IRS Continues Focus on the Governance Practices of Charities and Requests Comments on Donor-Advised Funds and Supporting Organizations

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February 02, 2007


The IRS has joined the public debate regarding the specific governance practices of charitable organizations with the release on February 2, 2007 of its paper titled “Good Governance Practices For 501(c)(3) Organizations.” The guidelines, which were distributed by Marvin Friedlander, Manager, Exempt Organizations Technical Branch, IRS National Office, focus on nine areas designed to help ensure that directors of charitable organizations understand their roles and responsibilities and actively promote good governance practices.

While these guidelines are still preliminary—and we anticipate that they will be refined following public consideration and comment—they reflect the IRS’s view that the adoption of good governance practices is central to an organization’s ability to be successful in pursuing its exempt purposes and earning public support.

The practices highlighted by the IRS include:

· Adopting a clearly articulated mission statement.
· Promoting ethical standards by adopting a code of ethics and effective policies and procedures for handling employee complaints (i.e., a whistleblower policy).
· Ensuring that directors exercise appropriate due diligence in carrying out their obligations andact in a manner consistent with the “duty of care.”
· Requiring that directors conform to the “duty of loyalty” by acting in the best interests of the charity and avoiding conflicts of interest. To this end, the charity should adopt and maintainan effective conflict of interest policy.
· Encouraging transparency about the organization’s mission, activities, and finances by adopting policies and procedures to make the organization’s Forms 990, annual reports, and financial statements publicly available.
· Ensuring that fundraising activities comply with all applicable federal and state requirements and that fundraising communications are accurate, truthful, and candid.
· Acting as good stewards of the organization’s financial resources. Large organizations should retain an independent auditor to conduct an annual audit, maintain an independent audit committee to select and oversee the auditor, and rotate auditing firms periodically (e.g., every five years). Smaller organizations should engage a CPA to conduct an annual audit. The IRS also recognizes alternate practices for very small organizations that cannot afford such services, such as utilizing volunteers, where appropriate.
· Paying no more than reasonable compensation for services rendered to the organization. Other than reimbursing expenses, the guidelines generally recommend against compensating directors for their service on boards.
· Maintaining a written document retention policy that provides guidelines for the maintenance, retention, and destruction of documents, including electronic files.

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Please click here to read the full text of the guidelines.

Study on Donor-Advised Funds and Supporting Organizations

In other developments, on February 6, 2007, the IRS released Notice 200721 (the Notice), which invites public comment in connection with a study being conducted by the Department of Treasury and the IRS on donor-advised funds and supporting organizations. Comments are requested no later than April 9, 2007.

This study is required by the recently enacted Pension Protection Act of 2006 and the Notice is designed to solicit public comments on specific issues relevant to this study, including

· The advantages and disadvantages of donoradvised funds and supporting organizations compared to private foundations and other charitable giving arrangements.
· The determination of the amount and availability of the charitable deduction for transfers to donor advised funds and supporting organizations in certain enumerated scenarios.
· The impact of recent legislative changes on the practices and behavior of donoradvised funds and their sponsoring organizations, supporting organizations, supported organizations, and contributors.
· The necessity or appropriate level for payout requirements for donoradvised funds, supporting organizations, and other types of charities.
· The advantages and disadvantages of perpetual existence for donoradvised funds or supporting organizations.

You can find the full text of Notice 200721 at irs.gov/pub/irsdrop/n0721.pdf.

If you have any questions about the issues raised in this LawFlash, please contact any of the following Morgan Lewis attorneys for more information:

TaxExempt Organizations Practice Group

Celia Roady 202.739.5279
Tomer J. Inbar 202.739.5843
Carolyn O. Ward 202.739.5988
Ann K. Batlle 202.739.3718
Drew Porter 202.739.5611
Alexandra O. Thomas 202.739.5618

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