(continued from front flap) hopkins anning the new ......bruce r. hopkins is a senior part-ner with...

• Public charity status

• Legislative activities

• Reporting and disclosure requirements

• Supplemental financial statements

• Tax-exempt schools

• Fundraising and gaming activities

• Tax-exempt hospitals

• Domestic grantmaking

• Foreign activities

• And more

The impact of Form 990 on the man-agement, operations, and governance of most exempt organizations is massive. The New Form 990 is a beacon for organi-zations struggling to revamp their opera-tions and upgrade their practices in order to complete this capacious new return.

BRUCE R. HOPKINS is a senior part-ner with the firm Polsinelli Shughart and the author of more than twenty-five books, including The Law of Tax-Exempt Organizations, Ninth Edition, Planning Guide for the Law of Tax-Exempt Organizations, and Nonprofit Law Made Easy (all published by Wiley).

DOUGLAS K. ANNING is a shareholder with Polsinelli Shughart, concentrating on tax-exempt and healthcare law.

VIRGINIA C. GROSS is a shareholder with Polsinelli Shughart and concen-trates her practice on tax matters and nonprofit organization law.

THOMAS J. SCHENKELBERG is chair of Polsinelli Shughart's Nonprofit Organizations Practice Group and also focuses his practice on tax-exempt organization law matters.

(continued from front flap)

The accurate and complete prepara-tion of Form 990—the information return that must be filed annually

by most types of tax-exempt organiza-tions—is key to maintaining tax-exempt status, public image, and fundraising capabilities. In December 2007, the IRS released the newly redesigned Form 990. The publication of this significantly expanded return has created, and is cre-ating, many new laws . . . and confusion. Recognizing that far too many nonprofit organizations are unprepared for what is coming their way, The New Form 990 channels its stellar author team’s decades of legal expertise to provide tax-exempt organizations and tax return preparers with the help they need to properly, effectively, and accurately prepare the new return.

Professionals working to prepare this new labyrinthine form are guaranteed to encounter many unexpected hurdles.Authors Hopkins, Anning, Gross, and Schenkelberg provide readers with guidance and a road map to help maneuver through the revised Form 990, including summaries of the law underlying each of the parts and questions in the return, so that tax-exempt organizations and their advisors can understand the background law whenformulating answers to the questions.

Deftly covering both pre-existing and newly created laws as well as discus-sions of policy and preparation, The New Form 990 brims with line-by-line analyses as well as numerous checklists of steps to take to be in the best pos-sible position to prepare the return. Coverage includes:

• Preparation of Parts I–XI and Schedules A–R

• Compliance tasks

• Checklist of schedules

• Corporate governance

• Compensation

• Revenue, expenses, and balance sheets

(continued on back flap)

R O N M A T T O C K S

BRUCE R. HOPKINSDOUGLAS K. ANNING

VIRGINIA C. GROSSTHOMAS J. SCHENKELBERG

LAW, POLICY, AND

PREPARATION

THE NEWFORM 990

THE NEW FORM

990

THE NEW FORM 990LAW, POLICY, AND PREPARATION

HOPKINS

ANNING

GROSS

SCHENKELBERG

LAW

, PO

LICY, A

ND

PREPA

RA

TION

The law, policy, andstep-by-step guidance

to the all-new IRS Form 990In December 2007, the IRS released the newly retooled Form 990, designed to enhance transparency, promote compliance, and inject the IRS into governance issues concerning tax-exempt organizations. The new return is now much lengthier than the previous return, requires much more disclosure of information by organizations than was previously required by the IRS, and will require tax-exempt organizations to monitor activities beginning with tax year 2008 for disclosure on the new form.

An essential tool for executive directors and officers of tax-exempt organizations as well as their lawyers and accountants, The New Form 990 provides a comprehensive and timely bellwether to help readers navigate this significant, complex, and extraordinary document. Providing the necessary laws and policies that correspond with the various questions and dis-closures posed by the form, The New Form 990 also includes step-by-step instructions to assist tax-exempt organizations and tax return preparers with their analysis and preparation of the required reporting on the form.

The redesigned Form 990 is no ordinary information return and no ordinary government form. Jam-packed with law, pol-icy, and preparation discussion and advice, The New Form 990 is designed to help readers save considerable time, money, and effort preparing and filing their new and expanded returns.

Hopkins_NF_FM_1 11/13/2008 2

Hopkins_NF_FM_1 11/13/2008 1

The New Form 990

Hopkins_NF_FM_1 11/13/2008 2

Hopkins_NF_FM_1 11/13/2008 3

The New Form 990

Law, Policy, and Preparation

Bruce R. HopkinsDouglas K. AnningVirginia C. Gross

Thomas J. Schenkelberg

John Wiley & Sons, Inc.

Hopkins_NF_FM_1 11/13/2008 4

This book is printed on acid-free paper.�1

Copyright # 2009 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this

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Library of Congress Cataloging-in-Publication Data:

The new form 990 : law, policy, and preparation / Bruce R. Hopkins . . . [et al.].

p. cm.

Includes index.

ISBN 978-0-470-37505-1 (cloth)

1. Nonprofit organizations–Taxation–Law and legislation–United States. 2. Tax

exemption–Law and legislation–United States–Forms. 3. Tax returns–United States. I.

Hopkins, Bruce R.

