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TABLE OF CONTENTS ABOUT THE AUTHOR COVERAGE ERROR! BOOKMARK NOT DEFINED. FORWARD ERROR! BOOKMARK NOT DEFINED. CHAPTER 1-SETTING THE STAGE: SOME PRELIMINARIES ERROR! BOOKMARK NOT DEFINED. Are Non-Profit Directors Really Afraid of Liability?: The Trustees of the Tampa Museum of Art Paint a Different Picture THE NEED FOR ACTION United Way of America and William Aramony, the Granddaddy of Scandals The Museum of Modern Art: A Fundraising Juggernaut. But Would Less Have Been More? PART OF THE BIGGER SCHEME ASSUMPTION GENERALITY OF COVERAGE USING QUALIFIED PROFESSIONALS BEFORE STARTING A NEW ORGANIZATION Start by Looking for an Existing Charity A New Trend Toward Consolidation Consider Partnering Opportunities Identify Funders Retain a Qualified Attorney Advice to The Wealthy CONCLUDING THE PRELIMINARIES CHAPTER 2-BEFORE SIGNING ON ERROR! BOOKMARK NOT DEFINED. "GIVE, GET, OR GET OFF" ASK QUESTIONS REVIEW MATERIALS MEET WITH THE EXECUTIVE DIRECTOR AND OTHER OFFICERS REVIEW OTHER RESOURCES STEP ASIDE IF THE INFORMATION IS NOT FORTHCOMING CHAPTER 3-ORGANIZATON BASICS ERROR! BOOKMARK NOT DEFINED. NON-PROFIT VERSUS TAX-EXEMPT STATUS THE CORPORATE FORM IS THE PREVALENT ONE THE PLAYERS The Board of Directors Oversight versus Operations Chairman of the Board Board Membership Board Committees A Director is a Director Board Decisions Trustees Functioning as Directors Removal and Resignation Board Vacancies The Officers The President The Vice-President The Treasurer The Secretary Members Advocacy vs. Affinity Membership Requirements and Rights Member Decisionmaking Membership Lessons From the Sierra Club Constitutional and Due Process Overlay Corporate Affiliated Groups The Regulators-State Attorneys General Standing Louisiana College ORGANIZATIONAL DOCUMENTS Using Forms Core Documents Articles of Incorporation By-Laws Statutory Default Provisions Amendments Director Review More than Boillerplate Terra Museum of Art and the Purposes Clause MEETINGS A Recommended Meeting Format Meeting Minutes Executive Sessions The Internet and Meetings MAJOR EVENTS Formation Dissolution The Dispute is Never Really Over Legal Doctrine: Shorter College and the Greater Baptist Convention Operations YOUR ROLE CHAPTER 4-LEGAL DUTIES & OBLIGATIONS ERROR! BOOKMARK NOT DEFINED. A WELL-KNOWN CASE DIRECTOR DUTIES AND RESPONSIBILITIES The Duty of Care The Duty of Loyalty The Duty of Obedience STANDARDS FOR JUDGING BEHAVIOR Business Judgment or Ordinary Prudence Malfeasance Specific Duties for Which There May Be Liability Liability Arising from Joint Ventures and Subsidiaries THE STANDARDS AS APPLIED TO COMMON DECISIONS Exercising Due Care-Compensation Exercising Due Diligence-Investments Avoiding Conflicts of Interest-Selling Assets Resisting Founder's Syndrome-Diversification DIRECTOR RIGHTS A FURTHER LOOK AT INVESTMENT DECISIONS What the Process is Not Reserves or Endowment? Investing Endowment-The Standard Dancing With the One Who Brung Ya Translating Legal Standards into Actual Conduct Risk-Reward Analysis: Asset Allocation Models Diversification Pulling the Pieces Together Into a Process Delegation versus Abdication Investment Managers and Advisors Risk Management Corporate Trustees and Charitable Beneficiaries A FURTHER LOOK AT CONFLICTS OF INTEREST Need for a Conflicts of Interest Policy The Community Organization-Case-1 The Art Museum-Case 2 The Hospital-Case 3 The Foundation "Slush" Fund-Case 4 Loans to Directors and Officers MOVING FROM A VOLUNTEER DIRECTOR TO A PAID