Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !

ssues

CHAPTER 14:

NOT-FOR-PROFIT ORGANIZATIONS REGULATORY, TAXATION, AND PERFORMANCE ISSUES

OUTLINE

Numbe .ue(*#!/(: 14-1 14-% 14-( 14-4 14-$ 14-/ 14-1 14-2 14-+ 14-1, C'(e(: 14-1 14-% 14-( 14-4 14-$

T!"#$

T%"e&T'()

S*'*u( + e: 1,&e1$-1 re"ised Ne' Ne' .ame Ne' .ame Ne' .ame .ame .ame Ne' .ame 1$-( re"ised 1$-4 re"ised Ne'

Regulatory authority of states and federal go"ernment &ifferen es in tax-exempt ategories Re)uirements for filing *orm ++, Pu-li harities and pri"ate foundations Politi al a ti"ity and tax-exempt status 0nrelated -usiness in ome tax Politi al a tion ommittees !ntermediate san tions Performan e measures !n orporating do uments 3nalyzing a N*P 04!T and ad"ertising *inan ial performan e measures of largest NPOs Nonfinan ial performan e measures Performan e e"aluation of a N*P

#xplain #xplain #xplain Compare and ontrast #xplain &is uss &efine, explain &is uss !dentify !dentify, explain !nternet #"aluate !nternet !nternet !nternet

E0e $#(e(&P !b1em(: 14-1 5arious 14-% Pu-li harity 14-( Tax-exempt ategories 14-4 14-$ 14-/ 14-1 04!T 8ift shop and 04!T !ntermediate san tions Performan e measures

6ultiple Choi e Compute !dentify #"aluate Compute &etermine Compute, analyze

1$-1 re"ised 1$-% re"ised 7uestion 1$-( re"ised .ame .ame .ame Ne'

14-1

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

CHAPTER 14:

NOT-FOR-PROFIT ORGANIZATIONS REGULATORY, TAXATION, AND PERFORMANCE ISSUES

3ns'ers to 7uestions 14-19 3 state go"ernment grants legal existen e to a not-for-profit organization in the form of a not-for-profit orporation, a limited lia-ility ompany or as a harita-le trust9 3s a result, the state has a responsi-ility to monitor the a tions of the N*P:s managers9 The pu-li loo;s to the state to monitor the harita-le organization so it operates for the pu-li good9 Part of the state:s monitoring responsi-ility in ludes dete ting ases 'hen managers or dire tors ha"e di"erted resour es, mismanaged, or defrauded the harity and the pu-li 9 5ery often regulations in the nature of onsumer prote tion, su h as li enses for harita-le soli itation, are re)uired to assist in the monitoring pro ess9 14-%9 3 $,1< =<(= tax-exempt organization is onsidered a pu-li harity9 3s su h, ontri-utions a donor ma;es to a $,1< =<(= N*P are tax dedu ti-le on federal in ome tax returns9 3 $,1< =<1= is a so ial or re reational N*P9 3lthough it is a tax-exempt organization, ontri-utions made to a $,1< =<1= are not tax dedu ti-le on federal in ome tax returns9 Thus, a ma>or differen e is 'hether the donor an dedu t the ontri-ution made to the N*P from his?her federal in ome tax return9 14-(9 8enerally all N*P organizations must file some type of *orm ++, 'ith the !R.9 .ome ex eptions in lude religious organizations and go"ernmental N*P organizations9 The N*P 'ould ;no' 'hi h form to file -ased on its size9 The filing re)uirements -y size are@ <1= *orm ++,-N or Ae-post ardB is filed -y N*Ps 'ith gross re eipts of C$,,,,, or less per year, <%= *orm ++,-#D is filed -y N*Ps 'ith annual gross re eipts of -et'een C$,,,,, and C%,,,,,,, and 'ith less than C$,,,,,, in total assets, and <(= a *orm ++, is filed -y N*Ps 'ith re eipts and assets too large to )ualify for filing the *orm ++,-#D9 14-49 Public charities are -roadly supported -y the general pu-li in the form of ontri-utions, dues, or harges for ser"i es, 'hi h is 'hy the ad>e ti"e Apu-li B is appropriate9 Private foundations are funded -y gifts from a small set of donors, usually a family or orporation9 3 pri"ate foundation ma;es grants to pu-li harities, 'hi h then operate programs9 4oth are tax-exempt under !RC .e 9 $,1< =<(=, -ut pu-li harities re ei"e the most preferred tax treatment -e ause it is assumed that the pu-li , -oth donors and -enefi iaries of the programs, 'ill monitor the a tions of the organization9 3 pu-li harity 'ill file an annual *orm ++, 'hile a pri"ate foundation files a similar form, *orm ++,-P*, 'hi h in ludes s hedules related to ex ise taxes on ertain prohi-ited -eha"ior9 3 pri"ate foundation is su->e t to many ex ise taxes for prohi-ited -eha"ior -e ause there is a higher ris; that this type of organization 'ill ser"e the interests of a relati"ely fe' donors at the expense of the pu-li 9 *or example, a 'ealthy donor ould esta-lish a pri"ate foundation, re ei"e a harita-le in ome tax dedu tion for a ontri-ution of appre iated sto ; in the urrent period, pla e family mem-ers on the -oard 'ho ma;e spending de isions, rent offi e spa e to the foundation, and pay out
14-%