KF6449.N49 2009

343.730502668–dc22 2008040277

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

www.wiley.com

Hopkins_NF_FM_1 11/13/2008 5

Contents

About the Authors xix

Preface xxi

Chapter One: Part I—Overview of New Form 990 1§ 1.1 Form 990 Basics 2

(a) Various Forms 2

(b) Filing Exceptions 2

(c) Filing Due Dates 3

(d) Penalties 3

(e) Disclosure Requirements 3

§ 1.2 IRS Guiding Principles 5

§ 1.3 Import of New Form 990 5

§ 1.4 New Form 990 Introduction 6

§ 1.5 Summary of Parts of New Form 990 8

(a) Part I (Summary) 8

(b) Part II (Signature Block) 9

(c) Part III (Program Service Accomplishments) 10

(d) Part IV (Schedules) 10

(e) Part V (Other IRS Fillings) 10

(f) Part VI (Governance) 10

(g) Part VII (Compensation) 10

(h) Parts VIII to XI (Financial Information) 11

§ 1.6 Law and Policy as to Summary 11

(a) Mission Statements 11

(b) Governing Instruments 12

(c) Organizational Test 12

(d) Statement of Purposes 12

(e) Primary Purpose Rule 13

(f) Independent Members of Governing Body 13

(g) Unrelated Business 13

(h) Program Service Revenue 14

(i) Professional Fundraising Expenses 14

§ 1.7 Preparation of New Form 990, Part I 14

§ 1.8 Summary of New Form 990 Schedules 15

(a) Schedule A 16

(b) Schedule B 16

(c) Schedule C 16

(d) Schedule D 16

n v n

Hopkins_NF_FM_1 11/13/2008 6

(e) Schedule E 16

(f) Schedule F 16

(g) Schedule G 17

(h) Schedule H 17

(i) Schedule I 17

(j) Schedule J 17

(k) Schedule K 18

(l) Schedule L 18

(m) Schedule M 18

(n) Schedule N 18

(o) Schedule O 19

(p) Schedule R 19

§ 1.9 Form 990-EZ 19

§ 1.10 Transition Rules 19

§ 1.11 Draft Instructions 19

Chapter Two: Part III—Program Service Accomplishments 21§ 2.1 Law and Policy 21

(a) Primary Purpose Rule 21

(b) Articles of Organization 22

(c) Operational Test 22

(d) Mission Statement 22

(e) Charitable Purposes and Activities 22

(f) Other Exempt Purposes and Activities 23

(g) Recognition of Exemption 24

(h) Program Service Accomplishments 24

§ 2.2 Preparation of New Form 990 Part III 25

(a) Statement of Mission 25

(b) Changes in Program Services 26

(c) Program Service Accomplishments 26

§ 2.3 New Form 990 Compliance Tasks 27

Chapter Three: Part IV—Checklist of Schedules 29§ 3.1 Law and Policy 29

(a) Line 1 (Public Charities and Split-Interest Trusts) 29

(b) Line 2 (Contributors) 29

(c) Line 3 (Political Campaign Activities) 30

(d) Line 4 (Lobbying Activities) 30

(e) Line 5 (Notice, Reporting, Proxy Tax) 30

(f) Line 6 (Donor-Advised Funds) 31

(g) Line 7 (Conservation Easements) 31

(h) Line 8 (Works of Art, etc.) 31

(i) Line 9 (Credit Counseling, etc.) 31

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Hopkins_NF_FM_1 11/13/2008 7

(j) Line 10 (Endowments) 32

(k) Line 11 (Assets and Liabilities) 32

(l) Line 12 (Audited Financial Statements) 32

(m) Line 13 (Schools) 32

(n) Line 14a (International Activities) 32

(o) Line 14b (International Revenues, Expenses) 32

(p) Line 15 (International Grantmaking to Organizations) 32

(q) Line 16 (International Grantmaking to Individuals) 32

(r) Line 17 (Fundraising Activities) 33

(s) Line 18 (Fundraising Events) 33

(t) Line 19 (Gaming) 33

(u) Line 20 (Hospitals) 33

(v) Line 21 (Domestic Grants to Organizations) 33

(w) Line 22 (Domestic Grants to Individuals) 33

(x) Line 23 (Compensation of Former Officers, etc.) 33

(y) Line 24a (Outstanding Bond Issues) 33

(z) Line 24b (Tax-Exempt Bonds Investments) 34

(aa) Line 24c (Tax-Exempt Bonds Defeasements) 34

(bb) Line 24d (‘‘On Behalf of’’ Issues) 34

(cc) Line 25a (Excess Benefit Transactions) 34

(dd) Line 25b (Prior-Year Excess Benefit Transactions) 35

(ee) Line 26 (Loans to Interested Persons) 35

(ff) Line 27 (Assistance to Interested Persons) 35

(gg) Line 28a (Business Relationships) 35

(hh) Line 28b (Business Relationships) 35

(ii) Line 28c (Business Relationships) 35

(jj) Line 29 (Noncash Contributions) 35

(kk) Line 30 (Noncash Contributions) 36

(ll) Line 31 (Dissolutions, etc.) 36

(mm) Line 32 (Substantial Contractions, etc.) 36

(nn) Line 33 (Disregarded Entities) 36

(oo) Line 34 (Related Entities) 36

(pp) Line 35 (Controlled Entity) 36

(qq) Line 36 (Transfers to Noncharitable Organizations) 36

(rr) Line 37 (Use of Entities Taxed as Partnership) 37

§ 3.2 Preparation of New Form 990 Part IV 37

(a) Line 1 (Public Charities and Split-Interest Trusts) 37

(b) Line 2 (Contributors) 37

(c) Line 3 (Political Campaign Activities) 37

(d) Line 4 (Lobbying Activities) 37

(e) Line 5 (Notice, Reporting, Proxy Tax) 37

(f) Line 6 (Donor-Advised Funds) 38

(g) Line 7 (Conservation Easements) 38

(h) Line 8 (Works of Art, etc.) 38

n vii n

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Hopkins_NF_FM_1 11/13/2008 8

