BY HEALTH LAWYERS • FOR HEALTH LAWYERS
IRS “Good Governance” Practices
Analysis and Annotations
BY MICHAELW. PEREGRINE, ESQUIRE
ELIZABETH M. MILLS, ESQUIRE
TOPICAL INSIGHT SERIES
IRS “GOOD GOVERNANCE” PRACTICES
ANALYSIS AND ANNOTATIONS
Michael W. Peregrine
Elizabeth M. Mills
The Internal Revenue Service (“IRS”) recently released proposed, suggested governance
guidelines for organizations recognized as tax-exempt under IRC Section 501(c)(3), such as
hospitals and health systems (“Proposed Guidelines”).1 Satisfaction of the Proposed Guidelines
is not a requirement for exemption, but they are intended to emphasize what the IRS believes to
be the important relationship between effective governance and satisfaction of exempt purposes.
The Proposed Guidelines address the following nine general topics: (1) adoption of a
mission statement; (2) adoption of a code of ethics and whistleblower policies; (3) satisfaction of
the duty of care/director diligence; (4) satisfaction of the duty of loyalty/effective conflicts of
interest oversight; (5) constituent transparency; (6) oversight of fundraising activity;
(7) stewardship of financial affairs; (8) payment of reasonable compensation; and (9) adoption of
a document retention policy.
According to senior IRS official Marvin R. Friedlander,2 the IRS does not have authority
to require that exempt organizations adopt the Proposed Guidelines.3 Rather, it is the IRS’ hope
that the Proposed Guidelines will help directors of exempt organizations “understand their roles
and responsibilities and actively promote good governance practices.”4 Indeed, the historical
IRS perspective is that there is a relationship between effective corporate governance practices
The Proposed Guidelines were distributed on February 2, 2007 at the Joint Annual Meeting of the Gulf
Const., Great Lakes and Mid-Atlantic Areas TE/GE Council, held in Washington, DC and are available on the IRS
website at http://www.ir.gov/pub/irs-tege/good_governance_practices.pdf
Chief, Exempt Organizations Technical Branch, Office of Rulings and Agreements.
BNA’s Healthcare Daily, Vol. 12, No. 23, 2/5/07.
and satisfaction of the “community benefit” standard of tax exemption. In recent published
comments, IRS Commissioner (Tax Exempt and Government Entities) Steven T. Miller called
promotion of good governance a new “pillar” of the IRS’ service and enforcement programs for
[t]he issue of governance is relevant to any discussion of exempt
organizations because a well-governed organization is more likely
to be compliant; while poor governance can easily lead an
organization into trouble.6
Indeed, the IRS statement of the “community benefit” standard, Revenue Rule 69-545,7
notes that the hospital in the “good” fact pattern has a board made up of prominent citizens in the
community.8 Both Sen. Charles Grassley and IRS Commissioner Everson have made repeated
public comments to the effect that an “independent, empowered and active board of directors is a
critical component of assuring that a tax-exempt corporation serves public purposes and protects
charitable assets.”9 Conversely, “poor governance is a factor that unites all charities found to
have failed their mission.”10 The Compliance Check Questionnaire issued to approximately 550
hospitals in 2006 by the IRS included a series of questions relating to the organization’s
“IRS Official Speaks on Exempt Organization Issues” Tax Notes (Tax Analysts), May 1, 2007.
1969-2 C.B. 117.
A strict IRS position on board composition for health care organizations generally limiting physicians to 20
percent of the board was articulated in training materials in 1993. Chapter N, “Integrated Delivery Systems,” in
1994 Exempt Organizations Continuing Professional Education Test (published in August 1993). In 1996, this
position was relaxed somewhat but emphasis placed on conflict of interest policies for heath care organizations.
