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The New IRS Form 990: What Does It Mean For Your Organization? George E. Constantine Thora A. Johnson Serena G. Simons Jeffrey S. Tenenbaum September 22, 2008 Association of Corporate Counsel

Page 3 Overview Introduction to the new Form 990, Jeffrey S. Tenenbaum The core Form 990, Thora A. Johnson Compensation reporting, Serena G. Simons Schedule highlights, George E. Constantine Next steps – Jeffrey S. Tenenbaum

Introduction to Redesigned Form 990 Jeffrey S. Tenenbaum Venable LLP The New IRS Form 990: What Does It Mean For Your Organization? September 22, 2008

Page 5 Background on Form 990 Redesign Reasons for redesign first redesign since 1979 more up-to-date reporting Purpose of Form 990 primary tax compliance tool for tax-exempt organizations IRS and State tax enforcement source of information for the public, media, researchers, and policymakers about the tax-exempt sector generally and individual organizations specifically

Page 6 IRS “guiding principles" Enhance transparency to provide the IRS and the public with a realistic picture of the organization, along with the basis for comparison to other organizations Promote compliance by accurately reflecting the organization’s operations so the IRS may efficiently assess the risk of noncompliance Minimize the burden on filing organizations

Page 7 Final form issued December 20, 2007 Draft instructions and glossary issued April 7, 2008, with comment period until June 1 Final instructions released on August 19 Implementation for 2008 required Phased-in Schedules H (Hospital) and K (Bonds) Timing of Redesigned Form

Page 8 Format of Redesigned Form Core form, including summary page 16 schedules with applicability based on organization’s specific indicators For complete set of Form 990 and final instructions, go to 0.html

The Core Form 990 Thora A. Johnson Venable LLP The New IRS Form 990: What Does it Mean for Your Organization? September 22, 2008

Page 10 Overview of the Core Form Summary page with signature block Statement of program services Checklist of required schedules Checklist of other IRS filings and tax compliance Governance, management, and disclosure questions Compensation reporting Financial reporting – revenue, expenses, balance sheet, and financial statements

Page 11 The Summary New to the Form 990 A snapshot of the organization Highlights most significant activities key financial, compensation, governance, and operational information Signature block

Page 12 Statement of Program Services Mission, program services, programmatic changes, and accomplishments in narrative format reformatted upfront so that organization can “tell story” early Must describe three largest programs if a Section 501(c)(3), must include: amount of grants to others total expenses revenue

Page 13 Checklist of Required Schedules J. Compensation Detail K. Bonds L. Transactions with Interested Persons M. Non-Cash Contributions N. Terminations and Major Dispositions O. Supplemental Information R. Related Organizations and Certain Joint Ventures A. Public Charity Status B. Schedule of Contributors C. Political and Lobbying D. Supplemental Financial E. Private School F. Foreign Activity G. Professional Fundraising and Gaming H. Hospitals I. Grants

Page 14 Other IRS Filings and Tax Compliance Alerts both filer and IRS to other potential federal tax compliance and filing obligations For example, UBIT and Form 990-T substantiation and disclosure requirements applicable to charitable contributions

Page 15 Governance, Management, and Disclosure Rationale: independent boards and well- defined governance and management policies increase likelihood of tax compliance, safeguarding of charitable assets, and serving of charitable interests Self-regulation and internal controls Transparency and accountability

Page 16 Questions Regarding Board and Management Independence of board members total number of voting board members number of voting board members that are independent relationships between officers, directors, and key employees

Page 17 More Questions Regarding Board and Management Any delegation to a management company Any material diversion of assets Minutes taken at board and board committee meetings

Page 18 and More Questions Regarding Board and Management Board receives a copy of Form 990 before filed What process to review Form 990

Page 19 Questions Regarding Policies A written conflict of interest policy officers, directors, and key employees required to disclose each year interests that could give rise to conflicts monitor and enforce its conflict of interest policy

Page 20 More Questions Regarding Policies Maintain a written whistleblower policy Maintain a written document retention and destruction policy Note – broader than SOX requirement

Page 21 More Questions Regarding Policies Follow the procedures for the rebuttable presumption Invest in a joint venture with taxable entity

Page 22 Questions About Disclosure Make its Form 1023 available Make its governing documents, policies, and financials available

Page 23 Legally Required? Not all policies legally required This point clarified on Form 990 itself Presumption of wrongdoing, however, if not in place?

Page 24 Remaining Sections of Core Form Compensation Revenue, expenses, and balance sheet Financial statement and reporting audits? audit committee?

