END - CMAA

CMAA Leadership/Legislative Conference

Tax Update

September 8, 2012

Presented By:

James P. Sweeney, CPA, MBA, MTAX

Partner, National Lead, Exempt Organization

Technical Tax Services

Washington, D.C.

james.sweeney@mcgladrey.com

1

Agenda



Current affairs



Revocation of Exempt Status



What happens when you are audited by IRS

– the need for management operational reviews



Form 990 Update – common foopahs



FIN 48 Update – what we see out there

2

Learning Objectives

After completing this program, you should be able to:



Understand current affairs that are occurring in the industry from a tax perspective.

Current Affairs of Importance

4

Current Affairs

Proposed Legislation



Ending Tax Breaks for Discrimination Act of 2012

-

HR 4376 – set forth by Ms. Maloney

-

Proposed amendment to the IRC to deny all deductions for business expenses associated with the use of a club that discriminates on the basis of sex, race, or color.

-

Applies to any private discriminatory club (as defined in previous bullet point)

5

Current Affairs

Proposed Legislation



Ending Tax Breaks for Discrimination Act of

2012

-

Deductions disallowed for the use of services or facilities, for transportation, meals, lodging and other travel expenses associated with such use

-

Deductions disallowed for any amount incurred for advertising of any event held at such a facility, or advertising of any product or service if the advertising occurs on any broadcast media during, or in association with, such media’s coverage of any such an event.

-

All receipts from the club MUST include the following statement: “The expenditures covered by this receipt are nondeductible for Federal income tax purposes.

6

Current Affairs

PLR 201138054



This was a social golf club with a restaurant, bar, pool, tennis courts and golf course



Revocation of exempt status was the result of an audit of activities and Form 990



Organization exceeded the safe harbor thresholds provided for in P.L. 94-569



35%/15% safe harbor ( no more than 15% nonmember use)



Examination yielded the club failed substantiation requirements of Revenue

Procedure 71-17, 1971-1 C.B. 683

7

Current Affairs

PLR 201138054



Club’s investment income was substantially below the 20% threshold, but nonmember use violated the 15% threshold



There was also advertising on the Internet and in the Yellow Pages advertising banquet facilities for events like weddings, corporate functions, parties, graduations, reunions, anniversaries, Bar/Bat Mitzvahs with accommodations for up to 300 persons.



Any advertising “prima face” evidence running a business and not formed for social purposes

8

Current Affairs

PLR 201138054



Operation of the 35/15 test

-

If no nonmember income: may have up to 35% investment income

-

Unusual sale items are not included in the 35% figure

-

Exceeding the 15% test does not necessarily establish a nonexempt purpose (facts and circumstances test)

-

Member-sponsorship arrangements will taint exemption (Rev. Rule. 60-324)

9

Current Affairs

PLR 201138054



Facts and circumstances test

-

Actual percentages of investment and nonmember receipts

-

Frequency of use by nonmembers (an unusual or single event [nonrecurring on a year to year basis] that generates all nonmember receipts is viewed favorably as opposed to frequent use by nonmembers

-

Record of nonmember use over a period of years, i.e. a high percentage in one year with other years being in permitted levels is favorable [consistent pattern of exceeding even by a small amount is unfavorable]

-

Generating net profits is private inurement to club members

10

Current Affairs

PLR 201138054



Failed arguments

-

Declining membership due to past and current economic conditions prompted the need for additional nonmember receipts to operate

-

Exceeded 15% limitation for at least three consecutive years (25%, 23% and 19%)

-

Advertising facilities was dagger and the evidence to deny continuing exempt status

-

Reverted to a 277 club, filing Form 1120 annually

-

UBIT issues: ad income generated at its annual member-guest golf outing; continual losses in bar, restaurant, greens fees and golf cart rental losses come under the hobby loss rules (losses in 3 out of 5 previous tax years)

-

END

11

Current Affairs

PLR 201146022



This ruling looked at a c7 with a related c3 audit results



The c3 operated charitable gaming activities



Both organizations had the same BOD



Club facilities were used to conduct the bingo activities



Rental income from the general public renting facility



Annual receipt of donations to the c7 from individuals and businesses



Fundraising income from sale of donuts to the general public



Result was an inordinate amount of nonmember income, as some of the receipts of the c3 were inured to the c7 because of commingling

