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2004
Index (back)
Report 11
This Report, prepared by Reporter Jason Havens Esq.,
covers several sessions that involve the representation of
charitable institutions and their donors. In addition, Reporter
John Warnick Esq. previously reported in Report
No. 8 on Kathryn Miree's Wednesday morning general session
presentation entitled "The Rules of Engagement: Managing
Liability for Nonprofit Boards."
Monday Morning, January 5, 2004 - Pre-Conference Fundamentals
Session
Publicly Supported Charities, Private Foundations
and Everything In Between: Talking - and Understanding - the
Talk
(a study of the practical and tax aspects of these entities)
Conrad Teitell
Cummings & Lockwood LLP
Stamford, Connecticut
I. INTRODUCTION
Mr. Teitell began with a quote from Democracy in America
(1835) by Alexis de Tocqueville: "These Americans are
the most peculiar people in the world.... In a local community,
in their country a citizen may conceive of some need, which
is not being met. What does he do? He goes across the street
and discusses it with his neighbor. Then what happens? A committee
comes into existence and then the committee begins functioning
on behalf of that need.... All of this is done by private
citizens on their own initiative."
II. PUBLICLY SUPPORTED CHARITIES: See IRC § 170(b)(1)(A)(i)-(vi).
Churches or conventions of churches.
Tax-exempt educational organizations with a regular faculty/curriculum/body
of students attending resident classes.
Tax-exempt hospitals and, under certain circumstances, organizations
directly engaged in continuous medical research in conjunction
with exempt hospitals.
Organizations operated exclusively to hold and administer
property for state/municipal colleges/universities.
Governmental units.
Publicly supported organizations: Must meet either:
(1) More than one-third support test (support from public/governmental
sources at least one-third of total support) or
(2) Facts and circumstances/10% test (substantial support
-- at least 10% of total support -- from public, nature of
publicly supported organization)
III. DONOR ADVISED FUNDS -- COMMUNITY FOUNDATIONS, CHARITABLE
GIFT FUNDS CREATED BY FINANCIAL INSTITUTIONS AND FUNDS MAINTAINED
BY UNIVERSITIES, ETC.
Must qualify as publicly supported organization (one of two
tests above)
Key: ADVICE: Donor gives advice (not absolute direction)
IV. SUPPORTING ORGANIZATIONS
Three types: IRC § 509(a)(3) (very detailed and complex
rules):
Type I: "parent-subsidiary" relationship: operated,
supervised, or controlled by publicly supported charity, which
designates majority of Type I's governing body
Type II: "brother-sister" relationship: supervised
or controlled in connection with publicly supported organization
Type III: "kissing cousin" relationship: operated
in connection with one or more publicly supported organization
See Nancy P. Marx, The Right Fit: Matching Client Goals with
Charitable Entities, Tr. & Est. (Oct. 2003).
V. PRIVATE FOUNDATIONS
Any organization described in IRC § 501(c)(3) except
organizations described in IRC § 509(a)(1), -(a)(2),
-(a)(3), or -(a)(4). 501(c)(3) organizations basically divided
into two classes: private foundations and public charities.
Most private foundations are non-operating foundations, but
other categories include operating foundations, exempt operating
foundations, and pass-through (conduit) foundations.
VI. PRIVATE OPERATING FOUNDATIONS: spends at least 85% of
its adjusted net income or its minimum investment return,
whichever is less, directly for the active conduct of its
exempt activities (income test) and also meets the assets
test, the endowment test, or the support test.
VII. EXEMPT OPERATING FOUNDATIONS
VIII. PASS-THROUGH (CONDUIT) FOUNDATIONS
IX. COMPANY FOUNDATIONS
X. TAXES ON SELF-DEALING -- IRC § 4941, TREAS. REG.
53.4941
Acts between private foundation and "disqualified person."
Examples of transactions that constitute self-dealing:
Sale, exchange, or leasing of property;
Lending money or other extensions of credit;
Providing goods, services, or facilities;
Paying compensation or reimbursing expenses to disqualified
person;
Transferring foundation income or assets to, or for use/benefit
of, disqualified person; and
Certain agreements to make payments of money or property to
government officials.