(i) Line 9 (Credit Counseling, etc.) 38

(j) Line 10 (Endowments) 38

(k) Line 11 (Assets and Liabilities) 38

(l) Line 12 (Audited Financial Statements) 39

(m) Line 13 (Schools) 39

(n) Line 14a (International Activities) 39

(o) Line 14b (International Revenue, Expenses) 39

(p) Line 15 (International Grantmaking to Organizations) 39

(q) Line 16 (International Grantmaking to Individuals) 39

(r) Line 17 (Fundraising Activities) 39

(s) Line 18 (Fundraising Events) 40

(t) Line 19 (Gaming) 40

(u) Line 20 (Hospitals) 40

(v) Line 21 (Domestic Grants to Organizations) 40

(w) Line 22 (Domestic Grants to Individuals) 40

(x) Line 23 (Compensation of Former Officers, etc.) 40

(y) Line 24a (Outstanding Bond Issues) 41

(z) Line 24b (Tax-Exempt Bonds Investments) 41

(aa) Line 24c (Tax-Exempt Bonds Defeasements) 41

(bb) Line 24d (‘‘On Behalf of’’ Issues) 41

(cc) Line 25a (Excess Benefit Transactions) 41

(dd) Line 25b (Prior-Year Excess Benefit Transactions) 42

(ee) Line 26 (Loans to Interested Persons) 42

(ff) Line 27 (Assistance to Interested Persons) 42

(gg) Line 28a (Business Relationships) 42

(hh) Line 28b (Business Relationships) 42

(ii) Line 28c (Business Relationships) 42

(jj) Line 29 (Noncash Contributions) 42

(kk) Line 30 (Noncash Contributions) 42

(ll) Line 31 (Dissolutions, etc.) 43

(mm) Line 32 (Substantial Contractions, etc.) 43

(nn) Line 33 (Disregarded Entities) 43

(oo) Line 34 (Related Entities) 43

(pp) Line 35 (Controlled Entity) 43

(qq) Line 36 (Transfers to Noncharitable Organizations) 43

(rr) Line 37 (Use of Entities Taxed as Partnership) 43


Chapter Four: Part V—Other IRS Filings and Tax Compliance 45§ 4.1 Law and Policy 45

(a) Form 1096 Rules 45

(b) Form W-2G Rules 45

(c) Backup Withholding Rules 45

(d) Form W-3 Rules 45

n viii n

CONTENTS

Hopkins_NF_FM_1 11/13/2008 9

(e) Federal Employment Tax Returns 45

(f) Electronic Filing Requirements 46

(g) Form 990-T Rules 46

(h) Form TD F 90-22.1 Rules 46

(i) Prohibited Tax Shelter Transactions 47

(j) Nondeductible Contributions 47

(k) Quid Pro Quo Contributions 47

(l) Form 8282 Rules 48

(m) Personal Benefit Contracts 48

(n) Contributions of Intellectual Property 48

(o) Contributions of Vehicles 49

(p) Excess Business Holdings Rules 49

(q) Donor-Advised Funds 52

(r) Social Clubs 54

(s) Mutual Organizations 54

(t) Nonexempt Charitable Trusts 55

§ 4.2 Preparation of New Form 990 Part V 55

(a) Various Information Returns 55

(b) Unrelated Business Income 56

(c) Foreign Bank Account(s) 56

(d) Prohibited Tax Shelter Transactions 56

(e) Nondeductible Contributions 57

(f) Quid Pro Quo Contributions 57

(g) Form 8282 57

(h) Personal Benefit Contracts 57

(i) Contributions of Intellectual Property 57

(j) Contributions of Vehicles 57

(k) Excess Business Holdings 58

(l) Donor-Advised Funds 58

(m) Social Clubs 58

(n) Mutual Organizations 58

(o) Nonexempt Charitable Trusts 59


Chapter Five: Part VI—Corporate Governance 61§ 5.1 Law and Policy 61

(a) Creation and Governance of a Tax-Exempt Organization 62

(b) Board Size 62

(c) Board Composition 63

(d) Independent Board Members 63

(e) Board Functions and Fiduciary Responsibility 65

(f) Duties of Directors 66

(g) National Developments in Nonprofit Governance 67

(h) State Acts on Charitable Accountability 70

CONTENTS

n ix n

Hopkins_NF_FM_1 11/13/2008 10

(i) Corporate Policies 71

(j) Document Disclosure Rules 75

(k) Reporting Material Changes to the IRS 76

(l) Filing a Copy of the Form 990 with State Authorities 77

§ 5.2 Preparation of New Form 990, Part VI 77

(a) Section A (Governing Body and Management) 78

(b) Section B (Policies) 83

(c) Section C (Disclosure) 85


Chapter Six: Part VII and Schedule J—Compensation 89§ 6.1 Law and Policy 89

(a) Private Inurement 90

(b) Excess Benefit Transactions and Intermediate Sanctions 100

(c) Private Benefit 107

§ 6.2 Preparation of New Form 990, Part VII and Schedule J 112

(a) Section A (Compensation Information) 112

(b) Section B (Independent Contractors) 122

(c) Schedule J (Additional Compensation Information) 122

§ 6.3 Part VII and Schedule J Compliance Tasks 133

Chapter Seven: Part VIII to IX—Revenue, Expenses, and Balance Sheet 135§ 7.1 Law and Policy 135

(a) Introduction of Issues Addressed Elsewhere in Book 135

(b) Unrelated Business Income 136

(c) Sarbanes-Oxley and Its Progeny 149

§ 7.2 Preparation of New Form 990, Parts VIII–XI 171

(a) Part VIII (Statement of Revenue) 171

(b) Part IX (Statement of Functional Expenses) 178

(c) Part X (Balance Sheet) 187


Chapter Eight: Schedule A—Public Charity Status 199§ 8.1 Law and Policy 199

(a) Private Foundation Defined 199

(b) Concept of Public Charity 200

(c) Institutions 201

(d) Donative Publicly Supported Organizations 204

(e) Service Provider Publicly Supported Organizations 210

(f) Comparative Analysis of Publicly Supported Charities 213

(g) New Publicly Supported Charities 213

(h) Supporting Organizations 214

(i) Public Safety Testing Organizations 223

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Hopkins_NF_FM_1 11/13/2008 11

