Revised form 990 a line by line preparation guide

Revised Form 990 Revised Form 990 A Line-by-Line Preparation Guide Jody Blazek Amanda Adams John Wiley & Sons, Inc This book is printed on acid-free paper  Copyright # 2009 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978–750–8400, fax 978– 646–8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River 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within the United States at 800–762–2974, outside the United States at 317– 572–3993 or fax 317–572–4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at http://www.wiley.com Library of Congress Cataloging-in-Publication Data: Blazek, Jody Revised Form 990: a line-by-line preparation guide/Jody Blazek, Amanda Adams p cm Includes bibliographical references and index ISBN 978-0-470-44647-8 (paper/website) Nonprofit organizations—Taxation—Law and legislation—United States—Forms Tax exemption—Law and legislation—United States—Forms Tax returns—United States I Adams, Amanda II Title KF6449.B567 2009 2008052083 343-7305 26—dc22 Printed in the United States of America 10 Contents Preface ix Acknowledgments xiii About the Authors xv Chapter One: Redesigned Form 990 § 1.1 History of Redesign Project § 1.2 Highlights of Revised Form 990 § 1.3 Filing of New Form Delayed for Many § 1.4 Find Out Why Organization Qualifies for Tax Exemption § 1.5 Who Is Required to File What 11 § 1.6 Filing for New Organizations 12 § 1.7 Who Is Not Required to File 12 § 1.8 Filing Deadline and Fiscal Year 13 § 1.9 New Form 990-N (e-Postcard) 13 § 1.10 Electronic Filing of Returns 14 § 1.11 Group Returns and Annual Affidavit 15 § 1.12 Public Inspection of Forms 990 and 1023/1024 16 Notes 17 Appendix 1A: 6/14/07 Draft of Core Form 19 Appendix 1B: BV Suggested Revisions 29 Appendix 1C: Form 990-EZ 30 Chapter Two: Good Accounting Makes a Good 990 § 2.1 Tax Accounting Methods 37 § 2.2 Professional Accounting Standards 38 § 2.3 Chart of Differences Between GAAP and IRS Rules Notes 45 10 35 42 Chapter Three: The Core § 3.1 2008 Form 990 Core 47 § 3.2 Part I Summary 48 § 3.3 Part II Signature Block 50 § 3.4 Part III Statement of Program Service Accomplishments 50 § 3.5 Part IV Checklist of Required Schedules 53 § 3.6 Part V Statements Regarding Other IRS Filings and Tax Compliance § 3.7 Part VI Governance, Management, and Disclosure 64 § 3.8 Part VII Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors 73 § 3.9 Part VIII Statement of Revenue 81 § 3.10 Part IX Statement of Functional Expenses 88 n v n 47 56 CONTENTS § 3.11 Part X Balance Sheet 95 § 3.12 Part XI Financial Statements and Reporting 97 Notes 97 Appendix 3A: Transactions with Interested Parties Questionaire 100 Chapter Four: Form 990, Schedules A through R § 4.1 Schedule A 103 § 4.2 Schedule B 120 § 4.3 Schedule C 125 § 4.4 Schedule D 132 § 4.5 Schedule E 146 § 4.6 Schedule F 149 § 4.7 Schedule G 155 § 4.8 Schedule H 160 § 4.9 Schedule I 165 § 4.10 Schedule J 170 § 4.11 Schedule K 173 § 4.12 Schedule L 174 § 4.13 Schedule M 182 § 4.14 Schedule N 188 § 4.15 Schedule O 192 § 4.16 Schedule R 195 Notes 200 Appendix 4A: State Unified Registration Statement 204 Appendix 4B: Interested Party by Part and Type 223 Chapter Five: Form 990-T: Exempt Organization Business Income Tax Return § 5.1 What Is Unrelated Business Income? 226 § 5.2 Exceptions and Modifications from Tax 228 § 5.3 Unrelated Debt-Financed Income 231 § 5.4 Who Files Form 990-T? 233 § 5.5 Due Dates, Tax Rates, and Other Filing Issues 234 § 5.6 Normal Income Tax Rules Apply 236 § 5.7 The Unique Design of the 990-T 238 § 5.8 Categories of Deductions 243 § 5.9 Cost Allocations 246 § 5.10 In-Kind Donations 248 Notes 248 Appendix 5A: Analysis of Corporation versus Trust 990-T Issues Chapter Six: The Private Foundation Return § 6.1 Successful Completion of Form 990-PF 253 § 6.2 The Part I Columns 255 § 6.3 Line-by-Line Instructions for Revenues 257 § 6.4 Line-by-Line Instructions for Expenditures 261 § 6.5 Part II: Balance Sheets 265 § 6.6 Part III: Analysis of Changes in Net Worth or Fund Balances n vi n 103 225 252 253 266 CONTENTS § § § § § § § 6.7 6.8 6.9 6.10 6.11 6.12 6.13 Part IV: Capital Gains and Losses for Tax on Investment Income 267 Reports Unique to Private Foundations 268 Part V: Reducing the Tax Rate 268 Part VI: Calculating the Excise Tax 269 Part VII-A: Proof of Ongoing Qualification for Exemption 270 Part VII-B: Questions Seeking Evidence That No Sanctions Apply 275 Part VIII: Information About Officers, Directors, Trustees, Foundation Managers, Highly Paid Employees, and Contractors 276 § 6.14 Part IX-A and B: Summary of Direct Charitable Activities and Program-Related Investments 278 § 6.15 Part X: Minimum Investment Return 279 § 6.16 Part XI: Distributable Amount 279 § 6.17 Part XII: Qualifying Distributions 280 § 6.18 Part XIII: Undistributed Income 280 § 6.19 Part XIV: Private Operating Foundations 282 § 6.20 Part XV: Supplementary Information (Lines 1–2) 282 § 6.21 Part XV: Grants and Contributions Paid During the Year or Approved for Future Payment (Line 3) 283 § 6.22 Part XVI-A: Analysis of Income-Producing Activity 285 § 6.23 Part XVII: Information Regarding Transfers to and Transactions and Relationships with Noncharitable Exempt Organizations 286 Notes 287 Index 289 n vii n Preface Forms 990 have traditionally provided a wealth of financial and programmatic information to enable government regulators, funders, journalists, and anybody else who is interested to measure a nonprofit’s performance Since 1987, the form must be provided to anyone who is willing to pay a modest fee for a copy of it Charities, and an increasing number of non-(c)(3) organizations, have their returns posted on the Internet courtesy of Guidestar.org for the public to view The forms are the most widely used tools for evaluating tax-exempt organizations Schools, health and welfare organizations, business leagues, civic associations, museums, farmers’ cooperatives, parent