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IRS Releases Revised Instructions to Redesigned Form

VIEWS: 3 PAGES: 9

									                                                        Tax Law News
                                                                                                 August 20, 2008
Hall, Render, Killian, Heath &             IRS Releases Revised Instructions to Redesigned Form 990
Lyman is a full service health law
firm with offices in Indiana,
Kentucky,         Michigan     and    On August 19, 2008, the Internal Revenue Service ("IRS") released a
Wisconsin. Since the firm was
founded by William S. Hall in 1967,
                                      second draft of the Instructions (the "August Release") to the redesigned
Hall Render has focused its           Form 990, Return of Organizations Exempt from Income Tax (the
practice primarily in the area of     "Redesigned Form 990"). The IRS expects to release the Instructions to
health law and is now recognized
as one of the nation's preeminent     the Redesigned Form 990 in final form (the "Instructions") in late 2008,
health law firms serving clients in   but it does not anticipate significant changes to the August Release other
multiple     states.    For   more
information about the firm please     than changes in format and syntax.              The Instructions provide
visit us at www.hallrender.com.       clarification and guidance to filing organizations that will complete the
Office Locations
                                      Redesigned Form 990. Organizations must begin using the Redesigned
                                      Form 990 and its Instructions for tax years that begin in 2008 (2009
Indiana Offices                       filing season).
One American Square
Suite 2000
Indianapolis, IN 46282                In addition to the Instructions, the IRS has released three background
(317) 633-4884
Contact: Andrea L. Impicciche
                                      papers on the Redesigned Form 990. The first document, Background
                                      Paper – Summary of Form 990 Redesign Process, provides an
8402 Harcourt Road                    explanation of the redesign process. The second document, Background
Suite 820
Indianapolis, IN 46260                Paper – Form 990, Moving from the Old to the New, lists and
(317) 871-6222                        summarizes the parts and schedules of the Redesigned Form 990,
Contact: James R. Willey
                                      highlighting which portions are new or significantly revised from the
Kentucky Office                       2007 Form 990, and comparing material differences between the 2007
614 West Main Street
Suite 4000                            Form 990 and the Redesigned Form 990 and Instructions. The third
Louisville, KY 40202                  document, Background Paper – Changes to April Draft Instructions
(502) 568-1890
Contact: Rene R. Savarise             ("Background Paper"), provides an overview of significant changes
                                      contained in the August Release of the Instructions.
Michigan Offices
Columbia Center, Suite 315
201 West Big Beaver Road              Background
Troy, MI 48084
(248) 740-7505
Contact: Michael J. Phibrick          On December 20, 2007, the IRS Exempt Organizations Division
2369 Woodlake Drive, Suite 280        released the Redesigned Form 990, which is the information return most
Okemos, MI 48864                      charities and tax-exempt organizations are required to file annually. A
(517) 703-0921
Contact: Brian F. Bauer               few months later, on April 7, 2008, the IRS released draft Instructions to
Wisconsin Office
                                      the Redesigned Form 990 for public comment ("Draft Instructions").
111 East Kilbourn Avenue              The period for public comment on the Instructions ended June 1, 2008.
Suite 1300
Milwaukee, WI 53202
(414) 721-0442                        According to the IRS Background Paper, the August Release includes
Contact: Gregory J. Melgares          changes in content and format intended to "provide greater clarity
                                      regarding the specific information sought," as well as, "additional
Contact Us                            examples to illustrate key points, reduce information gathering and
hallrender@hallrender.com
                                      reporting burden in key areas, and establish or revise definitions or
                                      standards in certain areas." The IRS has indicated that the August
                                      Release is still in "draft" form "because it has not yet completed the
process of review by the IRS Forms and Publications." The IRS has
additionally noted that it intends to make no significant changes to the
August Release other than changes to format or syntax. However, the
IRS has noted certain areas requiring further study for possible changes
to the Instructions for 2009 and later tax years (2010 and later filing
seasons).The August Release can be found at:

http://www.irs.gov/charities/article/0,,id= 185561,00.html.

Summary

The Redesigned Form 990 consists of a core form, divided into eleven
(11) "Parts," and sixteen (16) schedules. All organizations claiming
exempt status under 501(a) must complete the core form, while the
nature of an organization's activities determines which schedules must
be completed. Below is an overview of certain significant revisions
found in the August Release to the April Draft Instructions:

Definition of Key Employee

For purposes of reporting executive compensation, transactions with
interested persons, governance and management, and other items, the
revised three (3) part key employee definition will generally require
reporting an individual as a key employee if such individual was an
employee, other than an officer, director, or trustee (these individuals are
subject to separate and distinct disclosure requirements), who met all of
the following tests:

1. $150,000 Test.    The individual had reportable compensation
   exceeding $150,000 for the tax year;

2. Responsibility Test. The individual had or shared organization-wide
   control or influence similar to that of an officer, director, or trustee,
   or managed or had authority over at least ten percent (10%) of the
   organization's activities; and

3. Top 20 Test. The individual was within that group of the
   organization's top 20 highest paid employees for the year who
   satisfied both the $150,000 Test and the Responsibility Test.

