Dissolution of Nonprofit Foundations

April 14, 2023

By Natalie Glitz Grumhaus

There are many reasons that a nonprofit foundation may feel the need to dissolve.^[1] When James and Charlotte Brooks Foundation decided to fully dissolve in 2015, only five years after its founding in 2010, they donated most of the Brooks’ artwork to a local art museum, the Parrish, as a way to further the Foundation’s purpose as an artist-endowed institution, dedicated to the Long Island arts community.^[2] Another organization, the Urban Institute of Contemporary Arts in Grand Rapids, Michigan, dissolved in 2014, so that it was no longer a distinct organization and merged with Ferris State University due to unsustainable funding shortages.^[3]The Holt Smithson Foundation, which is currently in operation, is a unique example of a nonprofit organization with a termination date written into the founding documents: it is set to terminate in 2038, one century after the wife-husband team of artists Nancy Holt (1938-2014) and Robert Smithson (1938-1973) were born.^[4] Knowing how and when to dissolve a foundation is often even more important than setting one up so as to make the most of all assets owned by the foundation and fulfill the requirements of state and federal law.^[5]

This article will explore the process of dissolving a nonprofit foundation in the US, including the legal and regulatory requirements, as well as some best practices for ensuring a smooth and ethical dissolution. In order to better understand our case studies, this article will specifically examine New York’s and Michigan’s state processes.

State and Federal Forms and Processes to Dissolve Nonprofit Organizations

Beyond the difficult decision to terminate the operations of a nonprofit organization between the board of directors and the process of distributing the assets, there are a number of complex and often interrelated federal and state forms involved.

Most of the forms, both federal and state, ask questions regarding the organization’s assets and how the board plans to distribute them. Distribution can be accomplished in different ways, depending on the desires of the board and the nature of the assets. Two common ways are by making an outright gift of any assets to another (or multiple) organization or individual, or by “spending down.” Spending down means that the organization continues spending money in the same way it has before, such as giving grants, but simply doing so at an accelerated rate.^[6] Unfortunately, many other nonprofits rely on continuing grants from grantmakers, so the “spend-and-close” style of grantmaking is not a sustainable source of funding, especially for nonprofit organizations in niche areas.^[7]

Internal Revenue Service

The actual process of dissolution is primarily a state process. Although the IRS must be notified of the dissolution of any nonprofit organization, including foundations, the process really is just one of notification. If the state procedures have been correctly followed, no new research or actions will need to be taken. When filing that year’s annual report, the filer simply checks the box for “Final Return” (for Form 990-PF) or “Terminated” (for Forms 990 and 990-EZ) to officially notify the IRS of the change in corporate status.^[8]

For standard nonprofit organizations filing Forms 990 and 990-EZ, there is another question clarifying by what means the nonprofit dissolved. In addition, there is the requirement to fill out Schedule N, regarding the distribution of its assets and whether there were successor organizations and any “officer, director, trustee, or key employee” involved in them.^[9] The organization is also required to attach to their final return copies of their dissolution documents, which may include “articles of dissolution or merger, resolutions and plans of liquidation or merger.”^[10]

For private foundations filing Form 990-PF, there is no schedule that needs to be filled out. Rather, the IRS simply requires an attachment to the return that includes a specific description of all assets distributed or otherwise disposed of, as well as copies of all liquidation plans and filings or supplements that had not been previously submitted.^[11]

For organizations not required to file annual returns, the information requested is substantially the same as those above, but the organization is to submit it directly to the Tax Exempt and Government Entities Office.^[12]

State of New York

In New York, all charitable organizations are regulated by the Charities Bureau, a section of the Attorney General’s office, from beginning to end.^[13] All filings are done through the Attorney General’s office directly, though, as the Charities Bureau exists primarily as a supervisory body. All nonprofit organizations, including foundations, are also governed under the Not-For-Profit Corporation Law, as amended by the Nonprofit Revitalization Act, passed in 2013.^[14]

There are two different procedures to follow for a dissolving nonprofit corporation, depending on whether the corporation owns assets or not.^[15] If the nonprofit owns no assets greater than $25,000, in total, it may file what is called a “Simplified Dissolution,” as though it had no assets. The Charities Bureau actually provides a guide for all New York nonprofit corporations to follow when undertaking the dissolution process.^[16] According to this guide, the board of directors (and members, if it is a membership-based organization) must unanimously approve a plan of dissolution, which may include documents such as government approval of the dissolution or the agreement of any organizations receiving any assets to the purpose for which they were intended, and prepare and submit a Verified Petition to the Attorney General and the NY Supreme Court.^[17] The corporation must then carry out the plan within 270 days of being granted approval by the Attorney General or the Court.^[18] Corporations that “did business” in New York City also need the approval of the Commissioner of Finance of New York City.^[19] Once all petitions have been submitted, and the plan for dissolution has been completed, the NY Attorney General’s office will endorse the Certificate of Dissolution and return it to the corporation, which then files it with the state, and later files its final annual and financial report with the Charities Bureau. It is then officially dissolved.^[20]

The guide from the Attorney General provides several samples for documents needed throughout the process, as well as a checklist of documents needed to send to the Attorney General to fulfill state requirements.^[21] The majority of information in the documents is meant to pertain to what assets are owned by the corporation and how they will be distributed upon dissolution.