groups, garden clubs, private foundations, and the many other nonprofit organizations recognized under §501(c) of the Internal Revenue Code must file this form annually Information on the return is the basis for IRS scrutiny in meeting its responsibility to allow continued exemption from income tax Careful preparation of the form is therefore very important This guide contains the three major forms filed by taxexempt organizations: (1) Form 990 for §501(c) organizations that are not private foundations, (2) Form 990-T used by all to report taxable unrelated business income; and (3) Form 990-PF, filed by private foundations After 30 years of modest annual revisions, the IRS in June 2007 released a draft of an amazing and complex revision of the Form 990 for 2008 Thankfully, they invited input from the exempt sector, giving us a September 2007 deadline for comments Hundreds of e-mails were posted on the IRS Web site throughout an incredible summer as professionals in firms like ours exchanged ideas and expressed suggestions for revisions Again in April 2008 when the companion instructions were released, the ABA, AICPA, Independent Sector and many others weighed in Many of the issues reviewers brought up concerning the form and instructions, were instituted by the IRS as improvements in its product The final outcome is presented in this book The revised Form 990 reflects the IRS’s intention to enhance the transparency of a tax-exempt organization’s financial affairs and governance practices and procedures The most controversial part of the new Core Form is Part VI, entitled ‘‘Governance, Management, and Disclosures.’’ Readers will note the top of this part says that some sections ‘‘request information about policies not required by the Internal Revenue Code.’’ Steven T Miller, Commissioner, Tax Exempt and Government Entities, said in November 2005 that ‘‘we have seen the migration of the governance problems that surfaced a few years ago in the corporate world Weak governance and the resulting problems appear in the sector, evidencing themselves in such things as excess compensation and poor Form 990 reporting.’’ The evolution of the IRS’s focus on governance can be found on its Web site at www.irs.gov/charities at Speeches on Governance The fact that the questions on governance in Part VI are answered according to practices in place as of the last day of the filing organization’s fiscal year will be troubling for those who were unaware of the questions before year-end IRS representatives have said that negative answers on this part will not necessarily result in n ix n PREFACE examinations in the near future However, those now required to file the return electronically because they file more than 250 W-2 and 1099-type returns otherwise should be careful The IRS has already engaged programmers to design electronic auditing techniques There is an Exempt Organizations Compliance Unit (EOCU) in Ogden, Utah, where physical returns are sent to use sampling techniques to identify issues to question The second most troublesome aspect of the revised return is the extraordinary increase in information requested throughout the schedules Schedule M is a good example Not only must 24 different types of noncash contributions received be quantified and described, but the method of valuation, the acceptance policy for such gifts, who sells such donated items, and the practice of making proper donor disclosures for such gifts are required Similarly, the return previously made no distinction between domestic activities and those conducted outside the United States A brief look at new Schedule F reveals the extensive details now to be submitted for off-shore activities, as distinguished from Schedule I, where grants paid to organizations, governments, and individuals located in the United States are reported Maybe the most important thought to convey is that the revised return will in most cases require more time and effort to adequately gather information for its completion despite Director of Exempt Organizations Lois Lerner’s hope that the revision would minimize the burden on the filing organizations For many, the work will fall on not only the accounting or finance department, but also the personnel and development departments and certain executive officials and board members As the return data is prepared, the process should be evaluated to gather ideas to ease the burden Questions like ‘‘Should the accounting system be improved to allow adequate tracking of details for costs and revenues?,’’ ‘‘Should we identify a team of personnel to gather 990 data for 2009?,’’ or ‘‘How can documentation systems be improved?’’ should be asked Fortunately a transition period has been provided that will result in many former 990 filers being allowed to submit Form 990-EZ for 2008 and 2009, as shown on the chart in Chapter 1(§1.3) What’s good about the new return is the front page that presents an organizational snapshot with a brief description of mission, a bit of governance data, and a comparison of revenues and expenses for the current and past years Second best may be the ‘‘reasonable effort’’ rule An organization is only expected to its best to send questionnaires to its board and staff members to obtain answers regarding relationships for Core Parts VI and Schedule L Part IV may be difficult for some as they navigate a long list of questions prompting attachment of one of the 16 new schedules based on an array of varying financial thresholds Some of the questions don’t mention the issue One wishes the IRS had settled on $10,000 rather than the range of $5,000 to $25,000 that currently exists for the reporting thresholds What is a very helpful list of other tax filing requirements is displayed in Part V Part VII for reporting compensation for officials has a good display by positions, a much clearer definition of key employees who must be reported, and a higher