Exempt Organization Tax Update

Schneider DownsNonprofit Services Industry Group

Susan M. Kirsch

July 16, 2009

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CURRENT ENVIRONMENT

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Current Environment

The Economy

April 2009: IRS EO Director Promises Help toTax Exempts During Economic Crisis

– Mergers and Acquisitions (New IRS Pub 4779)

– UBIT

– Governance

– Prohibited Transactions

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Current Environment

Collegiate Sports

May 20, 2009: Senator Grassley calls for moredisclosure of money in college sports after theCongressional Budget Office (“CBO”) released itsreport “Tax Preferences for Collegiate Sports.”

– CBO used Indianapolis Star database of financialinformation from164 Division 1 athletic programs.

– Fact that congressional analysts had to rely onnewspaper for source data highlights how little isavailable about how these programs work.

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Current Environment

Collegiate Sports (cont.)

Policy options highlighted in the CBO report include:

• Limiting the deduction of charitable contributions

• Limiting the use of tax-exempt bonds

• Limiting the exemption from income taxation

• Subject the income of athletic programs to UBIT

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Current Environment

Payments to Researchers

March 2009: Senator Grassley Investigates Paymentto Harvard Researchers by Drug Companies.

– Requested Pfizer to provide details of its payments to at least149 faculty members at Harvard Medical School.

– Raised similar concerns (i.e. conflict of interest) aboutresearchers at other universities.

August 2007: Sent letters to several universitiesseeking information about the reporting systemapplicable to academic researchers regardingoutside consulting income.

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Current Environment

Compensation

February 2009: Senator Grassley issues remarksregarding The Chronicle’s Report addressingcompensation for private college employees otherthan presidents.

– Colleges get big tax breaks to help them achieve theirmissions.

– Trustees need to make sure assets are used in the bestpossible way to fulfill charitable mission.

– Is $4 million for a single professor or football coach thebest use of resources?

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Current Environment

Endowments

January 2009: Senator Grassley sent letters to the 136wealthiest colleges and universities.

– Requested data on student aid, cost of attendance, tuitionincreases and endowment spending over the last 10 years.

September 2008: Senator Grassley held a roundtablediscussion on rising tuition costs and how endowmentshelp offset those costs.

– Participants included cross section of the higher-educationcommunity.

– No commitment on future legislation.

– Senator Grassley prefers self-regulation.

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Current Environment

Alternative Investments – Offshore BlockerCorporations

• May 2007: Senate Finance Committee (“SFC”) heldclosed-door meeting to review nonprofits using theforeign blocker corporation as a tax planning tool wheninvesting in hedge funds.

• September 26, 2007: SFC held a hearing to review theissue resulting in proposals to restrict the endowmentsof educational institutions with respect to thedistributions and expenditures.

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Current Environment

Alternative Investments – Offshore BlockerCorporations (cont.)

• 2008 Dirty Dozen Tax Scams including hiding incomeoffshore.

• February – March 2009: Senator Levin (D-Mich.) andRepresentative Doggett (D-Texas) introduced bills S 506and HR 1265 entitled “Stop Tax Haven Abuse Act of2009”. These bills are designed to curtail alleged abusesof investments or businesses outside the U.S.

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What’s Next

• May 2009: NAICU Washington Updatereported Senator Grassley is expected tostep down as ranking member of the SenateFinance Committee in 2011 to becomeranking member of the Senate JudiciaryCommittee.

• Unclear whether non-profit financing andgovernance issues will remain a priority forFinance Committee after Grassley’sdeparture.

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CURRENT DEVELOPMENTS

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Current Developments

Employer-Provided Cell Phones

June 2009

• Cell phones are listed property (i.e., cars).

• Working condition fringe benefit treatmentavailable if substantiation requirements ofIRC 274(d) are met (i.e. accountable plan).

• Notice 2009-46: IRS seeking comments onproposals to simply cell phone businesssubstantiation, due September 4th.

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Current Developments

Employer-Provided Cell Phones (cont.)

Three alternative methods being considered:

– Minimal personal use method (two proposed) – all usequalifies as business if employee establishes that apersonal cell phone is available for use or a specifiedamount of minimal personal use is disregarded.

– Safe harbor substantiation method – employer treatscertain percentage as business.

– Statistical sampling method – personal usemethodology in Rev. Proc. 2004-29 permissible.

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Current Developments

2009 Dirty Dozen Tax Scams

April 2009

• IRS names “abuse of charitable organizationsand deductions” to list.

• Attempts by donors to maintain control overdonated assets or income from donatedproperty.

• Valuation of non-cash assets donated tocharity.

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IRS State of the Union

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IRS FY 09 EO Work Plan and Annual Report

– Annual Report – new initiative to provide statisticalinformation on the EO division.

– Highlights that the IRS has almost doubled enforcementcontact between FY04 and FY08.