12

Current Affairs

PLR 201146022



Outcomes

-

Revocation of exempt status

-

Government reminded taxpayer that a c7 may rent out its facilities to a charitable organization if only direct costs

ONLY are charged for such use then such use will not be deemed private inurement to the members of the club

-

In the instant case the c3 paid for all operating expenses of the club when it used such facilities

-

What prompted aggressive actions were the members unwillingness to pay higher dues

-

Nonmember taxable activities were: gaming activities, sales of markers, food and drink sales, rental of facilities and donations from the general public

-

END

13

Current Affairs

PLR 201204018



This was an adverse determination via a filed Form 1024 application for recognition of exempt status



Found to only operate a restaurant



Restaurant was operated by previous for profit owners



Dues were unusually low



END

14

Current Affairs

PLR 201032045



Leading up to a large development in

2012



Dissolution of a club process ruling: continued exempt status issue



Rising expenses and declining members resulted in members voting to liquidate club assets and dissolve the corporate entity



QUESTION: liquidating sale of the club real estate will not cause loss of exempt status

15

Current Affairs

PLR 201032045



Service referred to Rev. Rule 58-501, 1958-2 CB

262, holding where a social club found it impractical to conduct its operations and subsequently sales its assets and liquidates such sale was considered incidental to its exempt purposes



Sale purpose was to facilitate the club’s dissolution, rather than to make a profit (very important fact)



Exempt status up through the date of sale and distribution of the liquidated assets to its members.



IRS allowed.



End

16

Current Affairs

PLR 201213034



REVOKES AND SUPERCEDES PRIOR

PLR 200451031



Questions:

-

Sale and liquidation not result in loss of exempt status?

-

Sale proceeds subject unrelated business income tax?



Reason for dissolution: aging membership, new membership numbers dwindling, increasing operational costs

17

Current Affairs

PLR 201213034



In the 2004 ruling, IRS stated no loss of exempt status on sale and liquidation and gain is not UBI.



In this ruling, the SERVICE has done a 180 degree shift in this area!

18

Current Affairs

PLR 201213034 - Rationale



Investment income becomes taxable by virtue of IRC section 512(a)(3)(A) which taxes gross income that is NOT exempt function income



IRC section 512(a)(3)(B) provides that exempt function income means dues, fees, charges, or similar amounts by members in consideration of use of property which forms the basis for a c7s tax exempt status

19

Current Affairs




Generally, gain generated from the sale of club property is not subject to tax and it is reinvested in club activity assets within one year previous to the date of sale, or three years from the date of sale.



In order for this provision to apply, the assets must be used in accomplishing exempt purposes



Gain is recognized for only the excess of proceeds from sale as compared to cost of the replacement property [IRC section 512(a)(3)(D)]

20

Current Affairs




There is a general gain exclusion from UBI in

512(b)(5), where such provision states that gains from exempt use assets are not UBI



IRS cites Rev. Rule. 58-501 in addressing the exemption issue related to the sale of asset and liquidation of the club



IRS referred to Rev. Proc. 2011-1 which provides that the Service may revoke a previously issued ruling found to be in error, or not in line with current thought processes of the Service

21

Current Affairs




Tamarisk Country Club, 84 TC 756 (1985) cited by IRS in the ruling where the court found that gain not reinvested in club replacement assets and distributed to members was taxable



Atlanta Athletic Club, 980 F.2d 1409, (1993) gain was excluded from recognition even though the property sold was not continuously used or directly used just before the sale, but proceeds were reinvested in exempt purpose replacement assets

22

Current Affairs




Deer Park Country Club, v. Commr., 70 TCM

1445, (1995), sale of property never actually ever used in exempt activities was not protected under the general exclusion for gain recognition, notwithstanding its purchase at the time of acquisition the organization “intended” to use it in accomplishment of its exempt purposes

23

Current Affairs




IRS then cites Legislative History….

