To add insult to injury, not only have numerous charities seen their endowments plunge, but now the charity Board members may find themselves facing civil lawsuits and IRS penalties. The potential liability applies to both public charities and private foundations.
Public charities are always under scrutiny because of their higher profile. The State Attorney General offices can hold Board members responsible for failure to exercise proper oversight over charity employees. In recent years, some major public charities have had problems with officers using charitable funds for personal purposes. Also, if assets are not properly diversified or managed, the Board members could be personally liable.
For private foundation Board members, there are these same fiduciary concerns, plus more stringent IRS rules. For example, Internal Revenue Code Section 4944 imposes a personal tax on a private foundation’s Board and officers if the foundation holds investments that "jeopardize" the charity’s purpose. The liability is joint and several among all the Board members and officers.
Although Section 4944 is not new, what is recent is United States Senate Finance Committee member Charles Grassley’s comments to the BNA Daily Tax Report that a foundation’s Board that invested primarily with Bernard Madoff should examine why they put "all their eggs in one basket." With endowments down, Board members will need to be particularly diligent to protect their charity’s assets and themselves. Grassley’s comments establish that charities – both public and private – continue to be on Congress’ radar, and when it comes to investments the Board would be well-advised to consider a widely diversified and prudently managed portfolio.