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, 3ns'ers, 14-4 <Cont:d=

relati"ely small amounts to harities o"er time9 .tudents may remem-er from an introdu tory taxation ourse that the harita-le ontri-ution itemized dedu tion is more generous for gifts gi"en to pu-li harities than pri"ate foundations9 14-$9 3 degree of exempt lo--ying a ti"ity is allo'ed9 The ;ey is that the N*P organization should not su-stantially engage in lo--ying a ti"ity9 To assist 'ith the definition of su-stantial the !RC pro"ides guidan e on the amount that an -e spent on lo--ying a ti"ity 'ithout in urring taxes or >eopardizing tax-exempt status9 &epending on the size of the N*P organization, it an expend up to C1,,,,,,,, on lo--ying a ti"ity <influen ing legislation= 'ithout in urring taxes9 .ize is defined in terms of expenditures rather than re"enue? ontri-utions9 .pe ifi ally, the amount that an -e spent on lo--ying is al ulated as a per entage of ho' mu h the N*P expended on its exempt purpose up to the limit of C1,,,,,,,,9 3dditionally, the N*P an expend up to %$ per ent of the amount spent on lo--ying a ti"ity for grass-roots lo--ying a ti"ity <influen ing the opinions of the general pu-li =9 The -oard mem-er should -e autioned that the N*P ha"e a lear understanding of the definition of lo--ying a ti"ity9 Politi al ampaigning is not a lo--ying a ti"ity and harita-le N*Ps are -arred from politi al ampaigning9 Campaigning in ludes ontri-utions to politi al ampaign funds, pu-li statements of position on -ehalf of the organization in fa"or of <or in opposition to= any andidate for pu-li offi e, and the pu-li ation or distri-ution of politi al statements9 Eo'e"er, ertain "oter edu ation a ti"ities or pu-li forums ondu ted in a nonpartisan manner may not -e onsidered prohi-ited politi al a ti"ity9 The ;ey is 'hether the a ti"ities en ourage people to "ote for or against a parti ular andidate9 14-/9 3 gift shop that is onsidered unrelated to the tax-exempt mission of the museum and regularly arries on -usiness a ti"ities 'ill -e su->e t to the unrelated -usiness in ome tax <04!T= if its net in ome is greater than C1,,,,9 The 04!T rate is e)ual to orporate in ome tax rates9 !n order to ensure that the museum does not in ur a 04!T lia-ility, the managers should arefully re"ie' the in orporating do uments to determine if the taxexempt mission of the organization in ludes selling items related to exhi-its9 The museum an also es ape this tax if the gift shop is staffed -y "olunteers, if the entire in"entory is donated, or if its net in ome is less than C1,,,,9 14-19 !RC .e 9 $%1 in ludes su h organizations as politi al a tion ommittees, politi al parties and politi al ampaigns9 !n fa t, .e 9 $%1 organizations are onsidered tax-exempt under the !RC9 Campaign finan e la's typi ally ha"e an impa t on .e 9 $%1 organizations9 3s a result of su h la's, organizations that meet the definition of a politi al organization are re)uired to notify the !R. that they 'ish to -e onsidered a .e 9 $%1 tax-exempt