The Attorney General makes publicly available all approvals of nonprofit dissolutions through the Charities Transaction Search.^[22] However, requests for the plans of dissolution or other documents associated with the dissolving nonprofit organization must be officially requested through FOIL.^[23]

State of Michigan

In Michigan, the Licensing and Regulatory Agency handles all corporation matters, including nonprofit organizations, and both nonprofit organizations and foundations are governed by the 1982 Nonprofit Corporation Act.^[24] As in both the federal and New York State requirements, the questions on the Michigan forms mostly deal with distribution of assets. However, Michigan’s process is much more straightforward. The state provides a short (3-page) questionnaire that the nonprofit organization wishing to dissolve provides to the Attorney General in order to obtain a letter of approval for dissolution, which is then filed with the Department of Licensing and Regulatory Affairs.^[25]

While the organization does still need to obtain many of the same documents discussed previously (plan of dissolution, approval of board and/or members, financial returns, etc), the process of actually filing for dissolution in Michigan is quite simple. Regarding publicity of the dissolution plans, the questionnaire submitted to the attorney general is available upon request, along with any other documents submitted by the organization.^[26]

The nature of charitable organizations is an interesting point in this discussion. As can be seen in the case studies below, the only organization that is not an artist-endowed foundation (AEF) is the Urban Institute of Contemporary Art, a museum. Artists tend to endow foundations in the places they live: big cities, like New York, LA, or Chicago, or warm areas of the country where many retire, like Florida, Arizona, or New Mexico. As there are very few AEFs in the U.S.,^[27] it stands to reason that states like Michigan that are neither artistic hubs nor popular retirement states will be unlikely to have any major AEFs.^[28]

Case Studies

The James and Charlotte Brooks Foundation was established in 2010 in New York City to house the Brooks’ artwork after James and Charlotte’s deaths in 1992 and 2010, respectively.^[29] The two artists were abstract expressionists who were a part of the artist community in The Hamptons on Long Island, NY, and cared greatly for the community and the area.^[30] The Foundation was not meant to be a grantmaking organization but simply to care for their art and house it. The Parrish Art Museum is an art museum whose mission is dedicated to the East End of Long Island, and so, in what has been called a “rare move,” the Foundation decided to give the entirety of the Brooks’ artwork, the Foundation’s archives, and all other assets to the Parrish in order to better support the community that the two artists loved so much.^[31]

The Foundation’s assets were valued at “more than $6.5 million at the end of 2015,” including the 89 works by James and Charlotte.^[32] The Foundation also instructed the Parrish to sell some of the paintings donated to it in order to raise money to create a research grant.^[33] While this final gift of art and archives was not the Foundation’s only gift of art, as it had previously donated 170 works to other institutions, this was its most significant and concentrated. As the president of the Brooks Foundation said, this was an “innovative” method of dissolving the foundation and it would “stand as a model for how small artist foundations can fulfill their mission by collaborating with museums in new ways.”^[34]

In Michigan, the Urban Institute for Contemporary Art closed for good in 2023.^[35] However, at the time the Institute closed, it was no longer an individual nonprofit organization. It had dissolved and merged with the Kendall College of Art and Design, at Ferris State University.^[36] That dissolution was due to funding shortages and insurmountable debt to the tune of $4 million.^[37] Much of this debt was due to an investment in a new building in 2011 that cost the organization $13 million, from which it never really recovered as its only income was from membership and attendance.^[38] On the Institute’s final IRS return, one of its fundraisers actually reported a significant net loss. The Institute became a wholly owned subsidiary of Ferris State University, and its board disbanded in accordance with the standard dissolution procedures.^[39] Regarding distribution of its assets, the university acquired all assets, valued at $9,084,420 according to book value on the final return. Unfortunately, the dissolution and merger with the university did not save the financial status of the Urban Institute for Contemporary Art, and the pandemic finally, and sadly, crushed it.^[40]