(j) Import of Public–Private Dichotomy 223

(k) Nonexempt Charitable Trusts 224

(l) Disqualified Persons 224

§ 8.2 Preparation of New Form 990 Schedule A 227

(a) Part I (Reason for Public Charity Status) 227

(b) Part II (Support Schedule for Donative-Type Entities) 230

(c) Part III (Support Schedule for Service Provider–Type

Entities) 231

(d) Part IV (Supplemental Information) 232


Chapter Nine: Schedule C—Legislative Activities 235§ 9.1 Law and Policy 235

(a) Types of Lobbying Activity 235

(b) Exceptions to Treatment as Lobbying 237

(c) What Is Legislation? 237

(d) Substantial Part Test 237

(e) Expenditure Test 238

(f) Lobbying Taxes 241

(g) Lobbying by Other Exempt Organizations 241

(h) Deductibility of Dues 242

§ 9.2 Preparation of Schedule C 243

(a) Organizations Required to Report on Schedule C 244

(b) Part II-A—Expenditure Test 244

(c) Part II-B—Substantial Part Test 247

(d) Part III-A—Deductibility of Dues 249

(e) Part III-B—Dues Notice, Reporting Requirements,

and Proxy Tax 250

(f) Part IV—Supplemental Information 253

§ 9.3 Schedule C Compliance Tasks 253

Chapter Ten: Schedule C—Political Activities 255§ 10.1 Law and Policy 255

(a) Charitable Organizations 255

(b) Political Activity Taxes Paid by Charities 264

(c) Political Activity by Other Exempt Organizations 264

(d) Political Taxes Paid by Other Exempt Organizations 265

§ 10.2 Preparation of Schedule C 265

(a) Part I-A (Reporting of Political Campaign Activity) 265

(b) Part I-B 266

(c) Part I-C (Political Expenditure Subject to Tax) 267

§ 10.3 Schedule C Compliance Tasks 268

CONTENTS

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Hopkins_NF_FM_1 11/13/2008 12

Chapter Eleven: Schedule D—Supplemental Financial Statements 269§ 11.1 Law and Policy 269

(a) Donor-Advised Funds 269

(b) Conservation Easements 272

(c) Art, Historical Treasures, and Other Similar Assets 274

(d) Trust, Escrow, and Custodial Arrangements 275

(e) Endowment Funds 278

(f) Investments—Subsidiaries and Joint Ventures 281

§ 11.2 Preparation of New Form 990 Schedule D 296

(a) Part I (Donor-Advised Funds) 296

(b) Part II (Conservation Easements) 299

(c) Part III (Collections of Art, Historical Treasures, and

Other Similar Assets) 302

(d) Part IV (Trust, Escrow and Custodial Arrangements) 304

(e) Part V (Endowment Funds) 304

(f) Part VI (Investments—Land, Buildings and Equipment) 307

(g) Part VII (Investments—Other Securities) 308

(h) Part VIII (Investments—Program Related) 309

(i) Part IX (Other Assets) 310

(j) Part X (Other Liabilities) 311

(k) Parts XI, XII, and XIII (Reconciliation of Changes in Net Assets,

Revenues, and Expenses from Form 990 to Audited Financial

Statements) 312

(l) Part XIV (Supplemental Information) 312


Chapter Twelve: Schedule E—Tax-Exempt Schools 315§ 12.1 Law and Policy 315

(a) Public Charity Requirements 315

(b) Organizational Requirements (4.01) 316

(c) Statement of Policy (4.02) 316

(d) Publicity (4.03) 316

(e) Facilities and Programs (4.04) 318

(f) Scholarship and Loan Programs (4.05) 319

(g) Certification (4.06) 319

(h) Faculty and Staff (4.07) 319

(i) Specific Records (7.01) 319

(j) Limitation (7.02) 320

(k) Exceptions (7.03) 320

(l) Failure to Maintain Records (7.04) 320

§ 12.2 Preparation of Schedule E 320

(a) Public Charity and Nondiscriminatory Policy 320

§ 12.3 Schedule E Compliance Tasks 323

CONTENTS

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Hopkins_NF_FM_1 11/13/2008 13

Chapter Thirteen: Schedule F—Foreign Activities 325§ 13.1 Law and Policy 325

(a) Foreign Activities of an Exempt Organization 326

(b) Grants to Foreign Organizations 327

(c) Foreign Grants from Donor-Advised Funds 328

(d) U.S. Recognition of Foreign Charities and Equivalency

Determinations 328

(e) Grants to Foreign Individuals 330

(f) USA PATRIOT Act and Other Federal Acts Regarding Financing

Terrorist Activities 330

(g) Treasury Anti-Terrorist Financing Guidelines 331

(h) Suspension of Tax-Exempt Status for Designation as a

Terrorist Organization 333

§ 13.2 Preparation of New Form 990 Schedule F 334

(a) Part I (General Information on Activities Outside the United

States) 334

(b) Part II (Grants and Other Assistance to Organizations and Entities

Outside the United States) 337

(c) Part III (Grants and Other Assistance to Individuals Outside the

United States) 339



Chapter Fourteen: Schedule G—Fundraising and Gaming Activities 343§ 14.1 Law and Policy 343

(a) Federal Tax Law Concept of Fundraising 343

(b) Methods of Fundraising 344

(c) Fundraising Events 345

(d) Concept of Professional Fundraiser 345

(e) State Regulation of Fundraising 345

(f) State Charitable Solicitation Acts 346

(g) States’ Police Power 350

(h) Constitutional Law Considerations 351

(i) Federal Regulation of Fundraising 352

(j) Fundraising by Means of the Internet 354

(k) Fundraising Contracts 359

(l) Federal and State Regulation of Gaming 359

(m) Schedule B 362

§ 14.2 Preparation of New Form 990 Schedule G 364

(a) Part I (Professional Fundraising Expenses) 364

(b) Part II (Fundraising Events) 366

(c) Part III (Gaming) 367

§ 14.3 Preparation of Other Parts of New Form 990 370

(a) Part I, Line 16a (Professional Fundraising Expenses) 370

CONTENTS

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Hopkins_NF_FM_1 11/13/2008 14

