May 2009
Authors:
Tamara L. Watts tamara.watts@klgates.com
206.370.8396
Tracey E.N. Hawk tracey.hawk@klgates.com
206.370.7855
Cordelia A. Glenn Grabiak cordelia.grabiak@klgates.com
412.355.6701
K&L Gates comprises approximately
1,900 lawyers in 32 offices located in
North America, Europe, and Asia, and represents capital markets participants, entrepreneurs, growth and middle market companies, leading FORTUNE
100 and FTSE 100 global corporations, and public sector entities. For more information, please visit www.klgates.com
.
As most Section 501(c)(3) organizations are by now aware, the IRS released a new version of Form 990 that all public charities and other tax-exempt organizations
(other than private foundations, which must file IRS Form 990-PF) meeting the reporting thresholds must file for tax year 2008 and beyond. For exempt organizations on a calendar year-end, the 2008 Form 990 is due May 15, 2009.
Among other changes, the new Form 990 asks exempt organizations to disclose whether they have adopted certain governance policies and procedures. While these policies are not required under federal tax law, the new Form 990 puts added pressure on exempt organizations to adopt or revise their policies and procedures to respond favorably to the new Form 990 questions.
Failing to disclose information on the new Form 990, particularly with respect to an area of perceived abuse (e.g., executive compensation or conflict of interest), could lead to additional inquiry by the IRS. To avoid such scrutiny, all exempt organizations required to file the new Form 990 should carefully consider policies that are applicable or relevant to their particular operations in light of the new reporting obligations. This alert provides a summary of the most common policies covered by the new Form 990 that exempt organizations should review in light of the increased disclosure obligations.
The excess benefit transaction regulations applicable to transactions between public charities (and Section 501(c)(4) organizations) and “disqualified persons” (i.e., directors, officers, substantial contributors, and family members and entities controlled by any of the foregoing) include procedures by which an exempt organization can establish a “rebuttable presumption” that compensation paid to the disqualified person is reasonable. Under these rebuttable presumption procedures, compensation paid is presumed to be reasonable if (1) an “authorized body,” usually composed of disinterested members of the governing body, approved the compensation in advance, (2) the authorized body obtained and relied upon comparability data in rendering its decision, and (3) the basis for its decision is adequately and timely documented.
The new Form 990 asks about compensation procedures of all filing organizations
(not just public charities and Section 501(c)(4) organizations covered by the excess benefit rules), which procedures are substantially identical to the rebuttable presumption procedures, and expands the scope of those procedures beyond disqualified persons. For example, Part VI.B, Lines 15a-b ask whether the process for determining the compensation of the organization’s chief executive officer, executive director, other top management, officers, and “key employees” includes a review and approval by independent members of the governing body, review of comparability data, and contemporaneous written substantiation of the decision.

The new Form 990 also requires that the organization include a description of the compensation review process for such individuals.
An organization can respond more favorably to the new Form 990 compensation questions by adopting an executive compensation review process that follows the rebuttable presumption procedures under the excess benefit transaction regulations.
Organizations may find it advisable to memorialize such process in their conflict of interest policy or a separate executive compensation policy. Such a policy should cover the organization’s chief executive officer, executive director, or other top management official, as well as its officers and key employees. “Key employees” for this purpose are those that earn at least $150,000 in reportable compensation, have substantial authority over the affairs of the organization or a major segment or activity of the organization, and are among the organization’s twenty most highly paid employees.
Part VI.B, Lines 12a-b of the new Form 990 ask whether the filing organization has adopted a written conflict of interest policy, and whether officers, directors, trustees, and key employees are required to disclose annually interests that could give rise to conflicts. Line 12c asks whether the organization regularly and consistently monitors and enforces compliance with the policy and, if so, how this is done.
A conflict of interest policy should: (1) identify the individuals subject to the policy; (2) identify the types of relationships that constitute an actual or potential conflict of interest; (3) facilitate disclosure of information that may help identify conflicts of interest (including by requiring an annual written disclosure by covered persons of actual and potential conflicts); (4) identify the body responsible for evaluating and approving transactions involving a potential or actual conflict of interest (i.e., the board or a committee of the board); and (5) prescribe specific procedures to be followed in responding to or managing conflicts, such as preventing a covered person from participating in a decision from which he or she could benefit financially. It is also recommended that the conflict of interest policy require the board or a board committee to follow the excess benefit transaction rebuttable presumption procedures in approving economic arrangements with disqualified persons.
The Sarbanes-Oxley Act (“Sarbanes-Oxley”) imposes criminal liability on an exempt organization that alters, falsifies, covers up, or destroys records (or persuades another to do so) with the intent to obstruct a federal investigation.
As a result of this liability, exempt organizations must be vigilant in monitoring and justifying document destruction practices. In addition, Part
VI.B, Line 14 of the new Form 990 asks whether the filing organization has adopted a written document retention and destruction policy.
Although not legally required, adopting such a policy will help ensure that the exempt organization complies with Sarbanes-Oxley requirements and also retains records for appropriate periods.
A document retention policy should cover the responsibilities of members of the governing body, officers, and staff concerning maintenance, storage, and disposal of records (including email and other electronic records) and documents received or created by the organization in connection with its activities and business. It also should contain guidelines for how long certain documents should be kept and how records should be destroyed
(unless retained due to litigation or other legal inquiry). Most importantly, the policy should provide that all document destruction must cease if a legal investigation is known or suspected, so as to avoid exposure to criminal obstruction charges. An appropriate document retention policy should facilitate the organization’s operations by promoting efficiency concerning the retention and destruction of records, while at the same time comply with
Sarbanes-Oxley requirements.
Sarbanes-Oxley also imposes criminal liability on organizations, including exempt organizations, that retaliate against certain types of whistleblowers.
Part VI.B, Line 13 of the new Form 990 asks whether the filing organization has a written whistleblower policy. Such a policy encourages employees, volunteers, and others dealing with the organization to report a good faith suspicion or credible information regarding such things as
May 2009 2