Chapter C, “Tax-Exempt Health Care Organizations Community Board and Conflicts of Interest Policy,” in FY
1997 Exempt Organizations Continuing Professional Education Text (published in August 1996).
Letter to IRS Commissioner Mark W. Everson to Senator Charles E. Grassley, March 30, 2005 (p. 3)
(http://finance.senate.gov/hearings/other/Letter%20from%20Everson.pdf) (“Everson Letter”).
Memorandum, U.S. Senate Committee on Finance, Senator Charles E. Grassley, of Iowa, Chairman,
Friday, July 28, 2006, “GAO Survey on nonprofit hospitals-executive compensation” (“Grassley July 28, 2006
governance practices, and the newly revised Application for Recognition of Exemption as a
Under Section 501(c)(3) of the Internal Revenue Code (“Form 1023”), requires extensive
information about board composition and conflict of interest policies.
As Mr. Miller has clearly stated, the IRS expects to ‘fill the vacuum’ created by the
absence of a federal counterpart to the governance oversight role of state charity officials.11
The following is an analysis of the nine specific governance guidelines proposed by the
F.n. 5, supra.
Summary of Comments on Microsoft Word -
Date: 4/23/2007 4:07:11 PM
Commentary on "Mission Statement" Guidelines.
The emphasis on adoption of a corporate mission statement is consistent with the governance concept of the
duty of obedience to mission. For example, the Panel on the Nonprofit Sector, in its various reports and
recommendations, has emphasized the governing board’s obligation to oversee mission and strategic
direction. In the current draft of its Principles of Self-Governance, it recommends board review of mission
goals and objectives no less frequently than every three years.(http://www.nonprofitpanel.org/selfreg/
All_Principles_Revised.pdf, Principle #16.) The Better Business Bureau/Attorney Wise Giving Alliance’s
“Standards for Charity Accountability” similarly emphasizes the need for the board to regularly assess its
effectiveness in achieving its charitable mission.(http://www.give.org/standards/newcbbbstds.asp.)
The concept of a mission statement would presumably supplement the statement contained in the
organization’s articles of incorporation. ‘Popularizing’ the charitable mission of the organization is especially
important given renewed Congressional focus on the "Community Benefit" standard of tax-exempt status for
hospitals. (See, e.g., Treasury Inspector General for Tax Administration, “Tax-Exempt Hospital Industry Compliance with
Community Benefit and Compensation Practices Is Being Studied, but Further Analyses Are Needed to Address Any
Noncompliance” http://www.treas.gov/tigta/auditreports/2007reports/200710061fr.pdf.) Also noteworthy in this regard
recent comments by IRS Commissioner Everson that “[i]t [is] increasingly difficult to differentiate non-profit
from for-profit health care providers” for tax-exemption purposes.(Statement of the Honorable Mark Everson,
Commissioner, Internal Revenue Service, at the “Tax Exempt Hospital Sector” Hearing Before the Committee
on Ways and Means, U.S. house of Representatives, 109th Congress, First Session, May 26, 2005 (http://
[BBB/WGA Standards for Charity Accountability:
[Introduction and Main Site: Specific Link to Principles:
--Specific Link to Principles:
Date: 5/2/2007 4:16:41 PM
Commentary on "Code of Ethics and Whistleblower" Guidelines.
Here, the IRS encourages the adoption of policies and procedures consistent with the provisions of several
well-established corporate responsibility-related statutes, regulations and “best practices.” The IRS’ vision of
a corporate code of ethics, as adopted by the governing board, is consistent with the expectation of
organizational commitment to compliance expressed by the U.S. Sentencing Commission and the Inspector
General, HHS. For example, the Federal Sentencing Guidelines call upon governing boards to “promote an
organizational culture that encourages compliance with the law.”(http://www.ussc.gov/2006guid/gl2006.pdf
(Chapter 8, Section 8B2.1 “Effective Compliance and Ethics Program”). The OIG recommends adoption of a
“Code of Conduct” which serves as a formal commitment to compliance by the hospital’s governing board
and senior management. (See, Department of Health and Human Services, Office of Inspector General, “OIG
Comments from page 5 continued on next page
Supplemental Compliance Program Guidance for Hospitals,” Fed. Reg. Vol. 70, No. 19 (January 31, 2005).