(b) Part IV, Line 14b (Fundraising Outside the U.S.) 370

(c) Part VIII, Lines 1c, 8a, and 9a (Fundraising Events) 370

(d) Part IX, Line 11e (Professional Fundraising Expenses) 370

(e) Schedule B (Information about Contributions) 370


Chapter Fifteen: Schedule H—Hospitals 375§ 15.1 Law and Policy 375

(a) Charity Care and Community Benefit 375

(b) Management Companies and Joint Ventures 379

§ 15.2 Preparation of New Form 990 Schedule H 380

(a) Who Must File 380

(b) Transition Rules for 2008 380

(c) Aggregation Rules 381

(d) Part I (Charity Care and Certain Other Community

Benefits at Cost) 383

(e) Part II (Community Building Activities) 401

(f) Part III (Bad Debt, Medicare, and Collection Practices) 404

(g) Part IV (Management Companies and Joint Ventures) 410

(h) Part V (Facility Information) 411

(i) Part VI (Supplemental Information) 411


Chapter Sixteen: Schedule I—Domestic Grantmaking 421§ 16.1 Law and Policy 421

(a) Evaluating and Monitoring Grants 422

(b) Expenditure Responsibility Rules 424

§ 16.2 Preparation of New Form 990 Schedule I 426

(a) Part I (General Information on Grants and Assistance) 427

(b) Part II (Grants and Other Assistance to Governments

and Organizations in the United States) 427

(c) Part III (Grants and Other Assistance to Individuals

in the United States) 429



Chapter Seventeen: Schedule K—Tax-Exempt Bonds 433§ 17.1 Law and Policy 433

(a) Qualified Use of Proceeds and Private Business Use 434

(b) Arbitrage Yield Restrictions and Rebate Requirements 438

(c) Treatment of Hedge Bonds 439

(d) Refunding of Qualified Charitable Bonds 440

§ 17.2 Preparation of Form 441

CONTENTS

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Hopkins_NF_FM_1 11/13/2008 15

(a) Part I (Bond Issues) 441

(b) Part II (Proceeds) (Optional for 2008) 442

(c) Part III (Private Business Use) 444

(d) Part IV (Arbitrage) 446

§ 17.3 Schedule K Compliance Tasks 447

Chapter Eighteen: Schedule L—Transactions with Interested Persons 449§ 18.1 Law and Policy 449

(a) Excess Benefit Transactions 449

(b) Loans with Interested Persons 450

(c) Grants or Assistance Benefiting Interested Persons 452

(d) Business Transactions with Interested Persons,

Including Revenue-Sharing 456

§ 18.2 Preparation of New Form 990 Schedule L 460

(a) Part I (Excess Benefit Transactions) 460

(b) Part II (Loans to and from Interested Persons) 461

(c) Part III (Grants or Assistance Benefiting Interested Persons) 462

(d) Part IV (Business Transactions Involving Interested Persons) 464


Chapter Nineteen: Schedule M—Noncash Contributions 467§ 19.1 Law and Policy 468

(a) Charitable Giving Rules in General 468

(b) Noncash Contribution Rules in General 472

(c) Property Valuation Basics 472

(d) Contributions of Works of Art 474

(e) Contribution of Publications 475

(f) Contributions of Clothing and Household Goods 476

(g) Contributions of Vehicles 476

(h) Contributions of Intellectual Property 480

(i) Contributions of Securities 481

(j) Qualified Conservation Contributions 483

(k) Contributions of Real Estate 483

(l) Contributions of Jewelry and Gems 484

(m) Contributions of Collectibles 484

(n) Contributions of Inventory 485

(o) Contributions of Drugs and Medical Supplies 486

(p) Contributions of Taxidermy 486

(q) Contributions of Historical Artifacts 486

(r) Contributions of Scientific Specimens 486

(s) Contributions of Archeological Artifacts 486

(t) Other Types of Property 487

(u) Form 8283 487

CONTENTS

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Hopkins_NF_FM_1 11/13/2008 16

(v) Form 8282 489

(w) Restrictions as to Donee Holding of Property 489

(x) Nonstandard Contributions 489

(y) Substantiation and Reporting Requirements 490

§ 19.2 Preparation of New Form 990 Schedule M 493

(a) Introduction 494

(b) Questions 1 to 3 (Works of Art) 495

(c) Question 4 (Books and Publications) 496

(d) Question 5 (Clothing and Household Goods) 496

(e) Questions 6 and 7 (Vehicles) 496

(f) Question 8 (Intellectual Property) 496

(g) Questions 9 to 12 (Securities) 497

(h) Questions 13 and 14 (Qualified Conservation Contributions) 497

(i) Questions 15 to 17 (Real Estate) 497

(j) Question 18 (Collectibles) 497

(k) Question 19 (Food Inventory) 498

(l) Question 20 (Drugs and Medical Supplies) 498

(m) Question 21 (Taxidermy) 498

(n) Question 22 (Historical Artifacts) 498

(o) Question 23 (Scientific Specimens) 498

(p) Question 24 (Archeological Artifacts) 498

(q) Questions 25 to 28 (Other Types of Property) 499

(r) Question 29 (Forms 8283) 499

(s) Question 30 (Contribution Holding Period) 499

(t) Question 31 (Gift Acceptance Policy) 499

(u) Question 32 (Service Providers) 499

(v) Question 33 (Explanation of Nonrevenue Treatment) 499


Chapter Twenty: Schedule N—Liquidation, Termination, Dissolution,or Significant Disposition of Assets 501

§ 20.1 Law and Policy 501

(a) Process Issues 501

(b) Conversion Issues 502

§ 20.2 Preparation of New Form 990 Schedule N 504

(a) Part I (Liquidation, Termination, or Dissolution) 504

(b) Part II (Sale, Exchange, Disposition, or Other Transfer of More

than 25 Percent of the Organization’s Assets) 508

(c) Part III (Supplemental Information) 512

(d) Special Rules for Group Exemptions, Joint Ventures, and

Disregarded Entities 513


CONTENTS

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Chapter Twenty-One: Schedule R—Related Organizations andUnrelated Partnerships 515

§ 21.1 Law and Policy 515

(a) Corporation Entity Tax versus Flow-through of Tax Items 516

(b) Attribution of Subsidiary Activities to Exempt Parent 516

(c) Attribution of Related Exempt Organization 517

(d) Private Inurement and Excess Benefit Transactions 517

(e) Private Benefit—Generally 518

(f) Private Benefit and Joint Ventures 518

(g) Passive Income from Controlled Subsidiaries 520

(h) Disregarded Entities 521

(i) Supporting Organizations and Automatic Excess

Benefit Transactions 521

§ 21.2 Preparation of Form 522

(a) Part I—Identification of Disregarded Entities 523

(b) Part II—Identification of Related Tax-Exempt Organizations 524

(c) Part III—Identification of Related Organizations Taxable as

a Partnership 525

(d) Part IV—Identification of Related Organizations Taxable as

a Corporation or a Trust 527

(e) Part V—Transactions with Related Organizations 529

(f) Part VI—Unrelated Organizations Taxed as Partnerships 533

§ 21.3 Schedule R Compliance Tasks 535

Appendix A: Form 990 (2008) 537

Appendix B: Supplemental Instructions Information 601§ B.1 Chapter 6 Part VII and Schedule J 601

