The Institute for Public Engagement

1. The Institute for Public Engagement The IRS’ Corporate Governance Regime September 13, 2012

2. History • After several high profile scandals, such as: • Smithsonian • Getty Museum • Nature Conservancy • Senate Finance Committee and House Ways and Means Committee sponsored bills that ultimately became the Pension Protection Act of 2006.

3. IRS Vision • “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 … sound management practices is more likely to operate effectively and consistent with tax law requirements.”

4. The Charitable Nonprofit & 501(c)(3) • IRC 501(c)(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

5. The Relevant Parts of 501(c)(3) • organized and operated exclusively • no part of the net earnings of which inures to the benefit of any private shareholder or individual, • no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), • and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

6. Traditional Regulation of Nonprofit Governance The State: • Nonprofit corporations are creatures of state law, so state law has traditionally regulated the governance of nonprofit corporations.

7. Laissez faire approach • Beyond certain fundamental mandates, state nonprofit statutes did not prescribe specific corporate governance approaches. • IRS governance mandates proceed from a different frame.

8. Regulation at state: Attorney General • Regulation of nonprofit corporations has traditionally been assigned to the state attorney’s general. • Responsible for: • Promoting accountability • Maintaining a supervisory interest • Maintaining a registration of charities • Acts as an interested party in all proceedings affecting charitable trusts, uses and estates.

9. The Role of the IRS • Primary point of contact with the federal government • Police function serves to regulate charities – their board members and employees

10. “The power to tax involves the power to destroy. The power to exempt from tax presents the opportunity to intimidate, harass and bully.” Chief Justice John Marshall

11. Points of Contact • Creating standards for exemption • Determining Exemption • Examining exempt organizations & compliance • Form 990 • Education and outreach

12. Form 1023 and Governance • Form 1023 contains questions regarding the applicants governance “best practices”, including compensation and conflict of interest provisions. • Not required under state law • At the outset, new organizations are asked to adhere to governance regimes that are not state specific

13. Form 990 and Governance • All organizations that file the Form 990 must complete Part VI Governance, Management and Disclosure along with Schedule O. • Discloses information regarding • Governing body and management • Governance policies • Disclosure practices

14. Governance Questions and Form 1023 • Whether the organization engaged in or discovered an excess benefit transaction during the reporting year. • Whether the organization became aware during the year of a material diversion of organization assets. • Whether the process for determining compensation of top management includes a review and approval by independent persons. • Whether a compensation committee is used. • Whether the organization has a gift acceptance policy for non-standard contributions.

15. Disclosure • Organizations are required to provide public access to certain documents, including Form 1023, Forms 990 and 990-T. • Note: disclosure of governing documents is not required under Form 990.

16. Form 990 & Interested Person • “Interested person” – transactions with interested persons must be disclosed on Schedule L of Form 990. • Therefore, organization must have a conflict of interest policy in place, with annual conflict disclosure forms. • Impact on smaller organizations may be unwarranted.

17. Form 990 and Independent Directors • Three tests for independence: • Member was not compensated as an officer or director • Total compensation did not exceed $10,000 • Member did not take part in transaction with organization that must be disclosed under Schedule L

18. Documentation • Form 990 seeks contemporaneous documentation of board meetings and committee meetings. • Does not include advisory meetings • Significant impact on staff • Form 990, Part VI, Question 8

19. Document Retention Policy • Sarbanes Oxley inspired requirement • Appendix 7 to Form 990 provides guidance on retention and destruction policies.

20. Board Review of the Form 990 • Form 990 asks what board process is used to review the Form 990. • Implies that Form 990 in final form must be provided to each voting board member.

21. Whistleblower Policies • Policy is intended to identify those staff or board members to whom an individual employee can report misconduct.

22. Conclusion