Governance: Organizational Control

Governance: Organizational Control

4th in a Series

As part of the series in our follow-up to our initial tax tip entitled “Governance Issues for Tax-Exempt Organizations”, which was released on April 25, 2012, WithumSmith+Brown has compiled a summary of what we believe to be “best practices” with respect to each topic included in the Federal Form 14114, Governance Check Sheet. This tax tip focuses on Form 14114, Part 4, Organizational Control.

GOVERNANCE CHECK SHEET

The Internal Revenue Service (“IRS”) has publicly stated that it believes a well-governed public charity is more likely to obey the tax laws as opposed to an organization without a formal governance structure. An active and engaged board of trustees (directors) leads to better governance. Accordingly the IRS has implemented Form 14114, Governance Check Sheet, to aid in these efforts. The Governance Check Sheet is now used by Exempt Organization Revenue Agents in the examination of all Internal Revenue Code Section 501(c)(3) tax-exempt organizations.

Part IV of the Governance Check Sheet focuses on Organizational Control. This area focuses on the organization’s board of trustees and also key members of management. For example, it asks about family and business relationships amongst members of the board of trustees, officers, directors, trustees or key employees. It also asks whether control of the organization rests with a single or select few individuals. A critical component of a tax-exempt organization is the size of its board of trustees. Too few board members or too many board members can result in an inefficiently governed organization. Lastly, the board of trustees should be comprised of more than a majority of individuals who are independent and do not have conflicting family or business relationships. Thus, an organization must have a written conflict of interest policy which incorporates these IRS requirements relating to governance and a process for communicating this information to either the board or a board committee annually.

ALIGNMENT BETWEEN GOVERNANCE CHECK SHEET AND FORM 990

Areas of organizational control are contained in many parts of the Federal Form 990, Return of Organization Exempt From Income Tax. Part VI addresses governance, management and disclosure, requesting information regarding the organization’s governing body and management, governance policies, and disclosure practices.

Typically, Federal tax law does not mandate certain organizational and managerial structures as these are not requirements for tax exemption; however, every filing organization is required to answer each question in Part VI.

Copies of the Federal Form 14114, Governance Check Sheet and Form 990 can each be accessed at the healthcare services section of our Firm’s website

Part VI, Section A, Questions 1a and 1b address the number of voting members of the governing body. The organization must provide the number of voting members of the governing body at the end of the tax year and the number of voting members who are independent under IRS definitions. In order to be considered independent a voting member must meet the following four conditions:

1. The member was not compensated as an officer or other employee of the organization or related organization. Nor was the member compensated by an unrelated organization or individual for services provided to the organization or to a related organization, if such compensation is required to be reported in Form 990, Part VII, Section A.
2. The member did not receive total compensation or other payments exceeding $10,000 during the organization’s tax year from the organization and related organizations as an independent contractor, other than reasonable compensation for services provided in the capacity as a member of the governing body.
3. Neither the member, nor any family member of the member, was involved in a transaction with the organization, whether directly or indirectly through affiliation with another organization, that is required to be reported on Schedule L, Transactions with Interested Persons (Form 990 or 990-EZ) for the organization’s tax year.
4. Neither the member, nor any family member of the member, was involved in a transaction with a taxable or tax-exempt related organization of a type and amount that would be reportable on Schedule L if required to be filed by the related organization.

The Federal Form 990 contains the same questions relating to family and business relationships as the governance check sheet. Question two of Part VI of the Federal Form 990 asks if any officer, director, trustee, or key employee has a family relationship or a business relationship with any other officer, director, trustee or key employee. In addition, question twelve asks about the organization’s written conflict of interest policy and related procedures, including compliance and enforcement of the policy.

As best practices the governing body should include more than a majority of independent members that includes a diverse mix of members within the organization’s community and should not be overly influenced by employees or individuals who are not independent due to family or business relationships. Moreover, the board should include at least some individuals who are not organizational members or management staff, as well as those who might have expertise and knowledge in business, financial or accounting matters.

The Form 990 is a public document and the IRS is not only concerned about the numbers and figures reported therein but also good governance practices, both written and in procedural actions. A tax-exempt organization must carefully structure its governing body; both in terms of the number of board members and in determining and selecting these individuals; including their qualifications and relationships. A tax-exempt organization should annually review Form 11414 in conjunction with its tax compliance policies and procedures.

For more information on the topics discussed or services we can provide, please contact:
Scott Mariani, JD, Partner
Practice Leader
973.898.9494 |[email protected]

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