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All rights reserved, Phelps Dunbar LLP Health Law Update is published as a service to clients and friends of Phelps Dunbar LLP, and should not be construed as legal or professional advice or as opinion on specific fact.

Internal Revenue Service Previews Good Governance Guidelines
for Tax-Exempt Organizations

February 12, 2007

On February 2, 2007, Marvin Friedlander, Chief of the Exempt Organizations Technical Branch, Office of Rulings and Agreements, previewed the Internal Revenue Service’s “Good Governance Practices for 501(c)(3) Organizations.”  The guidelines are recommended as “best practices” by the Internal Revenue Service but are not required for the granting or maintaining of an organization’s tax-exempt status.

Mr. Friedlander provided the following nine “good governance” guidelines:

1. Adoption of a mission statement clearly describing the purpose for which the organization was formed;

2. Adoption of a code of ethics and whistleblower policies;

3. Exercise of due diligence by the organization’s board of directors;

4. Adoption of a conflict of interest policy consistent with the Internal Revenue Service’s sample policy;

5. Disclosure of complete and accurate information regarding the organization’s operation, financial situation and activities;

6. Adoption of fundraising policies that comply with federal and state law and careful monitoring of fundraising conducted by professional fundraisers;

7. Annual audits of an organizations’ finances and periodic changing of auditing firms;

8. Use of the rebuttable presumption procedure outlined in the regulations under Section 4958 when making decisions regarding compensation of directors, if any, officers and other employees to ensure reasonable compensation; and

9. Adoption of a document retention policy.

Many of the guidelines, such as the exercise of due diligence by a board member (the duty of care), avoidance of conflicts of interests, public disclosure of finances and monitoring of fundraising policies, are not entirely new and are already required by federal or state law.  In Mississippi and Louisiana, for example, the statutes governing nonprofit corporation require directors to act in the best interests of the corporation and there are statutory procedures regarding conflict of interest transactions.  Also, Mississippi and Louisiana regulate the solicitation of charitable fundraising and use of professional fundraisers.  Both the Internal Revenue Service and many states, in connection with their regulation of fundraising, require public disclosure of an organization’s Form 990 and other financial information.

What is new, however, is the recommendation that an organization periodically change its auditing firm.  This recommendation echoes the Sarbanes-Oxley Act, a federal law that in large measure does not apply to nonprofit organizations.

According to Mr. Friedlander, the foregoing guidelines are not expected to be finalized until the end of 2007.  A link to the text of Mr. Friedlander’s “good governance” guidelines is below.  If you have any questions regarding these guidelines, please contact one of the attorneys listed below.

http://www.phelpsdunbar.com/pages/pub_newsletters/good_governance.pdf

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