1 © 2008 Venable LLP The New Form 990: Defusing Governance, Political Activities, Compensation, and Other Issues JEFFREY S. TENENBAUM RONALD M. JACOBS AARON H. HILLER DECEMBER 4, 2008

2 © 2008 Venable LLP Schedule C –Political Activities –Lobbying Activities Part VI of the Core Form –Governance –Policies Political Issues and Governance The New Form 990

3 © 2008 Venable LLP Concept for the New 990 and Schedules 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 IRS Guiding Principles

4 © 2008 Venable LLP 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

5 © 2008 Venable LLP the road ahead for ABC CORPORATION Schedule C Political Activities and Lobbying

6 © 2008 Venable LLP Section I –Political Activities Expenses Volunteer Time Section II –Lobbying Activities for 501(c)(3) Organizations Section III –Lobbying Activities and Proxy Tax for Other 501(c) Organizations Three Areas of Disclosure Schedule C

7 © 2008 Venable LLP Political Campaign Activities –All activities that support or oppose candidates for elective federal, state or local public office. It does not matter whether the candidate is elected. A candidate is one who offers himself or is proposed by others for the public office. –Political campaign activity does not include any activity to encourage participation in the electoral process, such as voter registration or voter education, provided that the activity does not directly or indirectly support or oppose any candidate. Political Campaign Activities Section I

8 © 2008 Venable LLP Narrative description of direct and indirect political campaign activities Amount of political expenditures –Any expenditure for political campaign activities are political expenditures. An expenditure includes a payment, distribution, loan, advance, deposit, or gift of money, or anything of value. It also includes a contract, promise, or agreement to make an expenditure, whether or not legally enforceable. –Key Points: –501(c)(3) should not have political expenditures –Other organizations could trigger tax consequences Volunteer hours 501(c) and 527 Groups Section I-A

9 © 2008 Venable LLP Amount of any excise tax paid Amount of excise tax incurred Did the organization file Form (c)(3) Organizations Section I-B

10 © 2008 Venable LLP Amount of direct expenses for 527 exempt function –All functions that influence or attempt to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed Amount of internal funds contributed to other organizations for political activity –Not PAC contributions –Again, could have tax consequences Identification of all 527 organizations to which funds were given –Includes transfers to PAC (e.g., combined dues/contribution payment 501(c) (other than (c)(3)) Section I-C

11 © 2008 Venable LLP Lobbying in the tax code is not clearly defined Only test for excessive lobbying is if lobbying is “substantial part” of organization’s activities 501(h) provides clear definitions of lobbying, but sets caps 501(h) Election Versus No 501(h) Election Section II

12 © 2008 Venable LLP Fairly straightforward application of 501(h) Information –Grass roots lobbying expenditures –Direct lobbying expenditures –Total lobbying –Exempt purpose expenditures –Total of exempt purpose and lobbying –Tax amount 4-Year Average Amount reported on 1c would be used as basis for LDA number, if using Method B 501(c) (3) Making 501(h) Election Section II-A

13 © 2008 Venable LLP Series of questions designed to determine whether lobbying was “substantial” Same as old 990 No requirement to describe activities (was required on old 990) Yes/No questions and amounts expended Section asking to confess to engaging in “substantial” lobbying 501(c) (3) Not Making 501(h) Election Section II-B

14 © 2008 Venable LLP Applies to 501(c)(4), (5), and (6) organizations Amount spent on lobbying is either: –Not deductible by members –Subject to a proxy tax Section 162(e) – the nondeductibility/proxy tax section of the Code – provides Method C for the LDA Definition of lobbying in 162(e) is different than 501(h) definition Nondeductibility and the Proxy Tax Section III

15 © 2008 Venable LLP Lobbying includes: –Influencing legislation –Influencing actions of covered officials Methods of Calculation –Reasonable methods acceptable –Specific methods from IRS regulations 162(e) Lobbying Section III

16 © 2008 Venable LLP Same set of questions from old 990 Were substantially all dues received nondeductible by members –New form uses 90% –Old form did not have a percentage for “substantially all” Did the organization make only in-house lobbying expenditures of $2,000 or less Did the organization agree to carryover lobbying and political expenditures from the prior year 501(c) (4), (5), (6) Organizations – Screening Questions Section III-A

17 © 2008 Venable LLP Used if answered “Yes” to: –Did the organization agree to carryover lobbying and political expenditures from the prior year Or answered “No” to both: –Were substantially all dues received nondeductible by members –Did the organization make only in-house lobbying expenditures of $2,000 or less 501(c) (4), (5), (6) Organizations (in certain circumstances) Section III-B

18 © 2008 Venable LLP Report information about dues, lobbying, and nondeductibility – similar to old 990 questions: –Dues, assessments, and similar amounts –Section 162(e) non-deductible expenditures Lobbying and political But not political activity for which taxes were paid under section 527(f) –Carryover from prior year –Total –Aggregate amount reported as nondeductible on dues notices If required by III-A Section III-B