Exceptions to self-dealing:
Compensation or reimbursement to disqualified person that
is not excessive;
Providing goods, services, or facilities to disqualified person
if made available to general public on at least as favorable
a basis AND provision of same is functionally related to foundation's
exempt purpose; and
Leasing of property to disqualified person if without charge.
XI. TAXES ON FAILURE TO DISTRIBUTE INCOME -- IRC § 4942,
TREAS. REG. 53.4942
Distributable amount = minimum investment return of private
foundation reduced by sum of any income taxes and tax on investment
income, and increased by (1) amounts received or accrued as
repayments of amounts taken into account as qualifying distributions
for any tax year, (2) amounts received or accrued from sale
or disposition of property to extent that property's acquisition
was considered a qualifying disposition for any taxable year,
and (3) any amount set aside for specific purpose to extent
that amount set aside was not necessary for purpose set aside.
Minimum investment return = 5% of excess of combined FMV
of all foundation assets, other than those used or held for
use for exempt purposes, over amount of indebtedness incurred
to buy these assets.
XII. TAXES ON EXCESS BUSINESS HOLDINGS -- IRC § 4943,
TREAS. REG. 53.4943
XIII. TAXES ON INVESTMENTS WHICH JEOPARDIZE CHARITABLE PURPOSE
-- IRC § 4944, TREAS. REG. 53.4944
Jeopardizing investment = investment that shows lack of reasonable
business care and prudence in providing for long-term and
short-term financial needs of foundation for it to carry out
its exempt purpose.
XIV. TAXES ON TAXABLE EXPENDITURES -- IRC § 4945, TREAS.
REG. 53.4945
Examples of expenditures normally not considered taxable
expenditures include:
Expenditures to acquire investments that generate income
to be used to further organization's purpose;
Reasonable expenses related to acquiring these investments;
Payment of taxes;
Expenses that qualify as allowable deductions in figuring
tax on unrelated business income;
Any payment that is qualifying distribution;
Any deduction allowed in arriving at taxable net investment
income;
Reasonable expenditures to evaluate, acquire, modify, and
dispose of program-related investments; and
Business expenses of recipient of program-related investment.
XV. DISQUALIFIED PERSONS -- IRC § 4946, TREAS. REG.
53.4946
All substantial contributors to foundation;
All foundation managers;
Owner of more than 20% of (1) total combined voting power
of a corporation, (2) profits' interest of a partnership,
or (3) beneficial interest of trust or unincorporated enterprise,
which is (during ownership) a substantial contributor to foundation;
Member of family of any of above;
Corporation of which more than 35% of total combined voting
power is owned by persons described above;
Partnership of which more than 35% of profits interest is
owned by persons described above; or
Trust, estate, or unincorporated enterprise of which more
than 35% of beneficial interest is owned by persons described
above.
XVI. PRIVATE FOUNDATIONS -- 10 PITFALS
Pledges: satisfying pledge made by disqualified person. Treas.
Reg. § 53.4941(d)-2(f)(1).
$250-and-over substantiation requirement.
Tickets to fundraising events: purchasing such a ticket for
a disqualified person ("rubber chicken"!). See PLR
8449008; PLR 9021066.
Disqualified person's purchase at auction.
Terminating CRTs and dividing proceeds between life beneficiary
and charitable remainder organization (private foundation)
based on respective interests at time of termination. See
PLR 200310024; PLR 200314021; PLR 200225092.
"Qualified appreciated stock" to private foundation
(generally deductible at cost basis only unless gift is truly
"qualified appreciated stock").
IRA gift to private foundation -- 2% excise tax? See PLR
9838028; PLR 9341008. But see PLR 9633006.
Five-year carryover NOT available when lead trust for benefit
of private foundation. PLR 8824039.
CLT benefiting private foundation. See PLR 200138018 (road
map for avoiding inclusion of lead trust assets in donor's
estate where lead trust beneficiary is donor's private foundation
-- must relinquish ALL control of CLT).
