The IRSs New Form 990: New Governance Roles for Trustees of Colleges and Universities

1
The IRSs New Form 990New Governance Roles for
Trustees of Colleges and Universities

• Thomas K. Hyatt, Esq.
• Ober Kaler
• Washington, DC

2
Congressional Scrutiny of Tax-Exempt
Organizations

• Post-Sarbanes-Oxley uneven application to
  nonprofits
  
• House and Senate Hearings
• Senate Finance Committee
• Staff Discussion Draft on Charitable Reforms

3
Senator Grassleys Crusade

• Hospitals and Health Systems
• American Red Cross
• Educational Organizations
• Athletics, tax-exempt financing and endowments,
  executive compensation and benefits, governance
  
• Endowments The Letter
• Evangelists

4
Pension Protection Act of 2006

• Vehicle for charitable reforms
• Form 990-T is now a public record document
• Broadening of IRS intermediate sanctions
  application and impact
  
• Increase in amount of penalty excise tax on
  organization managers
  

5
Pension Protection Act of 2006 (contd)

• New restrictions on Supporting Organizations
• New restrictions on Donor Advised Funds

6
Nonprofit Executive Compensation

• IRS Executive Compensation Compliance Project
• Compliance checks and audits
• Round II of audits underway
• Component of other examinations, e.g., UBIT,
  universities
  
• New initiative on college and university
  executives
  
• New initiative on loans to executives

7
Nonprofit Executive Compensation (contd)

• March 2007 IRS Report-Summary of Findings
• Significant reporting issues
• No widespread reasonableness issues found
• Significant dollar assessments where problems
  found

8
IRS Implementing Guidelines for FY 2008

• New IRS Compliance Project for Colleges and
  Universities. IRS will be looking at how colleges
  and universities
  
• report income and expenses on Form 990
• calculate and report losses on Form 990-T
• allocate income and expenses in calculating their
  unrelated business taxable income
  
• invest and use their endowments and
• determine executive compensation.

9
Board Best Review Practices for Compensation

• GAO Compensation Study- Questions posed
• What governance is exercised over executive
  compensation?
  
• What is the basis for the compensation and
  benefits paid to CEOs and the four top health
  care executives of each health care system?
  
• What internal controls exist for the review and
  approval of executive travel and entertainment
  expenses, gifts and other perquisites?

10
Board Best Review Practices for Compensation

• Internal Control Issues
• GAO minority provide internal review of CEO
  expenses
  
• Expenses must be reported under an accountable
  plan or reimbursement is taxable income to the
  executive
  
• Non-reported expense reimbursement is an
  automatic excess benefit transaction under IRS
  rules executive must pay back all of the
  reimbursed funds and may still pay tax on them
• Non-reported expense reimbursement could be
  viewed as a loanmay subject directors to
  personal liability
  

11
Board Best Review Practices for Compensation

• Substantial conflict of interest policy
• Rebuttable presumption of reasonableness
• Robust internal controls
• Independent Compensation Committee
• Independent Audit Committee
• Full Board approval of CEO compensation, periodic
  review of staff compensation program
  
• Know your Form 990

12
Redesigned IRS Form 990

• The biggest thing the exempt organizations
  division at IRS has done in the last quarter
  century- EO Director Lois Lerner
  
• So much more than a tax formit is the key to the
  door of the entire organization
  
• www.irs.gov/charities is link for Redesigned Form
  990
  
• Final Version of new Form 990 released December
  20, 2007
  
• IRS will implement for 2009 filing season

13
Redesigned IRS Form 990

• Guiding Principles
• Enhancing transparency
• Promoting compliance
• Minimizing the burden on filing organizations
• (Two out of three aint bad)
• 11-page core form
• 16 schedules

14
Redesigned IRS Form 990

• Core Form 990
• Part I- Summary
• Designed to permit quick comparison of
  organizations
  
• Uses two-year comparison of financial data
• 3 ½ lines to describe mission and activities
• Disclosure of number of independent voting
  members
  
• Discussion drafts performance ratios have been
  removed
  

15
Redesigned IRS Form 990

• Part VI- Statements Regarding Governance,
  Management, and Disclosure
  
• Do you have a conflict of interest policy and if
  so, are annual disclosures required? How is
  compliance monitored and enforced?
  
• Do you have a whistleblower policy? Document
  retention and destruction policy?
  
• Do you follow the rebuttable presumption of
  reasonableness for determining compensation of
  CEO, other officers, key employees?
  
