensure that they understand their responsibilities and applicable federal, state
and local laws, and do not employ techniques that are coercive, intimidating, or intended to harass
potential donors.
32. A charitable organization should not compensate internal or external fundraisers based on a
commission or a percentage of the amount raised.
33. A charitable organization should respect the privacy of individual donors and, except where
disclosure is required by law, should not sell or otherwise make available the names and contact
information of its donors without providing them an opportunity at least once a year to opt out of
the use of their names.
4
Susan M. Mussman Schwartz
AREAS OF PRACTICE
Nonprofit Organizations: Corporate advice for nonprofit organizations including
formation, governance, governance disputes, contracting, real estate acquisition and
leasing, conflict of interest issues and financing.
PITTSBURGH OFFICE
412.355.8658
TEL
412.355.6501
FAX
susan.mussman@klgates.com
Tax-Exemption: Advice regarding obtaining and maintaining tax-exempt status,
preventing and addressing excess benefit transactions and self dealing , unrelated
business income issues, executive compensation, private foundation compliance
(including international granting), public charity status, avoiding and limiting
lobbying expenditures, relationships between taxable and tax-exempt organizations,
obtaining private letter rulings, sales and use tax-exemption issues and real property
tax issues.
Transactions: Corporate reorganizations, mergers and affiliations of nonprofit
organizations, acquisition of tax-exempt organizations by taxable organizations and
vice versa, and joint ventures involving tax-exempt organizations.
Fundraising: Regulatory compliance for charities engaged in fundraising programs
in Pennsylvania and across the nation, contracting with professional solicitors, the
conduct of special events, defense of efforts to revoke or deny the privilege to solicit
contributions and advice regarding internet solicitation.
PROFESSIONAL BACKGROUND
Ms. Schwartz is licensed in Pennsylvania and Florida. She is a frequent lecturer on
matters relating to nonprofit and tax-exempt organizations and is the author of the
Handbook for Directors of Nonprofit Corporations. She has taught nonprofit law at
the University of Pittsburgh Graduate School of Public and International Affairs.
Prior to practicing law, Ms. Schwartz spent 13 years working as an administrator in
the nonprofit community.
PRESENTATIONS
September 25, 1997 - Nonprofit Organizations in a For-Profit World
September 25, 1997 - Fiduciary Duties of Directors and Officers of a
Pennsylvania Nonprofit Corporation
November 12, 1997 Tax Restrictions on Lobbying Activities of 501(c)(3)
Organizations.
March 15, 1998 - Mergers and Other Affiliations in Long Term Care
May 5, 1998 Legal Issues in Pennsylvania Fundraising
October 8, 1998 Doing a Deal with a Nonprofit Organization (Pennsylvania
Community Providers Association, Annual Conference - Seven Springs)
October 8, 1998 Doing a Deal with a Forprofit Organization (Pennsylvania
Community Providers Association, Annual Conference - Seven Springs)
1997 Intermediate Sanctions for Certain Tax-Exempt Organizations
January 8, 1999 Issues for Tax Exempt Organizations; Intermediate Sanctions;
Completing Form 1023; Pennsylvania BCO; Primer on UBI (Western
Pennsylvania Tax Conference)
Susan M. Mussman
February 12, 1999 Intermediate Sanctions for Certain Tax-Exempt
Organizations (Allegheny Conference on Community Development)
May 13, 1999 The How and Why of Collaboration Among Non-Profit
Organizations (Alpern Rosenthal)
October 8, 1999 Common Grounds: Working Together Toward a New Future
(1999 Pennsylvania Community Providers Association Annual Conference)
February 22, 2001 Guardianship vs. Power of Attorney (Community College of
Allegheny County)
August 24, 2001 Legal Issues with Charitable Solicitation over the Internet
August 24, 2001 Public Charities & Lobbying
April 17, 2002 Exempt Organizations and Charitable Activities in Pennsylvania
(National Business Institute)