-

WHERE AN ORGANIZATION RECEIVES

INCOME FROM ITS INVESTMENTS, THERE IS

A BENEFIT TO THE MEMBERS NOT

CONTEMPLATED BY THE EXEMPTION

[PROVIDED TO SOCIAL CLUBS]

-

EXCEPTION PROVIDED WHERE PROCEEDS

ARE REINVESTED AND GAINS ARE NOT

WITHDRAWN BY MEMBERS…..

-

Senate Report 91-552 (1969), 1969-3 CB 423, at 471

24

Current Affairs




ISSUE: generally in order for an income flow to be subject to tax it must be generated by an unrelated trade or business regularly carried on



However this rule does not apply for c7s,

9s, 17s or 20s



The rule is exclude exempt function income and tax all other income for these entities



Only modifications are provided for in 512b6,

10, 11 and 12, (b5 for gains is excluded from the provided for exceptions)

25

Current Affairs




Service states that Rev. Rule. 58-501, although it addresses the exemption issue, does not address the UBI issue



Stating that it was issued before the 1969 ACT passage of the special UBIT rules of

512(a)(3)(D) [gain deferral rule for reinvestment]



GAIN is UBI subject to tax



PROBLEM: what to do if debt exchanged for property and no cash is received and debt is over tax basis thus resulting in a UBI liability??



END

26

Current Affairs

PLR 200935041



Include this for those who may be in a situation where the clubhouse is a historic building



Issue was can a c3 provide funds to a referenced c7 that was housed in a historic building



After rehab general public access provided to the historic areas of the club



RULING: Favorable to the c3 which accumulated public contributions for use in rehab (had a broad scope for the geographic area for historic rehab funding, referencing the club)

27

Automatic Revocation of Tax Exempt Status

28

Automatic Revocation of Tax Exempt

Status



Passed as a part of the Pension Protection Act of 2006



Basically what the law states is that failure to file a Form 990 series return for three consecutive years results in automatic revocation of tax exempt status (990, 990EZ or 990N)



Revocation is by operation of law, therefore it occurs on the original due date (not including extensions) for the third consecutive year for filing failure, not when IRS may inform you or such revocation

29


Status



Applies to all 501a tax exempt organizations required to file Form 990



Generally in the club and association world, we see charitable arms holding golf tournaments etc., losing exempt status (not good when a upcoming tournament is approaching)



Also applies to small entities, those that have less than $50,000 of gross receipts



No appeal process, once it is done, only way for reinstatement is via application process or via a letter if not required to file an application originally

30


Status



May request retroactive reinstatement, but to date we are finding that IRS is reluctant to provide this relief as reasonable cause for failure to file must exist and it has only in very limited circumstances have accepted such an argument (ignorance or reliance on a tax professional generally does not work)

31


Status



If a c3 running a golf tournament is revoked, during the interim it can not accept tax deductible contributions



Penalties for late filings under the program to be reinstated will not be assessed according to the IRS website



Any applications sent to the IRS can not receive “expedited treatment”



There have been members of a group filing receive revocation notices

32

What to Expect When the IRS Comes

Knocking

The need for internal operational reviews

33

IRS Audit Posture: What to Expect When the IRS Comes Knocking



Current administration has proposed doubling enforcement budget in next five years.



Audits across the board going up, to include clubs and associations



IRS Examiner Quote – “Tell your clients that we are coming………”



IRS Manager Quote – “Go out and get assessments……”



IRS posturing itself for a present round of

990-T audits

34




Compliance checks – whatever you do,

DON’T IGNORE THESE!



Correspondence audits – taxpayer receives an inquiry related to certain activity disclosures



Field exams

-

These are mostly what we see in the club and association area

35




Organizational requirements will be reviewed



Focus is on social, pleasure, recreation purposes



Activities are consistent with that purpose



NO INUREMENT OF INCOME



All UBI is reported properly and adequate expense allocations are used

36




Discrimination will be looked at but the following list are generally OK:

-

Limits on membership to a particular religion

-

Limits on membership to a particular national origin

-

Limits on political party or homeowners in a specific housing development

37




Membership requirements will be reviewed



Bylaws, club handbook, brochures and newsletters, applications, and materials given to prospective members will be reviewed