14-(

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, 3ns'ers, 14-1 <Cont:d=

organization9 3dditionally, .e 9 $%1 N*Ps must periodi ally omplete *orm 221%, notifying the !R. of the names and addresses of persons contributing more than C%,, to the N*P, and those persons receiving more than C$,, from the N*P9 14-29 Intermediate sanctions refer to the po'er gi"en to the !nternal Re"enue .er"i e <!R.= in !nternal Re"enue Code <!RC= .e 9 4+$2 to assess a tax on ex ess -enefit transa tions9 These are transa tions in 'hi h a su-stantial -enefit is gi"en to a dis)ualified person <i9e9, one 'ho has the a-ility to influen e the organization, su h as an offi er or manager=9 These transa tions result in a tax on the person re ei"ing the -enefit and possi-ly an additional tax on the organization, if the organization ;ne' the transa tion 'as improper9 #xamples in lude ex ess ompensation and sales of goods at -argain pri es to managers9 Prior to the introdu tion of this tool in the 1++/ Taxpayer 4ill of Rights % <P9F9 1,4-1/2=, the only san tion the !R. had 'hen a-use -y N*Ps 'as dete ted 'as to re"o;e their taxexempt status9 This harsh penalty often hurt the pu-li -enefi iaries 'ho lost the ser"i es of the harity, more so than the a-usi"e offi ers9 14-+9 Performan e measures should -e de"eloped that apture the out omes desired of the organization, as 'ell as inputs to and outputs from operations9 *or example, a ommunity:s hild are enter may ha"e a goal of -eing an ex eptional hoi e for parents in pro"iding safe, nurturing are for hildren from ages ,-49 The inputs ould -e the staff <e9g9, hours and dollars=, supplies <e9g9, food and edu ational play toys=, and the outputs ould -e num-er of hildren ser"ed ea h 'ee;9 To measure out omes, ho'e"er, the organization should in orporate parent sur"eys or a reditation?regulation reports9 3n effe ti"e report to the -oard 'ill pro"ide a small set of measures that an -e tra ;ed o"er time and ompared to other similar organizations9 The National Taxonomy of #xempt #ntities <NT##= lassifi ation s heme <presented in !llustration 14-$= is a good starting point for identifying similar organizations9 The "ersion of the taxonomy a"aila-le on the NCC. Ge- site 'ill pro"ide more detail for determining 'hether the ompara-le ategory should -e 4 for #du ation or O for Houth &e"elopment, or e"en I for Nutrition9 0sing the Ge- site '''9ur-an9org? enter pro"ides performan e measures that an -e used for the ategory identified as appropriate for the hild are enter9 14-1,9 !n orporating do uments that ha"e an external fo us and des ri-e the purpose of the notfor-profit organization are the arti les of in orporation9 3nother set of in orporating do uments, usually prepared at the same time as the arti les of in orporation, are the -yla's9 The -y-la's are internally fo used and des ri-e the manner in 'hi h the not-forprofit organization 'ill ondu t its -usiness9 *or example, -y-la's 'ill indi ate ho' offi ers of the -oard are ele ted, 'hether an audit is re)uired, and the minimum num-er of meetings the organization 'ill hold ea h year9 !n addition, the minutes to those -oard meetings are riti al in do umenting the de isions and poli ies of the -oard that impa t managers of the organization9 .ta;eholders external to the organization are most interested in the harita-le or pu-li mission of the organization found in the arti les of in orporation9

14-4

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions <Cont:d=

.olutions to Cases 14-19 Note: The ans'ers pro"ided to this ase are -ased on the %,1, annual report of the 3meri an !nstitute of Certified Pu-li 3 ountants9 a9 The 3meri an !nstitute of Certified Pu-li 3 ountants <3!CP3= re ei"es its exempt status under !RC .e 9 $,1< =</=9 !llustration 14-( identifies this ode se tion as appropriate for -usiness leagues, ham-ers of ommer e and real estate -oards9 The 3!CP3 'ould -e an example of a -usiness league9 The 3!CP3 has opted not to ma;e its *orm ++, a"aila-le on its Ge- site9 3ll organizations filing the *orm ++, are re)uired to ma;e the form a"aila-le to the pu-li 9 Therefore, the fa t that the purpose of the 3!CP3 is to ser"e its dues paying mem-ers does not affe t its responsi-ility to ma;e its *orm ++, a"aila-le to the pu-li 9 The !R. does not re)uire that the form -e made a"aila-le on an N*P:s Ge- site9 *or those interested, footnote / in Chapter 14 pro"ides additional information a-out pu-li a"aila-ility of the *orm ++,9 Hes9 3 re"ie' of the 3!CP3:s statement of ash flo' re"eals that this taxexempt organization has paid in ome taxes, indi ating unrelated -usiness in ome <04!T=9 3dditionally, a re"ie' of the footnotes indi ates that the 3!CP3 is su->e t to 04!T9 The 3!CP3 has t'o for-profit entities, one of 'hi h is a limited lia-ility ompany <FFC=9 North.tar Conferen es, FFC, pro"ided professional de"elopment programs and onferen es to "arious industries9 4e ause the 3!CP3 is the sole mem-er of this FFC the in ome generated -y North.tar flo's dire tly and totally to the 3!CP3 and is su->e t to 04!T9 The effe ti"eness ratio is al ulated as Program #xpenses?Total #xpenses9 0sing the %,1, om-ined statements of a ti"ities found in the annual report for the 3!CP3 the follo'ing ratio 'as al ulated@ Total Program .er"i es #xpense?Total #xpensesJ C144,+1/?C1+2,,$,J1(K The 3!CP3:s program effe ti"eness ratio is at the lo' end of the ratios pro"ided -y the ten largest harita-le N*Ps9 Only the 3meri an Can er .o iety has a lo'er ratio9 The ans'er to 'hether the 3!CP3 should -e as effe ti"e 'ill "ary -y student9 3!CP3 mem-ers pay dues in the expe tation that they are re ei"ing "alue for the dollars paid9 .ome may argue that -e ause the 3!CP3 is a -usiness league administrati"e osts should -e higher due to higher salaries and the per)uisites of offi e9 Others 'ill argue that mem-ers do not pay dues for su h non-"alue added ser"i es and the 3!CP3 effe ti"eness should -e similar to other N*Ps9

b.

