CNC Nonprofit Legal & Ethical Considerations 3 — Questions and Answers
Question 1: Under the Sarbanes-Oxley Act, which provisions apply directly to nonprofit organizations?
- All SOX provisions apply equally to nonprofits and public companies
- Only the whistleblower protection and document destruction provisions apply to nonprofits (Correct answer)
- SOX has no applicability to the nonprofit sector
- Only Section 404 internal controls requirements apply to nonprofits
Correct 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.
Question 2: A 501(c)(3) organization's 'public support test' under IRS regulations is used to determine:
- Whether the organization qualifies as a public charity rather than a private foundation (Correct answer)
- The percentage of revenue that must come from government grants
- How much the organization must spend on program activities
- Whether the executive director qualifies for exempt compensation
Correct 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).
Question 3: Which ethical principle requires nonprofit staff to put the organization's mission and clients' interests above personal gain?
- Transparency
- Fiduciary duty (Correct answer)
- Stewardship
- Accountability
Correct 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.
Question 4: When a nonprofit engages in unrelated business activities, the income from those activities is subject to:
- No taxes because of the organization's exempt status
- Unrelated Business Income Tax (UBIT) (Correct answer)
- A flat 10% nonprofit surcharge
- State sales tax only
Correct 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.
Question 5: An employee reports suspected fraud by the CFO to the board chair and is subsequently demoted. Under Sarbanes-Oxley, this situation likely constitutes:
- A legitimate employment action if performance reviews support it
- Whistleblower retaliation, which is prohibited (Correct answer)
- A civil rights violation requiring EEOC filing only
- Protected only if the employee reported to a government agency first
Correct 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.
Question 6: The 'excess benefit transaction' rules under IRC § 4958 can result in:
- Criminal prosecution of board members
- Excise taxes on the disqualified person and potentially on organization managers who approved it (Correct answer)
- Automatic revocation of tax-exempt status
- Personal liability for all unpaid organization debts
Correct 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.
Question 7: What is the primary ethical rationale for requiring nonprofits to make their Form 990 publicly available?
- To allow the IRS to cross-check state filings
- To enable public accountability and donor confidence through transparency (Correct answer)
- To facilitate competitor analysis among similar organizations
- To comply with federal open records laws
Correct 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.
CNC Nonprofit Legal & Ethical Considerations 3
Under the Sarbanes-Oxley Act, which provisions apply directly to nonprofit organizations?