Consistent with its overall focus on board oversight of organizational financial integrity, the Sarbanes-Oxley
Act requires the adoption of a “Code of Ethics” for senior financial officers (e.g., chief financial officer,
controller, principal accounting officer or persons performing similar functions). (Section 406, Sarbanes-Oxley
Act and SEC Final Rules (Release Nos. 33-8177, 34-47235, Sections 806, 1107 Sarbanes-Oxley Act). The
Independent Sector has also prepared a model Code of Ethics for Nonprofits and Foundations. (http://www.
www.independentsector.org/membes/code_main.html.) Furthermore, the Panel on the Nonprofit Sector, in its
Principles of Self-Regulation, is considering the addition of a separate principle on a corporate code of
ethics). (Fn. 9, supra, Principle #30, p. 47.)
Link: Chapter 8 of Amended Federal Sentencing Guidelines:
LINK:Supplemental Program Guidance
LINK:Section 406, Sarbanes Oxley Act (Final Rules
LINK:Independent Sector, Model Code of Ethics
The IRS’ companion call for adoption of an organizational policy for handling “whistleblower” complaints (and
protecting whistleblowers from retaliation) similarly has a foundation in corporate responsibility laws and
practices. Post-Sarbanes public policy strongly supports the creation and preservation of an internal
corporate mechanism to allow employees to report potential wrongdoing without fear of retaliation. Perhaps
most notable in this regard is the provision of the Federal Sentencing Guidelines that includes, as a criteria of
an “effective” compliance plan, a reporting system allowing for anonymous reports on compliance matters for
persons to use without fear of retribution. (Fn. 13, supra, Section 8B2.1(b)5(c).) Similarly, OIG Compliance
Program Guidance contains detailed recommendations concerning the establishment of a corporate culture
that encourages open communication of potential compliance issues (without fear of retaliation). (Fn. 14,
supra.) The Panel on the Nonprofit Sector also recommends adoption of “whistleblower” provisions as a
governance “best practice” for nonprofit organizations. (Fn. 9, supra, Principle #4.) Also notable in this regard
are the three separate Sarbanes-Oxley provisions that provide “whistleblower” protection for employees and
"informants" who provide information or assist in the investigation of accounting controls or auditing matters,
of securities laws violations or of other federal offenses(Section 301, Sarbanes-Oxley Act and SEC Final
Rules (Release Nos. 33-8220; 34-47654); Section 806, Sarbanes-Oxley Act; Section 1107, Sarbanes-Oxley
LINKS: FEDERAL SENTENCING GUIDELINES
OIG COMPLIANCE PROGRAM GUIDANCE
PRINCIPLES OF SELF-REGULATION
SARBANES-OXLEY SECTIONS 806 and 1107.
Date: 4/27/2007 1:51:34 PM
Commentary on Due Diligence/ "Duty of Care" Guideline.
Comments from page 5 continued on next page
This is the traditional “prudent man” standard which is reflected in the Revised Model Nonprofit Corporation
Act and in the statutes and common law of most states which adopt a “corporate” rather than “trust” standard
of director conduct.(Revised Model Nonprofit Corporation Act (American Bar Association), Section 8.30.)
This standard is continued in the Exposure Draft of the much-anticipated proposed Model Nonprofit
Corporation Act - Third Edition. (http://www.paperglyphs.com/nporegulation/documentsmodel_npo_corp_act.
html.) It is notable that the IRS places particular focus on the director’s obligation to be attentive to corporate
matters and to make informed decisions. In so doing, it suggests a sensitivity to situations in which
inattentive, poorly informed directors fail to exercise proper oversight over corporate affairs, to the detriment
of the nonprofit. The IRS makes no mention, however, of the Business Judgment Rule (although the authors’
view is that such omission should not be regarded as significant). In advising clients on this topic, AHLA
members should also be mindful of recent Delaware decisions in the Disney and Stone cases, which apply a
high “good faith” threshold for director ‘duty of care’ liability. AHLA members are advised to consult
applicable state corporate/common law concerning the application of the Business Judgment Rule to
nonprofit corporations in their particular jurisdiction.