EMPLOYEE RELIEF FOR DIRECTORS AND OFFICERS State Relief Federal Relief Under the Volunteer Protection Act GOOD FAITH: A STORM ON THE HORIZON FOR NON-PROFIT DIRECTORS AVOIDING TROUBLE AS A DIRECTOR AVOIDING TROUBLE AS AN OFFICER THE LITMUS TEST FOR GOOD CONDUCT CHAPTER 5-READING THE FINANCIAL STATEMENTS AND RELATED MATTERS ERROR! BOOKMARK NOT DEFINED. Theft At Chicago Public Television Station is Further Proof That Internal Controls Matter WHERE ACCOUNTING RULES COME FROM THE THREE COMPONENT PARTS Statement of Financial Position Financial Position and Liquidity Statement of Activities Activities and Liquidity Liquidity is Once Again the Problem Statement of Cash Flows Cash Flows and Liquidity Different Focus GUIDANCE FOR THE BOOKKEEPER RATIO ANALYSIS Seven Basic Ratios Current Ratio Quick Ratio Defensive Interval Ratio Savings Indicator Revenue Generation Ratio Debt to Total Net Assets Times Interest Earned Other Ratios THE HOURGLASS ANALYSIS-THE MILWAUKEE PUBLIC MUSEUM A HEALTHY DISCUSSION AT THE CORCORAN MUSEUM DONOR INSIGHTS AND FINANCIAL STATEMENT REPRESENTATIONS GAAP Versus Form 990 Disclosing Fundraising Expenses Expensing Fundraising Expenses Allocating Overhead Taking Contributed Services Into Account Consolidating Affiliated Entities AUDITOR'S REPORT AUDIT COMMITTEE Audit Committee Review Audit Committee and Whistleblowers Audit Committee Membership California's Approach to Audit Committee Membership GAO AUDIT GUIDELINES Best Practices Prohibited Services Personal Impairments-Case Study Concluding Thoughts INTERNAL CONTROLS The Three Basic Functions Custodial Function But What about Outright Theft? Recording Function Authorization (Disbursement) Function A Closer Look at Financial Controls Cash Whitney Museum Focuses on Art at the Expense of Internal Controls Receivables Inventory Fixed Assets Intangible Assets Accounts Payable Payroll Conclusion A Case Study Recommended Controls Considerations for Grantmakers FINANCIAL CONTROL RECOMMENDATIONS AND REQUIREMENTS FOR RECIPIENTS OF FEDERAL FUNDS FRAUD AND THEFT The Three Categories of Fraud Avoid Concentrating Efforts Trust, but Verify Employee Tips Two Anonymous Tipsters Set the Story in Motion Internal Audits and Controls The Lone Perpetrator Accounts for the Highest Percentage of Frauds Background Checks May Not Be the Answer Tenure is an Erroneous Basis for Trust The Lessons FRAUD AND THE AUDIT SARBANES-OXLEY REFORMS Financial Certification The Artist as Executive Director-Case 1 Minimal Financial Assets-Case 2 Auditor Independence Rotating Auditors Audit Committee Member Independence Financial Expertise Providing Audited Financial Statements to Members Other Provisions SUMMATION: STEPS FOR THE BOARD CHAPTER 6-FEDERAL TAX EXEMPTION ERROR! BOOKMARK NOT DEFINED. TAX-EXEMPT ENTITIES Charitable Organizations Social Welfare Organizations Labor and Agricultural Organizations Business Leagues Social Clubs Fraternal Societies Veterans' Organizations Employees' Associations Political Organizations THE BREAKDOWN A DETAILED LOOK AT SECTION 501(C)(3) STATUS Defining "Educational" and "Religious" GOING BEYOND CONVENTIONAL ILLEGAL SUBSTANCES: WILL THE U.S. SUPREME COURT SETTLE THE ISSUE ONCE AND FOR ALL? Organizational Test-The First Requirement Organizational Test_Drafting Considerations The Organizational Test-Focusing on the Organization's "Death" Operational Test-The Second Requirement No Private Inurement-The Third Requirement Benefits come With Burdens OBTAINING TAX-EXEMPT STATUS The Exemption Process-Preliminaries Obtain an Employer