threshold for reporting Only experienced 990 preparers, and the National Football League representatives who complained, will realize that this part now combines reporting of the compensation of those officials previously reported by §501(c)(3) charities on n x n PREFACE now-defunct Schedule A and non-(c)(3) personnel previously not reported unless they were an officer or a director Part VIII, ‘‘Statement of Revenue,’’ combines the part that in the past identified revenue according to its character as related to exempt purposes, unrelated to exempt purposes and thereby reportable on Form 990-T, and unrelated revenue that is not taxed due to volunteer conduct, donated goods, irregularity, and other exceptions Part IX, ‘‘Statement of Functional Expenses,’’ expands categories of fees for services, adding lines for lobbying, investment management fees, advertising and promotion, information technology, payments to affiliates, and royalties The relatively minor expense accounts previously listed have been combined to report ‘‘office expenses,’’ including supplies, telephone, postage and shipping, and printing and publications Part X presents the balance sheet in much the same fashion Organizations with donor-advised funds, conservation easements, collections, endowments, and other types of assets must submit enhanced detailed, information in Schedule D The biggest impact of the new form may come to those §501(c)(3) organizations classified as public charities because the revenue to support their activities comes from many donors or participants in exempt function activities The test for calculation of qualification now includes five rather than four years and can be prepared on either the cash or accrual basis, whichever method is normally followed for the organization’s financial and 990 reporting purposes Prior year calculations may need to be restated A regulation change was required to implement the changes Organizations with a support ratio below the 3313% floor for the prior year are instructed to file Form 990-PF if the calculation for the current year is also below 3313% Careful attention to support levels is critical for filers who must meet the test As readers go through the book, they will find schedules with significantly enhanced information for lobbying and electioneering activity (Schedule C) and fundraising and gaming (Schedule G) Again, thankfully, full completion of the amazingly detailed Schedule H for hospitals and Schedule K for tax exempt bonds has been delayed until 2009 Last, the form now contains a schedule that is virtually blank entitled Schedule O that undoubtedly will become the most viewed schedule of the form Chapter 4, §15 lists the 45 different times the form and schedules require a comment in Schedule O either because the organization has to say ‘‘No’’ it has no policy for that issue or instead to explain its existing policies Even though they are classified as tax-exempt organizations, some nonprofits receive income through an activity that does not advance the mission and are therefore subject to the normal income tax Chapter considers the preparation of Form 990-T, which reports such unrelated income, and presents ideas for maximizing deductions and minimizing the resulting tax liability Issues that are key to maintaining exempt status are highlighted in this guide to alert readers to questions that deserve close attention Specifically, the types of transactions that can endanger a nonprofit’s tax-exempt status and/or result in an unexpected tax liability are explained Footnotes provide references to the tax code and to the fourth edition of Blazek’s Tax Planning and Compliance for Tax-Exempt Organizations, where extensive discussions of the criteria for obtaining and maintaining n xi n PREFACE tax-exempt status can be found In addition to using this book, return preparers might also find that the new ‘‘plain language’’ publications and training videos available on the IRS web site help explain the rules applicable to tax-exempt nonprofits We hope this line-by-line preparation guide will be a useful tool that enhances the quality of public reporting required for nonprofit organizations on Forms 990 Jody Blazek Amanda Adams Houston, Texas January 22, 2009 n xii n THE PRIVATE FOUNDATION RETURN § 6.19 PART XIV: PRIVATE OPERATING FOUNDATIONS Private operating foundations submit information to calculate their ongoing qualification based on four years of their qualifying distributions, income, and assets The terms and rules applicable to this special type of foundation are somewhat complex and should be carefully studied before this part is completed.38 § 6.20 PART XV: SUPPLEMENTARY INFORMATION (LINES 1–2) n 282 n § 6.21 PART XV: GRANTS AND CONTRIBUTIONS PAID Lines and of this part are completed for foundations with assets of $5,000 or more, except those foreign foundations whose U.S source income is entirely investment income The name of any foundation manager who has donated more than $5,000 (or 2% of the total contributions received by the foundation) to the foundation is listed Those foundation managers who own 10 percent or more of the stock of a corporation in which the foundation also has a 10 percent or greater interest are also listed in this part The foundation reveals the following information regarding its grant programs: to whom a request is addressed, the form (if any) in which applications should be submitted, what should be attached, the deadlines, and any restrictions and limitations on awards, such as geographic area, subject, kinds of institutions, and so on Grant seekers use the information submitted in this part to select the PFs to whom they will make applications for funding Many PFs now post an application form on their website Because the return is also on the Internet at Guidestar.org, this part should be very carefully prepared The Foundation Center and other organizations publish books and electronic