The nonprofit world was stunned earlier this year when a federal appeals court found a board chair personally liable for his institution's unpaid payroll taxes. On February 26, 2009, the Fifth Circuit Court of Appeals upheld the ruling of a federal district court, declaring that Stephen K. Verret, chair of the board of Doctor's Hospital in Groves, Texas, must pay $409,000 in taxes that had gone unpaid by the hospital's management.

The chair was an unpaid volunteer, as are the trustees of most nonprofits, including theological seminaries. There was no question that the taxes were owed; "tax-exempt" does not cover every tax! What made the situation so startling was that the volunteer leader had personal liability for those taxes — a highly unusual ruling. (For one legal analysis, visit

There clearly is new and enhanced scrutiny of the governance of nonprofit organizations these days. As part of that scrutiny, the Internal Revenue Service will likely be paying ever closer attention to the information that organizations file in their Form 990s. Most tax-exempt organizations are required to file the 990, which has been in use since the 1940s. But a new version of the form was rolled out this year, and it is far more than a financial report. Rather, the new 990 is more of a report card on a nonprofit's overall health.

Which schools are required to file?

Not all theological schools are required to file the Form 990. For example, divinity schools affiliated with a university are normally covered by the university's Form 990 and do not need to file their own. And some independent seminaries have held determination letters from the IRS for many years, excusing them from filing the Form 990 because of their religious affiliation. The new directions for the Form 990 say that a "religious school" that is "an integrated auxiliary of a church" is not required to file, but the IRS "Tax Guide for Churches and Religious Organizations," available at, says exceptions to filing are granted to "churches, as opposed to religious organizations." The tax code itself gives one definition of a church as including "schools for the preparation of its ministers" which sounds definitive but becomes fuzzy under other descriptions.

Nevertheless, legal professionals who have debated this issue over the years are now leaning more heavily toward the view that theological schools should file the 990 each year. And they certainly should already file the Form 990-T if they have taxable "unrelated business income" of at least $1,000 (called UBIT for short). A seminary that rents meeting space, for example, or that sells services like lodging, catering, or child care, falls into that category. Certain types of investments also trigger the requirement to file a 990-T.

Some theological schools have decided that while they may not be required to file a Form 990, they will do so anyway. The form can serve as a means of protecting a school's reputation, or of advertising its sound governance policies. Even the process of completing the 990 can make boards and administrators more careful and transparent in what they do — a cardinal value for institutions that are guided by moral and spiritual teachings.

Let the sun shine in

What's not in doubt is the government's seriousness about its oversight of governance practices by nonprofits — seriousness that has been spurred by instances of documented fraud, self-dealing, excessive expenditures, and other such practices by nonprofit organizations, including some with religious affiliation. Media reports have told that shocking story many times.

That's why the IRS instituted a dramatic overhaul of the 990, adding an entirely new section on "Governance, Management, and Disclosure." After enlisting nonprofit leaders to help in the process, and after a public comment period in 2008, the new Form 990 was unveiled earlier this year, with a filing deadline of the 15th day of the fifth month following the close of a nonprofit's fiscal year — that is, November 15, 2009, for organizations with a fiscal year that ends June 30, 2009.

Before then, it is vital that boards educate themselves on the new requirements, which make board responsibility for the institution abundantly clear. Here are a few sample questions from the "Governance" section of the Form 990:

■ Did the organization contemporaneously document the meetings held or written actions undertaken during the year by (a) the governing body and (b) each committee with authority to act on behalf of the governing body? 

■ Was a copy of the Form 990 provided to the organization's governing body before it was filed? 

■ Does the organization have a written conflict of interest policy? 

■ Does the organization have a written whistleblower policy? 

■ Does the organization have a written document retention and destruction policy?

There are 20 such questions about governance policies and procedures, and only the foolhardy would answer "no" to them. Additional questions ask about the institution's compensation policies and practices. And an officer of the nonprofit must sign the completed Form 990, under penalties of perjury.

The IRS has stressed in written publications and speeches that its goal is to help nonprofits toward compliance with good governance policies and practices. But we don't yet know what penalties might be attached to nonprofits that defy this new approach to transparency. Withdrawal of an institution's tax-exempt status is the ultimate penalty, but this occurs rarely, and only in the most egregious cases.

Transparency can be costly

When a nonprofit files a Form 990, it does become more visible and transparent. Nonprofits are already required to provide a copy of their Form 990 to anyone requesting one. In addition, Guidestar (, an organization formed in 1994 to promote nonprofit transparency, publishes 990s electronically along with other information about 501(c)(3) organizations. Foundations and major donors sometimes rely on this information as the basis for their grant-making, and there are even foundations that only make grants to organizations that file a 990.

Educational institutions that have been examining the new compliance requirements say that additional staff work is necessary to complete the new form, which now has 11 pages (up from nine) and 16 possible schedules. In these days of tight financial constraints, this can be a significant issue.

Establishing a separate audit committee—a practice elevated among for-profit corporations after passage of the Sarbanes-Oxley Act and now recommended for nonprofits by governance experts—doesn't incur additional cost. Nor does insuring that an institution has current policies on such topics as records retention, conflict of interest and whistle-blowing. But they do require the board's attention.

Boards can take other steps to protect themselves. One is for the institution to carry directors and officers (D&O) insurance, which protects board members from personal liability such as that encountered by the hospital board chair in Texas. Naturally, additional insurance means higher premiums.

If state law allows, the board may also want to add an indemnity clause to the school's articles of incorporation, protecting board members from claims if the board was acting in good faith and with the best interests of the institution at heart.

The new Form 990 is a daunting new hurdle, but it also provides a great opportunity for board members to understand and guide their schools more effectively. Perhaps even more important, the new form will almost certainly become a de facto marketing document, showing funders, donors, and others that a school is following the best practices in nonprofit governance.

Help to complete the new form is available from many sources, starting with the IRS Web site ( Click on "Charities & Nonprofits" and then on "Churches and Religious Orgs." The "Tax Guide for Churches and Religious Organizations," which is the first item listed on that page, is an especially valuable resource.

Some do file; some don't

Theological schools don't all agree about filing an annual Form 990 with the Internal Revenue Service. Seminaries and divinity schools that are affiliated with universities typically are included in the Form 990 filed by their parent institutions. For example, Ashland Theological Seminary is a graduate division of Ashland UniversityCincinnati Bible Seminary is part of Cincinnati Christian University. And Multnomah Biblical Seminary is affiliated with Multnomah University.

A number of free-standing seminaries hold "determination letters" from the IRS exempting them from filing on religious grounds. McCormick Theological Seminary, along with most other institutions related to the Presbyterian Church (USA), avoids filing for this very reason. United Methodist seminaries typically do not file for the same reason.

But a number of other seminaries do file the form, some thinking it's necessary to comply and others believing they are going beyond the requirements of the law. President Nick Carter of Andover Newton Theological School is one who believes it is important to file for transparency reasons. "Transparency is a critical value for us as a school," he says.

He understands the opinions of many theological school leaders about the "growing intrusion" of government into religious organizations and the added effort required to file the Form 990, but he thinks the benefits outweigh the negatives. Carter headed a nonprofit consulting business before becoming president of Andover Newton about five years ago, and that experience confirmed his belief that making the 990 information publicly available is "an important part of the funding world."

But the values of transparency and openness are paramount, he says. "We're in the trust business and we need to be trustworthy."

Chris A. Meinzer, director of finance and administration at the Association of Theological Schools, would welcome discussing the new form with ATS members. Reach him at 412-788-6505 or

The latest issue of Colloquy, published by the Association of Theological Schools, contains more information about the Form 990. 
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