|Have a Question? No doubt that means someone else does too. If you have a question, send me a note on the
Contact page and I'll post it, with the answer (if I know it) (or my opinion) here. I sometimes have trouble deciding
between using this page or my Screeds page so you should probably check both places.
|Q & A
|Q: Are there any policies we are required to have?
A: Yes. Under Sarbanes-Oxley (which mostly applies only to publicly traded stock companies), all
corporations effectively must have both a whistle-blower policy as well as a document
retention/destruction policy. This is because 'SOX' makes it a crime to retaliate against a
whistle-blower and makes it a crime to destroy documents in certain circumstances. Having clear,
well-articulate policies that you actually follow is the best defense in both cases, hence, the
commonly misunderstood notion that SOX "requires" both policies (disclosure - for about a year
this retention/destruction policy. This is because 'SOX' makes it a crime to retaliate against a Form
1023. The New 990 carries this to a whole new level (see the "Form 990" page on this site for
whistle-blower and makes it a crime to destroy documents in certain circumstances. Having clear,
more discussion). A Conflict Policy is not legally required but new applications get tortured if they
say well-articulate policies that you actually follow is the best defense in both cases, hence, the
"no" until they cry "uncle" and adopt one, and on Form 990 it looks bad publicly to say no. The
conflict commonly misunderstood notion that SOX "requires" both policies (disclosure - for about a
year this policy that the IRS promulgates asks that directors and officers report if they or any person
related to site carried on that misunderstanding). Additionally, since 2004 or so, IRS has been
asking both new them by blood or business receives compensation in any form from the reporting
entity. It requires an annual report, which is often not complied with - group adopts IRS model
policy and never reads it again. The new revised 990 which has been published with intended use
for 12/31/08 and later year end filers (comments due by September) asks about all three policies,
* Conflict of Interest
* Document Retention/Destruction
....and goes on to ask about what conflicts have been reported and what action was taken!
Q: Do you have model policies to give us here?
A: No, unfortunately. I've seen several and have several in my archives (if you ask nice...) but what I
really wish someone would pay me to do (how mercenary!) is to sit down and think them through
and publish a realistic set for small 501(c)(3) charities and 501(c)(4) social welfare organizations
in the $0-$2M range.
|Q: What are Fiduciary Duties and who are the Fiduciaries?
A: Now of course what I should write here is "ask a lawyer," but part of the purpose of this site is to
offer free information! Do understand that this is a very highly nuanced area of law that evolves
really is a matter of seasoned legal judgment as to what is or is not sufficient carrying out of
fiduciary duty. So take my words as background, not perfect answers.
First, I write this because I find that the word "fiduciary duty" is so often interpreted as a sort of
'fiscal duty' (like "eat your Wheaties!") when in fact it goes much deeper than that. The primary
fiduciary duties are the Duty of Care and the Duty of Loyalty.
Duty of Care is where the "prudent person" standard comes in and where the idea that fiduciaries
should indeed read the financial statement (but also the program activities report and the status of
fundraising or earned income generation efforts). All of these things are necessary to do one's job
prudently and in good faith. Why does it matter? Social responsibility as a steward of public funds
is the main reason. At the extremes, a state Attorney General can bring suit against fiduciaries for
violating the Duty of Care, and if an organization gets sued, and a fiduciary is named as a
defendant, the fiduciary's personal attorney will try to get them dismissed as a defendant because
the point of being incorporated is to shield individuals (who fulfill their Duty of Care) from liability,
and in addition to the corporate "veil" there was a long-held "good samaritan" standard that in the
case of charities, we'd hold the fiduciaries a bit less responsible than fiduciaries of a for-profit
corporation (I'm told this is being steadily watered down).
Duty of Loyalty is one that I see violated all the time. It means that when you're serving a charity as
a fiduciary that you should act first and foremost in the interest of the charity. In other words, if
you're on the board and you know your dear friend the Executive Director has family problems and
really needs an extraordinary raise, that you must put your duty of loyalty to the charity ABOVE your
duty of loyalty to your friend. It also comes up with coalition-style boards where directors think of
themselves as liaisons or representatives for their "home" organization and overlook their Duty of
Loyalty to the charity, perhaps swiping fundraising intelligence, information on great staffers, etc.
At the most extreme we get a director mad at an employee, rooting around in employment files and
besmirching the reputation of the employee and have a possible cause of action by the charity
against its own fiduciary (for putting the organization at risk of an employment suit or department of
Who are the fiduciaries? Definitely the Board (directors or trustees, same difference) and the
Officers. Probably also the CEO/Executive Director, and probably the CFO. Perhaps very powerful
|How do we measure
progress that is not
A: I recently had a client ask me about how to measure some of the more ethereal aspects of her
strategic plan. This is a very sophisticated manager and organization already, and it worked to
make the strategic plan measurable and specific and quantified when it wrote the plan last (it is in
year 3 on this 5-year plan).
This question recalled to me a recent conversation at CompassPoint's Finance Professionals
Network, a local gathering of finance director types working at nonprofits who meet a half-dozen
times a year to share skills.