– Governance.

– Checklist for examining agents to determine whether anorganization’s governance practices impacted the taxcompliance issues identified during examination.

– Form 990 governance questions to be used in potentialcompliance initiatives, including compensation andtransactions with interested persons.

IRS Annual Report

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June, 2009- Assistant Commissioner IngramSpeaks to Georgetown Conference

– Explosive growth of TE sector

– Good governance as key

– IRS steps to manage this growth

June, 2009-Independent Contractor vs.Employee

– New IRS presentation on issue

– Also see IRS Pub 1779

IRS Annual Report

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2008-09 Priority Guidance Plan

• Pilot voluntary compliance program.

• Revenue procedure to modify Rev. Proc. 75-50 on thepublication requirement by a private school of itsnondiscriminatory policy.

• Final regulations on excise taxes on prohibited tax sheltertransactions and related disclosure requirements.

• Proposed regulations on new excise taxes on donor advisedfunds.

• Proposed regulations on IRS disclosure to state charity agencies.

• Guidance regarding contributions of inventory.

• Final regulations on substantiation and reporting requirementsfor cash and noncash charitable donations.

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IRS 2009-2013 Strategic Plan

Continued Oversight of the Tax-ExemptSector

Provide outreach and guidance to ensurewidespread adherence to the requirementsfor tax-exempt status.

Proactively address misuse of tax-exemptorganizations and/or tax-exempt status.

Maintain focus on universities, hospitalsand other major segments.

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Executive Compensation

200 Compliance Checks

50 Additional Single–Issue Exams

Focus on Organizations with Loans to Officers/Trustees

Continue Hospital Compliance Project ComplianceExams

90 Limited Scope Field Exams – Small and Mid-size501(c)(3) Organizations

Review of Colleges/Universities via Questionnaires

IRS Executive Compensation Reviews

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IRS COMPLIANCE INITIATIVES

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Compliance Initiatives

College & University ComplianceQuestionnaire

•UBI questions dominated (15 of 33 pages)

•The IRS requested the following for 47activities:

– Identify whether activity was reported as a taxable andprovide reason why any of the activities was not reported asUBI.

– Identify those activities that derived a loss for the past 3 outof 5 years and explain using a code the reason for it.

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Compliance Initiatives

College & University ComplianceQuestionnaire

• For UBI loss activities: Did taxpayer plan to make aprofit in the future? (e.g., activity was in start-upphase, costs were significantly greater thananticipated, etc.)

• For taxable activities, identify the type of expensesincurred (i.e. direct and indirect) and explain thecost allocation method used.

• IRS questioning accuracy of UBIT reporting andlawmakers to consider taking action.

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Compliance Initiatives

Trade/Business vs. Hobby

• IRS Fact Sheet, FS-2008-23, discussesappropriate guidelines for determiningwhen an activity is a business or a hobbynot engaged in for profit.

• Fact Sheet lists 8 key factors to assistexempt organizations evaluate if NOLdeduction should be .

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Compliance Initiatives

Form TDF 90-22.1 Foreign Bank Account Report

• Expanded the required “Persons” to complete formto include foreign individuals that “do business inthe U.S.” (suspended for 6/30/09 filing).

• Expansion of “financial interests” to include directand indirect investments in foreign corps andpartnerships.

• Voluntary disclosure program expires September23, 2009.

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Compliance Initiatives

Employment Tax Audits

•IRS National Research Program to improveemployment tax compliance to begin November,2009.

•The program will last for three years, with up to2000 tax examinations performed each year.

•Focus of review:– Worker classification;– Fringe benefits;– Officer’s compensation; and– Reimbursed expenses/accountable plan.

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Compliance Initiatives

De Minimis Fringe Benefits

IRS letter dated June 13, 2008 in response toan employer policy placing a $50 limit onexcludable de minimis fringe benefits.

– Letter states that the $50 limit was not imposedby the IRC.

– After providing examples such as occasionaltheater or sporting event tickets, the letterstates: “[no] dollar limit is placed on any of theseexamples.”

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Compliance Initiatives

No Additional Cost Benefits

PLR 200908032: Baseball tickets provided toemployees of a baseball organization may beexcludable as no additional cost fringe benefit.

•Issue: Tickets to sold out games.

•Reserved tickets well in advance of the gamesmay prove problematic.

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Compliance Initiatives

Community Foundations

• Questionnaires to 3,000 organizations

• Whether organizations qualify ascommunity foundations

• Initiating exams

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Charitable Spending Initiative

• Long range study

• Focus on sources and uses of funds,accomplishment of exempt purposes

Compliance Initiatives

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Compliance Initiatives

• Redesigned Form 990

• Request for Form 990-T

• Announcement 2008-2: covers publicdisclosure responsibilities

• Information on procedures for requests toIRS for copies of Form 990-T

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RECENT RULINGS

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Private Letter Rulings

Mergers and Acquisitions

PLR 200902013 (Oct. 17, 2008): Two hospitalsjointly operated a network of 6 medical clinics.Entering into a formal partnership agreementwould not adversely affect the exempt status ofthe organizations.