Compensation Reporting on the Form 990 Serena G. Simons Venable LLP The New IRS Form 990: What Does It Mean for Your Organization? September 22, 2008

Page 26 Who gets how much, and who decides? Compensation information core form, Part VII Schedule J Process of setting compensation governance and policies core form, Part VI, Section B, item 15 Form 990 focus

Page 27 Setting Compensation General requirements knowledge in compensation matters no financial interest IRS safe harbor process independent body comparability data documentation of decision

Page 28 General Structure For Compensation Reporting Basic reporting on core form with more detail on Schedule J New thresholds for reporting on key employees, highest paid non-key employees, and formers and for more detailed reporting Same structure for all organizations

Page 29 Core Form Reporting - Who Current officers, directors, trustees, and key employees Current 5 highest paid non-key employees – reportable compensation over $100,000 Former officers, key employees – reportable compensation over $100,000 Former 5 highest paid (different test) Former directors or trustees – reportable compensation over $10,000

Page 30 Core Form Reporting – Who “Key employee” definition $150,000 test Employee had reportable compensation of more than $150,000 Responsibility test Employee had or shared organization-wide control or influence similar to an officer, director, or trustee or Employee managed or had authority or control over at least 10% of the organization’s activities Top 20 test Employee one of “top 20” highest paid

Page 31 Core Form Reporting - Who Former status applies only to individuals reported as current on any Form 990 from five previous years Also 5 highest paid independent contractors - over $100,000 of reportable compensation Includes organizations as well as individuals

Page 32 Core Form Reporting - What Reportable compensation from organization Reportable compensation from related organizations Other compensation from organization and related organizations

Page 33 Core Form Reporting – Reportable Compensation Definition For employee, compensation reported on Form W- 2, Box 5, i.e., Medicare wages (includes vested nonqualified deferred compensation and 401(k) and 403(b) deferrals) For non-employee, compensation reported on Form 1099-MISC Other taxable compensation For calendar year ending with or within organization’s fiscal year

Page 34 Core Form Reporting – “other” Compensation Includes nontaxable deferred compensation (qualified and nonqualified, vested and nonvested) and most nontaxable benefits Reporting exclusion for items under $10,000, but with various exceptions IRS requested comments on whether nonvested, nonqualified deferred compensation should be excepted

Page 35 Schedule J – Compensation Questions Fringe benefits (expanded from discussion draft) first-class or charter travel, companion travel, tax indemnifications and gross-ups, discretionary accounts, housing, payments for business use of personal residence, club dues, personal services Severance or change in control payments Supplemental nonqualified deferred compensation Equity-based compensation

Page 36 Schedule J – Compensation Questions for Charities Compensation based on revenues or net earnings Other non-fixed payments Payments under the initial contract exception

Page 37 Schedule J – Thresholds for “Chart” Reporting All “Current’s” listed in Form 990, Part VII, Section A – “total” compensation over $150,000 (reportable + other) All “Former’s” listed in Form 990, Part VII, Section A Any person listed in Form 990, Part VII, Section A (line 5) who receives compensation from “unrelated” organization for services to filing organization

Page 38 Schedule J – Chart Compensation Breakout Base compensation Bonus and incentive compensation Other reportable (W-2/1099) compensation Deferred compensation Nontaxable benefits Previously reported deferred compensation (intended to address double-reporting issue)

Schedule Highlights George E. Constantine Venable LLP The New IRS Form 990: What Does It Mean For Your Organization? September 22, 2008

Page 40 Overview of The Schedules 16 separate schedules Reflects IRS approach of segmenting out unique types of entities and issues (e.g., hospitals, fundraising, bonds) Checklist of required schedules (Part IV of core form)

Page 41 Checklist of Required Schedules J. Compensation Detail K. Bonds L. Transactions with Interested Persons M. Non-Cash Contributions N. Terminations and Major Dispositions O. Supplemental Information R. Related Organizations and Certain Joint Ventures A. Public Charity Status B. Schedule of Contributors C. Political and Lobbying D. Supplemental Financial E. Private School F. Foreign Activity G. Professional Fundraising and Gaming H. Hospitals I. Grants

Page 42 Schedule A Removes questions unrelated to public charity status — no more questions about school non-discrimination policies, lobbying activities, compensation of employees and contractors, related party and other “red flag” transactions Moves public support testing period from four to five years (including the current tax year) IRS doing away with advance rulings process

Page 43 Schedule A (cont’d) Change now allows accrual accounting organizations to use accrual method for calculating public support test (used to required use of cash method for Schedule A) Supporting organization questions included

Page 44 Schedule A Other changes: Form 990-EZ filers will be required to complete this Schedule A Space added to make the case under the 10% “facts and circumstances” test Membership dues section included in support schedules Separates 509(a)(1) and 509(a)(2) support tests

Page 45 Schedule B No changes – requires listing of all contributors who gave $5,000 or more for the year Note that new Schedule M captures information on non-cash contributions Generally not required to be disclosed publicly (except 990-PF and 527s that file Form 990 or 990EZ)