One woman in the network really caught my attention at a recent meeting by saying "anything can
be measured" when we were talking about whether Finance should lead the way in developing
tracking reports for things other than money? So I called her just now to gather some thoughts
and have a few to offer here. We were talking generally about organizers, labor or community, who
often feel their work is not quantifiable.
She suggests you talk to the organizers and LISTEN to what they say. They know what they're
doing and if you listen for it you can help them figure out how to measure it. This is especially
important in multi-year campaigns where resources can too easily be wasted. Some tips:
"Be careful what you measure, or it will pervert the process." For example, if you place too much
emphasis on counting an effort such as house meetings, program staff may hold more of them
than is most effective for the objectives at hand.
"Anecdotal information systematically gathered is data." If we could afford it, we might pay for
longitudinal polling about attitudes towards our work, or towards being in a union among workers,
but this kind of study is expensive for most of our groups. This tip reminds me of the need for all
business organizations to create a "learning organization" but the key here is to capture, or better,
to methodically and regularly ask the target audience what it thinks/feels, and record that.
|Can we really keep
track of policies
adopted by the Board?
|rather than ask counsel to put it in the Bylaws and he asked if I knew anyone who really could keep
track of all their policies if they weren't in the Bylaws, without having to plough through all the old
minutes and hope to find the policies. So I asked the E.D. of one of my best-governed clients,
Elizabeth Lunney, of Washington Trails Association (www.wta.org).
Q: Do you have a system to keep track of all your policies without putting them in your Bylaws?
A: RE: board stuff. Hmmm. We have board notebooks that contain a section on all advocacy
policies, including our policies on how advocacy policy is made. It's really helped to have a 3-year
sunset on these things, helps make sure they stay on the radar screen or die off as needed.
We also include in the board notebook other administrative and financial policies, endowment and
gift acceptance policies in particular. It's just part of the template notebook I give them along with
bylaws, minutes, board contact lists, etc.
In general, though, I say, if it's not important or current enough to get your hands on easily, it's
probably best tossed in the shredder and then let the board reinvent it when it realizes there's a
need for such a policy again. Sunset provisions are a beautiful thing, especially when your board
turns over every couple years.
Life AFTER the Final
Ruling: What's different
|Q: I just received a letter from the IRS saying that based on the information submitted, [our group]
is classified as a public charity under the status of: 170(b) (1) (A) (vi) 1. Sounds good to me and I
thank you for your help with this! "509 (a) (1)" is not mentioned but perhaps this is understood, or
perhaps the classification they have given us is sufficient.
A: Yes it means you have your final 509(a)(1) determination. But they should have said it.
Here's the deal: These numbers are all sections of the Internal Revenue Code, meaning the law
passed by Congress. The law assumes you are a private foundation unless you can prove you
are not under Sections 509(a)(1), (2), (3) or (4). Section 509(a)(1) really has six parts because it
says "anything in 170(b)(1)(A)(i)-(vi)."
iii hospital or medical research organization
iv support organization to a public college or university
v unit of government
vi publicly supported like the group asking
The vi status is the most common type of nonprofit so it's weird that it's code section is so obscure.
Two technically accurate ways to refer to your status (but most donors only care about 501(c)(3), so
this language is mostly for private foundations to which you might apply):
"We have our final determination that we are a publicly supported 509(a)(1) public charity."
"We have our final determination that we are a 501(c)(3) charity, and a public charity, not a private
foundation, because we are described in Sections 509(a)(1) and 170(b)(1)(A)(vi)."
Congratulations! One less worry for you.
|Change fiscal year
|Q: How do we change our fiscal year end?
A: In tax exempt organizations, IRS usually doesn't mind (although there is a form somewhere in
there they made me use once in an elaborate maneuver called a private foundation termination),
so the answer is basically "just do it." (Write "change in tax year" at top of return.)
See Instructions to Form 990, 2006, Page 7, Column 1
You amend the Bylaws to adopt a new year-end, and then you file the 990 for the short year.
This happens often enough during advance ruling periods, that sometimes the end of the advance
ruling period falls at a mid-year point. For example, you incorporate 3/21/07, with a 12/31 year end,
and you apply for recognition as a publicly supported charity. They will then give you an advance
ruling period ending 12/31/11 (five fiscal year ends later). Come February 2008, you realize it
makes more sense to end on September 30, because you're handling federal contracts on that
same fiscal year. So in March the Board amends the Bylaws to adopt a new year-end, and you file
a return for 1/1-9/30/08, and then when the advance ruling period ends, your Form 8734 will have
the following "years":
9/30/11-12/31/11 (which will NOT be a year for a 990, just on the Form 8734)
Or, if it was an ongoing public charity already already with a final ruling, it would file two consecutive
990 Schedules A with public support test periods for which the "four year" basis was less than 48
months on the support schedule.
In taxable entities, this is much more sensitive because of the opportunity to defer taxes.
|Q: My husband provided health exams for a children's charitable program and has received
several "in-kind" forms for professional services donated. Are these the sort of thing that can be
used as a tax deduction or just for personal records?
