In mid-June 2007, the Internal Revenue Service (IRS) issued a proposed new Form 990, the informational tax return nonprofit organizations are obliged to file each year. The new form seeks significant, additional information about executive compensation, expenditures from tax-exempt bonds, charity care activities at hospitals, exempt organization endowments and fundraising, lobbying and political activity, and organizational policies and governance issues, including conflict-of-interest policies and their application. The IRS expects the changes to “enhance[e] transparency, promot[e] tax compliance, and minimiz[e] the burden on the filing organization.”

The proposed revision comes after increasing scrutiny from the Senate Finance Committee; a March 2007 report of the IRS Exempt Organizations Executive Compensation Compliance Project, which examined executive compensation at 1,800 exempt organizations; and a May 29, 2007, letter from Senators Max Baucus (D-MT) and Chuck Grassley (R-IA) identifying a Form 990 amendment as one of the key ways for the IRS to improve the transparency of exempt organization operations.

The IRS proposes to apply the new form to nonprofit activities in the 2008 calendar year for filings made in 2009. The public has until September 14, 2007, to provide any comments on the proposed form before it is finalized.

Based on our experiences, we expect our clients to be significantly affected by and potentially concerned about the following specific changes proposed in the newly suggested Form 990:

• Disclosure of individuals receiving compensation in excess of $100,000. The proposed form would require organizations to disclose the number of individuals receiving compensation in excess of $100,000 annually from the exempt organization and any “related organizations” as well as whether any current officer or employee earned or accrued more than $100,000 of nonqualified deferred compensation.
• Detailed compensation breakdown for individuals receiving compensation from the reporting nonprofit and “related organizations” totaling in excess of $150,000. For the first time, the IRS would inquire about executive compensation not only from the reporting nonprofit entity but from any related entities, including related for-profit entities.
  • For individuals receiving more than $100,000 in annual compensation, exempt organizations would have to disclose their compensation from the exempt organization together with their compensation from “related organizations” as well as loans and other amounts owed by that individual both to the exempt organization and to “related organizations.” The new form would also require disclosure as to whether such individuals were paid in whole or in part based on the net earnings of the exempt organization.
  • For individuals receiving in excess of $150,000 in annual compensation, the exempt organization would also have to disclose bonus and incentive compensation paid, severance payments, nonqualified deferred compensation, nontaxable benefits, nontaxable expense reimbursements, equity-based compensation and any other compensation.
  • The exempt organization would also have to disclose whether expense payments were made pursuant to a written policy regarding payments and reimbursement of travel and entertainment expenses and whether first-class travel, club dues or personal residence expenses are paid for such individuals.
• Independent executive compensation review disclosure. The new Form 990 would require that the exempt organization disclose whether the chief executive officer, executive director, treasurer and/or chief financial officer compensation determinations were made in connection with an independent review and approval that included consideration of comparability data and “contemporaneous substantiation of the deliberation and decision.”

• Tax-exempt bond usage disclosure.The proposed form would require organizations with any outstanding tax-exempt bonds to describe any investments of bond proceeds that have exceeded their “temporary period exception” (i.e., the period during which they can be invested without yield restriction), whether certain accounts were established to defease tax-exempt bonds (which accounts could also be subject to yield restriction) and whether the organization acted in the role of an issuer “on behalf of” a governmental entity (a type of role that has come under increasing scrutiny by the IRS).

  In addition, organizations with over $100,000 in tax-exempt bonds outstanding would be required to complete a new Schedule K that would, for the first time, require disclosure of the use of proceeds of the individual bond issues, including any private use of bond financed facilities. It would require a description of management or research agreements and whether they satisfy the IRS private use safe harbors. Fees paid to third parties such as bond counsel and underwriters must also be disclosed, as well as whether such fees were paid from bond proceeds and whether the parties were selected through a formal process. The new Schedule K contains detailed questions concerning the amount of unexpended bond proceeds, the placed-in-service date of the financed project and whether the bonds were entitled to a temporary period. It also asks whether IRS Form 8038 was filed in connection with the bonds (another area of IRS scrutiny).