Reformation to conform to donors' intent that private foundation
is allowable remainder organization of CRUT (by trying to
remove 170(b)(1)(A) reference to type of charity allowed to
receive CRUT remainder).
XVII. TERMINATION OF PRIVATE FOUNDATION STATUS -- EXIT STRATEGIES
See Rev. Rul. 2003-13, 2003-4 IRB 1; Rev. Rul. 2002-28, 2002-20
IRB 94.
XVIII. HELPFUL IRS PUBLICATIONS AND FORMS
XIX. INCOME TAX CHARITABLE DEDUCTION REDUCES COST OF GIFT:
ELEMENTARY (ELEEMOSYNARY) DEAR WATSON
XX. CHARITABLE DEDUCTION ENABLES DONOR TO MAKE BIGGER GIFT
THAN ORIGINALLY PLANNED BY A GIFT OF TAX ADVANTAGE
XXI. "3% REDUCTION RULE"
XXII. AMOUNT OF CONTRIBUTION AND APPLICABLE INCOME TAX CEILING
ON DEDUCTION DEPENDS ON TYPE OF GIFT, HOLDING PERIOD, TYPE
OF DONEE, AND SOMETIMES ELECTION MADE BY DONOR
[Covered in IRS Pub. 526, "Charitable Contributions":
http://www.irs.gov/pub/irs-pdf/p526.pdf.]
XXIII. GIFT AND ESTATE TAX CHARITABLE DEDUCTIONS
XXIV. PARTNERSHIPS: IRC § 702(a)(4); IRC § 703(a)(2)(E);
TREAS. REG. 1.170A-1(b)(7)
XXV. CORPORATION GIFTS: IRC § 170(b)(2), -(d)(2), AND
-(a)(2); TREAS. REG. 1.170A-1(b)(7)
XXVI. GIFT VS. BUSINESS EXPENSE
XXVII. SERVICES
XXVIII. UNREIMBURSED VOLUNTEER EXPENSES
XXIX. AVOIDING CAPITAL GAINS ON GIFT OF APPRECIATED SECURITIES
XXX. GIFT OF PROPERTY HAVING FAIR MARKET VALUE LOWER THAN
COST BASIS
XXXI. BARGAIN SALE
XXXII. PLEDGES
XXXIII. GIFT OF UNDIVIDED PORTION OF DONOR'S ENTIRE INTEREST
IN PROPERTY: IRC §§ 170(f)(3)(B), 2522(c)(2), 2055(e)(2);
TREAS. REG. 1.170A-7(a)
XXXIV. SPLIT-INTEREST CHARITABLE GIFTS
Idea of QTIP/CRUT combination (besides discussion of overview
of split-interest techniques from Mr. Teitell's other excellent
charitable planning materials, which are also available for
attendees of his Salvation Army presentation)
XXXV. SUBSTANTIATING INCOME TAX CHARITABLE DEDUCTIONS
XXXVI. THE APPRAISAL REQUIREMENTS
See Treas. Reg. 1.170A-13(c).
XXXVII. INFORMATION RETURN BY DONEES -- THE "TATTLETALE"
RULE
XXXVIII. IRS'S PUBLIC LISTINGS OF TAX-EXEMPT ORGANIZATIONS
XXXIX. JEOPARDIZING TAX-EXEMPT STATUS
XXXX. INUREMENT TO INSIDERS
XXXXI. PRIVATE BENEFIT
XXXXII. INTERMEDIATE SANCTIONS -- IN BRIEF
XXXXIII. EXEMPT ORGANIZATIONS -- LEGISLATION AND ISSUES ON
THE HORIZON
Mr. Teitell highlighted the importance of the passage of
the CARE Act (HR 7) and encouraged everyone to continue supporting
it. [I would certainly echo his encouragement and refer all
members to my ABA-PTL posting in October 2003:
http://mail.abanet.org/scripts/wa.exe?A2=ind0310&L=aba-ptl&P=R46009&I=3&m=51342.
