Updating Nonprofit Governance to Address the New Form 990 Michael E. Malamut Kopelman and Paige, P.C. Boston Massachuset

1. Updating Nonprofit Governance to Address the New Form 990 Michael E. Malamut Kopelman and Paige, P.C. Boston Massachusetts Nonprofit Network Strengthening Nonprofits in an Age of Precious Resources October 24, 2008

2. TABLE OF CONTENTS • Reasons to Implement form 990 Policy Directives 5 • Form 990-EZ Eligibility 7 • Form 990-EZ Changes 8 • Form 990-EZ Schedules 9 • Phase-In to Full Form 990 10 • Form 990, Part VI, Governance 12 • Form 990, Part VI, Sec. A, Governing Body and Management 13 • Directors & Independent Directors 14 • 2008 Instructions for Form 990 Glossary 16 Director or Trustee 16 Independent Voting Member 17 Reasonable Effort 19 • Governing Document Changes 20 • Instructions for Form 990 Part VI Line 4, Changes to Organizational Documents 22

3. Minutes 23 • Instructions for Form 990 Part VI, Line 8, meaning • of contemporaneous 25 • Chapter Relations Policies 26 • Form 990 Review 28 • Form 990 Part VI, Sec. B Policies 29 • Standard Policies: Conflict of Interest, • Whistleblower, Document Retention 30 • 2008 Instructions for Form 990 Glossary 32 • conflict of interest policy 32 • family member 33 • business relationship 34 • A Pair of SOX: Whistleblower & Document • Retention Policies 35 • Form 990 Schedule J, Part I, Compensation 36 • Compensation Policy 37 • Joint Venture Policy 39 • Form 990, Part VI, Sec. C, Disclosure 40 • Governance Disclosure Policy 41 • Form 990, Part XI 42

4. Audit Committee Charter 43 • 2008 Instructions for Form 990 Glossary 45 audit committee 45 • Form 990 Schedule M, Non-Cash Contributions 46 • Gift Acceptance Policy 47 • IRS Advisory Committee on Tax Exempt and Government Entities (ACT) 48 • Conclusion 52 • Future Trends 54 • What to do for Mid-Size to Large Nonprofits 55 • What to do for Small and Small, Small Nonprofits 56 • Where to Go 57 • IRS Information on Form 990 Governance Issues 59 • Brief Biography 60

5. Reasons to Implement Form 990 Policy Directives • Governance practices referred to in the Form are not mandates. • Donors, ratings agencies, and local tax and nonprofit governance regulators can be expected to review governance responses on the Form 990 in their evaluations. • The IRS may also use responses to evaluate which returns warrant more careful review or possible audits. • Gadflies and disgruntled members can be expected to review nonprofit organizations’ publicly available Form 990 filings.

6. For these reasons, exempt organizations filing the new Form 990 are strongly encouraged by the reporting requirement to adopt policies that will allow them to put down the “right” answers to the governance questions.

7. Form 990-EZ Eligibility

8. Form 990-EZ Changes • The Form 990-EZ has also been revised, but much more modestly than the Form 990. • Similar information to that required under the old Form 990-EZ is still required, but previously it was requested in unstructured narrative format. Now 7 Schedules from the Form 990 are incorporated, in full or modified format, in the Form 990-EZ. • Schedule L, Transactions with Interested Persons, relates to conflict of interest policies. • The other Form 990-EZ Schedules do not have significant governance policy implications.

9. Form 990-EZ Schedules • Schedules based on Form 990 Schedules included in the Form 990-EZ are: • • Schedule A Public Charity Status • • Schedule B Contributors • • Schedule C Campaign and Lobbying Activities • • Schedule E Schools • • Schedule G Fundraising • • Schedule L Transactions with Interested Persons • • Schedule N Liquidation, Termination, and Disposition of Assets

10. Phase-In to Full Form 990 • Because of the phase-in of the new Form 990, it will apply to 2008 tax year returns for most large exempt organizations ($1,000,000 in gross receipts or $2,500,000 in assets). • For the 2009 tax year, the new Form 990 will apply to organizations with at least $500,000 in gross revenues or $1,250,000 in assets, with limited exceptions. • For the 2010 tax year, intended as final phase-in, almost all exempt organizations with gross receipts above $200,000 or assets over $500,000 will be covered.

11. This phase-in period gives organizations limited time to implement governance policies called for in the new Form. • Organizations that have not yet started to prepare for the new Form 990 should start thinking about how to perform a real governance review. • Sample policies are readily available online and in commercially available publications.

