OK, just want to hear thoughts on this, of course this is all random fictional and made up. So don't look to find this in real life, cuz I made it all up. Really!

A 'controlling' and 'influential' BOD member brings privately owned locomotives(both his and a close friend of his) into a museum to be 'displayed'. The locomotives are restored(mostly cosmetic) with volunteer time and museum purchased/donated materials. Some are painted to original scheme, one to the fictional scheme of the BOD members 'hobby' railroad, then put on display in the indoor museum area. Most are covered in 'private property no trespassing' signs. Some of the remaining BOD members seem clueless on anything to do with the equipment, including what to expect to arrive next, agreements on what can/can not be done with it, etc. Requests to view the flies on said locomotives is stonewalled.

QUIT LOOKING! Any resemblance to real locomotives or museums or BOD's is coincidental and incidental! lol

Robert

Ok, so this fictional museum is a 501c3, right? Lets assume it is.

Bringing in private equipment to display- no problem.

Using museum funds and volunteers to work on them - BIG NO NO AND ILLEGAL!
Doing this will cause your museum to lose its tax exempt status permanently. It's called 'Private Inurement' and the IRS will catch wind of this and audit the books. Keep in mind that the Directors and Officers of the museum can (and most likely will) be held liable to repay monies spent along with fines and fees.

Here's some IRS info about Inurement:
http://www.irs.gov/charities/charitable ... 97,00.html

Finally, stonewalling someone from seeing the books is also a GIGANTIC NO NO. If this museum collects public funds (grants, donations, etc) it must comply with the 'Sunshine Laws' and must make financial records available to anyone who requests them within a reasonable timeframe. (time frame is covered in the specific laws)

If such a museum exists, it's in it's own best interests to rectify this situation immediately before the 'merdé hits the ventilateur'. If this museum isn't currently fiction, it could become so quite quickly.

Good luck

Yes, 501c3.

I am assuming all financial records might reflect is something like "10 gallons paint purchased" and such, and not much more. I would imagine this fictional museums records to be vague in a lot of places.

What about the potentially 'fuzzy' area of the equipment being restored on museum property, with museum tools and equipment? (in my fictional museum, I am sure the first line of defense would be "I did it for me for myself for the display, and any free help was my free help not museum volunteers"),

How can 'displayed as an exhibit" and "stored for free" be differentiated?

Robert

IIRC there is a way around this, if it written in a contract that Rental/Lease cost of said equipment is the cost of cosmetic external restoration of piece A to scheme B and piece C to Scheme D over X many years.

If this is actually a `Friend of Friend's" situation and not fully fictional, please verify this with a legal expert before your `Fictional' museum gets burnt.

Rich C.

I wouldn't think that it would not be an issue if the locomotives in question were leased or loaned to the museum as a "long term custodial loan" with part of the agreement that said museum would cosmetically restore the artifact(s) in question, provide display and storage for said items, etc.

On the other hand, I'm pretty sure that if one of the locomotives is owned by a BOD member, this is an "interested transaction" that must be listed on the IRS Form 990, as the BOD member in question by be recieving a benefit, especially if you factor in care, maintenance and indoor storage. You can pull any (real) non profit's IRS Form 990 off the web. They are usually interesting reading.

I mean, if the items are on display, signage or not, it might fit into this.

Now, comes the question as to whether this is a good institutional priority for said museum, or a good use of museum resoruces. That's an issue for another day.

I get a feeling that the IRS is going to potentially start really looking long and hard at non-profts in the next several years. It's time to really look at your filings.

We have a very important exhibbit at RMEO, CNR dental car 15095, formerly CN/ Canadian Northern Railway sleeper "Camrose".

http://rmeo.org/rolling-stock/attachment/120

This car is owned by member. This gent has a legal agreement with the museum (drafted by the museum's lawyer, and approved by the board) which clearly outlines the car's ownership, the fact that the owner pays for the lease of track it occupies, maintains full insurance (fire, comprehensive, liability) on the car, outlines minimum maintenance standards he is required to follow, gives the museum the right to use the car for exhibit and tours. It goes on to outline our obligations, which basically protect the owner from things that could happen which are the museum's fault.