XXXXIV. PRIVATE FOUNDATIONS -- PROPOSED LEGISLATION
XXXXV. ADVANTAGES AND DISADVANTAGES OF PUBLIC CHARITIES,
PRIVATE FOUNDATIONS, AND EVERYTHING IN BETWEEN: ACCOMPLISHING
CHARITABLE OBJECTIVES, TAX BENEFITS, CONTROL, FAMILY INVOLVEMENT,
SIMPLICITY, COMPLEXITY, AND PERSONAL LIABILITY
XXXXVI. CONCLUSION -- THE AMERICAN PHILANTHROPIC TRADITION
____________________
Wednesday, January 7, 2004 @ 9:00 AM - 9:45 AM
Charitable Trust Litigation: Enforcing Donor Intent
When the Ties That Bind Become Frayed
Howard M. McCue, III
Mayer, Brown, Rowe & Maw
Chicago, Illinois
Mr. McCue delivered a very good and timely session on charitable
trust litigation. His materials walk you through the analysis
of a charitable trust construction case, beginning with the
principles of charitable trust construction and ending with
the case's resolution. Some of the most helpful materials
are contained in Scott's appendices, which summarize relevant
charitable trust case law.
I. INTRODUCTION
II. HOW ARE THESE ISSUES ANALYZED?
A. First Principles.
B. The Role of Donor Intent.
Mr. McCue focused on the primary principle in construing
charitable trusts (and mixed charitable and private trusts):
"The controlling consideration in determining the meaning
of a donative document is the donor's intention. The donor's
intention is to be given effect to the maximum extent allowed
by law" (quoting The Restatement of Property (Wills and
Other Donor Transfers). Donor intent is determined from the
text of the trust agreement, together with all relevant evidence.
Mr. McCue stated the "plain meaning rule," which
is the traditional majority rule: Extrinsic evidence cannot
be introduced to contradict the plain meaning of the words
used in a trust. He explained the contrary position of the
Restatement of Property, Donative Transfers, which allows
extrinsic evidence to inform the text of the donative document.
He cited Andrea Cornelison's article, "Dead Men Talking:
Are Courts Ready to Listen? The Erosion of the Plain Meaning
Rule," which traces the history of the plain meaning
rule and its exceptions and was published in the American
Bar Association Section of Real Property, Probate, and Trust
Law's REAL PROPERTY PROBATE & TRUST JOURNAL in 2001.
C. Cy Pres.
Mr. McCue summarized the judicially applied principle of
construction known as cy pres. Under the doctrine of cy pres,
if property is placed in trust for a designated charitable
purpose and that purpose becomes unlawful, impossible, or
impractical to carry out, then, unless the terms of the trust
provide otherwise, the charitable trust will not fail; rather,
a court with proper jurisdiction will direction application
of the property (or an appropriate share of such property)
to a charitable purpose that nearly approximates the donor's
designated purpose. The cy pres doctrine is also sometimes
applied where enforcing the donor's designated purpose would
result in a wasteful use of the entire charitable trust property.
Mr. McCue used the "Hershey" cases to illustrate
the principles and application of the cy pres doctrine.
D. Equitable Deviation.
Equitable deviation is another judicial remedy which, like
cy pres, allows a court to change a charitable trust's purpose
in a trust construction matter. However, unlike the cy pres
doctrine, which is limited to cases where the donor's specific
charitable purpose cannot be accomplished, equitable deviation
has been applied in various cases. Mr. McCue noted that the
cy pres doctrine and equitable deviation are often used interchangeably
and are difficult to distinguish when reading case law. He
used the Barnes Foundation litigation to discuss equitable
deviation further.
E. Variance Power.
A "variance" power is sometimes included in trust
agreements and allows the trustees to change the trust's terms
when the trustees determine that the donor would not desire
literal compliance with the terms of the trust agreement due
to a substantial change in circumstances. Mr. McCue cited
the New York Community Trust's invocation of a variance power
to move a gift away from the Community Service Society of
New York.
III. STANDING
Mr. McCue outlined the critical aspect of standing in the
context of charitable trust litigation.