LINK: SECTION 8.30, REVISED MODEL NONPROFIT CORPORATION ACT
AHLA GOVERNANCE TASK FORCE MEMOS ON DISNEY, STONE V. RITTER DECISIONS (AHLA
The relationship of governance policies and procedures - particularly those implementing established “best
practices” - to effective board oversight has been particularly highlighted in the post-Sarbanes environment.
Such “best practices” are typically manifested in written governance policies adopted by the board. In the
post-Sarbanes era, many variations of governance “best practices” and other similar statements of
aspirational goals have been developed by a diverse set of authors including trade associations, public policy
organizations, and professional groups. Of particular relevance to the nonprofit sector are the Principles of
Self-Regulation proposed by the Panel on the Nonprofit Sector. These include a series of recommendations
designed to enhance the director’s ability to satisfy the duty of care, including those related to the general
adoption of governance policies, the frequency of board meetings, periodic review of board size and
structure, appointment as directors (or access to) individuals who are financially literate, oversight of the
CEO, periodic board self-evaluation, and oversight of financial matters.(Fn. 9, supra, Principles #7-18.) In
this regard, it is important to note that corporate law does not require adherence to so-called “best practices.”
However, as a thoughtful observer has noted, adoption of governance best practices can constitute evidence
of a board’s “good faith.” “[T]he conscientious pursuit by directors of principles of best practices is the best
prophylactic against liability.” (E. Norman Veasey, Counseling Directors in the New Corporate Culture, 59 The
Business Lawyer 1447, 1456-1457 (Aug. 2004).
Date: 5/2/2007 4:25:23 PM
The IRS has historically been very concerned with the application of “Duty of Loyalty” principles (particularly
those concerning conflicts of interest) as they relate to fiduciaries of tax-exempt organizations. Indeed, there
is great similarity in the fundamental principles supporting director’s loyalty to mission under corporate law,
and the prohibitions against private inurement, excess private benefit and excess market transactions, under
the Internal Revenue Code. Both seek to protect the charitable organization from risks presented when
fiduciaries place personal interests ahead of the interests of the organization.
The IRS perspective is that the adoption and enforcement of a comprehensive conflict of interest policy, while
not mandatory from a tax perspective, “can help assure fulfillment of charitable purposes.”(Janet E. Gitterman
and Marvin Friedlander, “Health Care Provider Reference Guide,” Exempt Organizations Continuing
Professional Education Technical Instruction Textbook FY2004, p. 11, http://www.irs.gov/pub/irs-tege/
eotopicc04.pdf.) Such a policy “represents an important opportunity for health care providers to avoid
potential private benefit, private inurement, and intermediate sanction violations.” (Id.) Indeed, both the IRS
Comments from page 5 continued on next page
Form 1023 and the Form 13790 (“Compliance Check Questionnaire Tax Exempt Hospitals”) inquire as to the
presence of an organizational conflict of interest policy. The IRS has long made available on its website and
in published guidance a sample conflicts of interest policy for tax exempt organizations.(Id., at Appendix A, p.
