​The Madoff Scandal and Charities and Foundations: The Need for All 501(c)(3) Entities to Improve Their Governance and Conflicts of Interest Policies in Advance of Reports for 2008 on Form 990 to be Filed With the IRS – Installment 7

April 7, 2009Articles White Collar Compliance & Defense Blog

This is the seventh in a series of Installments on this blog that will discuss some issues that face the manifold stakeholders who have been materially affected by the Bernard L. Madoff scandal, allegedly the longest, most widespread and financially devastating Ponzi scheme on record. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

We will continue the discussion of charitable entities and foundations that were affected by the Madoff scandal. Again, we believe that the unfortunate experiences of many charitable organizations and foundations (collectively, “501(c)(3) Entities”) that were directly involved in enormous losses from the Madoff morass should be poignant object lessons for all charitable organizations and their fiduciaries and supporters, whether or not victims of Madoff. This Installment will continue the discussion of the aftermath of the Madoff scandal for 501(c)(3) Entities, against the backdrop of the new Form 990 that has been adopted by the IRS for 501(c)(3) Entities.

Reasons Why a 501(c)(3) Entity Should File its 2008 Form 990 as Early as Possible

We have already discussed in Installment 6 the reasons why a 501(c)(3) Entity may choose or be induced to file its Form 990 for 2008 (the “2008 Filing”) on as late a date as possible in 2009, which may be extended to November 15, 2009. We believe that it is advisable for a charity to make its 2008 Filing as soon as practicable, so that it may commence an initiative for building and repairing bridges with stakeholders as soon as possible.

Many 501(c)(3) Entities will be showing relatively dismal results for 2008. Those charities that invested with Madoff will show losses that are devastating, both from economic and public image points of view. Even a charity that did not invest with Madoff most likely has suffered severe financial losses in its endowment funds since the beginning of 2008. Additionally, the deepening recession during 2008 had a materially negative impact on fundraising revenues. A charity that delays the 2008 Filing until almost 2010 will raise questions among those analysts, foundations and regulatory agencies that review and use Form 2008 Filings. The charity will also highlight late in 2009 a charity’s negative results for 2008. Getting the “bad news” out and in circulation earlier in 2009 will enable a charity to start afresh.

An early filing of the 2008 Filing with positive answers to the new questions and in the new schedules discussed hereafter can disclose a charity’s strong commitment to a defined mission, appropriate governance and investment policies, appropriate engagement by the board and other matters. The new changes to 2008 Filing will allow a charity to use the IRS items as a checklist of “best practices” and tell its positive story in its own words. Additionally, a 501(c) Entity can post its Forms 990 on its own website, together with principal governance documents, that demonstrate its commitment to best practices.

General Outline of New Areas Covered in the 2008 Filings

The new thrust for Form 990 is to emphasize compliance, transparency and accountability for 501(c)(3) Entities. As discussed in earlier Installments, the initiatives by the Senate Finance Committee in the last several years with respect to charities, especially hospitals and colleges and universities, led the IRS to make the changes in the 2008 Filing to appropriately take advantage of its public nature, widespread availability and accountability aspects.

However, the 2008 Filing also affords 501(c)(3) Entities with opportunities to explain and supplement their responses, to define and amplify their mission statements and tell their stories in a place that is universally available.

The principal design of the 2008 Filing changes are outlined below. Not all of them necessarily relate to the Madoff scandal that is the subject of this series, but they are worth mentioning.

1. Increased focus on activities, not just the financial results and other metrics respecting the 501(c)(3) Entity

2. A summary page on which a 501(c)(3) Entity can provide highlights of the 2008 Filing

3. A checklist of the comprehensive new schedules that may be required for certain types of 501(c)(3) Entities, e.g., hospitals

4. A governance section relating to the governing board, policies and disclosure items

5. A compensation and insider transactions section

6. A section on foreign activities

7. A description of related organizations, joint ventures, and unrelated business income

8. A description of non-cash contributions and fundraising

Governance Disclosures under the 2008 Filing

A number of new inquiries on the 2008 Filing could have brought to light the dealings by some charities with Madoff, if they had been in existence on Form 990 in earlier years and had been answered completely and accurately,. This is the new part of Form 990 that requires comprehensive disclosures of the governance policies and practice of a 501(c)(3) Entity. Some of the areas that are addressed in the 2008 Filing include explanatory and descriptive schedules if (i) the charity has loans or other transactions with “insiders” including officers and directors and highly paid individuals, (ii) there are “related organizations” and (iii) compensation in excess of defined thresholds is paid to current and former officers, board members and key employees.

The next Installment will continue in greater detail the aftermath of the Madoff scandal for 501(c)(3) Entities and its relationship to the new compliance, transparency and accountability obligations for 501(c)(3) Entities in the 2008 Filing.

[To be continued in Installment 8]