c9

d9

14-$

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, Case 14-1 <Cont:d=

3s a aution, effe ti"eness of any organization should -e -ased on fa tors other than a single ratio9 *or example, mem-ership in the 3!CP3 is "oluntaryL therefore, mu h as 'ith for-profit entities, mem-ers ha"e the option of not pur hasing the ser"i es <i9e9, not paying dues= offered -y the 3!CP3 if they do not -elie"e they are re ei"ing "alue for their money9 The fa t that mem-ers ontinue to pay dues indi ates they are some'hat satisfied 'ith the ser"i es pro"ided -y the 3!CP39 e. 3 ounting students 'ould -e surprised and disappointed if there 'asn:t some e"iden e the 3!CP3 'as pra ti ing good go"ernan e9 There are se"eral indi ators of good go"ernan e pro"ided -y the annual report and the Ge- site9 .ome of the items mentioned in lude@ 0se of an audit ommittee9 The audit ommittee is made up of independent dire tors9 The audit ommittee meets separately 'ith the internal auditor9 The 3!CP3 applies the CO.O frame'or; to internal ontrol9 6anagement pro"ides an internal ontrol assuran e9 The auditor pro"ides an opinion on management:s internal ontrol assuran e9 The 3!CP3 has a strategi plan9 3lthough the 3!CP3 pro"ides a strategi plan it does not pro"ide users 'ith measurea-le goals and o->e ti"es9 3s a result, it does not pro"ide finan ial or nonfinan ial performan e measures to e"aluate <-en hmar;= 'hether strategi goals and o->e ti"es are -eing a hie"ed9 14-%9 a. The follo'ing are )uestions the exe uti"e dire tor of the asso iation should -e prepared to ans'er@ !s there a fre)uen y and ontinuity of the ad"ertising that appears to -e pursued in a manner similar to ompara-le ommer ial a ti"ities of -usinessesM &oes the ad"ertising a ti"ity ontri-ute importantly to a omplishing the exempt purpose of the organizationM !s the ad"ertising spa e pur hased in the same manner as on"entional ad"ertising -y a -usinessM !s the ad"ertising sold to a -usiness merely to identify the pur haser 'ithout a ommer ial messageM *or example, are the ad"ertisers >ust listed or are separate spa es soldM &oes the pur haser of the ad"ertising deri"e good'ill from -eing identified as a patron of the organization, 'hi h an -e onsidered ommer ial -enefitM

14-/

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, Case 14-% <Cont:d=

&oes the ad"ertising a ti"ity meet any of the ex eptions under 04!T, su h as using "olunteer la-or, operated for the on"enien e of mem-ers, or selling donated mer handiseM &es ri-e these other fa tors that 'ill -e onsidered -y the !R. in onsidering 'hether an a ti"ity is unrelated -usiness in ome@ o The normal manner in 'hi h the pu-li ation is ir ulated9 o The territorial s ope of the ir ulation9 o The extent to 'hi h its readers or promoters ould reasona-ly -e expe ted to further the ommer ial interest of the ad"ertisers9 o The eligi-ility of the pu-lishing organization to re ei"e taxdedu ti-le ontri-utions9 o The ommer ial or non ommer ial methods used to soli it the ad"ertisers9 Gould the net in ome deri"ed from the sale of ad"ertising -e large enough to su->e t the N*P to 04!TM

&eri"ed from !R. Pu-9 $+2, <6ar h %,1,, p9 $=9 .ee ans'er to part b9 b9 The !R. Pu-li ation $+2 ATax on 0nrelated 4usiness !n ome of #xempt OrganizationsB 'ill help students identify 'hether this a ti"ity is onsidered Aunrelated -usiness in omeB su->e t to a tax9 This pu-li ation is a"aila-le at '''9irs9go"9 0nder Chapter (, A0nrelated Trade or 4usiness,B there is a su-se tion 'ithin the #xamples on A.ales of 3d"ertising .pa e,B along 'ith other types of a ti"ity that has -een deemed unrelated -usiness in ome -y the !R.9 The memo students prepare should in orporate the )uestions identified in part a ta;en from the !R. Pu-li ation des ri-ed in part b and any other guidan e students an find on the !nternet or from other resour es9 #mphasize to students that, as a -oard mem-er, 6r9 .mith 'ill use their analysis and memo to help him spea; to the -oard as a 'hole so the -oard an deli-erate the ad"antages and disad"antages of allo'ing ad"ertising in the annual onferen e pu-li ation9 .tudents an suggest an approa h, -ut they should point out that their analysis is deri"ed from pu-li ly a"aila-le !R. guidan e <and ite any other literature they used in their analysis=, and that they are not tax professionals, nor do they ha"e expertise in tax-exempt issues9 There is no information gi"en in the ase to al ulate the osts or -enefits of allo'ing ommer ial ad"ertising in the annual meeting pu-li ation9 .tudents 'ill hoose different sets of harities9 Ge- sites for the organizations listed on !llustration 14-1 an -e readily o-tained through a sear h engine su h as 8oogle9

c9

14-(9 a.

