Nonprofit Legal & Ethical Considerations Flashcards

Under the Sarbanes-Oxley Act, which provisions apply directly to nonprofit organizations?

Answer: Only the whistleblower protection and document destruction provisions apply to nonprofits

While most of SOX applies to publicly traded companies, the whistleblower protection (Section 1107) and document destruction prohibitions (Section 1102) explicitly cover nonprofits.

A 501(c)(3) organization's 'public support test' under IRS regulations is used to determine:

Answer: Whether the organization qualifies as a public charity rather than a private foundation

The public support test ensures that an organization receives broad public support, distinguishing public charities (which receive wider support) from private foundations (funded by few donors).

Which ethical principle requires nonprofit staff to put the organization's mission and clients' interests above personal gain?

Answer: Fiduciary duty

Fiduciary duty legally and ethically requires board members and officers to act in the best interest of the organization rather than personal financial interests.

When a nonprofit engages in unrelated business activities, the income from those activities is subject to:

Answer: Unrelated Business Income Tax (UBIT)

Income from activities not substantially related to the exempt purpose is subject to Unrelated Business Income Tax (UBIT) at corporate tax rates.

An employee reports suspected fraud by the CFO to the board chair and is subsequently demoted. Under Sarbanes-Oxley, this situation likely constitutes:

Answer: Whistleblower retaliation, which is prohibited

SOX prohibits retaliation against employees who report suspected fraud, and adverse employment actions following a protected report are presumed to be retaliatory.

The 'excess benefit transaction' rules under IRC § 4958 can result in:

Answer: Excise taxes on the disqualified person and potentially on organization managers who approved it

Excess benefit transactions trigger excise taxes of 25% on the disqualified person receiving the benefit and 10% on managers who knowingly approved the transaction.

What is the primary ethical rationale for requiring nonprofits to make their Form 990 publicly available?

Answer: To enable public accountability and donor confidence through transparency

Public disclosure of Form 990 enables donors, watchdogs, and the public to evaluate an organization's financial health and mission alignment, reinforcing the accountability central to public trust.