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Private Letter Rulings

Unrelated Business Income Tax (UBIT)

PLRs 200906053, 200904025, 200826026 –Favorable rulings to colleges and universitiesthat centralized the investment ofendowments in a single unitrust in which eachendowment and the respect college oruniversity are provided trust units.

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Unrelated Business Income Tax (UBIT) (cont.)

PLR 200832028 (Nov. 14, 2008) CommunityFoundation’s Services

Not UBTI fees from grant-making services (e.g. assistingwith the establishment of a grant-making program,designing a system of monitoring funded programs,reviewing grant requests, preparing research in specificareas of interest and identifying collaborationopportunities).

UBTI fees from clerical and administrative services providedby community foundation to foundations and other grant-making organizations.

Private Letter Rulings

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Private Letter Rulings

Private Benefit and Inurement

PLR 200849017 (Sept. 10, 2008)

Donor was granted organization an exclusivelicense to a patent with the right to sublicenseto third parties. Donor received compensationfrom the income from organization’ssublicenses in order to continue developmentof the technology.

Held: Private inurement

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OTHER ENFORCEMENT MATTERS

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Redesigned Form 990

“It’s a collaborative effort, but we really dohave a ways to go.”

- Stephen Clarke

IRS Form 990 Redesign Project ManagerMay, 2009

- Susan M. Kirsch

SD Tax Shareholder

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Schneider Downs Solutions

• GAP Analysis – SD’s electronic assessment ofclient’s prior year Form 990

• Interactive web-based PBC (Prepared by Client)Request

• Policy drafting and modification

– Internal and external

• Education

• Audit Committee and Board Participation

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Interactive PBC

Key Players

– Client (Nonprofit Organization)

– SD Audit Engagement Team

– SD Tax Engagement Team

– SD Technology Advisors

SD Integrated Service Delivery Model

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Interactive PBC

• Product Development Team:– SD Tax

– SD Technology Advisors

• Objectives:– Educate Nonprofit Clients

– Enhance Efficiency

– Collect Form 990 data

Introducing the SD ezFORM

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SD ezFORM

• Online system built to collect data fromclients using SD inSITE.

– SD inSITE is a tool developed by SchneiderDowns.

– Completely web based – no softwarenecessary.

– Secure using industry leading 256 bit dataencryption (SSL).

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• Time Entry– Time Clock

– Time in by Shift

– Time in Block

– Time in by Project

– Time in for Clients

– Payroll Entry

– Single Time Entry

• Time Export

• Time Approval– By Detail

– By Summary

– For Client Time

• Expense Reporting– Expense Entry

– Expense Approval

• inSITE Reports

• Tickler

• Employee PTO– Request

– Approval

• Inventory Requisition

• Client Database

• Document Portal

• inSITE Reviews

• inSITE Administration

• Work in ProgressCalendar

SD inSITE Other Offerings

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SD ezFORM

• What is it?

– Internet based electronic form.

– Allows multiple users at an organization to workconcurrently.

– Designed to ask only the questions appropriate for yourorganization.

• Benefits

– Organizes all of the tax questionnaires and associatedspreadsheets into one place.

– Enables you to ask questions of the tax staff as youprepare your response.

– Should reduce the time required by you and our staff tocollect and organize the information for your tax return.

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SD ezFORM

• Interactive– Some questions will appear depending on answers to

“trigger” questions.

– Download & upload associated spreadsheets.

– “Ask for Help” and “Tips” available.

– The user can start and stop as necessary without losingwork.

• Multi-user– Client can assign sections to various staff members to

spread the work.

Staff gets access to approved sections only, not to the entireform.

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SD ezFORM – Client Responsibilities

• Assign question sections to the appropriatestaff.

• Complete all questions and relatedspreadsheets.

That’s it!

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Login Screen

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Introduction Screen

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Question Sample

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Question Tip

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Download & Upload Files

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Quick Help Request

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Submit to SD Engagement Team

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Rollout

• Pittsburgh Client Introduction July 16, 2009

• 2009 Webinars scheduled

– 45 minutes in length

– Introduction to functionality and how to use

• July 22: 10 am and 2 pm

• August 5: 10 am and 2 pm

• August 19: 10 am and 2 pm

To register for a training webinar visit:

www.schneiderdowns.com/register

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Questions?

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Circular 230 Disclosure

This advice is not intended or written to beused for, and it cannot be used for, thepurpose of avoiding any federal tax penaltiesthat may be imposed, or for promoting,marketing or recommending to anotherperson, any tax related matter.