Peck Family Foundation

Click here to edit subtitle

Note from the Accountant: Most of the following is cautionary.  Once you’ve read through this message, maybe we can talk again by phone, and discuss how the Foundation might accomplish its very worthy charitable and family-oriented goals, while remaining in compliance and avoiding red flags. 

  1. Age of the Directors
  • Directors of a nonprofit board are the governing body of the organization.  The principal role of a director is stewardship; directors of nonprofit boards are considered fiduciaries and have a duty of care, a duty of loyalty, and a duty of obedience to the law.   
  • Duty of care includes responsibilities such as:
    • Attendance at board meetings and familiarity with all matters before the board,
    • Understanding the organization’s mission, strategy and goals,
    • Being familiar with the organization’s governing documents (e.g., Articles of Incorporation and Bylaws).
  • Duty of obedience to the law requires that directors have knowledge and understanding of the laws that govern nonprofits.
  • Duty of loyalty includes understanding and being able to act appropriately with regard to potential conflicts of interest.
  • Directors are also responsible for management, policy and fiscal oversight, and accountability to the public.
  • Directors of a nonprofit organization may be sued as personal defendants in some cases.  And the IRS holds directors personally liable if the organization violates federal tax law.

    • The attached guide published by the Oregon Department of Justice explains director responsibilities in more detail.  And following is a link to the DOJ website, Charitable Activities Section, for additional information:
    • While there may be no legal age requirement for an individual to serve on a nonprofit board of directors, all board members should have the capacity and ability to perform the requisite duties and responsibilities.

  1. Voting Members of the Board (Married Couple with One Vote?)
    • A married couple with one vote could be problematic for several reasons.  If a married couple shares a vote, then, essentially, each has one-half vote.  Although Oregon does not prohibit voting by proxy (in many states, board members may not delegate their responsibility to anyone else, i.e., vote by proxy is not allowed), there are specific rules for assigning a proxy (ORS 65.231)  If only one spouse attends a meeting, the non-attending spouse would likely need to assign his/her proxy to the attending spouse, which must be done in writing and provided to the Secretary/other officer authorized to tabulate votes.  In any case, in order for the couple to cast a vote, it seems they would need to confer and decide together how to vote, which is not considered a best practice.

  1. Benefits Provided to Contributors
    • Requiring payment in exchange for board position:

o  Impact on donor:  For an individual to qualify for a charitable contribution deduction, there are several criteria, including that no goods or services may be received by the donor in exchange for the donation.  The IRS could construe that a payment of a specified amount, which entitles the payor to a board position that includes financial benefits (reimbursement of travel), is a payment in exchange for goods/services and would not allow the deduction.  

o  Impact on the organization: This practice could also create issues for the Foundation – it may be seen as “selling” board positions, rather then electing individuals based on their qualifications and abilities to govern, and may be taxed as unrelated business taxable income (UBTI). 

    • Reimbursement of travel expenses:

o One of the most common reasons nonprofit organizations lose their exempt status is private inurement.  And any prohibited benefit inuring to a private interest (individual or entity) will jeopardize the organization’s exempt status. 

o A 501(c)(3) organization must use every dollar of its assets and income to benefit the public/achieve its exempt purpose.  Payments not in furtherance of the approved exempt purpose will be treated as “taxable expenditures.”

o If the reimbursement of travel expenses is found to provide a prohibited benefit to the individual, and/or to be not in furtherance of the Foundation’s exempt purpose, exempt status could be at risk.  The Foundation should reimburse only those expenses that are incurred by an individual in the performance of Foundation business.

  1. Avoidance of Self-dealing  (A landmine for private foundations!)
    • Most transactions between a private foundation and its “disqualified persons” are prohibited; these prohibited transactions are considered “self-dealing.”
    • If a foundation is found to have committed an act of self-dealing, the amount involved will be subject to a 30% penalty each year, or part of a year, until the amount is repaid.
    • Acts of self-dealing can also jeopardize tax-exempt status.
    • A disqualified person, with respect to a private foundation, includes any:

o Substantial contributor to the foundation, 

o Foundation manager (officer, director or trustee, or any individual having similar powers and responsibilities)

o Owner of the foundation’s substantial contributors, 

o Family member of individuals described above, and

o Entity owned by any of the above.

    • Although there are exceptions, self-dealing between a private foundation and a disqualified person generally means any:

o Sale, exchange, or leasing of property,

o Lending of money or other extension of credit,

o Payment of compensation or reimbursing payment or reimbursement of expenses to a disqualified person,

o Furnishing of goods, services, or facilities,

o Transfer of foundation income or assets to, or for  the use or benefit of, a disqualified person, and

o Agreement to make a payment of money or property to a government official.

    • Exceptions to the self-dealing rules include:

o Loan by a disqualified person to a foundation, if no interest is charged,

o Payment of expenses of a disqualified person by the foundation, if the expenses are incurred in the performance of foundation business.

    • Payment of certain travel expenses may meet one of the above exceptions….more on that when we talk.

Other Notes and Questions:

  • As we discussed, appointing children to an advisory committee or grant committee could achieve your purpose of encouraging philanthropy and family involvement.  The concerns regarding reimbursement of travel might be the same as if the children were Directors, but it could resolve some of the other significant issues.
  • Encouraging donations rather than requiring donations of board members should be considered.
  • Draft of Standard Operating Procedures, Paragraph #11, states, “The recipients must be charitable organizations with 501(c)(3) status.”  You may want to change that to, “…501(c)(3) organizations with public charity status.” Or “…501(c)(3) public charities.”  (If the Foundation makes grants to other private foundations, there are additional requirements under the “expenditure responsibility” rules.  They include obtaining a written contract with the grantee in advance of making the grant, requiring reports from the grantee, and attaching certain of those reports to the Foundation’s annual return.  Such grants may be allowed, but only if additional steps are taken, which would not be required if the grantee is a public charity.  If you don’t wish to change the language, you might alert others regarding the additional requirements if grants are made to private foundations.)
  • Bylaws, Article III, Section 2., states “The board shall consist of at least three but no more than twenty Directors.”  In 2018, the Foundation had 51 Directors, so was not complying with the Bylaws.
  • Bylaws, Article VI, Section 5. Gifts: the Board may want to consider adopting a gift policy, to limit the acceptance of certain types of property (e.g., real estate, loans, artwork/other treasures, future interests, partial interests, etc.)
  • Does the Foundation purchase D&O insurance for all board members?  (There are advantages and disadvantages.)

Regarding some of the issues/rules mentioned above, there is no bright line – the IRS’ treatment will depend on the “facts and circumstances.”  To avoid IRS scrutiny and the harsh penalties and sanctions that exist for private foundations, creating the best set of facts should be the goal.