A. The Charitable Beneficiary.
The charitable trust beneficiary, which has an actual interest
in the trust, has standing in all matters involving the construction
of a charitable trust. Mr. McCue discussed the case involving
the San Francisco Foundation and the Beryl Buck charitable
trust.
B. The Attorney General.
Most charitable trust cases have held that the state attorney
general also has standing to bring or participate in a construction
case. Mr. McCue used the two Connecticut cases of Herzog and
Blumenthal to illustrate the ability of a state attorney general
in such circumstances.
C. The Donor.
Mr. McCue pointed out that the donor does not always have
standing to enforce the charitable gift based on the inconsistent
cases on this issue. Mr. McCue contrasted the Herzog and Smithers
cases on the issue of a donor's standing. He also recommended
that donors make explicit in their gift agreements a retained
right to enforce the restrictions placed on a charitable gift.
D. The Donor's Family and Other Representatives of the Donor.
Mr. McCue highlighted the new trend of allowing -- or disallowing
-- the donor's family (or other donor representatives) to
challenge the use of charitable gifts. Mr. McCue used the
Sybill Harrington and Avery Fisher family case involving the
Lincoln Center and the New York Philharmonic to illustrate
this new trend.
E. Third Parties.
Mr. McCue used the Hershey cases to describe situations where
third parties have also sought standing to challenge the administration
of charitable funds.
IV. HOW ARE THESE ISSUES RESOLVED?
A. Political Considerations.
Charitable trust cases are inherently political, often involving
the attorney general, government officers and officials, lawyers,
public charities, and others. Mr. McCue cited the Bishop cases
involving the late Princess Bernice Pauahi Bishop, the last
surviving member of the Royal Kamehameha (Hawaii) family.
B. Venue.
Mr. McCue underscored the importance of venue which, like
political considerations, is very important when the impact
of one conclusion may favor citizens of one community over
the citizens of another.
C. Sometimes Legal Issues Get Lost.
Mr. McCue analyzed the relegation of legal issues in some
of the high-profile cases, such as Hershey and Barnes, where
the courts have relied more upon practical (or other) considerations.
D. Compromise Solutions.
As in most multi-party litigation situations, charitable
trust disputes often result in compromises. Mr. McCue cited
the Buck, Barnes, and Bishop cases to illustrate that these
cases are complex multi-party disputes.
V. SOME LEGISLATIVE APPROACHES TO THESE PROBLEMS
A. The Uniform Trust Code.
The Uniform Trust Code (UTC) codifies the cy pres doctrine,
grants broad authority to a court to apply the doctrine of
equitable deviation, and expressly addresses the issue of
standing. The UTC allows a donor to maintain a proceeding
to enforce a charitable trust (section 405(c)).
B. The Uniform Management of Institutional Funds Act.
VI. PRACTICAL GUIDANCE IN DRAFTING
A. Recognizing the Practical Issues of Administration.
Mr. McCue urged drafters to articulate the donor's intent
with clarity and with sufficient detail to permit the charitable
donee and other interested parties to determine what is intended
over the period of administration. Mr. McCue cautioned drafting
to do anything "in perpetuity," as circumstances
change over time.
B. Anticipate Enforcement Issues.
Mr. McCue recommended drafting for enforcement issues, but
certainly not as a substitute for clarity as to donor intent.
He also noted that providing for an alternative use of the
gift property may be appropriate to consider, although that
"gift-over" may not be recognized after a certain
period of years.
C. Avoid the Predictably Dysfunctional.
Mr. McCue challenged the estate planner to discuss practical
issues candidly with clients. He reminded us that we bring
the benefit of our training and experience to the table. If
a client's dispositive plan will not work, we should challenge
the client and urge the client to reconsider the plan. He
concluded with the Barnes case as an example of a plan that
was impractical from the beginning.