14-1

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, Case 14-( <Cont:d=

The most 'idely pu-lished ratio expe ted to -e a"aila-le on N*Ps Ge- sites is the per ent of total expenses spent on the program as opposed to supporting the program9 8enerally, organizations stri"e to ha"e this per entage -e -et'een /,K and +,K9 The a"aila-ility of data for al ulating ratios 'ill "ary -y the N*P9 Comparing to the %,1, ratios pro"ided in !llustration 14-1, students 'ill pro-a-ly o-ser"e that N*P organizations try to maintain fairly high effe ti"eness ratios9 b9 Readers of finan ial statements an al ulate the ratios presented in !llustration 14-/ from the audited annual finan ial statements and !R. *orm ++,9 *or example, donors an al ulate the organization:s fund-raising ratio -y loo;ing at the statement of a ti"ities to see if the dollars from ontri-utions and support ad>usted for fund-raising osts, di"ided -y total ontri-utions and support, is lose to one and ex eeds a target set -y the organization9 8enerally, a higher ratio is -etter9 The fund-raising effi ien y measure an also -e al ulated from the statement of a ti"ities9 Fi)uidity ratios ome from the statement of finan ial position9 Other ratios in !llustration 14-/ re)uire output measures not on the audited finan ial statements, -ut perhaps in the *orm ++, or in other se tions of the annual report9 3n example of su h information 'ould -e num-er of lients ser"ed9 .tudents ould present information in this manner@ C3' #*% 1 C3' #*% 4 C3' #* %5 C3' #*% 4 C3' #*% , C!mme/*(:

c.

Pe 2! m'/$e me'(u e(: Fi)uidity 8oing on ern Capital stru ture Program effe ti"eness #ffi ien y Fe"erage and de-t o"erage *und-raising ratio !n"estment performan e

.tudents should -e autioned that using ratios for a single year is >ust a first step in assessing the effi ien y and effe ti"eness of an organization9 Certainly trend information is important, as 'ell as other e onomi , finan ial, and program information that may not -e readily a"aila-le in the annual finan ial statements9 Of ourse, often all a donor has is pu-li ly a"aila-le information on 'hi h to -ase a ontri-ution de ision, so the N*P has a strong in enti"e to pro"ide useful information on its Ge- site9

14-2

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions <Cont:d=

14-49 a.

The Out ome !ndi ator Pro>e t a"aila-le at the 0r-an !nstitute:s Center for Nonprofits and Philanthropy Ge- site pro"ides omprehensi"e examples of performan e models sho'ing the program des ription, out omes se)uen e hart, and indi ators for 14 program areas9 Performing 3rts is one of those areas9 The hart suggested is more learly seen in the "ersion at '''9ur-an9org?nonprofitsL ho'e"er, the omponents are as follo's@ I/*e me6#'*e Ou*$!me( !n reased a'areness of arts programs and a ti"ities !n reased a ess !n reased to di"erse attendan e audien e 3rts program re ei"es external re ognition E/6 Ou*$!me( !n reased !n reased so ial Ino'ledge -onds in ommunity !n reased appre iation for the arts #nri hed life experien e !n reased ommunal meaning? understanding

OUTPUT 3rts programs are produ ed and promoted

b.

!ndi ators that an -e used to measure 'hether the asso iation a hie"ed the out omes it desired are@ I/*e me6#'*e Ou*$!me( Num-er and Per entage of per entage of fa ility apa ity ommunity filled per a'are of performan e performing arts opportunities E/6 Ou*$!me( Num-er and Num-er of per entage of outside programs audien e 'ho offered -y arts report gaining group in reased ;no'ledge of lo al ulture as a result of attending e"ents Num-er and Num-er of per entage of ommunity audien e 'ho organization de ide to pursue partnerships additional arts programs after attending an e"ent

19

%9

Num-er of free ti ;ets pro"ided

Num-er of su-s riptions rene'ed as a per ent of sales

14-+

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, Case 14-4 <Cont:d=

c.