-

Corporation sponsored individuals who have the same rights and privileges as regular individual members are fine (Rev. Rule. 74-168)

38




Focus on the 35%/15% test



Tour of facilities will look for signs inviting general public usage or absence of signs which state “for members only”



Member usage logs to show system restricting usage to members only (key cards or logs)



All board minutes, looking at approved activities



Liquor license review

39




Contracts with taxable corporations



Management contracts for relationships, more than general administrative responsibilities will be focused on (not good if management company can set dues amounts and select or expulsion of members)



Dues structure - to make sure not too low to encourage transient use



All advertising will be reviewed

40




Website and all links on website



Will go to chamber of commerce and visitor bureaus and review materials issued by these entities referring to your entity



Nontraditional activities – sale of package liquor, long term facility rental of rooms, take out or catering services, commuter use of parking facilities, advertising income, personal services income (issue if 13%, or

4.28 to 6.07%, or 5% will be benchmark)

41




All records in line with substantiation requirements of Rev. Proc. 71-17

-

Host/guest assumptions (8 or fewer and 1 member)

-

Unlimited number (where at least 75% are members)

-

Must have records that establish the above facts to use the assumptions

42




Records related to nonmember use



Cash sales – assumed to be nonmember unless records can trace to members!



Credit card sales



Reservation books, banquet books, party function sheets, member sponsorship of parties, dates club closed, reciprocal agreements, off premise sales of food and liquor

43




Party records (required by Rev. Proc. 71-17):

-

Numbers in the party

-

Total nonmembers in the party

-

Total charges to members and nonmembers

-

Charges paid by nonmembers

-

Member signed statement regarding reimbursement

-

Member signed statement related to employer reimbursements

-

Member signed statements related to gratuitous reimbursements

44




Monthly member billing sheets



All investment income sources



Employment contracts for percentage of gross or net profit arrangements



All distributions to members



All member classifications (for disproportional benefits to what pay)



Cash receipts journal



Asset backup

45




Financial statements with notes



All tax return filings



All work papers related to tax return filings showing trial balance tie back to amounts as reported on such returns



Member employer payments



Set asides and corresponding board resolution for the set aside

46




Agent will make judgments related to your expertise in tax and your advisors expertise in tax



Gross receipts allocation method is rarely considered reasonable by IRS to allocate fixed or variable expenses



Nonmember use: not reasonable NM fees to

M fees for golf, more reasonable, rounds by members vs. rounds by nonmembers

47




IRS uses the “Big Divot Allocation Method”

(referencing an example given in 1975 form 990 supplement)



Direct COGS allocations based on NM sales to

M sales, variable expense NM hours use to

TOTAL hours facilities used



Fixed expense allocations based on NM hours use to TOTAL hours in the year



Service still uses above notwithstanding

Rensselaer Polytechnic Institute case for taxpayer (only use actual use for fixed expenses)

48




Expenses reviewed for relationship to the generation of the UBI.



Proximate and primary relationships are audited

-

EX: Club manager devotes 35% of time to bar and restaurant activity, only 35% of his salary goes into the bucket to be allocated between member and nonmember use

-

EX: $40,000 of interest expense, 30k related to swimming pool, 5k related to purchase golf carts, 5k related to tennis court repairs, only $5K related to golf carts goes into bucket to determine member/nonmember allocable golf course expenses

49




All payroll records – tip reporting



Cash payments for services



Service contracts will be reviewed for employee vs. independent contractor status



Usually these field audits take from 1 to 2 years from beginning to the end, depending on the size and extent of the club being examined

50

2011 Form 990

Update and Frequently Missed Items

51

2011 Form 990



Form 990 is intended to be the chief compliance tool used by the IRS to enforce tax laws.



IRS has publicly stated, “that it is painfully obvious that people that prepare the Form 990

DO NOT refer to the instructions.



Section 6033 which is the controlling statute related to the information return Form 990 for exempt organizations was updated in 2011 to reflect changes made to Form 990 since 2008.



IRS stated when challenged with the Form 990 changes that its redesigned form did not adhere to regulations in place, IRS response: “We will change the regulations.” And they are doing it!

52

2011 Form 990



We need to take into account not only what it says in the form, but more important, what the instructions state, since Section 6033 make the instructions controlling.