April 24, 2002 Legal Requirements of Charitable Fundraising (Pro Arts)
June, 2002 Board Members are Special Too (Pennsylvania Forum for Primary
Health Care)
August 27, 2002 Advanced Issues in Tax-Exempt Organizations (Lorman)
October, 2002 Developing and Operating a Website (Pennsylvania Community
Providers Association)
June 26, 2003 Nonprofit Organizations Seminar (Pennsylvania Bar Institute)
September 22, 2003 Nuts & Bolts and Board Duties & Dangers (Law School
for Non Profit Organizations Washington County)
March 23, 2004 International Grantmaking (Grantmakers of Western
Pennsylvania)
April 16, 2004 Legal Issues Associated with Special Events Fundraising
(United Way)
September 9, 2004 Lobbying (Neighborhood Legal Services)
September 13, 2004 How to Organize a Nonprofit (National Business Institute)
October 5, 2004 Reorganized Corporate Structures for Nonprofit Organizations
(Eggs & Information Breakfast - Wessel & Company)
November 4, 2004 Social Enterprise: Doing it Legally (Bayer Center for
Nonprofit Management at Robert Morris University)
February 1, 2005 Risk Management for Nonprofit Leaders (Alpern Rosenthal
Nonprofit Seminar)
October, 2005 Nonprofit Governance (Alliance for Children and Families
National Conference - Orlando, FL)
December 2, 2005 Advocacy for Nonprofit Organizations (Robert Morris
University)
May, 2006 Nonprofit Governance (United Way of America 2006 Financial
Management & Human Resources Forum - Denver, CO)
March 9, 2006 Governance for Nonprofits (Sewickley YMCA)
June 14-16, 2006 Nonprofit Mergers (PA Forum for Primary Healthcare 25th
Annual Conference)
September 13, 2006 Representing Nonprofit Organizations in PA (Pennsylvania
Bar Institute)
June 15, 2006 Advocacy, Lobbying and all that Jazz (Bayer Center for
Nonprofit Management)
October 6, 2006 Governance Briefing: Advocacy, Lobbying and the Board
(University of Pittsburgh)
Susan M. Mussman
September 28, 2006 How to Serve on a Board and not go to Jail (CTAC)
September 12, 2006 Social Enterprise and the Law (Bayer Center for Nonprofit
Management)
June 20, 2007 Lobbying, Political Campaign Activity and Advocacy (Robert
Morris University)
September 6, 2007 Mergers of Tax Exempt Organizations (Not for Profit
Telephone Roundtable - CPA Associates/Wessel)
November 13-14, 2007 Social Enterprise Activities (Teeter & Associates)
PROFESSIONAL/CIVIC ACTIVITIES
Every Child (director and past president)
Glade Run Foundation (director and secretary)
Washington Place at St. Barnabas (director and chairperson)
American Bar Association (member, Exempt Organizations Committee)
Achieva (past president & director)
ARC Pennsylvania (past director and second vice president)
Animal Friends (past director)
Education Law Center (past director)
LAS Foundation (past director)
ABA Commission on Mental and Physical Disability Law (past member)
Pennsylvania Bar Association, Charitable Organizations Committee (past cochair)
BAR MEMBERSHIP
Pennsylvania
Florida
EDUCATION
J.D., University of Pittsburgh, 1984 (cum laude; Order of the Coif)
B.A., Davis & Elkins College, 1969 (summa cum laude)
REPRESENTATIVE EXPERIENCE
NONPROFIT ORGANIZATIONS
Advise a public charity as it (a) investigated an executive director who had
misused charitable assets, (b) developed policies to prevent a recurrence of such
an event and (c) terminated the employment of the executive director.
Advise a charity regarding a corporate structure and other mechanisms that enable
it to minimize its risk in an environment where liability insurance is not
affordable.
Advise a charity regarding the setting of compensation, including an incentive
package for use by officers of the charity.
Advise a charity as it established and implemented a conflict of interests policy
that protects the organization s tax exemption and prevents the imposition of
excise taxes on its directors.
Advise a family foundation as it divided itself into five separate foundations.
Susan M. Mussman
Advise a charity as it seeks to re-establish control over a foundation that sought to
use the endowment in a manner the charity did not like.