The ontri-utors may as; 'hat system is in pla e for gathering information on performan e indi ators9 3re there staff and resour es a"aila-le to ount and al ulate the num-er and per entage of indi"iduals attending programsM !s there a sur"ey me hanism in pla e for follo'ing up 'ith attendees to as; a-out their per eptions and su-se)uent -eha"ior <e9g9, attending more performan es or rene'ing su-s riptions for future e"ents=M Contri-utors may also as; a-out -en hmar;s for ea h of the indi ators to -e a-le to assess 'hether this organization is performing 'ell ompared to its peers or ompetitors9 .tudents may not ha"e mu h experien e in addressing these )uestions, so en ourage them to inter"ie' managers from a lo al performing arts asso iation or explore Gesites of similar not-for-profit organizations to see if performan e measures are a"aila-le9

14-$9 Note: 3ns'ers to ase 14-$ are -ased on !nternet a ess dated /?1$?%,11 and may differ slightly at the time the ase is assigned9 a9 The .ierra Clu- *oundation re ei"ed an 3N rating9 The rating is assigned -ased on the follo'ing riteria@ Program effe ti"eness <program expenses?total expenses=to re ei"e su h a high rating the .ierra Clu- 'ould need to ha"e an effe ti"eness ratio of 1$ per ent or greater9 Cost to raise C1,, in related ontri-utions <-asi ally fund-raising expenses?pu-li support=to re ei"e su h a high rating the .ierra Clu- 'ould -e expending C%$ or less on e"ery C1,, raised9 3 reasona-le le"el of a"aila-le assets9 Too many a"aila-le assets 'ill result in a lo'er rating9 The .ierra Clu- 'ould need to ha"e a"aila-le assets of less than three years to re ei"e su h a high rating9 3"aila-le assets is the amount of assets <in luding in"estments designated -y the -oard= a"aila-le to o"er the urrent year:s -udget9 Of less interest in de iding 'hether to ontri-ute to the .ierra Clu- is the fourth riterion 'hi h is Aopen--oo;B status9 This refers to dis losure of information to the 3!P for use in rating the .ierra Clu-9 The 3N grade re ei"ed -y the .ierra Clu- *oundation indi ates that the 3!P -elie"es the .ierra Clu- is highly effi ient and effe ti"e in pro"iding program ser"i es 'ithout in urring ex essi"e fund-raising osts9 b. No, the .ierra Clu- does not meet the 444:s standards for harity a ounta-ility9 !t fails to meet the standards -e ause it did not meet one of the %, standards on 'hi h the 444 rates harities9 .pe ifi ally, the .ierra Clu- did not meet standard 1-oard appro"al of the 'ritten report on effe ti"eness9 3 ording to the 444 Ge- site, the .ierra Clu-:s program effe ti"eness per entage <program expenses?total expenses= 'as +, per ent, and its fund-raising effi ien y per entage <fund-raising expenses?related ontri-utions= 'as / per ent9

c.

14-1,

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, Case 14-$ <Cont:d=

The 444 rule of thum- for program effe ti"eness is at least /$ per ent and its rule of thum- for fund-raising effi ien y is less than ($ per ent9 4ased on the rules of thum- pro"ided -y the 444 the .ierra Clu- appears to -e operating effe ti"ely and effi iently 'ith regard to programs and fund-raising expenses9 d9 Hes, -ased on the limited analysis ondu ted it appears the .ierra Clu- is performing )uite 'ell9 Program effe ti"eness per entages and the fund-raising effi ien y per entages are good -ased on the riteria pro"ided -y -oth the 3!P and the 4449 The 3!P riteria also indi ate that the .ierra Clu- is using its a"aila-le assets for its mission rather than holding assets in in"estments9

.olutions to #xer ises and Pro-lems 14-1. 1. 2. 3. 4. 5. 14-2. a. b. a. c. b. d. 6. 7. 8. 9. 10. a. c. a. c. d. $ 40,000 30,000 50,000 49,000 $169,000

United Way support Contribution ro! t"e #ity Contributions$ s!a%% #ontributions$ %ar&e #ontributions$ 5 &i ts ' $9,800 (t"e %i!it)* +ub%i# ,upport

* tota% support o $490,000*.02-$9,800. ."e ans/er is based on t"e re0ised 2008 12, pub%i#ation 557, C"apter 3, Co!pre"ensi0e 34a!p%es, pp. 34 (e e#ti0e or t"e 2010 ta4 year). b. ."e or&ani5ation is a pub%i# #"arity be#ause it passes t"e pub%i# support test. 6ore t"an 173 o its re0enue #o!es ro! t"e pub%i# at %ar&e ($169,0007$490,000 - 34.58). c. 9o. 9o/ t"e or&ani5ation ai%s t"e pub%i# support test be#ause %ess t"an 173 o tota% support ($129,8007$490,000-26.58) #o!es ro! t"e pub%i# at %ar&e.

