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An NPC Board of Directors may have several reasons for needing to make a strategic decision on the future state of an NPC.  Perciptating factors may include:

  • When two or more VA medical centers undergo administrative consolidation and each has an affiliated NPC, it may be appropriate for just one NPC to serve the combined VAMC; or
  • If an NPC’s expectations of growth and prosperity are not fulfilled making it questionable whether the NPC should even continue to exist; or
  • The research program at a local VAMC is not robust enough to support a fully functioning NPC administrative staff.

In such situations, it is incumbent on the boards of directors to determine whether an NPC is sustainable and should carefully evaluate its options. 

One option available to NPCs is to merge or consolidate with another NPC thereby becoming a multi-medical center research corporation. Other options are to dissolve or to become dormant.  Regardless of whether the decision is to become a multi-NPC or to dissolve or become dormant, the board should obtain advice from a local attorney and an accountant familiar with nonprofits.  As state incorporated nonprofit corporations, specific state rules apply. 

If the decision is to become a multi-NPC, then the board of directors of both NPCs should consider the different types of mergers and consolidations and choose the the option which will best serve all parties involved.  Discussion of the various types of consolidations follows as well as suggested steps to take in the event the decision is to pursue dissolution or dormancy of an NPC.  The following is offered as a starting point for board consideration and is not intended to be comprehensive guidance. Every NPC will have to examine its own circumstances and develop a customized blueprint. Additionally, expert advice and the involvement of all stakeholders are necessary to ensure a smooth transition.

Types of Mergers and Consolidations

In addition to the requirements provided in part 6. Multi-Medical Center Research Corporation (Multi-NPC) in VHA Handbook 1200.17, the boards of directors of both nonprofits should consider some of the different types of mergers and consolidations prior to becoming a Multi-NPC.

  • A merger involves integrating the programmatic and administrative functions of two or more organizations. Mergers occur when one organization becomes part of another organization. [Nonprofit A merges with Nonprofit B. All assets and liabilities of Nonprofit A are transferred to Nonprofit B. Nonprofit B assumes assets and liabilities.]
  • An administrative "consolidation" is a restructuring that includes the sharing, exchanging, or contracting of administrative functions to increase the efficiency of one or more of the organizations involved. [Nonprofit A and Nonprofit B come together to form a new Nonprofit C. Assets and Liabilities of both Nonprofits A and B are combined and assigned to Nonprofit C. Nonprofit C must apply to the IRS for tax-exempt status as a new entity.]
  • An asset transfer and dissolution occurs when Nonprofit A transfers all of its assets to Nonprofit B. Nonprofit A remains responsible for paying off all liabilities and divesting itself of all obligations. Nonprofit A subsequently goes through the dissolution process.

Due Diligence in the Event of a Merger or Consolidation

When the decision of the board involves merging or consolidating two or more organizations, the boards of directors must approve the transformation as well as the implementation process. The board of any surviving or subsequent organization should conduct a due diligence review of the other organization(s) prior to making a commitment. This requires full disclosure of all assets and liabilities through a thorough review of the other nonprofit’s:

  • Financial status including audit reports, tax returns and supporting documentation
  • Contracts, leases and agreements including industry sponsored agreements, grants, employment and consulting contracts, etc.
  • Financial performance (actual budget vs. projections)
  • Minutes from board and committee meetings
  • Actual and potential liabilities (i.e., possible disgruntled employees; actual, pending or threatened legal or tax liabilities)
  • Compliance with federal and state laws including those regarding human resource management (i.e., FLSA, ERISA, etc.)
  • Range of activities and staffing

This due diligence process involves considerable effort, but is necessary to ensure that the parties are aware of all possible liabilities. A nonprofit should also contact its insurance broker to ensure continuing coverage during the transformation process. Extended coverage (known as “tail” coverage) should be obtained to cover liabilities that may come to light as long as three years after the change in status.

Steps to take toward dissolution

If a board decision results in the need for dissolution of an NPC, the process must be conducted in accordance with the regulations of the state in which the NPC was incorporated, along with appropriate notifications. See below for recommended steps to take toward dissolution of an NPC.

Review NPC’s bylaws and articles of incorporation (or charter) for guidance on the steps necessary to obtain board approval for dissolution. The bylaws may require a unanimous or supermajority vote.

Follow the state process for dissolving a nonprofit. (Note: In accordance with VHA Handbook 1200.17, 7. Disassociation by VA, The Secretary of Department of Veterans Affairs may determine that an NPC is not acting in the best interests of VA and may authorize the Under Secretary for Health to require remedial measure up to and including VA's disassociation from the NPC.)  For guidance, go to National Council of Nonprofit Associations http://www.ncna.org/ to obtain the contact information for the association of nonprofits in your state.  Legal assistance from an attorney familiar with state nonprofit requirements is recommended to guide an NPC through the dissolution process.