(a) Compensation table for reporting on Part VII, Section A or

Schedule J, Part II 601

§ B.2 Chapter 9: Schedule C 603

(a) Part III-B, Line 2 of Schedule C, Form 990 603

(b) Part III-B, Line 5 of Form 990 606

Index 609

CONTENTS

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Hopkins_NF_FM_1 11/13/2008 19

About the Authors

BRUCE R. HOPKINS is a senior partner in the law firm of Polsinelli Shughart, prac-ticing in the firm’s Kansas City, Missouri, and Washington, D.C., offices. He special-izes in the representation of tax-exempt organizations. His practice ranges over theentirety of law matters involving exempt organizations, with emphasis on the forma-tion of nonprofit organizations, acquisition of recognition of tax-exempt status forthem, the private inurement and private benefit doctrines, the intermediate sanctionsrules, legislative and political campaign activities issues, public charity and privatefoundation rules, unrelated business planning, use of exempt and for-profit subsidia-ries, joint venture planning, tax shelter involvement, review of annual informationreturns, Internet communications developments, the law of charitable giving (includ-ing planned giving), and fundraising law issues.

Mr. Hopkins served as chair of the Committee on Exempt Organizations, Tax Sec-tion, American Bar Association; chair, Section of Taxation, National Association ofCollege and University Attorneys; and president, Planned Giving Study Group ofGreater Washington, D.C.

Mr. Hopkins is the series editor of Wiley’s Nonprofit Law, Finance, and Manage-ment Series. He is the author of The Law of Tax-Exempt Organizations, Ninth Edition;Planning Guide for the Law of Tax-Exempt Organizations: Strategies and Commentaries;IRS Audits of Tax-Exempt Organizations: Policies, Practices, and Procedures; The Tax Lawof Charitable Giving, Third Edition; The Law of Fundraising, Fourth Edition; The Tax Law ofAssociations; The Tax Law of Unrelated Business for Nonprofit Organizations; The Nonprof-its’ Guide to Internet Communications Law; The Law of Intermediate Sanctions: A Guide forNonprofits; Starting and Managing a Nonprofit Organization: A Legal Guide, Fifth Edition;Nonprofit Law Made Easy; Charitable Giving Law Made Easy; Private Foundation Law MadeEasy; 650 Essential Nonprofit Law Questions Answered; The First Legal Answer Book forFund-Raisers; The Second Legal Answer Book for Fund-Raisers; The Legal Answer Book forNonprofit Organizations; The Second Legal Answer Book for Nonprofit Organizations; andThe Nonprofit Law Dictionary; and is the coauthor, with Jody Blazek, of Private Founda-tions: Tax Law and Compliance, Third Edition; also with Ms. Blazek, The Legal AnswerBook for Private Foundations; with Thomas K. Hyatt, of The Law of Tax-Exempt Health-care Organizations, Third Edition; and with David O. Middlebrook, of Nonprofit Law forReligious Organizations: Essential Questions and Answers. He also writes Bruce R. Hop-kins’ Nonprofit Counsel, a monthly newsletter, published by John Wiley & Sons.

Mr. Hopkins earned his J.D. and L.L.M. degrees at the George Washington Uni-versity National Law Center and his B.A. at the University of Michigan. He is a mem-ber of the bars of the District of Columbia and the State of Missouri.

Mr. Hopkins received the 2007 Outstanding Nonprofit Lawyer Award (VanguardLifetime Achievement Award) from the American Bar Association, Section of Busi-ness Law, Committee on Nonprofit Corporations. He is listed in The Best Lawyers inAmerica, Nonprofit Organizations/Charity Law, 2007, 2008.

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DOUGLAS K. ANNING, is a shareholder of Polsinelli Shughart, and is vice-chair of the firm’s Nonprofit Organizations Practice Group. Mr. Anning advises cli-ents on their general tax and corporate law needs, navigates family foundationsthrough complex IRS requirements and regulations, serves as general advisor andcounselor to a number of nonprofit organizations, and consults with healthcare or-ganizations regarding myriad regulatory requirements (including tax-exemption,bond issues, HIPAA, anti-kickback, Stark self-referral, EMTALA, FTC/DOJ Antitrust,Joint Commission, and nonprofit governance). He also counsels, government entities,schools and universities, churches, trade associations and other nonprofit organiza-tions. In addition, he has substantial experience in mergers and acquisitions, transac-tional matters, and structuring joint ventures. Mr. Anning is listed in The Best Lawyersin America in the category of Nonprofit/Charities Law for 2009.

VIRGINIA C. GROSS is a shareholder of Polsinelli Shughart. Ms. Gross concen-trates her practice in the fields of tax and nonprofit law. She represents a variety ofnonprofit clients, including public charities, educational organizations, private foun-dations, associations, supporting organizations, medical research and other health-care organizations, and social welfare organizations. She works with all aspects ofnonprofit law, such as issues regarding the structure, operations, fundraising, unre-lated business income planning, and joint venturing and partnering of tax-exemptentities, and use of supporting organizations and for-profit subsidiaries by exemptorganizations. Ms. Gross is a frequent writer and speaker on nonprofit issues. Shewas named one of the Best Lawyers in America for nonprofit/charities law for 2008and 2009.

THOMAS J. SCHENKELBERG is a shareholder in the law firm of PolsinelliShughart. He is also the chair of the firm’s Nonprofit Organizations Practice Group.Drawing on his experience as both an attorney and a certified public accountant, Mr.Schenkelberg’s practice specializes in the areas of tax, nonprofit, and healthcare law.

Clients include national hospital systems, research organizations, private founda-tions, colleges, universities, associations, social welfare organizations, political actioncommittees, and governmental entities.