media that also contain this information Most often, persons seeking to understand a PF’s mission and type of funding it awards look at this and the following part to find out what kind of grants a PF makes Foundations that make grants only to preselected charities and not accept unsolicited requests for funds can check the box on line Because the paper load for some foundations is immense, there is a temptation in some cases to check the box although it does not necessarily apply There are ongoing philosophical discussions about the pros and cons of the box: Should a private foundation with unrestricted funds close the door to grant applicants by checking the box? § 6.21 PART XV: GRANTS AND CONTRIBUTIONS PAID DURING THE YEAR OR APPROVED FOR FUTURE PAYMENT (LINE 3) (Continued) n 283 n THE PRIVATE FOUNDATION RETURN This part lists both grants paid during the year and those approved for future payment The total under 3a should agree with the amount reported on line 25, column (d) The line 3b total of future grant commitments is provided for public inspection purposes only, and does not necessarily carry to any other part of the form A foundation following GAAP would reflect a liability on the balance sheet in Part II, line 18, for grants payable with which the number should agree Note that this amount for SFAS No 116 financial purposes will be equal to the discounted present value of the pledges, not necessarily the gross face amount of the pledge The presentation of this information is extremely important for several reasons Grant information is contained in the widely circulated local, state, and national directories published for grant seekers, in books and electronic media, and now on the Internet The foundation has an opportunity to paint a picture of its mission and reflect the scope and depth of its grant making Organizing the grant payments to arrive at subtotals that reflect the nature of programs the foundation funds, such as feeding the poor, crime prevention, education, culture, and so on, can result in the receipt of improved grant applications At the same time, it satisfies the IRS request that the purpose of the grant be described in the second-from-the-left column From a tax standpoint, the middle column in this part is very important and informs the IRS of the ‘‘foundation status of the recipient.’’ What this means is the grantee’s classification as a public or private charity under IRC §509, as described for Schedule A in Chapter If the grantee is a public charity (other than a nonfunctionally integrated Type III supporting organization [NFIIIISO]), no other information is reported in Form 990-PF concerning the grant If, instead, the grantee is another n 284 n § 6.22 PART XVI-A: ANALYSIS OF INCOME-PRODUCING ACTIVITY private foundation or NFIIIISO, Question 5a(4) in Part VII-B will be answered ‘‘Yes.’’ Additionally, the foundation must exercise ‘‘expenditure responsibility,’’ answer Question 5a(c) ‘‘Yes,’’ and attach a detailed report to the return The relationship, if any, between individual grant recipients and any foundation manager or substantial contributor is also revealed Any answer other than ‘‘None’’ raises several issues The first question is whether self-dealing might have occurred because a payment was made to a disqualified person Additionally, payment to related individuals might indicate that the foundation’s scholarship payments are not made on the required ‘‘objective and nondiscriminatory basis.’’ Finally, a grant to a controlled organization or a private foundation may not be a qualifying distribution § 6.22 PART XVI-A: ANALYSIS OF INCOME-PRODUCING ACTIVITY (Continued) n 285 n THE PRIVATE FOUNDATION RETURN Part XVI-B–Relationship of Activities (Continued) At the behest of Congress, Part XVI-A was added to Form 990-PF in 1989, as an audit trail to find unrelated business income Unrelated income is reported alongside related income in Part I, and this part is designed to fragment the two different types and alert the IRS when Form 990-T should be filed to report and identify The IRS instructions contain a helpful chart comparing the lines of Part I to the lines for entry on this part This part was moved to the Statement of Revenue, Core Part IX for 2008 Discussion of the concepts is found in Chapter § 6.23 PART XVII: INFORMATION REGARDING TRANSFERS TO AND TRANSACTIONS AND RELATIONSHIPS WITH NONCHARITABLE EXEMPT ORGANIZATIONS (Continued) n 286 n NOTES This part was designed for Form 990, does not apply to many private foundations, and was added in 1988, in response to a congressional mandate that the IRS search for connections between private foundations and non–501(c)(3) organizations The IRS is scouting for relationships that allow benefits, or the use of a foundation’s assets, to flow from the foundation to a noncharitable exempt organization Instructions for completion of new Schedule L of Form 990 describe relationships that should be disclosed and can be found in Chapter 4.12 NOTES The technical aspects of the sanctions applied to PFs, found in IRC §4940–4946, are far reaching Tax Planning and Compliance contains 135 pages presented in Chapters 12 through 17, on the complex rules that can be studied along with the following suggestions for completion of the form For further study consult Private Foundations: Tax Law and Compliance, 3rd edition, Hopkins and Blazek (Hoboken, N.J.: John Wiley & Sons, 2008) See J Blazek, Tax Planning and Compliance (Hoboken, N.J.: John Wiley, 2008), Ch 14 of Tax for 31 pages of discussion of these rules See Blazek, Tax Planning and Compliance, Ch 17, for 45 pages of discussion of these rules See Blazek, Tax Planning and Compliance, Ch 16, for 10 pages of discussion of these rules See Blazek, Tax Planning and Compliance, Ch 16, for pages of discussion of these rules The instructions for the 1990 form contained 22 pages—proof that this form is not getting simpler IRC §4940(c)(4)(D) See