Finally, some foundations may see their termination as an essential part of their mission from the very beginning. The Holt Smithson Foundation is one such organization. Its founding was conceptualized in 2014 by Nancy Holt upon her death to honor the artistic legacies of herself and her husband, Robert Smithson, and officially founded three years later.^[41] Holt and Smithson were contemporary artists and writers, famous for pushing the boundaries of art with famous earthworks like Sun Tunnels^[42] and Spiral Jetty,^[43] among other styles of contemporary art. The Holt Smithson Foundation was officially established in 2017 as a 501(c)(3) artist-endowed foundation, led by executive director Lisa Le Feuvre in Sante Fe, New Mexico.^[44] Le Feuvre commented in a 2019 interview about the purpose of terminating the foundation in 2038, only about 20 years after its official founding, was that “we’d rather put our limited resources into doing things really well over 20 years than over 50. … From a philosophical point of view, the role of the foundation is to get people to talk about these artists. One of the measures of its success will be that it becomes obsolete.”^[45] Unfortunately, the leadership of the Holt Smithson Foundation has not made its plan for dissolution and distribution of its assets, including title to the many artworks in their possession, public.

Conclusion

The foundations presented and discussed in this article dissolved (or will dissolve) for various reasons. In theory, dissolution happens when the Foundation’s work is finished and they can do no more. However, as the James and Charlotte Brooks foundation has shown, nonprofits and foundations that plan for and properly execute a dissolution can provide new life for another foundation or other nonprofit organization to carry on.

Suggested Reading:

For a description of best practices when dissolving a nonprofit corporation:

https://www.councilofnonprofits.org/running-nonprofit/governance-leadership/dissolving-nonprofit-corporation.

For practical considerations regarding artist-endowed foundations: https://www.aspeninstitute.org/wp-content/uploads/2010/11/AEF_V2.pdf

About the Author

Natalie Glitz Grumhaus is a law student at Michigan State University College of Law, graduating May 2023, and received her B.A. in Philosophy and Fine Art from Hillsdale College in 2020. Natalie was a Spring 2023 legal intern with the Center for Art Law.

Disclaimer:

The information provided in this article is for general informational purposes only and does not constitute legal or financial advice. Laws regarding nonprofit dissolution can vary depending on the state or country in which the organization operates, as well as the specific circumstances of the organization. Therefore, this article should not be relied upon as a substitute for professional advice from a licensed attorney or accountant. Neither Natalie Glitz Grumhaus nor The Center for Art Law, nor any of its associates, shall be liable for any loss or damage arising out of, or in connection with, the use of this article.