LINK TO SAMPLE IRS CONFLICTS POLICY
Of course, the common law of most states holds the nonprofit director to a duty of loyalty. Furthermore, the
Panel on the Nonprofit Sector has recommended as a governance practice the adoption and enforcement of
a conflict of interest policy “consistent with the laws of the state and tailored to its specific organizational
needs and characteristics.” (Fn. 9, Principle #3.) This clarification is noteworthy given that the provisions of
the sample IRS conflicts policy may not be sufficiently comprehensive to serve the needs of operationally
sophisticated nonprofits (e.g., the IRS sample policy does not contemplate the potential for conflicts arising
from non-financial arrangements, nor does it provide any detail regarding the process by which disclosed
potential conflicts are evaluated to determine whether an actual conflict of interest exists). Indeed, the Panel’s
recommendation identifies four key components of an effective conflicts policy: (a) definition of ‘conflict of
interest’; (b) identification of classes of persons covered by the policy; (c) facilitation of disclosure of
information that may help identify conflicts; and (d) specific procedures to be followed in managing conflicts.
LINK TO PANEL GUIDELINES ON CONFLICTS
The Proposed Guidelines also reference the need for annual written disclosure of potential conflicts. The IRS
does not, however, offer a sample disclosure questionnaire, and there is no generally accepted template for
such a questionnaire. The effectiveness of any such questionnaire is based in large part on its ability to
assist the respondent in (a) understanding the types of relationships and arrangements that merit disclosure;
and (b) providing sufficient detail to enable an evaluation of the disclosures. In this regard, it should be noted
that effective conflicts policies should speak to the director’s general “duty to make disclosure,” so that
affected directors do not believe that their obligation to disclose potential conflicts of interest is only annual (in
the questionnaire) as opposed to ongoing. Also, potentially relevant to the analysis is whether the
organization enforces the director’s obligation to complete and submit a written questionnaire.
Date: 5/2/2007 4:26:15 PM
Commentary on "Transparency" Guideline.
The concept of “transparency” has its roots in those provisions of Sarbanes-Oxley requiring “Enhanced
Financial Disclosures” of publicly traded companies.(See, e.g., Sarbanes-Oxley Act Secs. 401 and SEC final
rules (Release Nos. 33-8182, 34-47264); and 302 and SEC final rules (Release Nos. 33-8124, 34-46427).
The benefits of transparency to the “stakeholders” of nonprofit corporations (e.g., community members,
bondholders, vendors, consumers) has since become well-established. Indeed, a clear policy message of
the Sarbanes environment is that transparency regarding not only financial, but also operational and
governance matters, - including compensation of executive leadership- enhances corporate accountability.
The prevailing perspective is that the more corporate stakeholders know about the structure and operation of
an organization (non-profit or for-profit), the less likely the organization will be to succumb to corporate
LINK TO SARBANES SECTION 401
The Form 990 (the annual federal income tax return for tax-exempt organizations), and its related public
inspection requirement, has historically been viewed by the IRS as the primary portal through which tax-
exempt organizations may provide organizational and operational information to the IRS, and to the public.
While the Form 990 has been available to the public upon request to the IRS for many years, it has become
much more accessible to the public with the statutory imposition of obligations on exempt organizations that
are public charities to make information available.(Private foundations have been required to make their
Forms 990-PF available for public inspection since the Tax Reform Act of 1969.) The Revenue Act of 1987
first required exempt organizations to allow inspection of their exemption application and three most recently
filed Forms 990. Subsequently, beginning in 1998, exempt organizations have also been required to provide
copies of these documents upon request. During the past twenty years, the Form 990 and instructions have
undergone significant changes and expansion, particularly to increase disclosure of executive compensation-
related information, reveal relationships with related organizations, specifically describe revenue-generating
activities, and ask whether the reporting organization has complied with an ever-growing array of
requirements and prohibitions. The posting of many organizations’ Forms 990 on the www.guidestar.org
website has exponentially increased the availability of completed Forms 990.