Chapter 4.2, the same form is used for Form 990 filers See Blazek, Tax Planning and Compliance, Ch 14, for 24 pages of discussion of these rules 10 IRC §4940(c)(4), as revised by the Pension Protection Act of 2006 and §3(f) of the Tax Technical Corrections Act of 2007, P.L 110–172, 12/29/2007 11 §4940(c)(4)(C); before revision, the regulations, but not the tax code disallowed carrybacks 12 A similar rule operates for nonexempt charitable trusts described in IRC §4947 (§3.6); Rev Rul 74–497, 1974–2 C.B 383 13 Rev Rul 73–320, 1973–2 C.B 385 14 Reg §53.4940–1(f)(1); see Private Foundations: Tax Law and Compliance, Chapter 10, sec 2(b) 15 Reg §53.4940–1(d)(3); Priv Ltr Rul 8214023 n 287 n THE PRIVATE FOUNDATION RETURN 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 IRC §368 or other provision of IRC Subchapter C E.g., Priv Ltr Rul 8730061 Tech Adv Mem 9724005 Reg §1.4940–1 IRC §§162 and 212 Discussed in Chapter 5.3 Unless the recipient private foundation has agreed to redistribute the funds in accordance with §4942(g)(3) Discussed in Chapter 2.2 Gen Coun Memo 39808 IRC §§1011, 1012, 1014, 1015, and 1016 apply in completing this part IRC §4940(c)(3)(B) Reg §53.4940–1(f)(2)(i)(B), which refers to IRC §1015 Reg §53.4940–1(f)(3) Returns are displayed on Guidestar.org See Blazek, Tax Planning and Compliance, Ch 13 for illustrations of this important tax savings opportunity IRC §6655 Discussed in Chapter 4.3 Process and propriety of seeking approval discussed in Chapter 3.4 IRC §513 Chapter defines unrelated income and the many exceptions to taxation for certain types of unrelated income, including indebted investment properties IRC §507(a) Chapter 13 of Blazek, Private Foundations explains the circumstances under which a private foundation can go out of existence either by converting itself to a public charity or distributing its assets to other charitable organizations Model forms and instructions on this complicated matter are provided Reg §1.507–3 IRC §6050V(d)(2)(B) See Blazek, Tax Planning and Compliance, Ch 15.2 The order in which qualifying distributions are applied is illustrated in Blazek, Tax Planning and Compliance, Ch.15.6 See Blazek, Tax Planning and Compliance, Ch.15.5 n 288 n Revised form 990: A Line-by-Line Preparation Guide by Jody Blazek and Amanda Adams Copyright © 2009 John Wiley & Sons, Inc Index ABA (American Bar Association), Accounting: defined, 35 documentation needed, 36–37 generally accepted accounting principles (GAAP), 38, 42–45 importance of, 35–37 methods of, 37–38, 45n10, 103, 107, 200n2, 236, 256 professional standards, 38–42 Acquisition indebtedness, 231, 232–233 Activities outside United States, x, 8, 149–155 Adjusted net income, 256 Advertising and promotion, 93 Advertising revenue, 245–246 Affidavit, annual, 15–16 Affiliate payments, 94 Agency transactions, 41 AICPA (American Institute of Certified Public accountants), AICPA Audit and Accounting Guide for Not-For-Profit Organizations, 38 Alternative minimum tax, 235 Amendments to return, 266–267 American Bar Association (ABA), American Institute of Certified Public accountants (AICPA), Annual report filing, 11–12 Annuities, charitable gift, 233 Art, works of, 183–184 Artifacts, 186 Assets: dissolution of, 188–192 distribution of, 189–190 diversion of, 69 fair market value of, 95 gain/loss from, 258 other assets, 143 partial dissolution of, 191–192 property, 183–186, 231–233 restrictions on, 40 valuation of, 189, 255 See also Form 990: Schedule N Auditing, x Balance sheet, 95–96, 265–266 See also Form 990: Part X Barter transactions, 251n97 Bequests, 40 Black Lung Trusts, 11 Board members, 66–67 Bonds, tax-exempt, 173–174, 191 See also Form 990: Schedule K Books and publications, 184 Business, defined, 226 Business income, 226 Business transactions, defined, 180 Capital gains/losses, 259–260, 267–268 Charitable deduction, 238 Charitable disbursements, 257 Charitable programs, reporting of, 278–279 Chart of required information, by organization type, 200 Checklist of Required Schedules, x, 5, 6, 53–56 Churches, 11, 12, 105 Clothing items, 184 Codes, 53 See also Internal Revenue Codes Collectibles, 185 Collections, reporting of, 138 Commissioner v Groetzinger, 250n68 Community benefit standard, 160–161 Compensation of disqualified persons, 254 Compensation of officers, directors, and key employees, x, 73–81, 92 background, 73–74 deferral of, 172 and National Football League, 18n11 reasonableness of, 74, 170–172, 255, 262 rebuttable presumption test, 72, 98n26 reportable, 77 reporting exceptions, 80–81 reporting of, 277 types of, 78–80, 172 See also Form 990: Part VII; Form 990: Schedule J Conservation contribution, qualified, 136, 184, 185 Conservation easements, 133, 135–136, 182, 185 Conservation purpose, 185, 203n94 Consignment sales, 229 Contributed services, 39 Contributions, 183–187 calculating value of, 59–60, 257–258 defined, 38 de minimis, 87, 118, 157 as expenses, 90–91, 264 intellectual property, 60 major gifts, 117–118 noncash, 182–188, 203n87 nonstandard, 187 number of, 186 qualified conservation, 136, 184, 185 quid pro quo, 59, 87, 156, 157 n 289 n INDEX Contributions (Continued) restrictions on, 40, 45n15 services, 39 token gifts, 62–63 types of, 38–40, 60 Contributors, schedule of, 7, 120–125 Contributors, substantial, 254, 273 Control, defined, 196–197 Convenience exception, 229, 249n26 Cost allocations, 246–248 Costs: direct/variable and indirect/fixed, 36, 247 documentation of, 36–37 exempt function, 245 program service, 245 publication, 246 readership, 246 Credit counseling organizations, 139 Debt-financed property, income from, 231–233 Deductions, 243–246, 258 Delay in filing, 9–10 De minimis contribution, 87, 118, 157 Depreciation expenses, 94–95, 237, 263 Direct public support, 38 Disaster assistance, 168, 169 Disbursements, charitable, 257 Disqualified persons, 74, 253 Disqualified supporting organization, 98n17 Distributable amount, 279–280 