Definition of Officer

For purposes of reporting executive compensation, transactions with
interested persons, governance and management, and other items, the
revised definition of officer will include both:

1. Top Financial Official. The person having ultimate responsibility
   for managing the organization's finances; and

2. Top    Management       Official.     The   person    having    ultimate
   responsibility for implementing decisions of the organization's
   governing body or supervising the management, administration, or
   operation of the organization.

Governance, Management and Disclosure

For purposes of reporting governance and management, the August
Release clarifies and revises the following:

1. Information Regarding Policies and Procedures. The IRS provides
   an explanation that information requested in the governance and
   management section of the core form is not required by the Internal
   Revenue Code and that "an organization should consider its
   particular facts and circumstances, including its size, type and
   culture, when it considers whether to adopt or modify its governance
   polices or practices."

2. Definition of Independent Voting Member. The August Release
   revises the Draft Instruction's proposed four (4) part test for
   determining the independence of a particular voting member stating
   that an individual is an independent voting member of the governing
   body if such individual meets the following three (3) part test:

   a. Compensation as Officer or Employee. The individual was not
      compensated as an officer or other employee of the organization
      or of a related organization;

   b. Compensation as Independent Contractor. The individual did
      not receive total compensation or other payments exceeding
      $10,000 during the organization's tax year from the organization
      or from related organizations as an independent contractor
      (excluding reimbursement for expenses under an accountable
      plan or reasonable compensation for services provided in the
      capacity as a member of the governing body);

   c. Involvement with Transactions. Neither the individual, nor any
      family member of the individual, was involved in a transaction
      with the filing organization (whether directly or indirectly
      through affiliation with another organization).

3. Religious Exception. The revisions to the definition of independent
   voting member were further clarified regarding the exception for
   religious voting members.       Specifically, a member of the
   organization's governing body does not lack independence because
   they have taken a vow of poverty in any of the following
   circumstances:

   a. The individual receives compensation as an agent of a religious
      order or section 501(d) religious or apostolic organization, if
      such individual did not receive any taxable income; or
   b. The individual belongs to a religious order that receives
      sponsorship payments or other payments from the organization
      that do not constitute taxable income to the individual.

4. Membership Organizations. An individual who is a member of an
   organization's governing body will not be considered to lack
   independence because the individual receives financial benefits from
   the organization if such individual is a member of the charitable or
   other class served by the organization.

5. Reasonable Efforts Standard. The August Release implements a
   reasonable efforts standard, including examples, for which the
   reporting organization may rely on an express reasonable efforts
   process to obtain information required from interested persons or
   third parties. Examples of the fulfillment of the reasonable efforts
   standard in different areas are as follows:

   a. Independence of Voting Members. For purposes of gathering
      information to determine whether an organization's voting
      members are independent, to satisfy the reasonable efforts
      standard, an organization may rely on information they obtain in
      response to a questionnaire sent annually to each member of the
      governing body that includes the name, title, date, and signature
      of each person reporting information and contains the pertinent
      instructions and definition of an independent voting member.

   b. Family/Business Relationships. For purposes of gathering
      information to determine whether there is a family or business
      relationship between two officers, directors, trustees, or key
      employees, an example of a reasonable effort is for the
      organization to distribute a questionnaire annually to each such
      person that includes the name, title, date, and signature of each
      person reporting information and contains the pertinent
      instructions and definition of a business relationship.

   c. Interested Persons. For purposes of gathering information to
      determine if there has been a business transaction with an
      interested person subject to disclosure on Schedule L
      (Transactions with Interested) Persons, an example of a
      reasonable effort is for the organization to distribute a
      questionnaire annually to each current or former officer, director,
      trustee, and key employee listed in the core form, that includes
      the name, title, date, and signature of each person reporting
      information and contains the pertinent instructions and definition
      of an interested person. The organization is not required to
      distribute such a questionnaire to organizations or individuals
      with which it does business, but who are not current or former
      officers, directors, trustees, or key employees of the organization,
      in order to have made a reasonable effort for this purpose.
6. Delegation of Board Authority. The August Release adds an
   instruction regarding the number of voting members of the
   organization's governing body that requires the organization to
   disclose any broad authority delegated to an executive (or similar
   committee) in which the executive committee was delegated to act
   on the governing body's behalf. Such disclosure must also include
   the composition of such committee, the scope of such committee's
   authority, and whether any committee members are not members of
   the governing body.