Clients turn to Mr. Schenkelberg for structuring mergers and acquisitions, guid-ing corporate reorganizations, qualification for tax exemption, joint ventures of non-profit and for-profit entities, nonprofit governance issues, compliance with privatefoundation rules, unrelated business income planning, fundraising programs, for-profit subsidiary planning, public charity qualification, and use of supporting organ-izations. His practice also involves planning for various hospital/physician joint ven-tures, integrated delivery systems, whole-hospital joint ventures, medical serviceorganizations, and planning to avoid private inurement/intermediate sanctions. Heis a frequent writer and speaker on nonprofit law topics. He has written for manypublications and is coauthor of the Tax Management Portfolio’s ‘‘Private Founda-tions—Distributions (Sec. 4942)’’ published by the Bureau of National Affairs.

ABOUT THE AUTHORS

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Preface

It is not often that one has the opportunity to write a book about a government form.(This is a good thing.) As discussed in the book, the redesigned Form 990, however, isno ordinary government document. The promulgation of this return is one of themost extraordinary developments affecting the nonprofit community in recent times.Although there are defects with this form and many nonprofit organizations are un-happy that it exists, it cannot be credibly denied that the new return is a work of art.

Most government forms are based on law, usually statutory law. The new Form990 has this basis, with a considerable portion of the underlying law enacted in thelast three or four years. The new Form 990, however, goes far beyond that foundationand has created, and is creating, much new law. This is demonstrated, for example, inthe various policies, procedures, and protocols stressed by the IRS in its new return.Moreover, the new Form 990 is designed to induce and/or modify practices of tax-exempt organizations by the nature of the questions and the way they are to be an-swered (all those enticing—sometimes terrifying—‘‘yes’’ boxes). Thus, the IRS hasstated that the new Form 990 is now its governance enforcement tool and the gover-nance portion of it is the ‘‘crown jewel’’ of the return.

When the revised Form 990 was published in draft form, we immediately saw itsenormous implications and suspected that far too many nonprofit organizations wereunprepared for what is coming their way (indeed, did not even realize what wascoming). The solution to this problem, as we saw, was the writing of this book. Then,working with Professional Education Systems, Inc., we designed a series of seminarsand webinars to help sound the alarm and spread the word in the interim.

The principal purpose of this book is to summarize the law—both preexisting lawand the law created by promulgation of the return—that nonprofit organizations andtheir return preparers need to know to properly and effectively (this is, after all, apublic document) prepare the new return. In addition, the book focuses on line-by-line analysis of the return to help in the preparation of the Form 990 and providesmany checklists of steps to take to be in the best possible position to prepare thereturn.

As to this matter of the law, a development occurred that came too late to be in-corporated into the book text: the promulgation by the IRS of the proposed, tempo-rary, and final regulations to implement the new Form 990 (T.D. 9423, REG-142333-07). The temporary regulations revise the preexisting regulations to allow for newthreshold amounts for reporting compensation, require that compensation be re-ported on a calendar-year basis, modify the scope of organizations subject to informa-tion-reporting requirements on a substantial contraction, eliminate the advanceruling process for new organizations, change the public support computation periodfor publicly supported charities, and clarify that support must be reported using theorganization’s overall method of accounting.

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The size of this volume is a testament to what the IRS has wrought and the mas-sive impact this formidable Form 990 is having on the management, operations, andgovernance of most exempt organizations. We hope the book will be of assistance asorganizations struggle to revamp their operations and upgrade their practices inorder to complete this capacious return.

Bruce R. HopkinsDouglas K. Anning

Virginia C. GrossThomas J. Schenkelberg

PREFACE

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The New Form 990

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E1C01_1 11/12/2008 1

C H A P T E R O N E

Part I—Overview of NewForm 990

The annual information return filed by most tax-exempt organizations with the Inter-nal Revenue Service (IRS) is the Form 990. This return was issued in dramaticallyredesigned form on December 19, 2007, for the 2008 tax year (returns filed in 2009). Inits altered form, the new Form 990 has enormous implications for exempt organiza-tions. A copy of this return, including its many schedules, is in Appendix A.

At the time the revised Form 990 was issued as a discussion draft (on June 14,2007), the Acting Commissioner of Internal Revenue said: ‘‘The tax-exempt sector haschanged markedly since the Form 990 was last overhauled more than a quarter of acentury ago. We need a Form 990 that reflects the way this growing sector operates inthe 21st century. The new 990 aims to give both the IRS and the public an improvedwindow into the way tax-exempt organizations go about their vital mission.’’

The Director of the IRS’s Exempt Organizations Division, on that occasion,added: ‘‘Most organizations should not experience a change in burden. However,those with complicated compensation arrangements, related entity structures andactivities that raise compliance concerns may have to spend more time providingmeaningful information to the public.’’

When the new Form 990 was released in final form, the Commissioner, TaxExempt/Governmental Entities, said: ‘‘When we released the redesigned draft formthis past June, we said we needed a Form 990 that reflects the way this growing sectoroperates in the 21st century. The public comments we received in response to ourdraft form helped us develop a final form consistent with our guiding principles oftransparency, compliance and burden minimization.’’

The new Commissioner of Internal Revenue said:

Tax-exempt organizations provide tremendous benefits to the people and the com-

munities they serve, but their ability to do good work hinges upon the public’s

trust. The new Form 990 will foster this trust by greatly improving transparency

and compliance in the tax-exempt sector. Public comment on the draft instructions

will help the IRS to minimize the reporting burden on tax-exempt organizations,

which is another important goal.

On the occasion of issuance of the final instructions for the 2008 Form 990, onAugust 19, 2008, the Commissioner said:

These instructions are the final step in a tremendous effort to bring the Form 990 up

to date and to reflect the diversity and complexity of the tax-exempt community.

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The revised form will give the IRS and the public a much better view of how

exempt organizations operate. The improved transparency provided by these

changes will also benefit the tax-exempt community.

On the day after the draft of the revised Form 990 was issued, the executive direc-tor of a large public charity said: ‘‘If this is the Form 990 we will have to file, we don’twant to be tax-exempt anymore.’’