Liquidation and distribution of assets must be conducted in accordance with state regulations. Often, the secretary of state will appoint a supervisor who may require all assets to be held in trust pending distribution in accordance with the bylaws. The organization will continue to exist until all pending obligations have been met, but may not conduct any new business.

Carefully assess and address all outstanding obligations. This may include:
Paying taxes

  • Notifying creditors, PI's, employees, consultants, funding organizations, sponsors, grantees, etc.
  • Closing asset accounts including bank and brokerage accounts
  • Canceling contracts (i.e., leases, insurance, etc.)
  • Collecting amounts owed to the nonprofit
  • Arranging for the transfer or termination of any ongoing research studies or educational activities. Address any issues related to retention of research records.
  • Notify the IRS by sending a letter to EO Customer Account Services 

Internal Revenue Service
TE/GE Customer Account Services
P.O. Box 2508
Cincinnati, OH 45201

When filing the last Form 990 or 990 EZ, check the Final Return box in the header area on page 1 of the return.

Upon reaching a board decision to dissolve and at least thirty days prior to dissolution, notify the VA NPC Program Office in the Office of Research and Development and NAVREF. Upon completion of the dissolution process, provide the VA NPC Program Office with the final date of dissolution, state documentation and information for the NPC final Annual Report to VA.

Steps to Take Toward Dormancy

Rather than dissolution, an NPC board may determine that “dormancy,” putting an NPC into an inactive state, may be the best option. This would avoid the need to create an NPC from scratch should there be a future change in circumstances. However, even an NPC in a dormant state must meet certain requirements and maintain specified registrations. See below for recommended actions.

  • Determine the VA, IRS and state regulations applicable to nonprofits that cease operations (no revenues; expenditures only to maintain state registration), but do not dissolve.
  • VA: Notify the VA Nonprofit Program Office (Kimberly.Collins@va.gov) that the NPC has ceased operations and become "dormant" or "inactive," but has not decided to dissolve. NPCs that are dormant should still submit an annual report to VA by June 1 of each year to ensure that the Nonprofit Program Office always has current contact information.  Please complete the annual report cover page only.  Inactive NPCs will not need to include an audit or IRS Form 990 with their annual report.
  • IRS: Beginning in 2008, exempt organizations with gross receipts under $25,000 must file an annual notice that includes the requirement to provide evidence of the organization’s continuing basis for its exemption.  If an organization fails to meet its filing obligation to the IRS for three consecutive years, the organization’s tax exempt status will be revoked.
  • State: Consult the NPC accountant and state regulators to determine the minimum requirements for maintaining state nonprofit incorporation. Generally, this requires a nonprofit to:
  • Pay an annual state registration fee and to submit certain forms.
  • Ensure that the board meets the minimum number of times required by the state and bylaws
  • Prepare minutes to document that the nonprofit remains compliant with minimum requirements
  • Keep the registered agent information current (name and address of the person responsible for receiving legal notices - may be the VA Office of Regional Counsel)
  • Maintain accurate signature cards for bank accounts.
  • Determine whether to continue Directors and Officers liability insurance coverage. With no financial activity and no employees, the board’s risk level will be very low. However, the board should make a conscious choice about maintaining or terminating D&O coverage. Extended coverage is often available at a low cost to protect the board against suits alleging improprieties that may have occurred while the NPC was active, but which were filed after the organization became dormant. Review the bylaws to determine whether they require the organization to maintain D&O coverage. If so, the board will have to change the bylaws prior to terminating coverage.

Helpful Resources

Jeffrey Tenenbaum, Esq, of the law firm Venable LLP, 575 7th Street, NW, Washington, DC 20004-1601, 202-344-4000 is a frequent speaker on nonprofit mergers and acquisitions.

NPC Executive Directors who have been through, or are undergoing, a merger or consolidation and are willing to be resources:

  • Eileen Lennon, Ph.D., Executive Director, Seattle Institute for Biomedical and Clinical Research, Phone: 206-764-2710 or email: Eileen@sibcr.org
  • Cindy Reutzel, Executive Director, Chicago Association for Research and Education in Science, Phone: 708-343-6300; or email: cindy.reutzel@va.gov
  • Nancy Watterson-Diorio, Executive Director, Boston VA Research Institute, Inc. Phone: 617-738-1313, ext 13 or email: nwd@bvari.org
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