Accountants' Responsibilities and the New York State Attorney General's Charities Bureau

Article excerpt

New York State Attorney General Eliot Spitzer considers public education a most important part of his responsibilities. The Attorney General's Charities Bureau has offices in Albany and New York City, and many of the Attorney General's 13 regional offices employ lawyers with expertise in philanthropic law.

The Charities Bureau's publications and forms can be found online at www.oag.state.ny.us/charities.They cover charities registration and reporting, professional fund-raising, and various transactions that affect charities.

The Charities Bureau has recently published a booklet, "The Regulatory Role of the Attorney General's Charities Bureau," that describes the scope of the bureau's jurisdiction. It is available from the website or by request. At present, the Charities Bureau's annual financial report review resources are limited, but the IRS, Guidestar, and the Urban Institute's National Center for Charitable Statistics are working with state charities regulators in Pennsylvania, New York, and other key states to establish an information-sharing network for IRS Form 990 data. Pennsylvania has launched a pilot program, and New York hopes to follow by April 2003.

One way this effort will benefit charities and their accountants will be electronic filing of forms and, eventually, electronic payment of registration and annual filing fees.The Charities Bureau should benefit by being able to screen filings for key indicators and review more filings for accuracy than currently possible with 40,000 annual paper filings.

Endowment Fund Guidance Recently updated guidance available at www.oag.state.ny.us addresses the historic dollar value of endowments and similarly restricted funds held by not-for-profit corporations. Donors may restrict the use of assets contributed to a not-for-profit corporation or charitable trust. In the rare case where the restriction is illegal or impracticable, the charity may obtain the consent of a living donor to release the restriction or, in other cases, may apply to the court, on notice to the Attorney General, for a release of the restriction.

A commonly imposed restriction prevents a charity from spending principal, thereby creating an endowment fund. Section 102(a)(13) of the not-forprofit corporation law provides that an endowment is "not wholly expendable by the corporation on a current basis."

Property invested, an endowment fund can generate significant appreciation, both realized and unrealized. Section 513(c) of the not-for-profit corporation law states that the value of endowment assets when given to a notfor-profit corporation, known as the historic dollar value, may not be expended by the corporation. Instead, the assets must be invested and the income-traditionally interest, dividends, rents, and royalties-is available for expenditure, even if the value of the principal drops below historic dollar value because of realized investment losses or unrealized declines in market values or both. If the endowment fund principal has depreciated below the historic dollar value, however, the board of directors of the corporation may prudently determine not to expend income or to reduce expenditures until the historic dollar value is restored, if such actions are consistent with the gift instrument. Similarly, in inflationary times, it may be prudent for the board to adjust the historic dollar value of an endowment fund upward to maintain its buying power.

In addition, if the value of the assets has appreciated over the historic dollar value, the net appreciation, realized (with respect to all assets) and unrealized (with respect only to readily marketable assets), may be appropriated for expenditure, unless prohibited by the donor in the applicable gift instrument. The law permits the corporation's board of directors to appropriate these amounts if such a decision is prudent under the standard established by the law. Thus, officers, directors, and managers of New York State not-for-profit corporations should be aware that, even if the applicable gift instrument permits the expenditure of endowment fund appreciation, it cannot be expended unless the governing board appropriates the appreciation prudently. …