financial improprieties; improper destruction of records; misleading financial reporting; illegal, unethical, or other inappropriate activity or practices; or violations of the organization’s policies, without fear of retaliation.
A whistleblower policy can be fairly simple in nature, varying according to the nature of an organization’s activities, size, governance structure, and processes. At a minimum, it must provide assurances to reporting individuals that the information they supply will be confidentially and impartially evaluated without fear of retaliation. A whistleblower policy should specify who is covered by the policy (e.g., directors, officers, employees, volunteers, agents), describe the complaint reporting procedures (e.g., contact people and the preferred reporting procedures), identify the officer or other individual(s) responsible for investigating complaints, and set forth procedures on how reported violations will be resolved.
Depending on the size and nature of gifts accepted by an exempt organization, an organization may or may not need to adopt a gift acceptance policy.
Schedule M, Line 31 of the new Form 990 asks whether the filing organization has adopted a gift acceptance policy that requires review of nonstandard contributions. As well as allowing the filing organization to answer affirmatively to this question, adopting a gift acceptance policy can provide guidance to the organization’s governing body regarding the proper acceptance of gifts, highlight circumstances under which special consideration should be given to the acceptance of the gift (e.g., closely-held stock, charitable gift annuity, life insurance), ensure that the organization obtains information necessary to complete Form
990, Schedule M (see below) and other recordkeeping obligations and ensure that all reporting and receipt obligations are satisfied
(including substantiation of “quid pro quo donations” in excess of $75 and written acknowledgement of donor contributions of $250 or more). A gift acceptance policy also can be expanded to include provisions concerning compliance with state charitable solicitations laws and regulations.
It is worth noting that Schedule M must be completed only if the filing organization (1) reported receipt of more than $25,000 of aggregate non-cash contributions on Form 990, Part VIII, Line
1g, or (2) received contributions of works of art, historical treasures, other similar assets, or qualified conservation contributions, regardless of whether it reported any revenues from these contributions. If either of these thresholds are reached, however, the organization must provide information regarding twenty-four different categories of in-kind gifts
(e.g., artwork, real estate, securities, clothing, and books) that it received during the tax year, including the number of contributions in each category, revenues attributable to each category, and the methods used to determine the amounts reported as revenue. These expanded reporting requirements place a premium on good recordkeeping concerning such items, which recordkeeping procedures also could be incorporated into a gift acceptance policy.
Exempt organizations that engage in joint ventures or other similar arrangements with for-profit entities should consider adopting a joint venture policy.
Questions in Part VI inquire as to the organization’s participation in joint ventures or similar arrangements with taxable entities. Specifically,
Part VI, Line 16a asks whether the filing organization invested in, contributed assets to, or participated in such joint ventures or arrangements during the tax year. If the organization answers
“yes,” it must disclose in Part VI, Line 16b whether it has adopted a written policy requiring it, in its transactions with other organizations, to negotiate terms and safeguards to ensure that the organization’s exempt status is protected. For purposes of answering affirmatively to Part VI, Line
16b, an exempt organization might consider adopting a joint venture policy requiring, as a condition to the exempt organization entering into a joint venture or other arrangement with a taxable entity, that: (1) the exempt organization at all times retains control over the venture sufficient to ensure that the partnership furthers the exempt purpose of the organization; (2) any partnership in which the exempt organization is a partner gives priority to exempt purposes over maximizing profits for the partners; (3) the partnership not engage in any activities that would jeopardize the exempt organization's exemption; (4) returns of capital,
May 2009 3

allocations, and distributions be made in proportion to the partners' respective ownership interests; and
(5) all contracts entered into by the partnership with the exempt organization be on arm's-length terms, with prices at fair market value. While a joint venture policy may not be relevant for many exempt organizations, those that do enter into arrangements with taxable entities, even infrequently, may want to consider adopting such a policy.
If you have questions about the new Form 990 and the policies and procedures your organization should adopt to prepare for filing, please contact your K&L Gates lawyer for more information and guidance.
Anchorage Austin Beijing Berlin Boston Charlotte Chicago Dallas Fort Worth Frankfurt Harrisburg Hong Kong London
Los Angeles Miami Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park
San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d’Alene Taipei Washington, D.C.
K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the U.S., in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Singapore
(K&L Gates LLP Singapore Representative Office), and in Shanghai (K&L Gates LLP Shanghai Representative Office); a limited liability partnership
(also named K&L Gates LLP) incorporated in England and maintaining our London and Paris offices; a Taiwan general partnership (K&L Gates) which practices from our Taipei office; and a Hong Kong general partnership (K&L Gates, Solicitors) which practices from our Hong Kong office.
K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
©2009 K&L Gates LLP. All Rights Reserved
May 2009 4