Dividends, reporting of, 258 Dividends-received deduction, 238 Donated facilities, 39 Donated goods exception, 229 Donations See Gifts Donative public charities, 104, 111–112 Donor-advised funds (DAFs), 61–62, 118, 133–135, 202n46 Donor advisor, defined, 134 Donor-designated grants, 118 Down payment assistance organizations, 139 Drugs and medical supplies, 186 Earned income, defined, 225 Easements, 133–135 See also Conservation easements; Facade easements Electioneering See Lobbying Elliot Knitwear Profit Sharing Plan v Commissioner, 249n41 Endowment funds, 140–141, 202n58 E-Postcard, 13–14 Excess business holdings, 61–62, 228, 254, 259 Exchange function, 118 Exchange revenues, 82, 83, 226 Exchange transaction, 84 Excise taxes, 11, 269–270, 275–276 Exempt function revenues, 85 Exempt organizations: defined, 10 pending qualification, 12 retroactive recognition of, 12, 18n20 tax responsibilities of, See also Nonprofits Exempt purpose expenditures, 129 Exempt status: maintaining, xi, 270–275 qualification for, 1–2, 10–11 revocation of, 227–228 Expenditures, 129, 261–264 See also Expenses Expenditure test, 125 Expenses: depreciation, 94–95, 237, 263 direct/variable and indirect/fixed, 247 from exploited activities, 245, 250n84 occupancy/office, 93 shared, 244 travel, 94, 263–264 types of, 35–36, 88–95, 244–245 Type 1, 244 Type 2, 244 Type 3, 245, 250n84 from unrelated business activities, 244 Exploitation rule, 237 Facade easements, 138 Facts and circumstances test, 113–114 Fair market value (FMV), 156 Federated campaigns, 83 Fees, professional, 262 Filing: deadlines for, 13, 18n26 delay in, 9–10 electronic, 14–15 Filing requirements, 11–13 Financial statements, supplemental See Form 990: Schedule D Financial statements and reporting, 97 See also Form 990: Part XI FIN 48 footnote, 143, 202n60 Fiscal year change, 13 Food items, 186 Foreign activity reporting, 149–155 Foreign governments, defined, 151 Foreign individuals, defined, 151 Foreign organizations, defined, 151 Form TD F 90-22.1, 57–58 Form W-2, 12 Form W-2G, 56, 57 Form W-3, 12, 57 Form 940, 57 Form 941, 12, 57 n 290 n INDEX Form 990: accounting methods used, 37–38 ‘‘Core Form’’, 5, 47–48 filing deadline for, 12 filing requirements, 11 June 2007 draft, 19–28 Part I, 6, 48–49 Part II, 6, 50 Part III, 6, 50–53 Part IV, x, 5, 6, 53–56 Part V, x, 6, 56–64 Part VI, 4, 6–7, 64–73 Part VII, x, 73–81 Part VIII, xi, 7, 40, 81–88 Part IX, xi, 7, 88–95 Part X, xi, 7, 95–96 Part XI, 7, 97 public inspection of, 16–17 purpose of, ix, 1–3 redesign, suggested, 29 revision of, ix–x, 3–8 Schedule A, 7, 8, 38, 103–120 new rules for, 103–104 Part I, 104–110 Part II, 110–115 Part III, 115–120 Part IV, 113, 115 types of public charities, 104–112 Schedule B, 7, 120–125 Schedule C, xi, 7, 125–132 Part I, 126–128 Part II, 128–130 Part III, 131–132 Part IV, 132 Schedule D, xi, 7, 40, 132–146 Part I, 133–135 Part II, 135–138 Part III, 138–139 Part IV, 139–140 Part V, 140–141 Part VI, 141 Part VII, 141–142 Part VIII, 142 Part IX, 143 Part X, 143–144 Part XI, 144 Part XII, 144–145 Part XIII, 145 Part XIV, 145–146 Schedule E, 7, 146–149 Schedule F, x, 8, 149–155 Schedule G, xi, 8, 84, 155–160 Schedule H, xi, 8, 160–165 Schedule I, x, 8, 165–169 Schedule J, 8, 170–172 Schedule K, xi, 8, 173–174 Schedule L, 8, 174–182 Part I, 175–177 Part II, 177–178 Part III, 178–179 Part IV, 179–182 Schedule M, x, 8, 85, 182–188 Part I, 183–187 Part II, 188–192 Schedule N, 8, 188–192 Schedule O, xi, 5, 8, 64, 192–195 Schedule R, 8, 195–200 Form 990-BL, 11 Form 990-EZ, x, 9–10, 11 public inspection of, 16–17 redesigned, sample, 30–33 Form 990-N, 11, 13–14 Form 990-PF, xi, 11, 253–288 change in accounting method, 37 corrections to, 266–267 expenditures, 261–264 order in which to complete parts, 255 Part I, 255–264 Part II, 265–266 Part III, 266–267 Part IV, 267–268 Part V, 268–269 Part VI, 269–270 Part VII, 270–276 Part VIII, 276–277 Part IX, 278–279 Part X, 279 Part XI, 279–280 Part XII, 280 Part XIII, 280–281 Part XIV, 282 Part XV, 282–285 Part XVI, 285–286 Part XVII, 286–287 public inspection of, 16–17 purpose of, 254–255 revenues, 257–261 terminology in, 253–254 Form 990-T, xi, 11, 57, 225–252 accounting methods and periods, 236 alternative minimum tax, 235 capital and nondeductibles, 237–238 charitable deduction, 238 chart of issues, 252 consolidated, 236 cost allocations, 246–248 deduction categories, 243–246 depreciation, 237 design, 238, 242–243 dividend deduction, 238 due date, 234 extension for, 234 interest and penalties, 235 inventory deduction, 237 n 291 n INDEX Form 990-T (Continued) loss on, 236 net operating loss (NOL), 238 ‘‘Ordinary and necessary’’ criteria, 237 payment of tax, 234 profit motive, 237 proxy tax, 235 public inspection of, 16–17 refund claim, 236 schedules for, 243 statute of limitations, 235–236 tax credits, 235 who must file, 233–234 Form 1023, 10, 68, 113, 150 Form 1024, 10 Form 1041, 13, 64 Form 1096, 56 Form 1098, 56 Form 1099, 12 Form 1099-MISC, 56 Form 1120, 13 Form 1128, 13 Form 3115, 37, 236, 256 Form 4506A, 17 Form 4720, 11, 131, 177, 281 Form 4797, 231 Form 5498, 56 Form 5500, 11 Form 5500-EZ, 11 Form 5768, 11, 129 Form 8282, 124, 182, 186 Form 8283, 124, 182, 186 Form 8868, 234 Form 8886-T, 58 Form 8899, 60, 182 For-profit subsidiary payments, 231 Foundation manager, defined, 254 Fractional interest, 183–184 Fragmentation rule, 227 Functional expenses, 89–90 Functional expenses, statement of, xi, 88–95 See also Form 990: Part IX Functionally integrated, defined, 110 Fund accounting system, 37 Fundraising, 63, 89–90 definition of, 151 and exempt function expenses, 245 professional, 49 revenue from, 42, 83–84, 87–88 supplemental information on, 155–158 See also Form 990: Schedule G Future-use land, 231–232 GAAP rules, compared to IRS rules, 42–45 Gaming, 88, 158–160 See also Form 990: Schedule G GASB (Government Accounting Standards Board), 45n13 Generally accepted accounting principles (GAAP), 38, 42–45 