  These proposed requirements are particularly troublesome because they would require oversimplified answers to complex questions and, if filed electronically, would not provide for explanations. For example, if private business use is in excess of the 5 percent applicable threshold but is permissible because of the time-averaging measurement rules, the form would still require a borrower to disclose use in excess of 5 percent. Similarly, fees paid to various participants in a financing are proprietary, but 990s are in the public domain. Thus, information now disclosed only in the aggregate and only on nonpublic Form 8038 would become public.

• Hospital or medical care facilities charity care reporting. Entities with hospital or medical care facilities would have to complete a new Schedule H, which would require detailed “community benefit” reporting, including amounts expended in charity care, the number of persons served, subsidized health services offered to the public, how the organization publicizes the availability of charity care and how it assesses the health care needs of the community it serves. The organization would also have to disclose its charity care policy and provide detail about the bases for eligibility and any budgetary caps on care. Information on bad debt expenses and any written debt policies would also have to be disclosed.
• Enhanced fundraising activity disclosures. The proposed form would require organizations that raised money through mail, e-mail and other solicitations to complete a new Schedule G with detailed information about their relationships with the people or groups that helped raise the money. Those that raise money through special events (dinners, auctions, sales, etc.) and gambling would also be required to disclose additional information specific to the costs and income for each event.
• Enhanced disclosure from organizations with endowments, art collections, conservation easements. A new Schedule D would have to be completed by organizations that maintain collections of “art, historical treasures and similar assets” as well as those with conservation easements, donor-advised funds and/or endowments. Endowment reporting would be required for a five-year time period.
• Family and business relationships disclosure. The IRS proposal would require a tax-exempt organization to disclose in its Form 990 whether any officer, director, trustee or key employee has a family or business relationship with a person earning more than $100,000 from the exempt organization and its “related organizations”; has a business relationship with the exempt organization through ownership of more than 35 percent of another organization or through another organization owned by a family member; and/or serves as officer, director, trustee, key employee or shareholder of a professional corporation of an organization doing business with the exempt organization.
• Conflict-of-interest policy disclosure. The exempt organization would have to disclose whether it has a written conflict-of-interest policy and how many transactions the organization reviewed under the policy and related procedures during the year.
• Independent contractor compensation disclosure. The proposed form would require the disclosure of the total number of independent contractors receiving more than $100,000 of compensation from the organization as well as a list of the top five independent contractors that received more than $100,000 from the organization, including the specific compensation received and a description of the services performed.
• Lobbying andpolitical candidate campaign activities disclosure. Exempt organizations that participate in any kind oflobbying or political activity would have to disclose on a new Schedule C significant detail about the amount of funds expended on such activities conducted by the exempt organization, its political action committee, or a political organization to which the exempt organization contributes, the names and employer identification numbers of political organizations receiving funds for political or lobbying expenditures, and significant additional detail about the funding of political activities.
• Disclosure also required regarding whether organization has:
  • A written whistleblower policy
  • A written document retention and destruction policy
  • Contemporaneous documentation of meeting minutes
  • Written policies for activities of local chapters, branches or affiliates
  • An audit committee
  • Publicly available organizing documents, conflict of interest policy, Form 990, Form 990-T, financial statements and audit report

In public statements about the proposed form, the IRS has indicated that exempt organizations that fail to indicate that they have followed recommended governance policies will be at a significantly greater risk of audit. This is tremendously controversial since the IRS has no legal authority to require organizations to adopt its recommended “good governance” practices.

If you have questions about the newly proposed Form 990, recommended governance policies and/or practices, or would like an Arent Fox attorney to assist you in providing comments to the IRS on this proposal, please contact one of the practitioners listed below.

Deanne M. Ottaviano
202.775.5781
ottaviano.deanne@arentfox.com

Edward J. Rojas
212.457.5440
rojas.edward@arentfox.com

Richard A. Newman
202.857.6170
newman.richard@arentfox.com

Joseph A. Rieser
202.857.8964
rieser.joseph@arentfox.com

Marc L. Fleischaker
202.857.6053
fleischaker.marc@arentfox.com

Dennis H. Blumer
202.857.6068
blumer.dennis@arentfox.com

Linda A. Baumann
202.857.6239
baumann.linda@arentfox.com