There are still some conflicting instructions to re-stated questions on the Form, the instructions control, until we hear otherwise, or the instructions are changed.



Changes related to the last two years involve changes to the Form itself and Schedules to conform to the instructions.



Instructions are evolving as well with “no announcement of subtle changes” to them. No fanfare!



One thing is for sure, the Form 990 and its Schedules and Instructions, are living documents which is anticipated to continually evolve.

53

What We Are Seeing Nationally

54

What we are seeing Nationally



Part VII, Compensation exclusions are being disregarded in the event they won’t keep persons from being further reported and expanded on Schedule J, Part II.



These exclusions are the “under $10,000 per related entity exception for compensation” and the “less than $10,000 per-item exception for non retirement or health related benefits.”



Management just does not wish to deal with it.

55




Journalists are now just starting to get a hold of

Form 990 and its expanded reporting in the compensation area, this makes it even more important that we report what WE NEED TO

REPORT!



Expecting a potential uptick of compensation related articles, mainly in the c3 arena where charitable golf events are being housed and salaries are reviewed (St. Petersburg Times article comparing c3 salaries of 36 executive directors operating golf tournaments in the

Tampa Bay area)



Compensation reporting is really the only most important item that journalists will focus on

56




Clubs and associations are missing transactions reporting with insiders on their returns



Not adequately identifying those voting members of the governing body as not independent



Not adequately disclosing family or business relationships on the return



Some report no conflict of interest policy



Some report they have a conflict of interest policy but they don’t enforce it (important for both c6s and c7s as prohibition of private inurement is a part of the statute)

57




Failure to properly identify general manager as a top management official, treated as an officer for Part VII purposes



Failure to properly identify key employees other then the general manager/top management official



Listing substantial service vendors on Part VII,

Section B, yet not showing service payments on line

11 in Part IX



Answering line 1a Part V, related to number of 1099s issued, yet answering NO or leaving the answer blank for line 1c related to following the backup withholding rules



Answering Part V, line 6a related to soliciting nondeductible contributions incorrectly and not answering line 6b related to required communications

58




Schedule J, line 3 checking the box related to employment contracts in setting compensation where outside contracts are NOT used in setting top management officials compensation



Failure to disclose plan details for deferred compensation plans in place (Schedule J, line 4)



Part VII, checking officer and HCE boxes to limit number of disclosed HCEs



If financial statements audited, failure to include the FIN 48 footnote on Schedule D, Part XIV



Failure to properly answer line 38, Part IV related to whether or not a Schedule O is attached.



Failure to answer the financial statement question 2d on Part XI/XII Core Form 990

59

2011 Form 990 and Schedule Changes to the

Forms

60

General Instructions

Additions/Deletions/Expansions for 2011

There is an explanation related to future developments – Explains that the IRS has created a page on IRS.gov for information about Form 990 and its instructions, at www.irs.gov/form990 . Information about any future developments affecting Form 990

(such as legislation enacted after it releases the form and instructions) will be posted on that page.

Clarification that unless otherwise specified, information should be provided for the organization’s tax year.

For instance, an organization should answer “Yes” to a question asking whether it conducted a certain type of activity only if it conducted that activity during the tax year.

61





Clarification for 2011: An organization may not file a “consolidated” Form 990 to aggregate information from another organization that has a different EIN, unless it is filing a group return and reporting information from a subordinate organization or from a joint venture or disregarded entity (see Appendices E and F, later), or as otherwise provided for in the Code, regulations, or official IRS guidance.



NEW for 2011: A parent exempt organization of a section 501(c)(2) title-holding company may file a consolidated Form 990-T with the section

501(c)(2) organization, but not a consolidated

Form 990.

62





Section 509(a)(3) supporting organizations (big change!) important for association with supporting organizations:

-

A section 509(a)(3) supporting organization must file Form

990 or 990-EZ, even if its gross receipts are normally $50,000 or less, and even if it is described in Rev. Proc. 96-10, 1996-1

C.B. 577, or is an affiliate of a governmental unit described in

Rev. Proc. 95-48, unless it qualifies as one of the following:

•

1. An integrated auxiliary of a church described in Regulations section 1.6033-2(h),

• 2. The exclusively religious activities of a religious order, or

• 3. An organization, the gross receipts of which are normally not more than $5,000, that supports a section 501(c)(3) religious organization.