Identification Number from the IRS Complete the Formal Organizational Process Compile Financial Data Executing a Power of Attorney The Exemption Process-Completing Form 1023 Who Must File When to File Form 1023 Where to File Filing Fees Other Organizations_Form 1024 Approaching the Process State Exemption requirments PRIVATE INUREMENT-THE PROHIBITION Compensation Other Potential Instances For Prohibited Inurement Consequences INTERMEDIATE SANCTIONS Excess Benefit Transactions Private Inurement or Violation of the Intermediate Sanctions: Where is the Line? Disqualified Person-Basics A Board Member-Case 1 The New Hire-Case 2 Exercising Substantial Influence-Case 3 Excise Taxes Rebuttable Presumption Contemporaneous Substantiation Exceptions for Certain Income and Transactions Initial Contract Exception Nontaxable Fringe Benefits Exception Expense Reimbursement Exception Additional Punishment for EvilDoers What's Really Going On The Staff of the Senate Finance Committee is Unhappy with the Lack of Impact from the Intermediate Sanctions Compliance Procedures Comparables: Justifying Compensation IRS Direction to Agents Conducting Audits Beyond Museums, Hospitals, & Universities: Small Social Service Agencies Must Watch Out, Too PRIVATE FOUNDATIONS Public Charities versus Private Foundations_Workable Definitions Category 1_Absolutes Category 2_Broadly-Supported/Services organization Category 3_Supporting Organizations Typical Private Foundation Reasons to Avoid Private Foundation Status Tax on Net Investment Income Tax on Self-Dealing I Hear You Knocking: Will the IRS Compound the Problems Facing Former Managers of a Texas Foundation? Tax on Failure to Make a 5% Distribution Tax on Excess Business Holdings Tax on Jeopardizing Investments Tax on Taxable Expenditures Alternatives To Private Foundations Community Foundations Commercial Funds Supporting Organizations Termination of Status Conclusions POLITICAL ACTIVITIES Charitable Organizations Education or Politics? Permitted Activity or Crossing the Line? Permitted Activities Prohibited Activities Attribution of Individual Positions to the Organization NAACP Defies the IRS: Express Advocacy, Coded Language, or Policy Discussion? Excise Taxes on Political Activity Private Foundations Other Organizations Tax on Political Expenditures or Net Investment Income Deductible Dues: The Proxy Tax or Disclosure Politics and the Internet Political Activity: The Other Regulatory Regime LOBBYING "Lobbying" Defined Excluded Activities "Insubstantial" Level of Activity The Election Under Section 501(h)-Eliminating Uncertainty Lobbying By Other Tax-Exempts UBIT-NOT ALL INCOME IS TAX-EXEMPT Organizations Subject to the Tax Reason for the Tax Tax Rate Triggering the Tax: The Three Critical Conditions "Regularly Carries On" "Trade or Business" "Unrelated" Exceptions From Tax Exception for Investment Income Exception for Activities Involving Volunteer Labor Exception for Activities Operated for the Convenience of Employees, Members, Etc. Exception for Income from the Sale of Donated Goods Exception for Sponsorship Payments Exception for Low-Cost Items Exception for Mailing List Rentals Exception for Bingo Games Exception for Qualified Convention and Trade Show Activities Exception for Qualified Entertainment Activity Some Common Types of Income Income from Museum Gift Shops and Other Activities Income from Travel Tours Income from Insurance Activities Income from Partnerships Income from Online Activities The Hidden Business Issue in UBIT Deductions Against in Computing Unrelated Business Taxable Income A Workable Approach to UBIT REPORTING REQUIREMENTS Information Returns-The Form 990 Series Form 990 Content Preparation of Form 990 Watch Out for Question 89b Filing Form 990 Review by the Board Disclosure Now Required The Implications flowing From Disclosure Reporting Requirements for Gambling Activities (Bingo and Raffles) Other Reporting Requirements Terrorism and the Non-Profit Sector The 2004 Tsunamis and Terrorism CHAPTER 7-TAX ASPECTS OF CHARITABLE GIVING ERROR! 