A very important item is an exit clause for both parties.

This agreement guarantees that only the owner's money goes into restoration and maintenance of Camrose. Most of the labour is from the owner or outside volunteers who help him. Sometimes other museum volunteers will help him, but this is on their time and is not recorded as museum volunteering. The same applies to the owner- while he is a frequent museum volunteer, time spent on his car is strictly on his own time.

The only possible conflict might be the thimblefull of diesel oil used on the infrequent occasions we move the car, or the small amount of electricity consumed by its alarm system- and those costs are so minimal they can't really be measured.

The museum is the clear winner in this arrangement. The car is a huge draw for us, and has been feaured in numerous articles over the years. We receive a moderate amount of income for the use of 82' of track (far exceeding our maintenance costs). The owner could just as easily have stored the car on his farm, but the arrangement has benefitted us greatly over the years.

I believe this is the only way privately owned equipment should be allowed at a museum. Far too many museums have had bad experiences resulting from gentlemen's agreements that were poorly defined and not written down.

Steve Hunter

Museums can also have problems with non-rail items. I've forgotten all the details, but the story goes like this: A member brought several old automobiles to this museum and left them there. He said he was going to restore them, but somehow "never got around to it". Meanwhile, he avoided having to rent space in a storage yard or in someone's spare garage. Eventually the cars got to the point where restoring them would be a major project and cost far more than any of these non-classics would be worth in good condition. By now the other museum members were tired of having to move the old heaps around to make way for construction and instructed the owner to take them off the property. Of course he delayed the "moment of truth" as long as he could, but eventually either signed over the ownership or let the cars be considered "abandoned property" which the museum could sell for scrap. Not that big a deal, but it still used volunteer time and effort that could have been used for proper museum work.

Another problem that could arise in some states is that property tax exempt status of museum real estate could be endangered if the equipment owner does not pay rent for the storage space.

"How can 'displayed as an exhibit" and "stored for free" be differentiated?"

It's a gray area, but I'd think that the easy answer would be "Does it fit the mission and scope of the museum" and "Does it provide a useful and or educational benefit exceeding the cost".

For instance. Let's say you're a Milwaukee Road museum. Would an SD80MAC fit? No. Provide benefit? No. Then no 80MAC.


Now let's say that the 261 group wants to store their sky top there with the proviso that your museum keep up paint, etc in return for the lease. Would it fit? Yes. Would it provide benefit? Maybe (that's up to the Board to decide)


Sbsubhunter pretty much nailed it with what he said. That's how it should be done.

A big red flag though is the vague nature of any record keeping. As you said, it's easy too say "we got $500 worth of paint". The IRS -will- ask 'What for?' in the event of a fictional audit there better be a non-fictional answer. The best practice is to submit each reciept with something like "$450 paint for caboose 21165 - $40 misc painting supplies (disposable) $10 tools (reusable)". This way, the treasurer can better keep track of expenses and the overall cost of the project.


One big thing is NEVER try to hide things from the IRS. If they smell shenanigans, they'll get a forensic accountant in there and go through everything back as far as he can get. So if Bob's E8 has a nice coat of paint and the museum has $40,000 in paint related stuff. They'll go after Bob to see if he painted his engines or where the money may have come from. They are quite thorough, believe me.

The Museum I'm with has had a policy for 35 years or so that any equipment or other item coming onto the property had to gifted to the Museum or under some special agreement that the BoD had a specifically approved in advance.

After its first 15-years of existence it had realized that it could not become the storage location for maybe-in-the-future-it-will-be-given-us rail equipment. And the board enacted a policy that it still adheres to. It took another 20+ years to convert all of the privately owned cars into gifts to the museum.

My Fictional Museum also had a private business car that was stored inside the museum, unaccessable to anyone but the owner and plugged into the museum's electricity 24/7 for many years so it would stay warm/cool inside with no apparent rent or reimbursement for utility costs on the 990 form

That person is a "disqualified person" under IRS regulations. There are special, enhanced rules for his relationship with the nonprofit, and in particular, private inurement.