If the organization is described in (3) but not in (1) or (2), then it must submit Form 990-N unless it voluntarily files

Form 990 or 990-EZ.

63





EXPANDED: Use Schedule O (Form 990 or

990-EZ) to provide required supplemental information and other narrative explanations for questions on the core Form 990. For questions on Form 990 schedules, use the narrative part of each schedule to provide supplemental narrative.

64





RE-REVIEW: If the organization’s short year began in 2011, and ended before December 31,

2011 (not on or after December 31, 2011), it should use 2010 Form 990 to file for the short year.



NEW 2011: If the organization previously changed its accounting period within the 10calendar-year period that includes the beginning of the short period, and it had a Form 990 filing requirement at any time during that 10-year period, it must also attach a Form 1128 to the short-period return. See Rev. Proc. 85-58, 1985-

2 C.B. 740.

65





If an organization is required to file a return electronically but does not, the organization is considered not to have filed its return, even if a paper return is submitted, unless it is reporting a name change, in which case it must file by paper and attach the documents described in Specific Instructions, Item B.



If the return is a final return, the organization must check the “Terminated” box in item B of the Heading and complete Schedule N

(Form 990 or 990-EZ).

66



Item F: New instruction indicates that this officer must be the principal officer at the time the return is filed, not just for the tax year covered by the return.

Item J: New instruction indicates to state website address at the time the return is filed, not just for the tax year covered by the return.

67





CLARIFICATION: In general, do not report negative numbers, but use -0- instead of a negative number, unless the instructions otherwise provide .



Report revenue and expenses separately and do not net related items, unless otherwise provided.

68

Form 990, Part I and II Changes for 2011

69

Core Form 990, Page I, Header, Part I and Part II Changes/Additions/Deletions



NEW: Do not encrypt or password protect attachments to e-filed returns, IRS can not open such attachments.



ITEM B, CHECKBOXES: An organization that is required to file an annual information return (Form 990 or Form 990-EZ) or submit an annual electronic notice (Form 990-N) for a tax year (see General Instructions, Item A.

Who Must File, earlier) must do so even if it has not yet filed a Form 1023 or 1024 with the IRS, if it claims tax-exempt status.

70




New Language: For Part I, line 6, number of volunteers, an organization is to include an estimate of volunteers including members of the organization’s governing body, who provide volunteer services to the organization (this is also provided for in the definition of volunteer in the glossary).

71




NEW 2011 GLOBAL INSTRUCTION: Reporting information from third parties. Some lines request information that the organization may need to obtain from third parties, such as compensation paid by related organizations; family and business relationships between officers, directors, trustees, key employees, and certain businesses they own or control; the organization’s distributive share of the income and assets of a partnership or joint venture in which it has an ownership interest; and certain transactions between the organization and interested persons. The organization should make reasonable efforts to obtain this information. If it is unable to obtain certain information by the due date for filing the return, it should file

Form(s) 8868 to request a filing extension.



If the organization is unable to obtain this information by the extended due date after making reasonable efforts, and is not certain of the answer to a particular question, it may make a reasonable estimate, where applicable, and explain in

Schedule O.

72




Part II, preparers are now required, for 2011 returns to use PTIN on page one of Form 990.



In addition, preparers may use other forms of signature including rubber stamp, mechanical device or computer program in the signature area of Part II.



This PTIN will not be redacted. It appears that since areas are not redacted, a typed in signature will protect a preparer from fraudulent use of his/her signature, if acquirable on a public disclosure copy of a return.

73

Form 990, Part IV Changes for 2011

74

Core Form 990, Part IV

Changes/Additions/Deletions



Schedule F, there is a new region,

Antarctica, which brings the number of regions to 10 which can be reported on

Schedule F.

75

2011 Form 990 Changes



Part IV



Line 14b: adds investment to the list of revenues or expenses that must be included in the $10,000 calculation of activities outside the United States.