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DEDUCTION BASICS Overview The Deduction's Value Qualified Organizations Business or Charitable Organization Individuals Widows and Orphans Payments for Services Pushing the Limits Can Result in Jail Time Charitable Class-Disaster Relief Quid-Pro-Quo Contributions When to Claim a Deduction_Timing Amount of the Deduction Reduction in Contribution for Certain Property Bargain Sales to Charities Contributions of Encumbered Property Limits on Individual Contributions Carryforwards Anything but a Secret Limits on Corporate Charitable Contribution Deductions Volunteers Concluding Thoughts DISCLOSURES AND NOTICES BY CHARITIES Quid Pro Quo Contributions Substantiation Requirements Content Sample Substantiation Language A Cautionary Tale about Social Security Numbers The Board's Role Appraisals are the Donor's Responsibility, But Charities Should be Careful, Too SUBSTANTIATION BY THE DONOR AND APPRAISALS Appraisals Qualified Appraiser Prohibited Appraisal Fees Required Information Art Work Tax Treatment of Appraisal Fees Special Rule For Automobiles, Boats, and Airplanes PLANNED GIVING Pooled Income Funds From the Donor's Perspective From the Charity's Perspective A Pooled Income Fund Example Pooled Income Funds Are Not Black Boxes Pooled Income Fund Advantages Pooled Income Fund Statistics Charitable Remainder Trusts From the Donor's Perspective From the Charity's Perspective A Charitable Remainder Trust Example Charitable Remainder Trusts are Not Black Boxes Charitable Remainder Trusts Represent Fertile Ground for Fundraisers Charitable Lead Trusts From the Donor's Perspective From the Charity's Perspective Private Foundation Rule A Charitable Lead Trust Example Charitable Lead Trust Statistics Charitable Gift Annuities From the Donor's Perspective From the Charity's Perspective A Charitable Gift Annuity Example Other Partial Interests in Property Partial Interests in Personal Residences and Farms Conservation Easements Partial Interests in Works of Art New Devices Are Proposed All the Time CHAPTER 8-OTHER BENEFITS ERROR! 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PROPERTY TAXES Illinois State Constitution and Statutes Three Cases Exclusive Use-Case 1 Exempt Use-Case 2 These Disputes Do Arise in the Real World Commercial Competition-Case 3 "It's So Elementary, It's Almost Embarrassing" PILOTs Philadelphia's Experience Possible Benefits Taking the Offensive with PILOTs Targets Checklist SALES TAXES-PURCHASES BY NON-PROFITS Iowa Department of Revenue and Finance_June 2002 SALES TAXES-SALES BY NON-PROFITS POSTAL NONPROFIT STANDARD MAILING RATE Basic Rules Products Advertising Content USPS Diagram Personal Information Comprehensive Example Applying for Favorable Rates In Practice SECURITIES OFFERINGS Section 3(a)(4) of the Securities Act of 1933 TAX-EXEMPT FINANCING Relying on Forecasts GRANTS "DO NOT CALL" Registry and other FTC Limitations Two Rules Additional Rules Applicable to Telephone Solicitations FEDERAL FUNDING FOR