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.
[email protected]
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
PLR 201213034 - Rationale



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
PLR 201213034 - Rationale



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
PLR 201213034 - Rationale


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
PLR 201213034 - Rationale

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
PLR 201213034 - Rationale

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
PLR 201213034 - Rationale




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
PLR 201213034 - Rationale





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
Automatic Revocation of Tax Exempt
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
Automatic Revocation of Tax Exempt
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
Automatic Revocation of Tax Exempt
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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking



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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking





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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking

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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking


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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking





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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking




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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking



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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking

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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking




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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking

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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking







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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking





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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking



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 Audit Posture: What to Expect When
the IRS Comes Knocking




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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking


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
IRS Audit Posture: What to Expect When
the IRS Comes Knocking




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
What we are seeing Nationally



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
What we are seeing Nationally





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
What we are seeing Nationally





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
What we are seeing Nationally






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
General Instructions
Additions/Deletions/Expansions for 2011


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
General Instructions
Additions/Deletions/Expansions for 2011

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
General Instructions
Additions/Deletions/Expansions for 2011

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
General Instructions
Additions/Deletions/Expansions for 2011


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, 19852 C.B. 740.
65
General Instructions
Additions/Deletions/Expansions for 2011


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
General Instructions
Additions/Deletions/Expansions for 2011
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
General Instructions
Additions/Deletions/Expansions for 2011


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
Core Form 990, Page I, Header, Part I
and Part II Changes/Additions/Deletions

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
Core Form 990, Page I, Header, Part I
and Part II Changes/Additions/Deletions
 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
Core Form 990, Page I, Header, Part I
and Part II Changes/Additions/Deletions



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
Changes/Additions/Deletions
 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 W2s) 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
Changes/Additions/Deletions

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
Changes/Additions/Deletions
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
Core Form 990, Page 6, Part VI
Changes/Additions/Deletions
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
Core Form 990, Page 6, Part VI
Changes/Additions/Deletions


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
2011 Form 990 Draft Changes

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
2011 Form 990 Draft Changes

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
2011 Form 990 Draft Changes

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
2011 Form 990 Draft Changes


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
2011 Form 990 Draft Changes


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
2011 Form 990 Draft Changes


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)
Probability of
Occurring
Cumulative
Probability of
Occurring
1,000,000
5%
5%
800,000
25%
30%
600,000
25%
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
Tax Positions - Exemption

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
Tax Positions - Exemption


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
Tax Positions - Exemption

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
Tax Positions - Exemption

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
Tax Positions - UBIT



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
Tax Positions - UBIT


Dual use of facilities and personnel and
expenses.
Net operating losses (NOL) carrying
forward into the open years under the
statute of limitations.
114
Tax Positions - UBIT

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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