Specifically, the penalty for private inurement is 25% if you unwind the transaction; and 200% additional if you don't. You can only unwind a transaction in the same tax year. The chances of being caught in the same tax year are remote, so the 225% is very likely. The basis is the cash value of the exchange, so whatever a contractor charges to do the work.


His friend is not a Disqualified Person, so the rules are somewhat easier for him. So far this situation really depends on the relative value being obtained by the museum and the owner. If a reasonable observer would say the museum is getting the long end of the stick, then he's in the clear.

Mind you I'm not saying this is legal or proper to do. It's flipping stupid to do given the penalties you face if you fail to walk the tightrope correctly. I'm just saying it is possible to walk the tightrope correctly, and/or to be judged as having done so.


The historic scheme and displaying the unit to the public favors the museum. Painting a pink lightning stripe Fap Fap & Epeen R.R. scheme favors the collector, unless the museum paints many of its other pieces that way too. Hey, some do!

On the no-trespassing signs, it's perfectly legitimate to deter tourists from opening up cars not intended for public walk-through. The public is very, very destructive. A well intended but curious urb-ex'er will open up the car and not really secure it. A family will see him leaving and explore the car themselves, leaving the car wide open when they leave. Everyone else will consider it an open car, including a vandal with a magic marker or glass scraper.


It is in their best interest to sort that out. They need to follow at least the Business Judgment Rule or they are not protected from personal liability. Obviously their nonprofit could also lose its status, which is going to make for a lot of paperwork for somebody to keep the museum alive. If somebody decides a successor organization needs to be formed, you can have $30,000 of legal fees real easy, and the negligent directors could be personally liable for it.

Requests BY WHOM???

J. Random Member is not entitled to see every aspect of a nonprofit's business. Which aspects a member is allowed to see is governed by your state law. There's no sunshine law on earth that'll undercut an nonprofit's right to keep important business secrets like pending negotiations.

In some state laws, each director is entitled to see absolutely everything, and can sue to that effect, and it would take an extraordinary situation and argument for a court to deny them. My attorney and I agree this is also true in common law, because the directors' due diligence duties, and their right to protection under the business judgment rule, exceeds any legitimate need of management to conceal data. On the other hand, Mid-Continent management did successfully conceal its member list against then-director Byron Long, arguing exactly that.

Regardless, a majority of directors always have access to absolutely everything, since everyone else is subordinate to them, and they can simply order the material disclosed. I suppose the wayward employee could QUIT rather than hand it over.

Assuming the value of the BOD member's asset has increased by the cosmetic restoration, to keep the transaction above board the value of the services he received is income to him/her and should be reported to IRS using a 1099-misc..

He also has a potential conflict of interest and there's a place on the 990 where 501c3 organizations have report whether or not they have a conflict of interest policy.

Bob H

Arkansas nonprofit corporation law reads as such:
4-28-218. Books and accounting records.

(a) Each corporation shall keep correct and complete books and records of account.

(b) All receipts of moneys and expenditures shall be properly recorded according to accepted accounting principles.

(c) A record of the proceedings of its members, board of directors, and committees shall be kept.

(d) A record of the names and addresses of its members entitled to vote shall be maintained at the principal office or place of business of the corporation.

(e) All books and records of a corporation may be inspected by any member for any proper purpose at any reasonable time.


'Member' is defined in another section, as a person who pays dues in which case they have to be issued a membership number/card(loosely, as a nonprofit who does not charge for membership does not have to issue cards or a serial number)

In general, in this situation, it seems the theory is the less is written down and recorded, the less questions can be asked, 990 forms are little more then what you might expect if it was just a newsletter club with almost no assets.

This can vary a bit from state to state.... in some states, for example, a full external audit (by a CPA) may be required depending on things like how much the organization received in donations.

For non profits with income above a certain dollar amount, IRS requires that 990s be made available to anyone who requests a copy and an organization can charge a reasonable fee (say $25) for providing an actual copy.

These days, however, most people who want to look at a 990 do so via the Guidestar website.

For organizations with a relatively low amount of income, however, the 990 is just a post card

Bob H.