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For public charities and other tax exempt organizations that file a Form 990 (Return of Organization Exempt From Income Tax) each year, the newest version of the form – effective for tax years beginning in 2008 -- is already prompting discussion and preparation at all levels of the organizations’ leadership. One reason for this degree of attention is that the Internal Revenue Service has advised that certain questions on the new Form 990 devoted to an organization’s governance, management and disclosure may be answered in the affirmative only if the polices are adopted by the board of directors before the close of the 2008 tax year. Right now, this is especially critical for those organizations operating on a calendar-year basis (i.e., with tax years beginning on January 1), because they are facing the close of their 2008 tax year in less than two months.

The new Form 990 and its instructions are the result of a major effort on the part of the Service, which culminated with the release of a set of final instructions on August 19. What follows is a summary of the changes brought by these final instructions. This summary is meant as an update to our advisory “Is Your Charity Ready for the New Form 990?” published in June. To access that advisory, please click here.

Governance, Management and Disclosure

The new Form 990 requires an organization to go beyond its own records and seek out information from others. For example, an organization must disclose how many of its voting members are “independent” and, for that purpose, must be aware of transactions between the organization, its related organizations, its members and their families. Similarly, an organization must disclose certain “family” and “business relationships” among its officers, directors, trustees and key employees. The final instructions clarify that the organization need not engage in more than a reasonable effort to obtain the necessary information and may rely on details provided by its members, officers, directors, trustees and key employees, such as in response to an annual questionnaire that meets certain criteria. The final instructions also recognize that certain “business relationships” between officers, directors, trustees and key employees are privileged, such as those between attorney and client, medical professional and patient, and priest and penitent. Lastly, the final instructions modify one of the criteria in the draft instructions for determining a voting member’s independence by looking to whether a board member was involved in any transaction that was reportable on Schedule L, rather than by determining whether a board member received a material financial benefit.

Compensation and Transactions with Interested Persons

The new Form 990 places great emphasis on the reporting of compensation of current and former officers, directors, trustees, key employees and certain highly compensated employees whose compensation from the organization and related organizations exceeds certain thresholds. The final instructions clarify the scope of some of the definitional requirements, including the critical concept of “key employee.” The final instructions also provide a reasonable-efforts standard for an organization assembling information on compensation paid to officers, directors, trustees, key employees and highly compensated employees by related organizations. Finally, the final instructions clarify reporting requirements for perks and benefits, such as first-class or charter travel.

Certain business transactions with interested persons, such as loans, grants, assistance and other business dealings, must now be reported on Schedule L. The final instructions generally increase the reporting threshold for these transactions.  In addition, the final instructions clarify when grants or other assistance provided to interested persons in furtherance of the organization’s exempt purpose are excepted from reporting on Schedule L.

Other Highlights of the Final Instructions

The final instructions differ from the draft instructions in several other respects. The highlights are that the final instructions:

• clarify, for purposes of Schedule H, the definitions of “hospital” and “facility;”
• narrow the category of post-2002 tax-exempt bonds for which the organization must answer questions on Schedule K (beginning in 2009, organizations that issue tax-exempt bonds must complete Schedule K for bonds issued after December 31, 2002);
• specify which countries are included within the geographical regions used on Schedule F for reporting an organization’s foreign activities;
• expand the reporting in Schedule O (which already provided an organization with the opportunity to expand upon some of its answers to Form 990 questions) to require an organization to include items such as material differences in voting rights for members of the governing body, an explanation for filing a late return, and a description of the reasonable efforts engaged in by the organization to determine whether its key individuals have family or business relationships; and
• clarify that, in response to the new question asking whether the organization’s board reviewed the Form 990 before it was filed, an organization may answer “yes” if it emails a copy of the final document to each board member prior to filing it.

This summary was prepared by the members of Nutter Charitable Advisors. For more information on the many requirements of the new Form 990, or on charitable giving or non-profit organizations in general, please contact your attorney at Nutter at 617-439-2000.

Circular 230 Disclosure:  To ensure compliance with IRS Circular 230, we inform you that any federal tax advice included in this communication is not intended or written to be used, and it cannot be used, for the purpose of (i) avoiding the imposition of federal tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.