Geographic regions, 151–152 Gifted property, 233 Gifts: calculating value of, 257–258 as expenses, 90–91, 264 in-kind, 119, 248, 251n97 major, 117–118 noncash, 85 property, 233 reportability of, 38–39 token, 62–63 See also Contributions: noncash Good Governance Practices for 501(c)(3) Organizations, 65, 98n19 Governance, Management, and Disclosures section, ix, 64–73 background, 64–65 board members, 66–67 conflicts of interest, 71 diversion of assets, 69 documentation, 70 ethics policies, 71 management compensation, 72 management outsourcing, 67–68 member status and rights, 69 organizational changes, 68 public disclosure of documents, 73 record retention policies, 71–72 reportable ventures, 72 review of Form 990, 70 state requirements, 73 subordinate organizations, 70 See also Form 990: Part VI Government Accounting Standards Board (GASB), 45n13 Government grants, defined, 84 Grant making, defined, 150 Grants: defined, 166 disaster assistance, 168, 169 domestic, 154 donor-designated, 118 as expenses, 90–91, 264 foreign, 153 future commitments of, 284–285 government, 84 minimizing discrimination in awarding, 166 pass-through, 40, 118 by private foundations (PFs), 282–285 property as, 259 reporting on Schedule I, 165–169 reporting on Schedule L, 178–179 as revenue, 85 n 292 n INDEX for services, 118 ‘‘unusual’’, 114–115 value of, determining, 167–168, 169, 257–258 See also Form 990: Schedule I Greene County Med Society Found v United States, 249n20 Gross income method for cost allocations, 247 Gross sales, 260 Group returns, 15–16, 18n31 Historical treasures, 183 Hospitals, 106, 160–165 See also Form 990: Schedule H Household goods, 184 Income: adjusted net income, 256 capital gains, 259–260 from debt-financed property, 231–233 earned/unearned, 225 interest, 258 investment, 86, 107, 255, 256, 258, 267–268 rental, 258 research, 230 royalties, 86, 93, 230 undistributed, 280–281 See also Revenue Income modifications, 260 Income-producing activity, 285–286 Independent Sector, 131 Information technology expenses, 93 Inherently public activity, 104 In-kind gifts, 119, 248, 251n97 Insurance contract, foundation interest in, 274–275 Insurance expenses, 95 Intangible recognition, 38 Intellectual property, 182, 184 Interested Parties by Part and Organization Type, 223 Interest expenses, 94, 262–263 Interest income, 258 Intermediate sanctions, 74 Internal Revenue Codes, 118 §119, 172 §132, 80, 172 §162, 237 §170, 150 §170(b), 105, 106, 108 §170(c), 125 §170(c)(4), 125 §170(o), 184 §183, 237 §263A, 246 §501(c)(3), 1, 2, 104, 168 classification of, 103–104 and compensation, 170 and contributions, 58 dissolution of assets, 189 dues payments, 82 and elections, 126–127 and employee compensation, 74 impact of new form on, xi and intermediate sanctions, 175 and lobbying, 271 and political activity, 126, 131 qualification, xi, 10 retroactive recognition, 18n20 schedules for, transactions with interested persons, 175 and unemployment tax, 57 §501(c)(4), 126, 131, 246 §501(c)(5), 131, 246 §501(c)(6), 131, 246 §501(c)(7), 125, 163 §501(c)(8), 125, 163 §501(c)(10), 163, 246 §501(h), 129 §509, 10 §509(a)(1), 104, 107, 117, 118, 119, 120 §509(a)(2), 105, 107, 117, 118, 119, 120 §509(a)(3), 11, 105 §509(a)(4), 105 §512(b), 229–230 §527, 126, 128 §527(f)(3), 127 §1221, 230 §1231, 230 §4912, 131 §4941, 254 §4942, 254, 281 §4943, 254 §4944, 254 §4945, 254 §4958, 172, 177 §4967, 62 Internal Revenue Service See IRS International programs, 149–155 Inurement, 74 Inventory deduction, 237 Inventory sales, 88 Investment income, 86, 107, 255, 256, 258, 267–268 Investments: closely held stock, 184 dividends and interest on, 230 jeopardizing, 254 land, buildings, and equipment, 141 other securities, 141–142 program related (PRI), 142, 278–279 unrealized changes in, 40 Iowa State Univ of Science and Tech v Portland Golf Club v Commissioner, 250n74 Iowa State Univ of Science and Tech v United States, 250n68, 250n79 Irregular exception, 228 n 293 n INDEX IRS (Internal Revenue Service), IRS rules, compared to GAAP rules, 42–45 Office space utilization charts, 36 One-way receipts, 38 Operational test, 174 Orange County Agricultural Soc’y, Inc v Commissioner, 90.1 USTC, 248n16 ‘‘Ordinary and necessary’’ criteria, 237 Organizational relationships, 196 Organizational test, 73–74, 174 Jeopardizing investments, defined, 254 Joint costs, 95 Key employees, 77, 254 The Law of Tax-Exempt Healthcare Organizations, 3rd Edition, 161 Legislation, defined, 126 Lerner, Lois G., x, Liabilities, other, 143–144 Life Cycle of a Public Charity, 65 Life estate, 233 Like, like, like rule, 74 Lobbying, 125–132, 201n42 defined, 126 private foundations and, 271 by public charities, 17n6 See also Form 990: Schedule C Maintaining offices, employees, or agents, defined, 151 Management and general (M & G) expenses, 89 Management costs, 37 Mandatory payout, defined, 254 Medical research, 106 Meeting expenses, 94, 263–264 Member benefit payments, 91–92 Membership dues/fees, 83, 118 Miller, Steven T., ix Minimum investment return, 279 Mission, 51 Motor vehicles, 184 National College Athletic Ass’n v Commissioner, 914 F., 248n19 Net operating loss (NOL), 238 Non-cash contributions See Contributions: noncash; Form 990: Schedule M Noncharitable exempt organizations, 286–287 Nondiscrimination policies of schools, 146–149, 202n63 Non-employee service fees, 93 Nonprofits: institutions that qualify as, 10–11 tax responsibilities of, See also Churches; Exempt organizations: Hospitals; Private foundations (PFs); Public charities; Schools; Social clubs Notice 2007–21, 133 Occupancy expenses, 93 Office expenses, 93 Officer compensation, 73–81 Officer information, 276–277 Partnerships, 184, 198, 199 Passive income modification, 229–230 Pass-Through grants, 40, 118 Patents, 182 Penalties, 13, 18n18 Pension Protection Act of 2006, 13–14, 109 Permanent endowment funds, defined, 140 Personal benefit contract, 60 Planned Parenthood Federation