[LINK TO NEW FORM 990 INSTRUCTIONS
Link to Guidestar
The Proposed Guidelines emphasis on transparency is consistent with a related “Principle of Legal
Compliance” recommended by the Panel on the Nonprofit Sector. The Panel’s specific recommendation is to
make information about the nonprofit organization (e.g., mission, operations, governance, finance) “widely
available” to the public. (Fn. 9, supra, Principle #6.) The expectation is that “stakeholders” will have greater
confidence in the nonprofit organization if they can readily access information on its organization and
Of particular significance here is the suggestion that the organization’s Form 990, together with other
important information, be posted on the corporation’s public website and be available to the public on request.
Indeed, many leading nonprofit, tax-exempt organizations have added a “governance” page to the corporate
Comments from page 6 continued on next page
[LINK TO PANEL RECOMMENDATION
Date: 4/23/2007 5:07:38 PM
Commentary On "Solicitation and Fundraising" Guideline.
Here, the IRS makes a surprising intervention in an area of law typically reserved to the states and to the
oversight of state charity officials. Indeed, most states have specific laws requiring charities to be registered
before being authorized to conduct solicitations, and specific rules governing the manner of solicitation and
the individual parties who conduct the solicitation. For example, the relatively new California Nonprofit
Integrity Act of 2004 contains extensive new provisions dealing with (a) oversight of commercial fundraisers
and fundraising counsel; (b) the obligation to make accurate representations with respect to the solicitation;
and (c) specific prohibited acts when soliciting donations. (California Government Code Sec. 12585 et. seq.)
LINK TO SUMMARY OF NONPROFIT INTEGRITY ACT
The Panel on the Nonprofit Sector has evidenced a particular interest in the development of principles of
responsible fundraising practices. It has proposed seven different principles to assist nonprofit organizations
in self-regulating their practices in this area. These draft principles relate to (a) the accuracy of
communications; (b) the use of contributions; (c) organizational acknowledgement to donors; (d) adoption of
policies addressing when acceptance of a gift is in the organization’s best interests; (e) training and
supervision of those conducting solicitations; (f) a prohibition on compensating fundraisers on a commission
or percentage of funds-raised basis; and (g) implementation of donor privacy protections.(Fn. 9, supra,
LINK TO PANEL RECOMMENDATION
The IRS has always been interested in the effect of fundraising practices on an organization’s operation
consistent with exemption. (See, e.g., United Cancer Council v. Commission, 165 F.3d 1173 (7th Cir. 1999).
This new emphasis-by both the IRS and the Panel on the Nonprofit Sector-is significant and suggests a
noteworthy, materially greater regulatory interest in charitable solicitation practices.
Date: 5/2/2007 4:39:39 PM
Commentary on "Financial Audit" Guidance.
The board’s responsibility to oversee the financial affairs of the organization is a well-established fiduciary
principle, which has gained particular emphasis in the wake of the Sarbanes-Oxley Act and related corporate
controversies (see, e.g., the AHERF controversy, which pre-dated Enron). Indeed, the IRS has long been
concerned with the relationship between proper financial oversight and the preservation of assets dedicated
to charitable use.
The Proposed Guidelines speak generally to the value of financial oversight and offer useful suggestions on
the types of financial-related documents to be read, presumably by all board members. The most relevant (to
AHLA members) of these recommendations are for boards of organizations with “substantial assets” to: (a)
ensure the engagement of an independent auditor to conduct an annual independent audit of the
organization; (b) appoint a separate audit committee (consisting of independent members) to select and
oversee the independent auditor (no mention is made of the financial literacy of committee members); and (c)
to periodically (e.g., every five years) change the auditing firm (as opposed to rotating the lead audit partner).
