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Nonprofit Insider


January 2013 Vol. 4 No. 1

U H Y LLP C e r t i f i e d P u b l i c A c c o u n t a n t s

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Looking that Gift Horse in the Mouth

The importance of policies and procedures
By Jennine Anderson, Partner write this article on the Friday after Thanksgiving ... and gifts are on my mind. We are taught as young children to welcome all gifts despite our honest opinion about them. It is, after all, the polite thing to do, we are told. Howeverand Id wager weve all had this experiencesometimes a gifts value is viewed more highly by the giver than by the receiver. Unfortunately, and too often, nonprofits dont properly evaluate gifts (cash or otherwise). Sometimes its because they want to be polite; other times its because they dont have a good policy in place; and, perhaps, at times, its because the gift appears valuable. Often blinded by the positives of the gift, they do not consider if the gift meets the needs of the organization or if it has potentially negative impact. In my experience, a wise organization will evaluate each and every gift to determine if the gift contributes to the overall furtherance of its mission. An even wiser organization will set in

valuable time solving the problems associated with that gift. Ive heard other cases of real estate gifts that have had environmental problems that the receiving organization then had to pay to have cleaned and remediated. Real estate is, by no means, the only source of potential legal problems associated with gifts. While gifts of fraudulently gained funds are much less common than real estate gifts, when they do occur, claw back lawsuits and significant legal fees may result in the mandatory return of those gifts. One such case was that of Tom Petters, a well-connected creator of a Ponzi scheme. Several foundations received donations of notes receivable by entities that were involved in or had benefited from Mr. Petters Ponzi deal. Complainants said that these notes were subject to claw back. In such a case, even if the foundations prevail, legal fees and emotional energy have been expended. Legal fees may also need to be incurred in unwinding donor restrictions. Restrictions that might have seemed reasonable in prior years may become outdated and inappropriate 50 or 100 continued on page 2

place policies and procedures for evaluating and acceptingand sometimes rejectinggifts.

Legal issues
Anyone who owns real estate knows that propertyboth land and buildingscan be full of unpleasant surprises. Gifts of real estate can involve legal surprises and associated costs to resolve the accompanying problems underneath the surface. While most organizations would conduct due diligence if purchasing the property, those safeguarding measures are often neglected when receiving a gift of property. A great example of this type of problem was experienced by a new and rapidly growing nonprofit in the suburbs whose very new CFO was made aware that the organization had been given (prior to his arrival) a house in the nearby city. The value associated with the house was very low ($3,000) and the house was vacant. Soon enough, police officers contacted him concerning drug activity at the house, and while the story is a much longer one than will fit here, suffice it to say that he spent a significant amount of

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January 2013 Vol. 4 No. 1

Looking that Gift Horse in the Mouth

continued from page 1 years later. Poorly written agreements surrounding a restricted gift may be rigid with few mechanisms for change. Case in point: donors heirs have sued Columbia University, saying the university has strayed from the terms of a 1927 gift. No matter the outcome of this lawsuit, legal fees are being incurred on both sides; and one can surmise that that money would have been better spent furthering the causes of the plaintiffs and the defendant.

Impact on an organizations operations

Have you ever received a grant where staff considered the administrative requirements more trouble than they are worth? And how many grants or gifts have you received that cover very specific direct program costs but do not cover any of the costs of administering the grant? Have you ever thought about whether getting more federal funds was worth the hassle of going through an audit under OMB Circular A-133? Have you ever been offered funds to perform a service that was totally outside the exempt purpose of the organization? In all of these cases, there are strings attached that influence what staff does and how unrestricted reserves are spent. Sometimes donor restrictions or requirements can involve governance matters. An example was a gift of $500,000 offered to a Maryland nonprofit. The string in this case was the requirement that the donor be given the right to select a new board! The organization wisely rejected this offer despite being in a fragile economic state. I wonder if other organizations could have withstood such temptation. What if the offer was contingent on replacing only one board member or maybe two? Would that have been acceptable? Or might the organization have accepted the gift and terms without much consideration?

Accounting and other professional fees

Certain gifts carry with them the need for additional annual professional services. Audit costs, tax preparation costs, investment and valuation fees may increase. For example, your auditors may require independent valuations of real estate. Similarly, ownership of partnership interests brings with it a requirement to carry at fair value. That involves determining what fair value is at a point in time. Such a valuation can be difficult to do, and costly. This same partnership interest can generate unrelated business income and the requirement for additional tax filings and reporting. Foreign interests will involve even more filings: filings that are complicated and should be prepared by professionals. Organizations that liquidate noncash gifts immediately upon receipt from the donor must still incur selling costs. These include real estate or stock sale commissions and fees and transfer taxes.

beneficial to an organization. I am not saying that organizations should never accept gifts of real estate, partnerships, donor-restricted cash or gifts requiring subsidies from the unrestricted reserves of the organization. From where I sit, serving and supporting nonprofit organizations for several decades, there should be policies in place providing guidance on when a gift should, or should not, be accepted by the organization. The policy should clearly outline the process and appropriate documentation needed. The board is the body that has responsibility for the governance of the organization. Passive acceptance of each and every gift seems to me to give donors power to influence the activities and direction of the organization even when that influence may be detrimental to the organization. It is much easier, more polite and far less insulting to point to a policy when put in the situation of needing to refuse a gift. The Panel on the Nonprofit Sector states the same. In Point 30 of their Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations youll find, A charitable organization should adopt clear policies, based on its specific exempt purpose, to determine whether accepting a gift would compromise its ethics, financial circumstances, program focus or other interests. I think this is excellent advice, Dont you?

Advice from our perspective

Obviously, manyand probably mostgifts are well-intentioned and

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