1. Such reasons can come from external environmental factors that are often entirely out of the control of the nonprofit, not just from the more apparent internal reasons that will be discussed at greater length in this article. See Tim Delaney & Amy Silver O’Leary, Rising Interest in Nonprofit Dissolutions & Mergers, Nat’l Cncl. Nonprofits (Feb. 16, 2022), https://www.councilofnonprofits.org/articles/rising-interest-nonprofit-dissolutions-mergers (discussing the rise in nonprofit dissolutions and mergers during and after the Covid-19 pandemic). See also Kim Wright-Volich & Christopher W. Geison, Breaking Up Is (Not So) Hard to Do, Penton Media (2008) https://www.schwabcharitable.org/public/file/P-5282719/Breaking-Up-Is-Not-So-Hard-to-Do.pdf (discussing many other reasons why private foundations may need to close). ↑
2. Andrew Russeth, James and Charlotte Brooks Foundation Donates Art Holdings, Archives to Parrish Art Museum, ARTnews (Aug. 29, 2017) https://www.artnews.com/art-news/news/james-and-charlotte-brooks-foundation-donates-art-holdings-archives-to-parrish-art-museum-8897. ↑
3. Jeffrey Kaczmarczyk, Urban Institute for Contemporary Arts Announces Merger with Kendall College of Art and Design, MLive (Aug. 23, 2013) https://www.mlive.com/entertainment/grand-rapids/2013/08/urban_institute_for_contempora_16.html. ↑
4. Holt Smithson Foundation, Mission, https://holtsmithsonfoundation.org/mission (last visited April 5, 2023). ↑
5. See Benjamin Takis, The Basics of Nonprofit Dissolution, Nonprofit Accounting Basics, https://www.nonprofitaccountingbasics.org/governance/basics-nonprofit-dissolution, last updated Sept. 29, 2021. ↑
6. David Cay Johnston, As More Foundations Choose to Spend Down, Charities Worry About Future Funding, Candid (Nov. 13, 2009) https://philanthropynewsdigest.org/news/as-more-foundations-choose-to-spend-down-charities-worry-about-future-funding. ↑
7. Id. ↑
8. Internal Revenue Service, Termination of an Exempt Organization, https://www.irs.gov/charities-non-profits/termination-of-an-exempt-organization (last visited Mar. 25, 2023). ↑
9. Id. ↑
10. Id. ↑
11. Id. ↑
12. Id. ↑
13. New York State Office of the Attorney General, Charities Bureau, https://www.charitiesnys.com (last visited Mar. 25, 2023). ↑
14. N.Y. Not-For-Profit Corporation Law § 715-B (McKinney 2013). ↑
15. Office of the New York State Attorney General: Charities Bureau, Voluntary Dissolution of Not-For-Profit Corporations with Assets (2018), found at https://www.charitiesnys.com/pdfs/dissolution_with_assets.pdf. ↑
16. Id. ↑
17. Id. ↑
18. Id. ↑
19. Id. ↑
20. Id. ↑
21. Id. ↑
22. Charities NYS, Welcome to Charities Transaction Search, https://charitiesnys.com/Transactions/jsp/index.jsp (last visited Apr. 12, 2023). ↑
23. New York State, Freedom of Information Law, https://otda.ny.gov/legal/foil (last visited Apr. 12, 2023). ↑
24. Licensing and Regulatory Affairs, Domestic Nonprofit Corporation, https://www.michigan.gov/lara/bureau-list/cscl/corps/corporations/types/domestic-nonprofit-corporation (last visited Mar. 25, 2023); Nonprofit Corporation Act, Mich. Comp. Laws § 450.2101 (1982). ↑
25. State of Michigan Department of Attorney General, Dissolution Questionnaire, https://www.michigan.gov/-/media/Project/Websites/AG/charities/fundraisers/f021mast_dis_quest.pdf?rev=5e8b3b152fa7404ab5e358557d850699, last updated Mar. 26, 2015. ↑
26. Id. ↑
27. There are only 433 Artist-Endowed Foundations in the United States, out of approximately 1.5 million total charitable organizations. Christine J. Vincent, The Artist as Philanthropist: Study Report Supplement 2018, Artist Endowed Foundation Initiative, The Aspen Institute (2018) https://www.aspeninstitute.org/wp-content/uploads/2019/02/aefi-2018-supplement-exec-summary.pdf; The Nonprofit Sector in Brief, National Center for Charitable Statistics (June 18, 2020) https://nccs.urban.org/project/nonprofit-sector-brief. ↑
28. The only AEFs located in Michigan, as of 2018, were the Alden and Vada Dow Fund, the Alden B. and Vada D. Dow Creativity Foundation, and the Marshall M. Fredericks Sculpture Museum. Vincent, supra note 27, p. 96, 109. ↑
29. Russeth, supra note 2; see also Foundation Directory, James and Charlotte Brooks Foundation, Candid, https://fconline.foundationcenter.org/fdo-grantmaker-profile?collection=grantmakers&activity=result&key=JAME616&view_format=compact&_gl=1*1tbpork*_ga*NTI1NjUwMDEyLjE2Nzc3OTY1NTI.*_ga_5W8PXYYGBX*MTY3OTc4MzcwNi4yLjAuMTY3OTc4MzcwNy41OS4wLjA.&_ga=2.117280646.1004583318.1679783707-525650012.1677796552 (last visited Mar. 25, 2023). ↑
30. Russeth, supra note 2. ↑
31. Russeth, supra note 2. ↑
32. Candid, supra note 28. ↑
33. Candid, supra note 28. ↑
34. Pat Rogers, James and Charlotte Brooks Given, in Entirety, to Parrish Art Museum, Hamptons ArtHub (Aug. 9, 2017) https://hamptonsarthub.com/2017/08/29/news-james-and-charlotte-brooks-foundation-in-entirety-given-to-the-parrish-art-museum. ↑
35. Benjamin Sutton, Michigan contemporary art museum will close permanently due to funding shortages exacerbated by the pandemic, The Art Newspaper (Dec. 9, 2022) https://www.theartnewspaper.com/2022/12/09/urban-institute-contemporary-arts-grand-rapids-closing-permanently. ↑
36. Kaczmarczyk, supra note 3. ↑
37. Kaczmarczyk, supra note 3. ↑
38. Lindsey Smith, State’s Largest Contemporary Art Center Merges with Ferris State University, Michigan Radio (Aug. 23, 2013) https://www.michiganradio.org/arts-culture/2013-08-23/states-largest-contemporary-art-center-merges-with-ferris-state-university. ↑
39. Id. ↑
40. Kaczmarczyk, supra note 3. ↑
41. Holt Smithson Foundation, supra note 4. ↑
42. Holt Smithson Foundation, Sun Tunnels Film, https://holtsmithsonfoundation.org/sun-tunnels-film (last visited Apr. 6, 2023). ↑
43. Holt Smithson Foundation, Spiral Jetty, https://holtsmithsonfoundation.org/spiral-jetty (last visited Apr. 6, 2023). ↑
44. Alan Gilbert, Full Circle: The Holt/Smithson Foundation, Brooklyn Rail (Dec. 2020), https://brooklynrail.org/2020/12/artonic/Full-Circle-The-HoltSmithson-Foundation. ↑
45. Id. ↑