Comments from page 6 continued on next page
As such, the Proposed Guidelines are generally consistent with related provisions of state law, and with the
recommendations of the Panel on the Nonprofit Sector. For example, a focus of several of the emerging
state nonprofit “corporate responsibility” statutes and regulations is the creation of a discrete audit committee
to enhance governance oversight of financial affairs. Indeed, the Panel’s approach is even more explicit in
this regard, with five specific recommendations relating to financial oversight: (a) adoption of board policies
and procedures designed to assure effective oversight of financial matters and to require board approval and
subsequent monitoring of the annual budget; (b) annual audit of financial records conducted by an
independent auditor; (c) a prohibition on loans to directors; (d) spending a reasonable amount of annual
budget on mission-related objectives, and providing sufficient resources for organizational administration
(and, if appropriate, fundraising); and (e) adoption of policies addressing the reimbursement of business/
travel expenses.(Fn. 9, supra, Principles #18-22.) Interestingly - and unlike the Proposed Guidelines - the
Panel specifically calls for the board to include, or have access to “some individuals with financial
literacy.” (Fn. 9, supra, Principle #9.) In this regard, the Panel’s recommendations are consistent with the
provision of Sarbanes Sec. 407, which requires that audit committees disclose those members who qualify as
“Financial Experts” (thus, indirectly recommending the appointment of committee members with financial
literacy). Also relevant to this focus on financial oversight is the new “Audit Committee Tookit: Not-for-Profit
Corporations,” published by the American Institute of Certified Public Accountants.(http://www.aicpa.org/
Audcommetr/toolkitsnpo/homepage.htm; see also William Josephson, “The AICPA’s Nonprofit Audit Toolkit,”
The Exempt Organization Tax Review, Vol. 56, No. 1 (April, 2007) p. 75.) (Note, e.g., the Toolkit’s proposed
attributes for Audit Committee financial expertise). Finally, the Proposed Guidelines call for change in
auditing firms, and not just audit partners, every five years; this may be a point that the IRS may revisit in the
Date: 4/27/2007 2:02:27 PM
Commentary on "Compensation Practice" Guideline.
Here, the Proposed Guidelines address three familiar topics: (a) executive compensation; (b) board
compensation; and (c) reliance on the rebuttable presumption of reasonableness. The sparseness of the
Proposed Guidelines’ comments on executive compensation belie the extent of the IRS’ recent, extraordinary
interest in the executive compensation practices of tax-exempt health care organizations. This level of
interest has been manifested most recently with the March 1, 2007 release by the IRS of its “Executive
Compensation Project Report summarizing the results of the IRS’ “Soft Contact Audit Initiative” of 2004-2005
with respect to the executive compensation practices of nonprofit corporations (“IRS Report”).(http://www.irs.
gov/pub/irs-tege/exec._comp.final.pdf.) Other relevant examples of interest include comments of the IRS
Commissioner (e.g., that he cannot distinguish for-profit from non-profit health care companies when it comes
to matters of executive compensation), and in major portions of the Community Benefit Compliance Check
Questionnaire of 2006.
The Proposed Guidelines follow the trend (initiated by the Panel on the Nonprofit Sector) that seeks to
discourage compensation of directors of nonprofit, tax-exempt organizations. The Panel makes the
generalization that “[B]oard members are generally expected to serve without compensation, other than
reimbursement for expenses incurred.” (Fn. 9, supra, Principle #17.) It acknowledges, however, the possibility
that charitable organizations may choose to do so but must be prepared to disclose to third parties on request
information that will support the reasonableness of such compensation. Indeed, this guidance is somewhat
inconsistent with the related provisions of the Model Act, which authorizes the board to establish the
compensation of directors (unless provided otherwise in the articles or bylaws). (Revised Model Nonprofit
Corporation Act, supra, Sec. 8.12.) The ability to compensate members of the governing board for their
services is specifically authorized by the nonprofit laws of many states, including those that closely follow the
provisions of the Model Nonprofit Corporation Act. The Proposed Guidelines are not saying that it is
inconsistent with exempt status for directors of tax-exempt organizations to be compensated for their board
service. Rather, the Guidelines (and the Panel) are speaking in part to the importance attributed to
establishing the reasonableness of such compensation and to confirming the disinterested nature of the
The Proposed Guidelines’ endorsement of the Rebuttable Presumption of Reasonableness as a means of
achieving reasonable compensation should be helpful in overcoming institutional/executive reticence to
satisfy its requirements due to concerns of cost, timing and efficiency. Furthermore, support for the
“Presumption” is particularly welcome given the data contained in the IRS Report suggesting that only half of
the audited public charities tried to satisfy all of the three elements of the Rebuttable Presumption. It also
helps refute the criticisms presented at Senate Finance Committee hearings on exempt organizations by
Minnesota Attorney General Mike Hatch and others, challenging the impact and effectiveness of the
‘Rebuttable Presumption’ process. Attention to Intermediate Sanctions issues generally is timely given the
September 2005 release of proposed regulations addressing the relationship between excess benefit
transactions and loss of exempt status.