FAITH-BASED ORGANIZATIONS Boards of Faith-Based Organizations Receiving Government Funding Should Closely Monitor Organizational Activity: Avoiding Lawsuits PURCHASING PROGRAMS CONCLUSIONS CHAPTER 9-REGISTRATION AND REPORTING ERROR! BOOKMARK NOT DEFINED. REGISTRATION IS CONSTITUTIONAL THE REGISTRATION PROCESS California Government Code Sections 12580-12599.5 Florida Statutes Chapter 496 Solicitation of Funds States Requiring Registration Exemption for Smaller Organizations Annual Financial Reports The Internet Raises Difficult Questions Smallville Children's Theatre-Case 1 Save the Bay-Case 2 The World Church of the Creator and the Illinois Experience Professional Fundraisers Generally Must Register Soliciting on Behalf of a Charity Some Concluding Thoughts LOBBYING Lobbying Disclosure Act of 1995 Two Basic Categories of Lobbyists Basic Registration Requirements Compliance Expense and Time Allocations Optional Reporting Two Common Scenarios Compliance with State Law Registration Provides Useful Information CHAPTER 10-FUNDRAISING ERROR! BOOKMARK NOT DEFINED. TRUTH IN solicitation Honoring Donor Intent: Direct Relief International Sets an Example for Other Relief Organizations to Follow When it Comes to Transparency FUNDRAISING AND MISSION PLEDGES Beware of the Big Man On Campus Enforceability High Pressure Tactics Pledges Can Serve a Useful Function for Donors Financial Statement Treatment RESTRICTED GIFTS Examples The Name Game Leads to a Lawsuit: "How Would You Feel if They Changes the Name on an Ancestor's Tombstone" Legal Action Restrictions, Contracts, and Taxes: Does Good Planning Create Tax Issues? Loans, Pledges, and Sales Intra-Organizational Loans Asset Pledges Asset Sales DONOR-RESTRICTED ENDOWMENTS UMIFA Basics Donor-Restrictions Accounting For Endowments CHANGED CIRCUMSTANCES-DEVIATION AND CY PRES GIFT-ACCEPTANCE POLICIES Addressing types of assets Cash and Equivalents Publicly-Traded Securities Real Estate Other Assets Addressing Types of Gifts Bargain Sales Pledges Restricted Gifts Scholarship Funds and Special Programs Addressing Donor Benefits Tax Consequences Naming Opportunities Planned Giving Programs Donor Expenses Quid Pro Quo Gift Acceptance Committee BINGO AND RAFFLES FEDERAL GRANTS Types of Federal Grants OMB Circulars OMB Circular No. A-110 (Revised September 30, 1999)-General Administration OMB Circular No. Circular A-122 (May 10, 2004)-Cost Principles for Non-Profit Organizations OMB Circular A-133 (June 27, 2003)-Audits of States, Local Governments, and Non-Profit Organizations Federal False Claims Act State and Local Grants Fundraising Through the Internet CHAPTER 11-OPERATIONAL LIABILITIES ERROR! 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OPERATIONAL LIABILITIES ARISING FROM EVENTS Security Employment Taxes, The Organization's Perspective-Issue 2 Employee or Independent Contractor: The IRS's Take Employment Taxes, Your Perspective-Issue 2 Workers' Compensation-Issue 3 Food Sales Liquor and Dram Shop Laws Fun Runs, Marathons, Carnivals, and Other Events Fun Runs Other Events Celebrities and Musicians ASCAP and BMI Licensing Summary CONFERENCE HOTELS AND RENTED FACILITIES EMPLOYMENT PRACTICES Employment At-Will Federal Anti-Discrimination Statutes Section 1981 Title VII of the Civil Rights Act of 1964 Fair Labor Standards Act Covered Employers Hours and Overtime Rates Child Labor Laws Family and Medical Leave Act Americans With Disabilities Act Uniformed Services Employment and Reemployment Rights Act of 1994 Other Laws to be Considered Preventive