A: Sorry, no the [non] billable hours are not charitable tax deductions. The idea is that if you
volunteer time you need some income to deduct it against. The Opportunity Cost ("I could have
been making money but for the time I was donating" doesn't count.)
You could get paid and then turn around and donate the money but what's the point? (You'd come
out worse actually because it's a deduction and not a credit).
Now, if he paid a junior staff person, or used supplies and materials, his costs in doing that are
likely deductible. Same for mileage. In the instructions to Schedule A for itemized deductions, in
the part about charitable contributions, it may repeat this, and it will give the mileage rate usable for
the charitable deduction when volunteering.
That charitable program needs some help because it sounds dangerously like they're implying to
in-kind service donors that it's deductible. A nice certificate that you could consider hanging on the
wall of the home office as a kind of p.r. move to show community involvement would be more
useful than what they sent.
Information on recording Gifts In Kind is on the Downloads page of this site.
|Q: We are virtually all volunteer with a tiny budget. Someone told us we do not have to file any
Form 990 because we are under $25,000. Is this true?
A: No. The law has changed. It used to be true if you averaged <$25K in income and assets but
now every organization must file something, and if they don't file for three years they must start over
and re-apply for recognition of exemption. The IRS has not yet finalized the form but it will be an
online "e-postcard" called 990-N, which Attorney Eve Borenstein (see my page for nonprofit
attorneys) calls the 990-No (I just LOVE that...and it's a perfect example of Eve's creative energetic
Note also that in California, the Form RRF-1 is due from all charities no matter how small, and in
the context of the Attorney General's registry of charitable trusts, "charity" means public benefit
corporation so includes 501(c)(4) social welfare organizations.
Q: What would we report on the form? We are dormant.
A: That's always the wrong answer. To be exempt at all, you must be "organized and operated" for
exempt purposes. "Organized" is about what's in your Articles of Incorporation or equivalent
founding document, but "operated" requires that you be doing something, but does not require that
you have or spend money. So the way to describe an intentional period of dormancy is that you're
in an 'all-volunteer planning mode' with your board meeting at least annually (maybe more if your
state requires it - once per year is the common requirement) to assess whether more activity is
needed. And so you should also hold that annual meeting, also to elect directors and officers
whenever required by your Bylaws. You're just operating at a very low level. :)
|990-N for very small
|Q: Our nonprofit gets money in large grants to be spent over the next year. Typically in May/June
and November/December. This means that at the end of the calendar year we often have a lot of
cash. Do we REALLY need to worry about bank failures if we bank with a large prominent bank?
A: YES. In my lifetime there was a period when banks were failing, surprisingly large ones, and
often nonprofits were the ones holding the bag, precisely because of this issue of timing. I
googled "FDIC bank failures" and found a list of bank failures back to 1991. I think it was the early
80's when it was really bad. In any case, you don't want to go there. In February, CNN.com
reported that 100-200 banks were expected to fail. As I write (7/27/08), we've had the IndyMac bank
failure in L.A. where depositors over $100K were out of luck, and this week the FDIC shuttered two
banks in the Southwest and immediately sold both to Mutual of Omaha (all deposits were "bought"
and covered). The business press still reports that FDIC is tracking as many as 200 "troubled"
banks (they of course do not release names or they'll trigger a run on those banks. The FDIC itself
does not have enough to cover all 200 banks. Additionally, I'm told that when banks did fail it
sometimes created delays in accessing funds. Scary. In any case, assuming the FDIC limits will
be honored by the U.S. taxpayer no matter what,
I asked around and got two answers from respected colleagues:
1. First response from this one: "Thanks, Terry. I am completing the paperwork to put $100k in
New Resource Bank (you should check them out if you haven't already - they are doing some
interesting things and are FDIC). I'm also working to set up a CD ladder - I'll keep you posted."
and then later he writes:
"Schwab researched certificate of deposits for us and developed a strategy to invest in 5 or 6
different banks, to both increase return and diversify the cash so that we were safely under the
FDIC limit. ...
I'd like to go ahead and set [us] up with the same thing. Of course I would be sure that we always
had ready cash for operating, but as an example right now we have about $600k in [our bank] with
another $350k from [big funder] coming soon. (Good news on that grant we've been waiting on.
It's not official yet but this is their assurance to us. So that's $150k more than we budgeted.) We
need about $130k per month, so we could build a CD "ladder" with maturity dates staggered over
the next 6 months or so."
2. Another client had taken action before I spoke to her; she writes: "In order to protect our
deposits in excess of the $100k FDIC limit, I asked our bank to purchase federal treasuries as
collateral. That way the first $100k is as good as the fed gov and the excess is as well. Our bank
did this for the state university and was willing to do it for us when we threatened to pull out our
money in excess of $100k. It’s great because I get all the efficiencies of having the money at one
institution. We have several accounts -- checking, money market, CDs. The bank looks at the total
that is in excess of $100k. The bank sends me a monthly report documenting the treasuries that
are held. Feel free to pass this suggestion to others if you think it would be helpful." [Note the
need to threaten- this is consistent with my experience - the big banks refuse to acknowledge they
Are we really safe?
What to do?