Post on 24-Dec-2015
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The New Form 990:Defusing Governance, Political Activities,
Compensation, and Other IssuesJEFFREY S. TENENBAUM
RONALD M. JACOBS
AARON H. HILLER
DECEMBER 4, 2008
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Schedule C
– Political Activities
– Lobbying Activities
Part VI of the Core Form
– Governance
– Policies
Political Issues and Governance
The New Form 990
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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
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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
www.irs.gov/charities/article/0,,id=185561,00.html
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the road ahead for ABC CORPORATION Schedule C
Political Activities and Lobbying
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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
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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
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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
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Amount of any excise tax paid
Amount of excise tax incurred
Did the organization file Form 4720
501(c)(3) Organizations
Section I-B
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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the road ahead for ABC CORPORATION
Part VI Governance, Management & Disclosure
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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 VIRationale
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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 & ManagementIndependent Board
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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 & ManagementOther Questions
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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 & ManagementOther Questions (Continued)
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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 PoliciesPolicies Needed
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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.”
PoliciesConflict of Interest (Line 12)
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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!
PoliciesConflict of Interest (Continued)
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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!
PoliciesConflict of Interest (Continued)
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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.”
PoliciesWhistleblower (Line 13)
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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
PoliciesWhistleblower (Continued)
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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.
PoliciesDocument Retention (Line 14)
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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.
PoliciesCompensation (Line 15)
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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.
PoliciesJoint Venture (Line 16)
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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.
PoliciesOther Issues
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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
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Contact InformationYOUR VENABLE TEAM
Jeffrey S. Tenenbaumjstenenbaum@venable.comt 202.344.8138f 202.344.8300
Ronald M. Jacobsrmjacobs@venable.comt 202.344.8215f 202.344.8300
Aaron H. Hillerahhiller@venable.comt 202.344.8289f 202.344.8300
www.Venable.com