The overarching purpose of VA affiliated nonprofit research and education corporations (NPCs) is to support VA research and education in accordance with 38 USC §§7361-7368. NPCs are not “banks” designed for the accumulation of funds. Funds provided for VA research projects and educational activities should be used for those purposes.  Remaining funds (often referred to as "residuals"), if any, should be used within a reasonable time to support the facility research program in general, other projects, research related activities not attributable to a single project or for approved education activities. It is important to keep these purposes in mind as NPC boards consider issues related to transfers of funds.

Note:  VHA Handbook 1200.17 published December 8, 2010, states: 

13.  NPC FINANCIAL MANAGEMENT; d. Limitations on Expenditures; (3) Transfers of funds from NPCs

(a)  Funds and Equipment Associated with Active Research Projects or Education Activities. An NPC may transfer to another NPC or to a VA entity funds and equipment associated with an active research project or education activity subject to the applicable agreement and approval of the Board, the funder and the recipient institution.

(b)  Residual Funds 

          1.  Any funds and/or equipment remaining after completion of a research project or education activity that the sponsor does not require to be returned (residual funds) must be used for the general support of VA research or education consistent with the requirements of this Handbook. 

          2.  Upon departure of an investigator from a VA medical center, residual funds and equipment associated with that investigator may be retained by the NPC in accordance with Board policy.  Alternatively, such funds and equipment may be transferred, but only to another NPC or to a VA medical center, subject to approval by the Board and the recipient NPC or VA entity.

Background: VA investigators retire from the VA, move to other VAMCs, transfer to affiliated universities, and are hired by other nonprofits or for profit companies.  When this happens, how should an NPC handle funds for the PI's active projects or accumulated funds remaining from completed projects?  The former is generally fairly straightforward, but the latter can become contentious, especially if the amounts are large or the PI has certain expectations.  All NPCs are encouraged to have a board-approved policy to govern transfer decisions and to inform all PIs of the policy so there are no misunderstandings. 

IRS regulations provide that 501(c)(3) organizations may give or transfer funds and other assets only to another 501(c)(3) organization with a similar purpose, or to a local, state, or federal government entity. However, the NPC authorizing statute states, "The Secretary may authorize the establishment at any Department medical center of a nonprofit corporation to provide a flexible funding mechanism for the conduct of approved research and education at the medical center (emphasis added)." Also, an NPC’s organizing documents – IRS Form 1023 Application for Recognition of Exemption, articles of incorporation and/or bylaws – may establish a narrower focus for an NPC that further constrains transfers. For example, the application may state that the NPC will “support research and education in conjunction with the XXX VA Medical Center.”

The NPC authorizing statute and such statements have been interpreted to mean that once funds are deposited in an NPC, they may be expended only in support of VA research or education. 

Some have taken this a step further, stating that the funds may only be expended by that NPC, and for the benefit of research or education conducted at the affiliated VAMC.  [Note: Transfers of funds directly associated with active projects are commonly accepted - see below.] Those holding this view (including GAO investigators when visiting NPCs during their 2002 oversight review of NPCs) maintain that the intent of the donor was to support research at the affiliated VAMC, and VAMC support is what makes acceptance of research projects and accumulation of residual funds possible.  Consequently, it is appropriate that expenditure of those funds ultimately should benefit the facility where the initial work was performed.

Finally, board approval of transfers even to other NPCs may be viewed as an indication of lack of exercise of fiduciary responsibility for two reasons:

1. The nonprofit governance duty of “loyalty” requires boards to ensure that decisions serve the best interests of the organization of which they serve on the board. Transfers of funds (particularly residual or general research funds) to other organizations are likely to be detrimental to the financial condition of the original nonprofit and reduce its ability to fulfill its mission. Therefore, the decision could be a breach of the loyalty requirement.

Asked whether an NPC board of directors has the discretion to deny a request for a transfer, a 2000 opinion by a VA staff attorney in a Regional Counsel Office concluded:

“ . . . when a request is made to transfer funds from one corporation to another, the Board of Directors has a fiduciary obligation to consider the interests of the corporation, not just the DVA employee . . . Our understanding is that the Board of Directors has deliberated on this matter and decided against transferring the funds you requested. It is not only their right to reach this decision, but their legal obligation to make the decision by considering the interests of the corporation. [emphasis added]
 

2. Boards must demonstrate complete control over the funds under their stewardship in order to guard against the perception of financial conflicts of interest by those requesting disbursements.

Residual Funds:  Before establishing a policy governing transfer of residual funds, the board should define and establish policy on residuals (see separate sample policy on residual funds).

