Res Ipsa Loquitor
selecting the agent, establishing the scope
of the delegation, and reviewing the agent’s
actions. A charity that does so is not liable
for the actions of the agent. However, the
agent is held to a “reasonable care” standard
and is expressly made subject to appropriate
court jurisdiction.
VIII. WHAT ABOUT CHANGING A
RESTRICTION?
A. UPMIFA allows a charity to release or
modify a restriction regarding management,
investment, or purpose of a fund if the
donor consents in writing.
B. If a purpose or use restriction becomes
unlawful, impracticable, impossible to
achieve, or wasteful, the court may modify
the restriction in a manner consistent with
the donor’s intent. The Attorney General
must be notified.
C. The court can modify a management
or investment restriction if it has become
impracticable or wasteful, impairs the
management or investment of the fund,
or (if due to unforeseen circumstances)
the release would further the purposes
of the fund. The Attorney General must
be notified.
D. If a fund is less than $100,000 in
value and over 20 years old, and the
charity determines that a restriction on the
management, investment, or use of the fund
is unlawful, impracticable, impossible to
achieve, or wasteful, the charity can (after
notice to the Attorney General) release or
modify the restriction. It must thereafter
use the funds in a manner consistent with
the donor’s charitable purposes.
IX. WHAT ABOUT ENFORCING
SPENDING OR PURPOSE
RESTRICTIONS?
A. The Attorney General can bring an
action to enforce the terms of a restricted
gift. Depending on the law governing the
internal affairs of the charity, an officer,
director, or even a voting member may be
able to challenge a breach of trust. See,
e.g., Cal. Corp. Code §5142 (for California
nonprofit public benefit corporations).
10 | SPRING 2015
UPMIFA allows a charity to appropriate
for expenditure, or accumulate, so much
of an endowment fund as the charity determines
is prudent for the purposes for which the fund
was established.”
B. What if the donor believes the
institution is violating the use restriction?
Some states have held that unless the
donor reserves a right to enforce in the
gift instrument, only the state Attorney
General has legal standing (Carl Herzog
Foundation v. University of Bridgeport,
699 A.2d 995 (1997)). Other states
have concluded that a donor may have
standing (LB Research and Education
Foundation v. UCLA Foundation, 130
CalApp 4th 171 (2005); Smithers v. St.
Luke’s Roosevelt Hospital Center, 723
N.Y.S.2d 426 (2001)).
C. A donor may consider building
donor standing into the gift instrument.
A power of reversion is likely to render
the gift incomplete and non-deductible for
income tax purposes; consider including
a power to redirect the gift to another
charity willing to abide by the restrictions
in the event of default.
X. WHAT ABOUT THOSE
ACCOUNTANTS?
A. In general, for accounting purposes,
funds received as “true” endowments are
classified as permanently restricted. Funds
subject to a restriction that the Board can
satisfy – such as a timing restriction or
purpose restriction – are classified as
temporarily restricted. Funds received
with no donor-imposed restrictions are
classified as unrestricted.
B. FASB Staff Position 117-1 sets
forth guidelines for reporting endowments
governed by UPMIFA. It states that a
charity should classify “all or a portion” of
an endowment as permanently restricted
net assets, based upon explicit donor
restrictions (if any) or what the Board
determines must be retained permanently.
For example, a Board could determine
that UPMIFA requires it to maintain the
“historic dollar value” of its endowments.
The value of an endowment in excess
of the amount reported as permanently
restricted is to be reported as temporarily
restricted, until such time as some amount
is “appropriated for expenditure,” at which
time that amount becomes unrestricted.
FASB Staff is not encouraging charities
to report as permanently restricted the
purchasing power of an endowment
(e.g., initial value increased by the rate
of inflation, not reduced for losses or
expenditures). FSP 117-1 also requires
more disclosure, including information
regarding a charity’s spending policy and
investment policy.
C. FASB 124 requires that distributions
from the endowment, and losses suffered
by the endowment, be taken from the
endowment portion of the temporarily
restricted asset class first (until it goes
to zero), then from the