This change in the form presentation still insinuates that the reason to answer line 14b, is associated with revenues and expenses of more than $10,000 from investment activity abroad. Instructions should clarify whether “expense” means, investment expense.

Schedule F, column f, asks for investments “in” the region. Reporting at book value.

76

Schedule F Disclosures

77

Form 990, Part V Changes for 2011

78

Core Form 990, Page 5, Part V




Line 2a asks for the number of employees reported on Form

W-3, not the number of W-2s issued with Form W-3 for the calendar year ending with or within the filing organization’s tax year:

-

There is no specific place on Form W-3 for 2011 where an employer or reporting agents reports the number of employees associated with

Form W-3

-

Presumably, this clarification takes into account situations where one employee may receive two W-2s, or voided W-2s (no information W-

2s) are submitted with Form W-3.

-

The number of employees look at W-3a filed by the exempt filing

Form 990, its reporting agents, which include common paymasters and payroll agents.

-

Clarification added for line 2b to answer YES, if payroll tax returns were filed by the filing organization or by its reporting agents, which include common paymasters or payroll agents. (ambiguity in 2010 lead filers to believe it was only addressing whether the filing organization filed employment tax forms, this change clarifies this aspect of reporting).

79

Core Form 990, Page 5, Part V




Reminders:

-

If a question does not have a number, its corresponding YES/NO answer may be left blank.

-

If an answer is NO following questions which may follow may be left blank, for example, lines

3a (990-T) or 4a (foreign accounts) or 5a

(prohibited tax shelter transactions), for example.

-

Leave blank if a question does not apply to your organization, except line 14 must be answered by all organizations.

80

Form 990, Part VI Changes for 2011

81

Core Form 990, Page 6, Part VI


Instructions now clarify that the number of governing board members may be one or more persons.

In addition, for 2011, the instruction on the form states that if there are material difference voting rights among members of the governing body, or if the governing body delegated broad authority to an executive committee or similar committee, this must be explained on

Schedule O. This was an instruction, but now incorporated on face of the form.

82



Instructions for Schedule L exclude from the definition “key employee” of another

Organization or related organization, if that organization was required to file Schedule L.

This in essence removes from consideration of not being independent related family

Members of a governing board member at the end of the year that may be a key employee of an organization which may cause a filing of Schedule L for that organization.

83





Line 2 instructions now exempt from reporting certain business relationships in which an officer, director, trustee, or key employee of the filing organization was a key employee of another organization.



Key employee is no longer a person of interest for relationship purposes for this line item in Part VI.

84

2011 Form 990 Draft Changes



Lines 7b – clarifies language by rephrasing question to: are any governance decisions of the organization reserved to ( or subject to approval by) members, stockholders or persons other than the governing body (from are any decisions of the governing body subject to approval by members, stockholders, or other persons?).

85




We see with this last change that the IRS is getting a bit more legally precise and taking legal arguments out of the equation for certain NO answers in Part VI.

86




Line 10b – clarifies language by changing object to ensure affiliate operations are consistent with the organization’s exempt purpose (from consistent with those of the organization)

More focused question in line with how the IRS wishes for this question to be answered.

87




Line 16b – changes language to did the organization follow a written policy … (from has the organization adopted a written policy…)

This is an important change to this question from a legal position in applying the tax law in this area and could give some exempt organizations some difficulties if the answer to

Q16a is YES.

88

Form 990, Part VII Changes for 2011

89




Part VII, Section A



Column C – changes parenthetical to do not check more than one box, unless person is both an officer and a director/trustee (from check all that apply).

90




This change in the instructions solidifies the requirement to move people out of lower buckets as they are classified for 990 purposes in other areas.



Will and does cause more persons to be listed on this Part of Form 990.

91




Section B



Line 1 – Adds instruction to Report compensation for the calendar year ending with or within the organization’s tax year .

92

Update ASC 740 (FIN) 48

93

The More-Likely-Than-Not (MLTN) Standard

FIN 48

MLTN



More likely than not to be sustained on its technical merits in the event that the tax position is audited by the IRS

-

Just because MLTN, must measure the certainty of that



6694-realistic possibility standard, in open years (prior to a recent change, it was a reasonable belief standard, which was problematic.