Page 46 Schedule C Specific form for disclosing lobbying and political activities Some new disclosure requirements compared to what used to be collected on the Form 990 and Schedule A description of direct and indirect political campaign activities estimate of volunteer hours spent on political activities

Page 47 Schedule D Supplemental financial statements Disclosures regarding donor advised funds, conservation easements, art collections, other investments, trust and escrow arrangements, endowment funds FIN 48 disclosure – uncertain tax positions under SFAS 109

Page 48 Schedule E Only to be completed by schools Same information as had been collected under Schedule A, Part V

Page 49 Schedule F Activities outside the U.S. Recent increased scrutiny on foreign activities Not limited to 501(c)(3)

Page 50 Schedule F (cont’d) Significant new disclosures required for entities engaging in non-U.S. activities: for aggregate revenue or expenses that exceed $10,000 disclosure of region, offices, employees, activities, expenditures

Page 51 Schedule F (cont’d) Requires grantmakers to describe procedures for monitoring use of grant funds name of recipient organization EIN, IRS code section region purpose of grant amount of grant, manner of disbursement amount, description of non-cash assistance method of valuation

Page 52 Schedule G Fundraising or gaming activities Significant new disclosures required, particularly for fundraising activities Service reports “continuing noncompliance” in these areas Fundraising questions – designed to facilitate “quick look” reviews by state attorneys general, charity officials

Page 53 Schedule G (cont’d) Describe relationships with fundraisers List states in which the organization is registered to solicit List fundraising events List gaming activities

Page 54 Schedule H Hospitals – controversial new schedule “Hospital” – defined by state licensure For 2008, only Part V (Facility Information) required For 2009, entire schedule must be completed

Page 55 Schedule H (cont’d) Significant inquiry regarding charity care and community benefit Charity care policy? If yes, in writing? not bad debt expenses not the difference between cost of care provided under Medicaid/Medicare and revenue derived therefrom worksheets provide the methodology for calculating cost reporting Annual written report on charity care? If yes, available to public?

Page 56 Schedule H (cont’d) Description of community building activities and how these activities provide community benefit and promote health How much bad debt, if any, is attributable to persons who qualify for financial assistance under charity care policy? Disclosure of management companies and joint ventures

Page 57 Schedule I Grants and other assistance to organizations, governments, and individuals in the U.S. Very similar questions regarding grant recipients as asked in Schedule F $5,000 threshold

Page 58 Schedule J Compensation Information (covered already)

Page 59 Schedule K Supplemental information on tax-exempt bonds Significant new information being requested – IRS “is aware of significant non-compliance with recordkeeping and record retention requirements” for tax-exempt bonds Only Part I required for 2008; Parts II-IV required for 2009 Davis Sherman will discuss in next session

Page 60 Schedule L Transactions with interested persons One-pager listing of excess benefit transactions (c)(3) and (c)(4); loans to and from interested persons; grants or assistance benefitting interested persons; business transactions involving interested persons. “Reasonable efforts” provisions in instructions

Page 61 Schedule M Non-cash contributions IRS reports “significant tax compliance problems exist” with non-cash contributions Donations of art, books, clothing, cars, boats, intellectual property, securities, qualified conservation easements, real estate, collectibles, food inventory, drugs and medical supplies, taxidermy, historical artifacts, scientific specimens, archeological artifacts

Page 62 Schedule M (cont’d) $25,000 threshold Question regarding “gift acceptance policy” Question regarding use of third parties to solicit, etc.

Page 63 Schedule N Liquidation, termination, dissolution or significant disposition of assets focus on significant transactions – liquidation, termination, dissolution, sale, exchange, disposition or other transfer of more than 25 percent not just (c)(3)s seeking information that might suggest private inurement

Page 64 Schedule O Supplemental information to Form 990 Additional space for filers to submit narrative responses Designed to assist with simplifying the e-filing process

Page 65 Schedule R Related organizations and unrelated partnerships Expanded questions regarding the identification of: disregarded entities related tax-exempt organizations related organizations taxable as a partnership related organizations taxable as a corporation or trust

Page 66 Schedule R (cont’d) Questions regarding transactions with related organizations Significant information regarding transactions that are often commonplace among related entities Part V, Line 2 limited to entities that would be described in 512(b)(13)

next steps Jeffrey S. Tenenbaum Venable LLP The New IRS Form 990: What Does It Mean For Your Organization? September 22, 2008

Page 68 Next Steps Dry run of new Form 990 Perform gap analysis regarding policies Establish compensation approval procedures Determine if new bookkeeping required Select Form 990 team

Page 69 Questions George E. Constantine th Street NW Washington, DC (202) Thora A. Johnson 750 E. Pratt Street Suite 900 Baltimore, MD (410) Serena G. Simons th Street NW Washington, DC (202) Jeffrey S. Tenenbaum th Street NW Washington, DC (202)

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