• Do you have a written policy to review
  investments or participation in joint ventures or
  affiliates and to safeguard exempt status?
  

16
Redesigned IRS Form 990

• Part VI- Statements Regarding Governance,
  Management, and Disclosure (contd)
  
• Perhaps the most significant governance question
  of them all Was a copy of the Form 990 provided
  to the governing body before it was filed?
  Organization MUST describe the process, if any,
  the organization uses to review the 990

17
Redesigned IRS Form 990

• Part VII- Compensation of Officers, Directors,
  Trustees, Key Employees, Highest Compensated
  Employees, and Independent Contractors
  
• Must disclose compensation to former officers,
  key employees, or highly compensated employees
  who received more than 100,000 and former
  directors or trustees who received more than
  10,000 for serving as directors or trustees

18
Redesigned IRS Form 990

• Schedule D- Supplemental Financial Statements
• Part V- Endowment Funds
• Financial data for current year and four years
  back
  
• Contributions
• Investment earnings/losses
• Grants/scholarships
• Admin expenses
• EOY balance
• Disclosure of restrictions on endowment ()
  board-designated, permanent, term
  
• Describe intended uses of endowment funds

19
Redesigned IRS Form 990

• Schedule J- Supplemental Compensation
  Information
  
• Applies to every officer, director, trustee, key
  employee (including former), and top 5 highest
  compensated employees with reportable income
  above 150K or reportable plus nonreportable
  above 250K
• Requires full compensation disclosure with
  breakdown by type of compensation

20
Redesigned IRS Form 990

• Schedule J- Supplemental Compensation
  Information
  
• Must disclose payment of first-class travel,
  companion travel, tax indemnification and
  gross-ups, discretionary spending, housing
  allowance or personal residence, business use of
  personal residence, health or social club dues,
  personal services (maid, chauffeur, etc.)
• Written policy and substantiation required?
• Identify process for review of CEO compensation
• Identify change in control payments, severance
  payments, SERPs, equity-based compensation
  

21
Redesigned IRS Form 990

• Schedule K- Supplemental Information on Tax
  Exempt Bonds
  
• Disclosure of bond issues and use of proceeds
• Disclosure of private use compliance, including
  compliance with management agreement and research
  agreement safe harbors of Rev. Procs. 97-13 and
  97-14
• Transition period does not apply to bonds issued
  before 2003
  

22
Redesigned IRS Form 990

• Some issues to ponder for governing boards
• Transparency
• Is Form 990 focused on disclosure or establishing
  norms?
  
• Does the 990 establish best practice or mandatory
  practice?
  
• Do we make publicly and readily available
  documents, policies, and reports that would
  provide greater transparency as to our operations
  even when we are not required to do so? Should
  we?
• Does the Form 990 accurately tell the tale of how
  our board works?
  

23
Redesigned IRS Form 990

• Some issues to ponder for governing boards
• Governance
• Do we follow the best practices cited in the Form
  990?
  
• What if we do it differently? What if we say no
  ?
  
• Who should review the Form 990board work or
  committee work?
  
• Do we have best practice standard policies on
  conflict of interest, record retention, and
  whistleblowing?
  
• Is our conflict of interest policy actively and
  uniformly monitored and enforced?
  

24
Redesigned IRS Form 990

• Some issues to ponder for governing boards
• Compensation
• Are our board compensation review procedures
  adequate?
  
• Do we secure the rebuttable presumption of
  reasonableness (independent board review of
  compensation and benefits, based on objective
  comparable data, and documented in the minutes)
  when appropriate?
• Do we have effective internal controls for
  reimbursement of expenses?
  
• Do the types of compensation we provide to senior
  leadership, particularly for expenses of a
  personal nature, satisfy IRS rules for reasonable
  compensation? Do they pass the front page test?

25
Redesigned IRS Form 990

• Some issues to ponder for governing boards
• Endowments
• Does the board understand the nature and extent
  of any restrictions placed on endowment funds?
  
• Did the board discuss and does it periodically
  revisit any board restrictions placed on
  endowment funds?
  
• Does the board actively discuss and periodically
  revisit the uses of its endowment funds?
  
• How does the investment and use of our endowment
  funds compare with like institutions?
  
• How do/would we fare in our answers to the
  Letter ?
  

26
The IRSs New Form 990New Governance Roles for
Trustees of Colleges and Universities

• Thomas K. Hyatt, Esq.
• Ober Kaler
• Washington, DC