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
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.
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.
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:
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]
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.
NAVREF strongly encourages NPC boards to adopt policies regarding transfers that are explicit and then to apply them consistently. Further, the board and the NPC should encourage and foster the use of accrued funds at the VAMC where they are earned.
Active Research Projects:
Transfers of active research projects and their related funds are commonly accepted in the scientific community. In all cases, requirements established by the project sponsor must be honored. In addition, it is advisable for the nonprofit board or a designated representative to review and approve all active project transfer requests. Sometimes, particularly in the case of clinical trials, it is agreeable to all parties (PI, sponsor, and institutions) to identify an alternative PI at the original site. However, when a project is to be moved to a new site, first obtain the sponsor's written permission for the transfer of the project and any unexpended funds to another organization. Also, the recipient organization must agree in writing to accept the project and funds. In the event of a transfer to a non-governmental entity, verify that the recipient organization is a 501(c)(3) organization with a similar tax-exempt purpose (research or education) by requesting a copy of its IRS letter of determination of tax-exempt status.
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.
After the board has established a transfer policy, it should take several steps:
Inform all current and incoming PIs of the policy. Such a policy should contain an explicit statement that all funds deposited in the NPC belong to the NPC and are subject to decisions, policies and procedures established by the board. An NPC may ask PIs to sign an acknowledgement that they have received and understand the policy.
Ensure that donor acknowledgement letters and other correspondence with donors contain an explicit statement of how residual funds will be used that is consistent with the board's policy on transfers.
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.
Ensure that research agreements with sponsors are consistent with the board's policy.