In a recent New York County Supreme Court opinion, Empire 33rd LLC v. Forward Ass’n Inc., the court ruled in favor of the defendant charities to dismiss the plaintiff’s complaint demanding the return of payments under an agreement in which it alleged defendants lacked the “required approvals and consents required by law” to execute. The court found that the proposed sale of property by the defendant charities was duly authorized by the NY Supreme Court, as Section 203 of the New York Not-for-Profit Corporation Law (“NPCL”) requires.
After attending the Georgetown University Law Center “Representing & Managing Tax-Exempt Organizations” Conference in April, 2010, we wanted to discuss some of the lessons that exempt organizations should take away in the following areas: governance; transparency; compensation; joint ventures; and endowments and investments.
We tweeted live from the Georgetown Conference that occurred on April 22-23, 2010. Our tweets highlight IRS next steps and agenda items, as well as discuss other topics of interest to exempt organizations.
The goal of the revision of the IRS Form 990 is to increase transparency, encourage compliance, and emphasize the importance of ethics within a not-for-profit organization. Given that so much emphasis has now been placed on “good” governance, it is increasingly important for not-for-profit boards to draft, adopt, and implement relevant governance policies – meant to be “living” documents reflecting the organization itself, and changing as an organization grows and develops.
The Tax Court recently delivered some sound advice – do not play “cat and mouse” with the IRS. In Ohio Disability Association v. Commissioner, a Tax Court Memo filed November 12, 2009, the Tax Court rejected the petitioner’s request for a declaratory judgment that it qualified as a public charity. The court’s rejection was based on its inability to conclude that the organization would operate exclusively for exempt purposes.
The IRS completely redesigned Form 990, the Return of Organization Exempt from Income Tax, to be filed for calendar year 2008 and subsequent periods. This form is filed by most tax-exempt organizations and is open to public inspection. One stated purpose of the makeover was to increase transparency and disclosure of exempt organization operations, thereby improving governance and highlighting conflicts of interest and insider dealings. One major change in the form is that it requires extensive reporting concerning the organization’s governance and management policies, the independence of its board, and board members’ and key employees’ family and business relationships with each other and with the reporting organization.
Over the past few years, the IRS has become increasingly interested in monitoring the governance practices of tax-exempt organizations, particularly public charities. This interest has been shown through public statements of IRS officials, the addition of questions about board makeup and policies to the Form 990, an explanation of why the IRS considers governance important, and the development of training materials on governance for IRS personnel. Not all members of the exempt organizations community agree that the IRS should focus on governance. However, the IRS rationale is that a well-governed organization is a tax-compliant organization.
The IRS has now developed and released a governance issues checklist (the Governance Check Sheet) to be completed in each audit of an exempt organization. The checklist provides a very specific roadmap for exempt organizations to compare their practices and policies with what the IRS wants to see and to make adjustments where necessary.
In September, 2009, Proskauer, by way of Scott Harshbarger, was retained by the Association of Community Organizations for Reform Now (“ACORN”) to conduct an independent analysis of the videos that caused this summer’s uproar as well as the organization as a whole, including its core weaknesses and inherent strengths.
The serious management challenges detailed in our report are the fault of ACORN’s founder and a cadre of leaders who, in their drive for growth, failed to commit the organization to the basic, appropriate standards of governance and accountability. As a result, ACORN not only fell short of living its principles but also left itself vulnerable to public embarrassment.