Circular 230-same MLTN standard

95

Implementation and Post-Implementation

Issues

FIN 48

Implementation Year - Scope



Current year tax positions



Prior year tax positions open under statute of limitations where the returns may be examined by the taxing authority:

-

Generally three years

Don’t file a return: technically statute does not begin to run

-

Fraudulent: no statute of limitations

-

Substantial omission from gross income (over

25%): 6 years

97

The Two Step Process

FIN 48

Two Step Process



The first step is recognition



The second step is measurement

99

Two Step Process-Recognition



The tax exempt organization determines whether it is more likely than not that a tax position will be sustained upon examination by the taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position.



In evaluating whether a tax position has met the more likely than not (MLTN) (over 50%) recognition threshold, the tax exempt organization should presume that the position will be examined by the appropriate taxing authorities and the taxing authorities are in possession of all relevant information pertaining to that tax position.

100

Two Step Process-Measurement



The second step is measurement: a tax position taken by a tax exempt organization that meets the more likely than not recognition threshold is measured to determine the amount of the benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authorities.

101

Two Step Process-Matrix Analysis

Possible Estimated

(Realized)

Outcomes (tax benefit)

1,000,000

Probability of

Occurring

5%

Cumulative

Probability of

Occurring

5%

800,000

600,000

25%

25%

30%

55%

500,000 25% 80%

102

Universal Tax Issues and Related

Overarching Principles

How can it apply to a tax exempt organization?



Two universal tax issues apply to a tax exempt organization

-

Exemption Issues

-

Unrelated Business Income Issues

104

Universal Tax Issue: Exemption

Related Overarching Tax Positions

Tax Positions - Exemption



Lack of proof of tax exemption.



Egregiously high compensation paid to insiders.

-

C3 issue 4958 is not an income tax/revocation in egregious situations

-

C7 and c6 issue: inurement



Egregiously undervalued asset sales by the tax exempt organization to insiders.

-

C3 issue 4958 is not an income tax/revocation in egregious situations

-

C7 and c6 issue: inurement

106




Treat an income flow as exempt from tax, when it should be subject to tax.

-

Revocation: is substantial to other income flows

35/15 test



Management time and focus is substantial in generating unrelated business income.

-

Revocation issue 35/15 test



A transfer of substantial assets to a forprofit joint venture, where the tax exempt organization may not control the activities of the joint venture.

107




Control of the exempt organization’s activities by a for-profit subsidiary or cojoint venturer.



Excessive advertising of facilities use by the general public

108




Deciding to not file required income tax returns in a local, state, or foreign jurisdiction.

-

Where entity is not treated as tax exempt or failed to file an application to be treated as exempt



The tax law has changed.

-

And the past treatments have not

109




An organization (other than IRC section 501(c)(3) or IRC section 501(c)(4)) that pays unreasonably high compensation.

-

Where prohibition of private inurement to insiders is present in the statute



Current substantial activities of the organization have changed.

-

Lost focus on original recognized tax exempt purpose



Current activities of the organization, which confer more than incidental private benefit.

-

Private benefit disallows exemption (c3 issue)

110

Universal Tax Issue: Unrelated Business

Income Tax

Related Overarching Tax Positions

Tax Positions - UBIT



Over allocating expenses against unrelated business income.



After an IRS exam closing agreement, and the organization is not following procedures agreed upon.



Treating an income flow as exempt from tax.

112




Decision to not file income tax returns in a local, state or foreign jurisdiction.



Not properly report (allocate or apportion) income earned in other taxing jurisdictions.



An income producing activity with a long history of net operating losses (NOLs).

113




Dual use of facilities and personnel and expenses.



Net operating losses (NOL) carrying forward into the open years under the statute of limitations.

114




Alternative investments in pass-through entities.

115

Management’s Suggested Approach

FIN 48 Analysis and Implementation

Management’s Suggested Approach



Decision Tree Analysis:

-

Identify all tax positions taken by the organization

-

Provide authority for all identified tax positions

117

Internal Management Memorandum –

PBC/Auditor Interview

118

Tax Positions Matrix - PBC

119

Questions?



[end]

120

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