of America v Commissioner, 249n28 Pledges, 38–39, 63 Political campaign and lobbying activities, 125–132 See also Form 990: Schedule C Political expenditure, correction of, 127 Political expenses, defined, 126 Portland Golf Club v Commissioner, 250n68 Private foundations (PFs): charitable program reporting, 278–279 definition of, 253 and excess business holdings, 61 filing requirements, 11 income and, 256–257 ongoing tax-exempt status, 270–275 reports unique to, 268 termination of, 272 See also Form 990-PF Private operating foundations, 282 Prize winnings, 57 See also Form 990: Part V Profit motive, 237 Program-related investments (PRIs), 278–279 Program service revenues, 85, 89 Program services, defined, 151 Prohibited tax shelter, 58 Project allocations, 36 Property: debt-financed, 231–233 gains from sale of, 230–231 gifted, 233 types of, 183–186 See also Assets Proxy tax, 235, 249n58 Publication costs, 246 Public charities: donative, 104, 111–112 life cycle of, 65 service-providing, 105, 115–120 types of, 104–112 n 294 n INDEX Public charity status, 10–11, 103–120 See also Form 990: Schedule A Public inspection, 16–17 Public status problems, 119–120 Public support calculation, 111–112 Public support percentage, 115 Public support test, 107–108 Qualified conservation contribution, 136, 184, 185 Qualified real property interest, 136, 184–185 Qualifying distributions, 280 Quasi-endowment funds, defined, 140 Quid pro quo contribution, 59, 87, 156, 157 Readership costs, 246 Real estate, 185 Reconciliation of assets/revenue/expenses, 144–145 Related activity, 226 Related organizations, 84, 195–200 Relationships, organizational, 196 Rensselaer Polytechnic Institute v Commissioner, 251n94 Rental income, 230, 258 Rents, gross, 86 Required information chart, 200 Research income, 230 Revenue: advertising, 245–246 exchange, 82, 83, 226 exempt function, 85 Form 990-PF, 257–261 fundraising, 245 program service, 85 reporting of, 52 statement of, xi, 81–88 support test for reporting, 107–108 types of, 83–88 See also Form 990: Part VIII; Income Royalties, 86, 93, 230 Rules, GAAP vs IRS, 42–45 Salary allocation system, 36 Sale of property, gains from, 230–231 Sanctions, 275–276, 287n1 Sarbanes-Oxley Act, 65, 71, 72 Schedules, see specific form number Schedules, checklist of required, 53–56 Schools, 12, 105, 146–149 See also Form 990: Schedule E Scientific specimens, 186 Securities, 184 Self-dealing, defined, 254 Service-providing public charities, 105, 115–120 Set-asides, 280 SFAS No 116, 38–40, 138–139, 248, 251n97 SFAS No 117, 40, 140 SFAS No 124, 41, 258 SFAS No 136, 41 Shiloh Youth Revival Ctrs v Commissioner, 249n22 Sierra Club v Commissioner, 249n28 Sixty-month termination, 120 Social clubs, 63, 231 Southwest Tex Electric Coop., Inc v Commissioner, 249n42 Sponsoring organization, defined, 134 Sponsorship, 84, 99n39 Statement of Activity, 41 Statement of Functional Expenses, 88–95 Statement of Position 94–3, 41 Statement of Position 98–2, 41–42 Statement of Program Service Accomplishments, 6, 50–53 Statement of Revenue, 81–88 See also Form 990: Part VIII Stock, closely held, 184 Substantial contributor, 254, 273 Substantial part test, 131 Suffolk County Patrolmen’s Benevolent Ass’n Inc v Commissioner, 77 T.C., 248n19 Supplemental financial statements, 132–146 See also Form 990: Schedule D Supplemental information, 282–285 Schedule D, 145–146 Schedule F, 154 Schedule M, 188–192 See also Form 990: Schedule O Support, defined, 117 Support, public/private, 111, 115 Supporting organizations (SOs), 61, 105, 109–110 Support test, 107–108 Sweat test, 226 Tax: exceptions and modifications from, 228–231 excise, 11, 269–270, 275–276 proxy, 235 Taxable distribution, defined, 62 Taxable expenditure, defined, 254 Tax accounting methods See Accounting: methods of Tax compliance, 56–64 Tax credits, 235 Tax-exempt bonds, 173–174 See also Form 990: Schedule K Tax exemption, ongoing qualification for, 270–275 Taxidermy property, 186, 203n96 Tax rate, reducing, 268–269 Tax reporting, of private foundations, 263 Tax shelter, prohibited, 58 Term endowment funds, defined, 140 Texas Farm Bureau v United States, 249n28 Thresholds, financial, x, 5, 53–56, 181 Trade, defined, 226 n 295 n INDEX Transactions with Interested Parties Questionnaire, 100–101 Transactions with interested persons, 174–182 business transactions, 179–182 correction of, 177 interested parties list, 176–177, 178, 179, 180 Transparency in reporting, 4–5 Travel expenses, 94, 263–264 Trusts, 184, 198, 234 Types of property, 183–186 Undistributed income, 280–281 Unearned income, defined, 225 Unified Registration Statement (URS), 157, 204–206 distribution sites for, 222 initial registrations checklist, 221 state-by-state appendix, 207–220 United States, defined, 150 United States v American Bar Endowment, 250n84 Unrelated business income tax (UBIT), 225 Unrelated business income (UBI): consequences of earning, 227 defined, 226 earned income and, 225 exceptions and modifications from, 228–231 income from debt-financed property, 231–233 limits on, 272, 288n32 Unrelated income tax, payment of, 227 ‘‘Unusual’’ grant, 114–115 Volunteer exception, 228–229 Voting rights of board members, 66–67 Waco Lodge No 166, Benevolent & Protective Order of Elks v Commissioner, 249n21 West Va Med Ass’n v Commissioner, 250n86 n 296 n ... the USA’s Troop 21125 Her two children, Alexis and Major, are a continual source of inspiration and joy n xv n Revised form 990: A Line- by -Line Preparation Guide by Jody Blazek and Amanda Adams... http://www.wiley.com Library of Congress Cataloging-in-Publication Data: Blazek, Jody Revised Form 990: a line- by -line preparation guide/ Jody Blazek, Amanda Adams p cm Includes bibliographical references and index... Law She and her husband, David Crossley, nurture two sons, Austin and Jay Blazek Crossley Amanda Adams is a tax manager at Blazek & Vetterling, a Houston, Texas CPA firm providing tax compliance