1. 1 © 2010 Venable LLP. All Rights Reserved. FIN 48: What Every Nonprofit Needs to Know Jeffrey S. Tenenbaum, Esq. Matthew T. Journy, Esq. Association of Corporate Counsel Nonprofit Organizations Committee Legal Quick Hit January 12, 2010, 3:00-3:30 pm ET

2. 2 © 2010 Venable LLP. All Rights Reserved. FIN 48 What is it? When is it effective? Who does FIN 48 apply to? What does it apply to? How does it work? How will it affect my organization? What can we do to prepare?

3. 3 © 2010 Venable LLP. All Rights Reserved. What Is FIN 48? FIN 48: Accounting for uncertainty in income taxes –This is the Financial Accounting Standards Board’s (“FASB”) interpretation regarding the fair value measurement of financial liabilities related to income tax positions.

4. 4 © 2010 Venable LLP. All Rights Reserved. What Is FIN 48? FIN 48: Accounting for uncertainty in income taxes –The purpose is to require disclosure of uncertain income tax positions in the organization’s financial statements. –FIN 48 only requires disclosure in financial statements, however, Schedule D of the 2008 Form 990 requires a “verbatim” disclosure of FIN 48 footnotes.

5. 5 © 2010 Venable LLP. All Rights Reserved. When Is FIN 48 Effective? For tax periods beginning after December 15, 2008.

6. 6 © 2010 Venable LLP. All Rights Reserved. Who Does FIN 48 Apply to? Pass-through entities and nonprofit organizations: –Nonprofit organizations includes tax- exempt entities – both section 501(c)(3) and 501(c)(6) organizations, among others. –On July 8, 2009, FASB clarified that nonprofit entities includes organizations exempt from federal income tax.

7. 7 © 2010 Venable LLP. All Rights Reserved. What Does FIN 48 Apply to? Uncertain income tax positions –Income tax position Unrelated business income –Is an activity related? –Is a deduction from UBI permitted? Tax-exempt status

8. 8 © 2010 Venable LLP. All Rights Reserved. What Does FIN 48 Apply to? Uncertain income tax positions –Uncertain positions Any position that has less than a more-likely-than-not level of confidence. As such, FIN 48 does not require disclosure of any positions for which there is a greater than 50% likelihood upon examination, appeals or litigation, the position will be upheld.

9. 9 © 2010 Venable LLP. All Rights Reserved. How Does FIN 48 Work? Every tax position is analyzed according to a two-step process: 1)Is the position more-likely-than-not to be sustained upon examination, appeal or litigation?  If the position meets the more-likely- than-not standard, it does not need to be disclosed.  If the position does not meet the standard, the position must be disclosed. 2)Disclose the tax position and the nature of the liability.

10. 10 © 2010 Venable LLP. All Rights Reserved. How Does FIN 48 Work? The FIN 48 disclosure will include: 1)A description of the nature of the position (UBI, exempt status); 2)An estimate of the liability due to the uncertainty of the position (including total interest and penalties); 3)A description of events that may significantly increase or decrease the potential liability; and 4)A description of the tax years that remain subject to examination.

11. 11 © 2010 Venable LLP. All Rights Reserved. How Does FIN 48 Work? Essentially, tax-exempt organizations have two additional steps in the FIN 48 disclosure process: 1)Disclose the uncertain position in the Form 990, and 2)Wait for the IRS examination

12. 12 © 2010 Venable LLP. All Rights Reserved. How Will FIN 48 Affect My Organization? The real impact is the Form 990 disclosure. The instructions to Schedule D provide: An organization “must provide the text of the footnote to its financial statements, if applicable, regarding the organization’s liability for uncertain tax positions under FIN 48. This includes, for example, the description of the liability for unrelated business income tax, or tax that may be assessed as a result of the revocation of exempt status. Any portion of the FIN 48 footnote that addresses only the filing organization’s liability must be provided verbatim.”

13. 13 © 2010 Venable LLP. All Rights Reserved. How Will FIN 48 Affect My Organization? It is important to avoid positions requiring FIN 48 disclosures. Financial Statements – in our experience, accounting firms have been very conservative, generally refusing to acknowledge that a position is certain without an opinion letter. FIN 48 does not require an opinion from counsel, however, the practical reality is that many accounting firms seem to require this before signing financial statements without a disclosure.

14. 14 © 2010 Venable LLP. All Rights Reserved. How Should We Prepare? Evaluate your tax positions now. If there is a position that your organization has taken that does not clearly meet the more-likely-than-not standard, consider obtaining a tax opinion before your annual audit and be prepared to provide the opinion to your auditor during the audit process.

15. 15 © 2010 Venable LLP. All Rights Reserved. Questions? Jeffrey S. Tenenbaum 575 7 th Street NW Washington, DC 20004 (202) 344-8138 jstenenbaum@venable.com Matthew T. Journy 575 7 th Street NW Washington, DC 20004 (202) 344-4589 mjourny@venable.com