LINK TO PROPOSED SEC. 4958 REGULATIONS
Date: 4/27/2007 2:03:12 PM
Commentary on "Document Retention Policy" Guideline.
Comments from page 7 continued on next page
The Proposed Guidelines’ support for a document retention policy is consistent with historical IRS emphasis
on record retention as it relates to exempt status, and the “obstruction of justice” provisions of the Sarbanes-
Oxley Act (which are generally applicable to all organizations (for-profit and non-profit)).
For example, IRS Publication 4221 sets forth basic compliance guidelines for recordkeeping, reporting and
disclosure requirements applicable to I.R.C. Sec. 501(c)(3) organizations. (Compliance guide for 501(c)(3)
Tax-Exempt Organizations http://www.irs.gov/pub/irs-pdf/p4221.pdf - 298.5KB.) Generally speaking, the IRS
requires Sec. 501(c)(3) organizations to maintain books and records to demonstrate compliance with tax law.
This includes, but is not limited to, documentation of the sources of receipts and expenditures reported on
Form 990. Failure to keep required records may prevent the organization from demonstrating qualification for
Sec. 501(c)(3) status (thus jeopardizing exemption) and preventing it from accurately completing tax returns
(thus subjecting it to potential penalties). (Id.)
The Sarbanes-Oxley Act contains two important provisions, §§ 802 and 1102, that are applicable, in
pertinent part, to all types of corporations-whether publicly held, nonpublic and/or nonprofit-and specifically
define the crime of obstruction of justice in the context of document destruction. The Act creates new felonies
and penalties for such conduct as the destruction or fabrication of evidence and the failure to preserve
financial and audit records. A new provision added by Sarbanes § 802 applies criminal penalties broadly to
any act of destroying, fabricating or concealing evidence when done with intent to obstruct, impede or
influence an investigation or proper administration of any matter within the jurisdiction of any U.S. department
or agency or any Chapter 11 bankruptcy proceeding, or in relation to or in contemplation of such a matter or
investigation (18 U.S.C. § 1519). It is notable that this provision could also be used to prosecute not only one
who destroys the documents, but also one who persuades another to do so. An additional new provision
added by Sarbanes § 1102 (18 U.S.C. § 1512(c)(1)) applies criminal penalties, including imprisonment for up
to 20 years, to an individual who corruptly alters, destroys or conceals evidence, or attempts to do so, with
the intent to impair its availability for use in an official proceeding.
The Panel on the Nonprofit Sector also recommends that charitable organizations establish and implement
document retention policies and procedures. (Fn. 9, supra, Principle #5.) The Panel's rationale is that such
policies and procedures serve to protect records of the organization’s governance and administration, as well
as business records necessary to demonstrate legal compliance and protect against allegations of
LINK TO PANEL RECOMMENDATIONS
Date: 4/23/2007 5:25:50 PM
Summary and Conclusion.
The release, in draft form, of the Proposed Guidelines is a meaningful contribution to the body of
commentary, regulation and statutes speaking to the important role of corporate governance in the nonprofit
sector. Nonprofit boards should be made aware of this significant IRS initiative and should ask their general
counsel to compare the organization’s governance practices against the IRS’ Proposed Guidelines.