A point to keep in mind is that subject to limitations established by the intent of the NPC authorizing statute as well as VA guidance derived from VA interpretation of the NPC authorizing statute, IRS regulations, and the NPC’s organizing documents, discretion to determine dispensation of all funds resides with the board of directors – not any single individual. It is important to avoid any misperception on the part of investigators by overtly stating that any and all funds administered by the NPC belong to the NPC, not to the investigator.

Sample transfer of funds and residual policies are provided below.

Sample statement that may be revised as needed to reflect the board's policy: "Upon completion of the study, the remaining balance of funds, if any, will be used for the general support of approved VA research projects or education activities at the AAA VAMC. Please advise Corporation if this is not acceptable or if use of the funds is restricted."

The sample statement conveys that it is the board's intent that the residual funds will never leave the corporation. If that is not the board's intent, it should be revised accordingly.

All funds deposited in the corporation and all equipment purchased with corporation funds are the property of the corporation and are subject to policies and procedures established by the board of directors. Such policies and procedures will be consistent with applicable federal and state statutes and regulations and board decisions. Decisions of the board are final.

External Transfer: Transfer of an active research or education project and the associated corporation funds and/or corporation-owned equipment may be made only after approval by the board of directors, the project sponsor and the receiving institution. Such transfers may be made only to another 501(c)(3) non-profit organization with the same stated exempt purpose of conducting research, or to a local, state or federal government entity. An investigator who wishes to relocate an approved active research or education project, must submit a written request for such a move to the VA non-profit board of directors through the executive director.

Internal Transfer: The project sponsor must be notified of any substantial change in the status of the designated principal investigator on an active research project or education activity. Changes such as assigning a replacement principal investigator or changing the PI’s role can be made only with prior written approval of the project sponsor and the VAMC R&D Committee. If the designated principal investigator of an active research project relocates, is terminated from the study, or dies, a written request to assign a replacement principal investigator must be submitted to the project sponsor. In addition, an amendment changing the principal investigator name must be executed if a clinical research agreement is involved.

Funds provided to a Corporation for the general support of an investigator’s research or education activities and funds remaining from completed projects are generally referred to as “residual funds” and held in “general research or education” accounts. Use of such funds for general research and education purposes is predicated on first fulfilling all requirements specified by the sponsor or any other donor at the time funds are initially received by the corporation. Residual funds may be used only for scientific and professional expenditures and must further the conduct of VA-approved research or education.

The board of directors discourages the accumulation of residual funds. Funds provided in support of research or education should be used for those purposes as they are accrued. When residual account balances exceed $X, and/or there is no activity on an account for X months, the executive director will discuss with principal investigators their plans for disbursements and will submit a report at the next meeting of the board of directors.

After completion of the research project for which funds are originally received, residual funds, if any, remaining in the project account are reclassified as “unobligated” and may be used for the general support of research and education activities of principal investigators. In the donor acknowledgement letter or other form of agreement, the corporation informs the project sponsor that the corporation will allow the principal investigator to request use of the remaining balance of funds following completion of the project for the general support of the investigator’s research and/or education at the VA facility affiliated with the corporation.

After the project account is closed, residual funds may be transferred within the corporation to other active research or education project account(s) for which the same individual is the principal investigator or may be transferred to a general research account, usually identified by the principal investigator’s name solely for the sake of convenience. All expenditures must be consistent with policies and procedures established by the board of directors and are subject to approval by the executive director.

An investigator must be the principal investigator or co-PI on at least one active research or education project in order to maintain, and request expenditures from, a general research account. Exceptions will be made only upon approval of the board of directors.

In the event an investigator ceases conducting research, retires, dies or otherwise terminates his or her employment at the VA medical facility affiliated with the corporation, or with the corporation itself, all residual funds remaining in the investigator’s general research account will be transferred to a corporation administrative account and used at the discretion of the board of directors. All funds provided to the corporation are intended to support VA projects and research and/or educational activities at the VA facility affiliated with the corporation.  Consequently, the corporation does not allow transfer of residual funds or corporation-owned equipment to any other organization.

Separate from issues related to transfers of residual funds, an NPC may wish to consider providing the VA-affiliated nonprofit research and education corporation at a PI’s new VA location with “start up” funds to help the PI become re-established in research. A sample policy follows. [Note: This may be allowable only for NPCs whose organizing documents provide for broad support of VA research and education as opposed to only at the affiliated VAMC.]

In the interests of fostering VA research and education, when a principal investigator re-locates to another VAMC, the board of directors may approve a donation to the NPC at the destination VAMC to be used as start up funds for the PI. To be eligible for start up support, the PI must have an expectation of conducting at least one ongoing project at the new site or a reasonable prospect of initiating a new study within a reasonable time of terminating employment at the originating VAMC. The PI must provide justification for the requested amount based on anticipated start up costs.

The board may consider allocating an amount for this purpose equivalent to X% of the amount in the applicable general research account at the time of re-location, up to $X.