Advise a charity regarding hiring and firing and other employment policies.
Advise numerous charities in connection with the purchase and sale and leasing
of real estate.
TAX-EXEMPTION
Advise a private foundation regarding complying with tax law and Patriot Act
requirements as it established and operated a granting program in 37 countries
around the world.
Advise a charity establishing a low income housing project regarding the tax,
finance, corporate and structural issues associated with the project.
Advise an economic development fund as it established a neighborhood
revitalization fund that loans money for projects in low income neighborhoods.
Advise an advocacy organization regarding structuring its activities so they will
not constitute lobbying.
Advise a trade association as it established a political action committee.
Advise a charity regarding establishing a get-out-the-vote campaign and voter
guide without engaging in prohibited political campaign activity.
Assist a charity in obtaining a private letter ruling addressing tax issues
surrounding the social enterprise activity it desired to undertake.
Advise a charity regarding how to structure an activity so as to minimize
unrelated business income.
TRANSACTIONS
Advise a charity developing 235 acres of land so as to create a source of revenue
to support its operations for the foreseeable future.
Advise a museum as it merged with another museum.
Advise a health system as it acquired a nursing home.
Advise a charity as it joint ventured with three proprietary companies and several
private foundations to undertake economic development activities.
Advise a charity establishing a public market intended to reinvigorate a distressed
neighborhood.
Provide advice for the merger of two organizations providing residential services
for persons with mental retardation.
Provide advice for a joint venture among three hospitals establishing a mobile
lithotripsy service.
Advise three hospitals acquiring the practices of hundreds of physicians.
Advise dozens of charities about corporate reorganizations.
Assist an organization whose mission is to redirect juvenile delinquents in
obtaining the licenses and contracts necessary to establish programs in numerous
states.
Assist 23 trade associations in establishing a joint venture that made
competitively-priced health insurance available to small employers.
Assist a charity in obtaining a cypress ruling removing restrictions on its land.
Susan M. Mussman
FUNDRAISING
Advise a charity regarding fundraising for a hospital in a third world country.
Advise a charity engaged in complex nationwide charitable solicitation regarding
in what states it must register to solicit charitable contributions and what will be
necessary to fulfill its obligations in each state.
Advise a charity as it established a complex series of sponsorships for a series of
events celebrating a 250 th anniversary.
Advise a charity as it revoked an onerous contract with a professional solicitor.
Advise charities hiring professional fundraising counsel and professional
solicitors.
Cordelia A. Glenn
AREAS OF PRACTICE
PITTSBURGH OFFICE
412.355.6701
TEL
412.355.6501
FAX
cordelia.glenn@klgates.com
Tax-Exempt Organizations/Nonprofit Institutions: Counseling and planning for
nonprofit organizations with respect to formation and organization; applying for and
maintaining tax-exempt status; governance reform and best practices; corporate
reorganizations; mergers, acquisitions, affiliations, and joint ventures; state sales tax
exemptions; excess benefit transactions and private inurement; maintaining public
charity status; private foundation compliance, including international granting,
scholarship programs, and self-dealing; fundraising compliance related to state
registration, federal substantiation requirements, and conduct of special events.
Health Care: Representation of hospitals and physician practices in corporate
transactions and regulatory and governance matters, including reorganizations of
health care systems; governance reform and best practices; mergers, acquisitions, and
affiliations of health care providers; negotiation and preparation of employment,
independent contractor, and shareholders agreements; fraud and abuse compliance.
PROFESSIONAL/CIVIC ACTIVITIES
American Bar Association
Allegheny County Bar Association
Pennsylvania Bar Association
American Health Lawyers Association
Ms. Glenn was recognized as a Pennsylvania Rising Star in the December 2005
issues of Philadelphia magazine and the Pennsylvania Super Lawyers - Rising Stars
edition.
BAR MEMBERSHIP
Pennsylvania
EDUCATION
J.D., George Washington University, 1999 (with honors; Articles Editor, The George
Washington Law Review)
B.S., Georgetown University, 1994 (cum laude)