13. Form 990 Part VI Sec. A

14. Directors & Independent Directors • The Form 990 inquires about the total number of directors and the number of independent directors who meet the definition in the instructions. • Comparison of the numbers readily discloses the percentage of independent directors. • After commentary during the Form 990 revision process, the definition of independent excludes ordinary members of membership associations and substantial donors who do not have other transactions with the organization.

15. Organizations may consider amending their bylaws or adopting nomination policies to encourage board composition with a high percentage of members meeting the instructions’ definition of independent.

16. 2008 Instructions for Form 990 Glossary director or trustee A member of the organization’s governing body, but only if the member has any voting rights. A member of an advisory board that does not exercise any governance authority over the organization is not considered a director or trustee.

17. 2008 Instructions for Form 990 Glossary

18. 2008 Instructions for Form 990 Glossary

19. 2008 Instructions for Form 990 Glossary

20. Governing Document Changes • Narrative description is required for all significant changes in an organization’s “organizational documents.” This includes constitution, bylaws, articles of incorporation or organization, and, for trusts, a trust instrument or declaration of trust. • Nonprofit organizations contemplating any bylaw change must review the instructions: (1) to determine if the change is significant; and (2) to consider the public perception of its narrative description of the change.

21. This requirement will undoubtedly discourage bylaws amendments, and will encourage migration of provisions from bylaws, which are reportable, to policies, which are not reportable.

22. Instructions for Form 990 Part VI Line 4 Changes to organizational documents. The organization must report significant changes to its organizing or enabling document by which it was created (articles of incorporation, association, or organization; trust instrument; constitution; or similar document), and to its rules governing its affairs commonly known as bylaws (or regulations, operating agreement, or similar document). Report changes made since the prior Form 990 was filed, or that were not reported on any prior Form 990. Do not report changes to policies described or established outside of the organizing or enabling document and bylaws (or similar documents), such as adoption of, or change to, a policy adopted by resolution of the governing body that does not entail a change to the organizing document or bylaws.

23. Minutes • The Form asks whether the organization contemporaneously documents its board meetings and meetings of committees with power to act. • These questions encourage boards and board committees to formalize the recording of their procedures and to determine what level of detail they want in the minutes.

24. It may encourage adoption of minutes policies or adoption by reference of a parliamentary authority that prescribes standardized methods for recording and adopting minutes. • Parliamentary authorities with guidance on minutes include Robert’s Rules of Order Newly Revised, Alice Sturgis’s Standard Code of Parliamentary Procedure, Ray Keesey’s Modern Parliamentary Procedure, and Donald Tortorice’s Modern Rules of Order.

25. Instructions for Form 990 Part VI Line 8 For this purpose, contemporaneous means by the later of (1) the next meeting of the governing body or committee (e.g., approving the minutes of the prior meeting), or (2) 60 days after the date of the meeting or written action. If “No,” explain in Schedule O the organization’s practices or policies, if any, regarding documentation of meetings and written actions of its governing body and committees with authority to act on its behalf.

26. Chapter Relations Policies • The Form asks whether multi-level associations have policies and procedures to ensure consistency throughout the organization. • This will encourage central or superior organizations within multi-level associations to adopt chapter relations policies (or unit, division, lodge, constituent, component, regional, or local relations policies, as the case may be).

27. Similarly, associations will be encouraged to adopt bylaws provisions and consistent sample chapter (or other appropriate unit) charters and bylaws with stronger oversight provisions.

28. Form 990 Review • The Form asks whether each member of the Board reviewed the final draft of the Form 990 before it was filed and requires a narrative description of the review process. • Cursory submission to Board members immediately before filing, just to be able to answer “yes,” will not look good. • Boards will need to consider adopting a Form 990 review policy that provides adequate time for meaningful review and a method for allowing feedback and revisions based on Board input.

29. Form 990 Part VI Sec. B

30. Standard Policies: Conflict of Interest, Whistleblower, Document Retention • The Form 990 asks whether organizations have conflict of interest, whistleblower, and document retention/destruction policies. • Conflict of interest policies have long been a good governance standard and are prescribed for many nonprofit organizations by state statute, for example in New York. • The Form 1023 application for 501 (c) (3) status has for several years suggested that applicants adopt a conflict of interest policy.

31. Nonprofits with conflict of interest policies need to consider revising the policies in light of the new Form 990 instructions. • For nonprofits that have not yet adopted a conflict of interest policy, it is time to do so. The policy should incorporate the minimum requirements set out in the Instructions.