Measures Avoiding Diversity-Related Complaints Conducting Job Interviews and Developing Application Forms Conducting Performance Reviews Protecting WhistleBlowers Avoiding Problems-Case Studies EPL and Director Liability VOLUNTEERS CHILDREN AND LIABILITY Basic Steps Screening Defined Failure to Screen Designing the Procedures OSHA AVOIDING ORGANIZATIONAL SELF DESTRUCTION Nature Conservancy Opportunities Industrialization Center of Greater Milwaukee Even Giving Money Away Can Result in Potential Liability (or at Least a Lawsuit)-"Thank You Very Much for Your Generosity, Now Pay up" RECORD RETENTION Basics The Policy The Judicial Perspective on Document Destruction Policies Destruction in the Face of Existing, Imminent or Foreseeable Litigation or Investigations Digital Documents The Sedona Guidelines: Grappling With Tough Questions Copies E-Mail Other Issues Not All Advice is Worth Following: A Simplistic Approach to Record Retention is Ill-Advised Criminal Acts Assessing a Document's Value Legally-Mandated Minimums Retention Period Resources FACTA-Destruction of "Consumer" (Employee and Job Candidate) Information Conclusions Mechanics of the ACLU's Document Retention Policy Show the Difficulties in Implementing Any Policy A LESSON FROM THE FEDERAL SENTENCING GUIDELINES CHAPTER 12-RISK SHIFTING, INDEMNIFICATION AND INSURANCE ERROR! BOOKMARK NOT DEFINED. JUST THE FACTS INDEMNIFICATION Indemnification_Legal Issues Indemnification_Questions to Ask D & O INSURANCE Cost and Availability Considerations When Evaluating a Policy Time Frame_Two Basic Approaches Claims-Made Policies Occurrences Policies Which is More Desirable? Claims-Made is the De Facto Standard Important Clauses Insured Coverage Event versus Policy Limits Claims Notification Policy Exclusions Deductibles Allocation Employment Practices Severability Insured vs. Insured Hammer Clause Insurers Tax Considerations Arising from Indemnification and D & O Insurance Private Foundations Public Charities Recipient's Income Tax Treatment Conclusions IDENTIFYING AND SHIFTiNG ORGANIZATIONAL RISKS Risk Management Insurance Policies in General Basic Form Defense and The Costs of Defense Primary, Excess, and Umbrella Policies Marketing: Monoline, Packages, & Programs Available Coverages Commercial General Liability Insurance Workers' Compensation Insurance Automobile Coverage Commercial Property Insurance Errors and Omissions Insurance Sexual Abuse and Molestation Fidelity Insurance and Bonds Employment Practices Insurance Special Coverages CHAPTER13-EVALUATING YOUR ORGANIZATION ERROR! BOOKMARK NOT DEFINED. THE SURVEY Survey-Organizational Structure Survey_Directors Survey_Financial Oversight Survey-Financial Controls Survey-Internal Controls (Other Than Financial Controls) Survey-Tax Considerations Survey_Fundraising Survey-Registration, Reporting, and Disclosure Survey-Risk Management USING METRICS TO EVALUATE YOUR ORGANIZATION Four Basic Ratios Charitable Focus Fundraising Efficiency Management Efficiency Donor Reliance Resisting the Lure of Efficiency Ratios Applying the System_Case 1 Applying the System_Case 2 Concluding Thoughts on Ratios INDEPENDENT REVIEW STANDARDS BBB Wise Giving Alliance Maryland Association of Nonprofit Organizations' Standards project Charity Navigator Conclusion GRANTOR REVIEW STANDARDS The Combined Federal Campaign United Way CHAPTER14-A FINAL THOUGHT ERROR! BOOKMARK NOT DEFINED. ENDNOTES ERROR! BOOKMARK NOT DEFINED.
Library of Congress Subject Headings for this publication:
Nonprofit organizations -- Management.