SPECIAL SESSION I-D: charitable trust litigation: enforcing
donor intent when the ties that bind become frayed:
******************
Wednesday, January 7, 2004 @ 2:00 PM - 3:30 PM Special Sessions
I
Session 1-D: Charitable Trust Administration: Enforcing
Donor Intent When the Ties That Bind Become Frayed
Howard M. McCue, III
Mr. McCue's special session centered on a hypothetical case
study involving entertainment lawyer Louis Howe, his third
wife Ilsa de Freshlinghoven, and Louis' two children from
his first marriage, Hubert and Dewey. Louis had built a mansion
home on a 300-acre island in the Florida Keys, where whooping
cranes began to migrate. Louis and Ilsa developed a strong
affection for the whooping cranes, and Louis decided to make
his island a sanctuary and research center to be run by the
University of Miami (UM). His sons were concerned about Louis'
distraction from his "extraordinarily complex estate
plan" that had been designed by a well-known estate planning
attorney and would benefit the sons primarily. Louis approaches
you and states that he wishes to protect (1) Ilsa, (2) whooping
cranes in south Florida, and (3) Hubert and Dewey.
The attendees of the special session had a wonderful and
entertaining exchange of ideas as to how to achieve his estate
planning goals and how to represent UM. The consensus was
that Louis would convey the property to UM during lifetime.
The majority of attendees also agreed that a trust would probably
not be appropriate here. One attendee suggested consideration
of a supporting organization (SO), probably a Type I, to be
governed by representatives from three other charitable organizations
that are involved in the study of birds and two representatives
from the family; however, there were strong concerns against
involving Hubert and Dewey because of their lack of interest
in Louis' donative intent.
We also discussed a more simplistic outright transfer with
a retained life estate. Another attendee mentioned that UM
would want the ability to change the use of the donated property
if the circumstances changed substantially, e.g., if the whooping
cranes decided not to migrate to Louis' island sanctuary.
Attendees voicing concerns on behalf of Louis stated that
they would want to retain the ability for Louis and/or Ilsa
to enforce the agreement.
Then more facts were supplied. Louis decided to negotiate
his own agreement with UM, donated the property with a retained
life estate (the last-to-die of Ilsa and Louis), and provided
a $20M endowment for the research institute. Louis provided
that Ilsa and his sons serve on an advisory committee, but
included no alternative "gift-over" of the property
to another charitable organization. Later, after Louis' death,
the cranes stop coming to the sanctuary and instead migrate
to the Everglades. The chair of UM's Department of Biodiversity
suggests that the facilities be converted to a research institute
for red tilapia, which Ilsa does not like. The President of
UM says that the endowment cannot support the research institute
and that Ilsa should consider (1) contributing additional
funds to continue the study of the whooping cranes or (2)
selling the island, adding the proceeds to the endowment,
and broadening the focus of the endowment. Ilsa also learns
that Hubert and Dewey are proposing that a donor advised fund
be created with the proceeds to benefit UM, but shift the
focus of the benefit to the UM athletics program (as they
are "serious football fans").
The attendees then analyzed the additional facts. We agreed
that UM could assert the cy pres doctrine or pursue equitable
deviation to devote the property and endowment to another
purpose. One of the attendees emphasized that if the property
is sold, the proceeds should be used to enforce Louis' specific
purpose to study the whooping cranes. Thus, the research institute
would need to continue in the Everglades.
One attendee noted that an additional contribution from Ilsa
is inconsistent with the gift agreement. Another attendee
stated that Ilsa can probably enforce the gift agreement,
although Louis should have included language affording standing
to her in the gift agreement. Lastly, we agreed that the alternative
charitable organization and the "gift-over" probably
should have been inserted in the gift agreement.
We concluded that we would recommend a 50-year supporting
organization and then allow UM to take the property. The concern
is that the family will "blow up" the plan. It is
also not realistic to create a perpetual charitable vehicle
in these circumstances, given the tenuous status of the whooping
cranes.[Reposted from report #8 and reported by john warnick,
esq.]
_______________________
Wednesday, January 7, 2004 @ 9:45 AM - 10:30 AM
The Rules of Engagement: Managing Liability for Nonprofit
Boards
Kathryn W. Miree
NOTE: This general session was previously reported on by
John Warnick Esq. in Heckerling Report
No. 8. Readers are referred to that Report for the details.
The follow up Special Session on this topic that was held
Wednesday afternoon is reported on below by reporter Jason
Havens Esq.
