Posted January 1st, 2008

Corporate Governance Update: Part 2

Editor’s note: Last month, Give & Take brought you Part 1 of an article on corporate governance. We reported on the recent meeting of the National Association of Attorneys General (NAAG)/National Association of State Charity Officials (NASCO) and examined questions raised by the activities of some high-profile nonprofits and individuals involved with them, and discussed the themes of transparency and accountability. In this month’s follow-up article, we examine other recent developments, including some aspects of the proposed new Internal Revenue Service Form 990.

It is important to be aware that the IRS is not the only federal entity interested in the issue of accountability and transparency of nonprofits. This issue is also on the radar screen of the legislative branch as well as regulators at both the state and federal levels.

Recently, for example, Iowa’s Charles E. Grassley, the ranking Republican on the Senate Finance Committee, began investigating six well-known religious organizations. Senator Grassley stated, “The allegations involve governing boards that aren’t independent and allow generous salaries and housing allowances and amenities such as private jets and Rolls-Royces. I don’t want to conclude that there’s a problem, but I have an obligation to donors and the taxpayers to find out more.”

Such concern was not limited to congressional leaders. In response to the action of Senator Grassley, Marvin A. Olasky, editor of World magazine, a respected and influential publication, stated, “These organizations should be pressured to disclose information. If glasnost worked in the Soviet Union, it can work in relation to these ministries.”

Senator Grassley has requested that the six ministries provide additional information about their spending, including compensation and benefits, board structure, and oversight. Since the six churches are classified as religious organizations, they are not required to file Form 990, which would outline the details of their financial affairs.

Recently, as reported in the Chronicle of Philanthropy, in response to some nonprofit hospitals’ objection to the proposed content of Form 990, Senator Grassley stated that if nonprofit hospitals continued to push for what he called a “watered-down” version of the proposed schedule H, which would accompany the new Form 990, he would consider legislation that would create stringent new rules for hospitals.

In these statements by Senator Grassley, we gain insight into the mood of Congress in regard to the significance of transparency and accountability, and we better understand the importance and the priority Congress is placing on the new Form 990.

Form 990 gets a makeover

The proposed new Form 990 is this tax form’s first major overhaul since 1979. With the updates, the IRS has taken the opportunity to help create an environment in which the public, donors, regulators, and legislators can have a better understanding of how a specific organization works or, in some cases, does not work.

Regardless of the final format of the new 990, it is apparent that corporate governance is very important to those at the federal level. Materials submitted by parties in response to the proposed 990 acknowledged that transparency in the nonprofit area is critical.

Two good examples of the type of responses the IRS has received are from the Taxpayer Advocate Service and BoardSource. In a letter from the Taxpayer Advocate Service, the introductory sentence reads, “I commend your efforts to redesign Form 990 so as to enhance transparency, promote compliance, and minimize the filing burden on exempt organizations.” On its web site, BoardSource states, “We support efforts by the IRS to redesign the Form 990 so that it enhances transparency, promotes tax compliance, and minimizes the burden of filing.”

The question is not whether the IRS should be involved in corporate governance: it is already involved. The question is how involved it will be in the future. We can get an indication to the answer by reading the remarks of Steven T. Miller, Commissioner of Tax-Exempt and Government Entities of the Internal Revenue Service. In a speech at a Georgetown Continuing Education Seminar, Miller stated, “Sunshine and good governance will drive good behavior. As physical borders diminish in importance, and with no federal counterpart to the state charity officials’ fiduciary rules on the use and misuse of charitable corpus, I believe there is a vacuum. As long as that vacuum exists, I believe the IRS is in the best position to fill it. At a minimum, we should educate on basic standards and practices of good governance and accountability. And we should strongly encourage the community in its efforts to formally elevate standards. Whether we must do more will depend on if these or similar efforts by the community are successful. Someone needs to lead the sector on this issue. If not the IRS, then whom?”

The importance of the IRS’s role in nonprofit governance was further expressed by Lois G. Lerner, a top IRS official who spoke at the NAAG/NASCO conference in October 2007. Lerner acknowledged that while the states have responsibility for the day-to-day corporate governance of nonprofits within their jurisdiction, this does not preclude the IRS from asking questions about board governance. Lerner stated that “governance is a very big part of accountability.”

The proposed new Form 990 contains the following three questions that will likely spur discussion:

1. Did the organization’s governing body review this Form 990 before it was filed?

2. Does the organization have a written conflict of interest policy and, if so, how many transactions did the organization review under this policy and related procedures during the year?

3. How do you make the following available to the public?

a. Organizing/governing documents
b. Conflicts of interest policy
c. Form 990
d. Form 990-T
e. Financial statements

As a result of numerous comments from the public sector, the IRS has agreed to make some changes and to clarify certain issues. However, as of this date, there is no evidence that they have made any changes regarding the governance issues. In fact, the IRS has received very few negative comments about the transparency required by the new sections dealing with corporate governance.

Final thoughts

In an era where board members and officials of both for-profit and nonprofit organizations are subject to more scrutiny, the IRS has decided to be a player. We in the nonprofit sector understand that when the agency that can question our tax-exempt status is interested in how we do our business, how we do our business becomes that much more important.

Regardless of the final format of Form 990, the landscape of corporate governance has changed and will continue to change. When top officials of the IRS, Congress, and state governments begin to inquire into nonprofits’ financial practices, charities—whether they like it or not—must be prepared and confident that when their finances become an “open book,” they have nothing to hide.

Editor’s note: For the latest on the Form 990, check www.irs.gov.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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