19 © 2008 Venable LLP Determine Excess: –If total exceeds amount from dues notices, how much will be carried forward to next year? –Amount not carried forward and subject to taxation Tax Calculations Section III-B

20 © 2008 Venable LLP the road ahead for ABC CORPORATION Part VI Governance, Management & Disclosure

21 © 2008 Venable LLP Departure from typical tax form questions. IRS rationale: an independent board of directors 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. Introduction to Part VI Rationale

22 © 2008 Venable LLP Number of independent voting members of the board of directors? (Line 1) Independence Defined: –Not compensated as an officer or employee by association or related organization (Schedule R); –Not compensated as independent contractor in excess of $10,000, except for reasonable compensation for services provided; and –Not involved, and no family member involved, in a financial transaction with the association (Schedule L). –Do not lose independence because of charitable donation or member benefits. –Required to put up reasonable effort to obtain information necessary to determine independence, and may rely on the responses provided. Questions About Board & Management Independent Board

23 © 2008 Venable LLP Family relationships and business relationships among officers, directors, trustees, and key employees? Again, reasonable effort. (Line 2) Delegation of key responsibilities to a management company? (Line 3) Significant changes to your organizational documents? (Line 4) Do members elect or appoint members of the governing body? (Line 7a & Schedule O) Do members approve decisions of the governing body? (Line 7b & Schedule O) Questions About Board & Management Other Questions

24 © 2008 Venable LLP Do you document decisions taken in board meetings? Committee meetings? (Line 8) Does the governing body have an opportunity to review the Form 990? What is the process for review? (Line 10) Use Schedule O A “yes” or “no” answer is rarely enough! Questions About Board & Management Other Questions (Continued)

25 © 2008 Venable LLP Do you have all of these policies in place? –Conflict of Interest Policy –Whistleblower Policy –Document Retention and Destruction Policy –Compensation Policy –Joint Venture Policy Written policies Enforcement of policies Questions About Policies Policies Needed

26 © 2008 Venable LLP Acceptable policy: –“defines conflicts of interest, identifies the classes of individuals within the organization covered by the policy, facilitates disclosure of information that may help identify conflicts of interest, and specifies procedures to be followed in managing conflicts of interest.” “A ‘conflict of interest’ arises when a person in a position of authority…may benefit financially from a decision he or she could make in such capacity.” Policies Conflict of Interest (Line 12)

27 © 2008 Venable LLP Conflict Defined: –“For this purpose, a conflict of interest does not include questions involving a person’s competing or respective duties to the organization and to another organization, such as by serving on the boards of both organizations, that do not involve a material financial interest of, or benefit to, such person.” Annual disclosure of potential conflicts? The bare minimum—of course “conflict of interest” means more! Policies Conflict of Interest (Continued)

28 © 2008 Venable LLP Ongoing monitoring and enforcement of the policy? Often worse to have the policy and not enforce it than to not have the policy at all! Policies Conflict of Interest (Continued)

29 © 2008 Venable LLP An acceptable policy “[e]ncourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization.” “Specifies that the organization will protect the individual from retaliation.” “Identifies those staff or board members or outside parties to whom such information can be reported.” Policies Whistleblower (Line 13)

30 © 2008 Venable LLP Sarbanes-Oxley: a federal crime to retaliate against whistleblowers who report to federal law enforcement authorities Broad enough to cover legal questions and association policy Policies Whistleblower (Continued)

31 © 2008 Venable LLP An acceptable policy specifies the “[r]ecord retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting storage and destruction of the organization’s documents and records.” Tailor specifically to your activities. Seek advice of counsel—requirements vary from jurisdiction to jurisdiction. Policies Document Retention (Line 14)

32 © 2008 Venable LLP 2008 Form 990 requires all tax-exempt entities (not just 501(c)(3)’s) to report five highest paid employees. Rebuttable presumption procedure from IRC 4958 and best practices: –Formal approval by board or compensation committee. –Comparability data. –Timely documentation of the decision. Policies Compensation (Line 15)

33 © 2008 Venable LLP Basic set of principals. Every joint venture should be governed by a written agreement, reviewed by counsel, and designed to protect your tax-exempt status. Policies Joint Venture (Line 16)

34 © 2008 Venable LLP Are the policies legally required? This point clarified on Form 990 itself. Presumption of wrongdoing, however, if not in place? Best practices, gather the information you need. Policies Other Issues

35 © 2008 Venable LLP 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

36 © 2008 Venable LLP Contact Information YOUR VENABLE TEAM Jeffrey S. Tenenbaum t f Ronald M. Jacobs t f Aaron H. Hiller t f

37 © 2008 Venable LLP the road ahead for ABC CORPORATION The New Form 990 Defusing Governance, Political Activities Compensation, and Other Issues