32. 2008 Instructions for Form 990 Glossary • conflict of interest policy A policy that defines conflict of interest, identifies the classes of individuals within the organization covered by the policy, facilitates disclosure of information that may help identify conflicts of interest, and specifies procedures to be followed in managing conflicts of interest. A conflict of interest arises when a person is in a position of authority over an organization, such as an officer, director or manager, may benefit financially from a decision he or she could make in such capacity, including indirect benefits such as to family members or businesses with which the person is closely associated. For this purpose, a conflict of interest does not include questions involving a person’s competing or respective duties to the organization and to another organization, such as by serving on the boards of both organizations, that do not involve a material financial interest of, or benefit to, such person.

33. 2008 Instructions for Form 990 Glossary family member, family relationship Unless specified otherwise, the family of an individual includes only his or her spouse,ancestors, brothers and sisters (whether whole or half blood), children (whether naturalor adopted), grandchildren, great grandchildren, and spouses of brothers, sisters,children, grandchildren, and great grandchildren.

34. 2008 Instructions for Form 990 Glossary business relationship Business relationships between two persons include the following: 1) One person is employed by the other in a sole proprietorship or by an organization with which the other is associated as a trustee, director, officer, key employee, or greater-than-35% owner. 2) One person is transacting business with the other (other than in the ordinary course of either party’s business on the same terms as are generally offered to the public), directly or indirectly, in one or more contracts of sale, lease, license, loan, performance of services, or other transaction involving transfers of cash or property valued in excess of $10,000 in the aggregate during the organization’s tax year. Indirect transactions are transactions with an organization with which the one person is associated as a trustee, director, officer, key employee, or greater-than-35% owner. 3) The two persons are each a director, trustee, officer, or greater than 10% owner in the same business or investment entity. Ownership is measured by stock ownership (either voting power or value) of a corporation, profits or capital interest in a partnership or limited liability company, membership interest in a nonprofit organization, or beneficial interest in a trust. Ownership includes indirect ownership (e.g., ownership in an entity that has ownership in the entity in question); there may be ownership through multiple tiers of entities.

35. A Pair of SOX: Whistleblower & Document Retention Policies • Whistleblower and document retention/destruction policies are fallout from Sarbanes Oxley (SOX), which applies its whistleblower and document destruction sanctions to nonprofits. • The Form 990 encourages those nonprofit organizations that have not yet adopted such policies to do so in the near future.

36. Form 990 Schedule J

37. Compensation Policy • Executive compensation has been a significant issue for exempt organizations since the introduction of intermediate sanctions. • A number of the high profile nonprofit scandals, such as American University and United Way, have involved compensation.

38. The Form asks for a narrative description of the organization’s executive compensation procedures and suggests certain basic parameters: review and approval by independent persons, use of comparability data, and contemporaneous substantiation of the deliberation and decision (minutes and compensation committee reports). • These details encourage the adoption of a formal compensation process complying with the terms suggested in the Form.

39. Joint Venture Policy • If the organization engages in most forms of joint ventures or other joint investments, whether with nonprofit or for-profit partners, it must disclose whether it has a joint venture policy in place. • The questions and instructions define such a policy as one that safeguards the organization’s tax-exempt status during its participation in the endeavor.

40. Form 990 Part VI Sec. C

41. Governance Disclosure Policy • A further question requests a narrative response to how the organization makes its governing documents, conflict of interest policy, and financial statements available to the public. • Despite the ready availability of Form 990s gratis online through GuideStar, another question inquires about how the organization disseminates is Form 990. • Nonprofits need to think about regularizing the disclosure of their significant governing documents.

42. Form 990 Part XI

43. Audit Committee Charter • The Form asks, in Part XI, whether the filing organization has an audit committee to review its outside audit. • Not any committee denominated the “audit committee” will do. • The instructions include a detailed description of a compliant audit committee.

44. Nonprofits need to think about: • adding a standing audit committee if they do not already have one, • re-structuring their existing audit committee to meet the definition if they have one, or • explaining in narrative why they think their current audit committee structure works better for them than one that meets the definition in the instructions.

45. 2008 Instructions for Form 990 Glossary • audit committee A committee, generally established by the governing body of an organization, with the responsibilities to oversee the organization’s financial reporting process, monitor choice of accounting policies and principles, monitor internal control processes, and oversee hiring and performance of any external auditors.

46. Form 990 Schedule M

47. Gift Acceptance Policy • If the organization has received more than $25,000 in noncash contributions or contributions of art or historic items, regardless of value, it must complete Schedule M. Schedule M in turn inquires whether an organization that receives nonstandard gifts has a gift acceptance policy.