The return to be filed by small tax-exempt organizations (Form 990-EZ) has alsobeen revised (see § 1.9). Many of the schedules that accompany the Form 990 (see§ 1.8) may have to be filed with this small exempt organizations return. (The Form990-PF filed by private foundations has not been revised as part of this process.)

§ 1.1 FORM 990 BASICS

Nearly every organization that is exempt from federal income taxation must file anannual information return with the IRS. This return generally calls for the provisionof much information, some of it financial and some in prose form. This document,being an information return rather than a tax return, is available for public inspection(see § 1.1(e)).

(a) Various Forms

For most tax-exempt organizations, the information return that must be filed annuallyis Form 990. Private foundations, however, file an information return that is uniquelystyled for them: Form 990-PF. Small organizations (other than private foundations)—that is, entities that have gross receipts that are less than $100,000 and total assets thatare less than $250,000 in value at the end of the reporting year—file Form 990-EZ.Other forms in the 990 series are Form 990-N, 990-T, and 990-W.

(b) Filing Exceptions

The requirement for the filing of an annual information return does not apply to:

� Churches (including interchurch organizations of local units of a church)

� Integrated auxiliaries of churches

� Conventions or associations of churches

� Financing, fund management, or retirement insurance program managementorganizations functioning on behalf of the foregoing organizations

� Certain other entities affiliated with a church or convention or association ofchurches

� Most religious orders (to the exclusive extent of their religious activities)

� State and local institutions

� Certain schools and mission societies

� Governmental units

� Affiliates of governmental units (which can include nonprofit, tax-exemptorganizations)

PART I—OVERVIEW OF NEW FORM 990

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� Organizations (other than private foundations) that have gross receipts thatnormally are not in excess of $25,000 annually

� Foreign organizations (other than private foundations) that normally do notreceive more than $25,000 in gross receipts annually from sources within theUnited States and that do not have any significant activity (including lobbyingor political activity) in the United States

(c) Filing Due Dates

The annual information return is due on or before the 15th day of the 5th month fol-lowing the close of the organization’s tax year. Thus, the return for a calendar-yearorganization should be filed by May 15 of each year. One or more extensions may beobtained. These returns are filed with the IRS service center in Ogden, Utah.

The filing date for an annual information return may fall due while the organiza-tion’s application for recognition of tax-exempt status is pending with the IRS. In thatinstance, the organization should nonetheless file the information return (rather thana tax return) and indicate on it that the application is pending.

(d) Penalties

Failure to timely file the annual information return, without reasonable cause or anexception, can generally give rise to a $20-per-day penalty. The organization mustpay for each day the failure continues, up to a maximum of $10,000. For larger organi-zations (those with annual gross receipts in excess of $1 million), the per-day penaltyis $100 and the maximum penalty is $50,000.

An additional penalty can be imposed, at the same rate and up to the same maxi-mum, on the individual(s) responsible for the failure to file, absent reasonable cause.Other fines and even imprisonment can be imposed for willfully failing to file returnsor for filing fraudulent returns and statements with the IRS.

(e) Disclosure Requirements

The IRS, in its instructions, observes: ‘‘Some members of the public rely on Form 990,or Form 990-EZ, as the primary or sole source of information about a particular orga-nization. How the public perceives an organization in such cases may be determinedby the information presented on its returns.’’

A tax-exempt organization’s completed Form 990 or Form 990-EZ is available forpublic inspection and disclosure. Schedule B (see § 1.8(b)) is generally not availablefor public inspection, although it is available in the case of political organizations thatfile either return (and private foundations). Form 990-T filed by a charitable organiza-tion after August 17, 2006, to report unrelated business income, is also available forpublic inspection and disclosure.

(1) Availability through IRS. Form 4506-A may be filed to request (1) a copy of atax-exempt organization’s return, report, notice, or application for recognition ofexemption, and/or (2) an inspection of a return, report, notice, or application at anIRS office.

§ 1.1 FORM 990 BASICS

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(2) Availability through Exempt Organization. In general, a tax-exempt organiza-tion must:

� Make its application for recognition of exemption and its annual informationreturns available for public inspection without charge at its principal, regional,and district offices during regular business hours

� Make each annual information return available for a period of three years,beginning on the date the return is required to be filed or is actually filed,whichever is later

� Provide a copy without charge, other than a reasonable fee for reproductionand actual postage costs, of all or any part of any application or returnrequired to be made available for public inspection to any individual whomakes a request for such copy in person or in writing

A tax-exempt organization must:

� Provide copies of required documents in response to a request made in personat its principal, regional, and district offices during regular business hours

� Provide these copies to a requester on the day the request is made, except forunusual circumstances

In the case of an in-person request, where unusual circumstances exist sothat fulfilling the request on the same business day causes an unreasonable bur-den to the tax-exempt organization, the organization must provide the copies nolater than the next business day following the day that the unusual circum-stances cease to exist or the fifth business day after the date of the request,whichever occurs first. Unusual circumstances include requests received (1) thatexceed the organization’s daily capacity to make copies, (2) shortly before the endof regular business hours that require an extensive amount of copying, or (3) on aday when the organization’s managerial staff capable of fulfilling the request isconducting special duties, such as student registration or attending an off-sitemeeting or convention.

A tax-exempt organization may charge a reasonable fee for providing copies.Before the organization provides the documents, it may require that the individualrequesting the copies pay the fee. If the organization has provided an individualmaking the request with notice of the fee, and the individual does not pay the feewithin 30 days, or if the individual pays the fee by check and the check does not clear,the organization may disregard the request.

A tax-exempt organization is not required to comply with a request for a copyof its application for recognition of exemption or an annual information return ifthe organization has made the requested document widely available. (It mustnonetheless comply with the public inspection rules.) This widely available require-ment is satisfied by posting the document on a Web site that the exempt organiza-tion maintains or on a Web site maintained by another organization where:

� The Web site clearly informs readers that the document is available and pro-vides instructions for downloading it.

� The document is posted in a format that, when accessed, downloaded, viewed,and printed in hard copy, exactly reproduces the image of the application for

PART I—OVERVIEW OF NEW FORM 990

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