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Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, 14-% <Cont:d=

United Way support Contribution ro! t"e #ity Contributions$ s!a%% #ontributions$ %ar&e #ontributions$ 1 &i t ' $9,800 (t"e %i!it) +ub%i# ,upport

$ 40,000 30,000 50,000 9,800 $129,800

9ote t"at a ta4-e4e!pt entity in its irst i0e years /i%% not "a0e to pro0e t"at it !eets t"e pub%i# support test: "o/e0er, it /i%% in t"e 6 t" year. 14-3. 1. 2. 3. 4. 5. 6. 7. 8. 14-4. Ces D subEe#t to UF1. 1. 2. 3. 4. 5. ,a%e o ,i%0erton ,y!p"ony ;r#"estra Con#ert C=s in t"e a#i%ityGs &i t s"op. 2enta% o t"e a#i%ity to t"e "i&" s#"oo% dra!a #%ub. 2enta% o t/o apart!ents in t"e a#i%ity to t"e sy!p"ony ,a%e o t"e season ti#@et !e!bers"ip %ist to a %o#a% !usi# store. 2enta% o t"e a#i%ity to t"e state C+< asso#iation or #ontinuin& pro essiona% edu#ation e0ents. 1nternet sa%es o &i t s"op ite!s /it" t"e ,i%0erton ,y!p"ony ;r#"estra %o&o. Aease o t"e a#i%ityGs par@in& %ot to t"e %o#a% uni0ersity on ootba%% &a!e days.
14-1%

;tto/a County Credit Union <!eri#an =iabetes <sso#iation +ea#e u% +%a#e Ce!etery <!eri#an 6useu! o 9atura% >istory <1C+< ?rederi#@sbur& Ci0i# Aea&ue Bu% Coast Ca#"t C%ub Aands#apers +ro essiona% <sso#iation

12C ,e#. 501(#)(14) 12C ,e#. 501(#)(3) 12C ,e#. 501(#)(13) 12C ,e#. 501(#)(3) 12C ,e#. 501(#)(6) 12C ,e#. 501(#)(4) 12C ,e#. 501(#)(7) 12C ,e#. 501(#)(6) 9o D not unre%ated business in#o!e H H H H H

6. 7.

H H

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, 14-4 <Cont:d=

Note: ?ro! t"e in or!ation pro0ided, /e #an in er t"at a#ti0ities des#ribed in I1 and I2 appear to be re%ated to t"e !usi# and per or!an#e a#ti0ities o t"e ,i%0erton ,y!p"ony ;r#"estra >a%%. <#ti0ities des#ribed in I3 t"rou&" I7 are not re%ated to !usi# and per or!an#e arts. 14-5. a. Unre%ated business in#o!e ta4 is $2,100 (158 o t"e net in#o!e o t"e &i t s"op, $15,000, %ess $1,000). ."e or&ani5ation !ay not be subEe#t to UF1. i t"e yout" it is trainin& /or@s in t"e &i t s"op. b. ."e UF1. /ou%d be t"e sa!e. UF1 depends pri!ari%y on t"e nature o t"e !oney re#ei0ed, and not "o/ it /as used. 1nterest earned on endo/!ents is not subEe#t to UF1.. 14-6. 1. Ces. ."is is a #%assi# e4a!p%e o e4#ess e#ono!i# bene it transa#tions. Jane is a disKua%i ied person be#ause s"e is an o i#er /it" substantia% in %uen#e o0er t"e or&ani5ation and s"e is re#ei0in& !ore t"an t"e air !ar@et 0a%ue or t"e bui%din&. ."e or&ani5ation #an a0oid san#tions by &ettin& ot"er appraisa%s t"at do#u!ent t"at t"e bui%din& is rea%%y /ort" $250,000, or pur#"asin& t"e bui%din& or $200,000. 2. Ces. >o/e0er, on%y /"en t"e e4#ess bene it is paid. ."e or&ani5ation #ou%d a0oid a prob%e! by puttin& a %i!itation on t"e a!ount o #o!pensation t"e president #ou%d re#ei0e. 3. 9o. >o/e0er, t"e %a/ is si%ent on t"is parti#u%ar e4a!p%e. ,"e is probab%y re#ei0in& t"e ti#@ets as a !e!ber, i a%% !e!bers re#ei0e t"e sa!e nu!ber o ad!ission ti#@ets. 1 t"e or&ani5ation intended it to be #o!pensation, t"en it needs to be e4p%i#it%y stated in a board reso%ution.

14-1(

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, 14-/ <Cont:d=

4.