Wednesday, January 7, 2004 @ 3:45 PM - 5:15 PM Special Sessions
II
SESSION II-A: The Rules of Engagement: Managing Liability
for Nonprofit Boards
Kathryn W. Miree
Kathryn W. Miree & Associates, Inc.
Birmingham, Alabama
Jerry J. McCoy
Attorney at Law
Washington, D.C.
Ms. Miree's and Mr. McCoy's special session also focused
on case studies. We reviewed several problems and provided
analysis. Following is a summary of those comments.
A. Problem 1:
In the first problem, Knowledge College has lost most of
its students and its endowment over the past eight years.
Knowledge College is governed by a Board of Trustees, which
consists of fifteen prominent individuals, including one who
is a president of a more successful college at the other end
of the state. The Board has been unable to devise a successful
solution to the declining enrollment and the decreasing endowment.
At its next meeting, the Board will discuss whether to (a)
close the college, sell the campus, and devote the remaining
assets to educational purposes; (b) stay the course and keep
the college going; or (c) seek a merger partner from among
the other colleges in the area.
We discussed that the focus or purpose of Knowledge College
is not very strategic as a "small liberal arts college."
There is nothing to attract good candidates to the college.
The Board needs to spend time refining the college's purpose.
We also questioned the reason for the eight-year decrease
in the endowment. The Board could be facing liability, and
has seemingly taken no action or even planning to correct
this problem. The fact that the college is governed by a Board
of Trustees means that the college is probably governed by
a trust instrument, which should be analyzed (as the duty
of care is generally higher than if the charitable organization
were a non-profit corporation).
The main point of discussion centered on the lack of review
and planning. Ms. Miree and Mr. McCoy noted that the planning
process is crucial, even if the wrong decision is ultimately
made. The fact that no planning or analysis has been done
leaves this Board exposed to potential liability.
Mr. McCoy revealed that this hypothetical is based on Zehner
v. Alexander (Wilson College) (Pa. Surrog. Ct. 1979 -- Judge
Keller (citation unavailable)), which took the first option
-- to close the college. However, the opposing trustees, faculty/alumni,
and students enjoined the closure. Wilson College survived
after the injunction and is evidently still running.
B. Problem 2:
In the second problem, the Friendly City Opera Company is
encountering financial difficulties. Several large bequests
have saved the organization in the past. The Board wants to
pursue changes and address the need of a shortage of younger
supporters.
We agreed that the Board should pursue a more structured
system of planned giving and financial reporting. Other facts
illustrated that the Board has not been kept fully informed
by the Executive Director. The more structured Board and systems
are crucial.
Then Mary Sunshine, an affluent socialite, proposes that
she would like to join the Board. However, she does not want
to become involved in meetings or functions of the Board.
"That's just not [her] thing." Nevertheless, she
promises to raise $1M in a year or else contribute it herself.
We discussed that the Board is justifiably concerned about
Mary joining the Board. We concluded that the Board should
create an advisory committee so that Mary can participate,
but not on a full Board member level. The committee member
status would insulate Mary and the Board from potential liability
due to her lack of involvement.
Lastly, more facts express that the Board wants to divide
its responsibilities among its members. Opponents argue that
the Board should instead provide oversight and not simply
delegate individual responsibilities to individual Board members.
We agreed that the latter approach of providing oversight
is the main function of the Board. While committees and subordinate
processes can be used effectively, the Board itself must provide
oversight and governance when it meets and acts.
Mr. McCoy revealed that this hypothetical is based on the
Bishop case and the creation of "fiefdoms." Ms.
Miree noted that the Board should function by committees,
but it CANNOT shed its ultimate responsibility for making
decisions.
C. Problem 3:
In the third problem, which we did not have much time to
address, a situation similar to the National United Way case
was discussed involving a Chief Executive Officer who had
outstanding loans from the organization, advances on trips,
and the like. Mr. McCoy noted the private inurement issues
and also the oversight responsibilities of the organization.
Ms. Miree noted that there was seemingly no fiscal policy
in place for the organization.
__________________________________________
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