+ossib%y. 1 t"e in#o!in& presidentGs duties are si!i%ar to t"e out&oin& president and #o!parab%e or&ani5ations, t"en t"e #o!pensation !ay be unreasonab%e. 1 t"e duties are si!i%ar, "o/e0er, Joe Curtis is ab%e to per or! t"e! !ore e i#ient%y t"en t"e "i&"er sa%ary !ay be reasonab%e. ."e or&ani5ation s"ou%d be sure "is ot"er o ers are /ritten and t"at "e did not in %uen#e t"e ot"er o ers so t"at t"e o ers #an substantiate "is L/ort".M ."e 9?+ s"ou%d a%so sur0ey or #o!parab%e sa%aries and do#u!ent t"e nature o t"e presidentGs duties and "o/ t"e duties !ay di er ro! t"e pre0ious president, as /e%% as any di i#u%ty in indin& a #andidate as Kua%i ied as Joe Curtis.

14-7. a .
6easure

2atios Fased on t"e 2010 ?or! 990

Ca%#u%ation (a!ounts in 000s) $4+$6,350+$798+$40+$116,932+$529 $5,357+$3,637 $795,079 $854,605 $844,468 $854,605 $6,702 $794,564 2ati o 13.8 6

Current ratio (part X, col. B, lines 1 9, 17 ! 18" #e$enues%e&penses (part '(((, line 12 ! part (X, line 25" )ro*ra+ e&penses%total e&penses (part (X, line 25" ,un- raisin* e&penses%pu.lic support (part (X, line 25, ! part '(((, line 1/"

0.93

0.99

0.01

14-14

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

."e #urrent ratio indi#ates t"at <!eriCares is "i&"%y %iKuid, #o0erin& its #urrent %iabi%ities a%!ost 14 ti!es. W"i%e its e4penses are s%i&"t%y &reater t"an re0enues, in t"e s"ort-ter! t"e inabi%ity to #o0er e4penses /it"
Ch9 14, .olutions, 14-1 <Cont:d=

re0enues /ou%d not be a #on#ern. < ratio eKua% to or &reater t"an one /ou%d be desirab%e. < re0ie/ o t"e state!ent o inan#ia% position indi#ates su i#ient unrestri#ted net assets to #o0er t"e s"ort- a%% in t"e #urrent period. >o/e0er, t"e %ar&e de#%ine in unrestri#ted net assets ro! 2009 to 2010 indi#ates t"is is an area t"at s"ou%d be !onitored. <!eriCares appears to be "i&"%y e e#ti0e /it" 99 per#ent o e4penses re%ated to pro&ra!s and on%y 1 per#ent re%ated to support. ?und-raisin& e i#ien#y a%so appears to be &ood, in t"at <!eriCares is spendin& about $.01 in undraisin& or e0ery do%%ar o pub%i# support re#ei0ed.

b .

2atios Fased on t"e 2010 <udited ?inan#ia% ,tate!ents 2ati o 16.9 3 0.93

6easure Current ratio

Ca%#u%ation (a!ounts in 000s) $153,320 $9,054 $804,223 $861,147 $850,430 $861,147 $7,185 $801,044

#e$enues%e&penses (total support ! re$enue, an- total e&p." )ro*ra+ e&penses%total e&penses (total pro*ra+ ser$ices an- total e&p." ,un- raisin* e&penses%pu.lic support (total 0un- raisin* ! total pu.lic support"

0.99

0.01

Usin& annua% report in or!ation to #a%#u%ate ratios or <!eriCares pro0ides resu%ts 0ery si!i%ar to t"ose resu%ts obtained ro! t"e ?or! 990. ."ere is an in#rease in t"e #urrent ratio 0a%ue. ."e di eren#e does not appear to be

14-1$

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

%ar&e enou&" to /arrant a #"an&e in t"e ana%ysis o <!eriCaresG per or!an#e or 2010.

14-1/

Chapter 14 - Not-for-Profit OrganizationsRegulatory, Taxation, and Performan e !ssues

Ch9 14, .olutions, 14-1 <Cont:d=

c.

<s a &enera% ru%e, audited inan#ia% state!ents t"at #on or! to &enera%%y a##epted a##ountin& prin#ip%es s"ou%d be pre erred to ?or! 990 in or!ation ta4 return data be#ause o t"e assuran#e ro%e t"at an independent auditor pro0ides. >o/e0er, t"e ?or! 990 "as !ore narrati0e and Kua%itati0e in or!ation t"an does t"e audited annua% inan#ia% state!ents. ."ere is 0a%uab%e in or!ation in ea#" and a sop"isti#ated reader o inan#ia% state!ents /i%% /ant to "a0e bot" on "and. <s seen /it" <!eriCares, per or!an#e !easures #an be 0ery si!i%ar usin& eit"er sour#e o data. <!eriCares prepares audited inan#ia% state!ents and uses a##rua% a##ountin& nu!bers in its ?or! 990, /"i#" resu%ts in t"e si!i%ar per or!an#e !easures #a%#u%ated in parts a and b. >o/e0er, it is possib%e t"at t"e !easures #ou%d be Kuite di erent &i0en t"at t"e 12, does not reKuire t"at a##rua% a##ountin& or audited inan#ia% state!ents be used in preparin& ?or! 990.

14-11