7. Scope of Business Relationship. Filing organizations must generally
   report if any of the organization's officers, directors, trustees, or key
   employees had a family or business relationship with another of the
   organization's officers, directors, trustees, or key employees at any
   time during the organization's tax year exceeding a threshold of
   $10,000. The scope of a reportable business relationship is narrowed
   in the August Release by providing two exceptions from reporting:

   a. Ordinary Course of Business Exception. Business transactions
      between two of the aforementioned parties in the ordinary course
      of either party's business, on the same terms generally offered to
      the public.

   b. Privileged Relationships Exception. A business relationship
      does not include any of the following three (3) privileged
      relationships: (i) attorney and client; (ii) medical professional
      and patient; and (iii) priest/clergy and penitent/communicant.

Schedule H: Hospitals

For purposes of reporting in Schedule H, the August Release clarifies
and revises the following:

1. Required Disclosures for 2008. Only Part V (Facility Information)
   is required for the 2008 tax year.

2. Definition of Facility Triggering Schedule H.              Organizations
   operating "at least one facility that is, or is required to be, licensed,
   registered, or similarly recognized by a state as a 'hospital'" must
   complete Schedule H. This clarification is intended to encompass
   "licensing-equivalents" in states that do not have licensing
   procedures for hospitals.

3. Definition of Facility for Schedule H, Part V. For purposes of
   reporting on Schedule H, Part V (Facility Information), the
   definition of facility has been revised to "include each hospital or
   other facility that is licensed, registered or similarly recognized by a
   state as a 'health care facility,' including facilities other than
   hospitals."


4. Subsidized Health Services. For purposes of reporting subsidized
   health services for physician clinics and skilled nursing facilities, the
   August Release clarifies that physician clinics and skilled nursing
   facilities are eligible for treatment as a subsidized health service in
   accordance with the generally applicable rules.

5. Health Professions Education Costs. Clarifies that the definition of
   such costs includes costs of all health education programs open to
   the general public, even if employees of the organization may
   participate in such programs.

6. Internally Funded Research. Clarifies that the definition of
   internally funded research may include both the internally funded
   research the organization conducts, as well as the cost of research
   funded by a governmental entity, but may not include the cost of
   research funded by an individual or organization that is not tax-
   exempt or a government entity.

7. Cash or In Kind Contributions. Clarifies by example how to treat
   cash or in kind contributions funded through restricted grants from
   related organizations.

8. Bad Debt. Clarifies that organizations are required to use the "most
   accurate system and methodology available to [them]" for reporting
   bad debt expense as a cost. In addition, organizations must describe
   how they account for discounts and payments on patient accounts
   when determining bad debt expense.

9. Cost Reporting. Clarifies that, under Part III of Schedule H (Bad
   Debt, Medicare, and Collection Practices), organizations may report
   only allowable costs reported in Medicare Cost Reports, except for
   costs reported as subsidized health services or health professions
   education.

10. Medicare-Related Costs and Revenues. An additional instruction
    was added to clarify that Medicare costs not reported under Part III
    of Schedule H (because not an "expense" reported on a Medicare
    Cost Report) may be included in Part IV (Supplemental
    Information). The August Release also clarifies that an organization
    must describe in Part IV the costing methodology it uses to
    determine Medicare allowable costs reported in the organization's
    Medicare Cost Report.

Schedule K: Supplemental Information on Tax-Exempt Bonds

The August Release exempts refunding bonds issued after 2002 to
refund pre-2003 bonds from reporting in Schedule K, Part III (Private
Business Use). All other parts of Schedule K must be completed with
respect to such refunding bonds under the generally applicable rules.


Schedule J: Compensation Information

The August Release clarifies the compensation reporting requirements
for Part VII (Compensation) of the Core Form and Schedule J. With
regard to reportable compensation, specific instructions are provided
regarding the identification of compensation on Form W-2 and Form
1099-MISC. With regard to other compensation, details about what
types of compensation should be reported are provided. For example,
amounts for retirement plans, health benefits, and deferred compensation
are reportable regardless of amount. However, such amounts may be
estimated if actual amounts are not readily available.

Schedule L: Transactions with Interested Persons

For purposes of reporting on Schedule L, the August Release clarifies
and revises the following:

   1.      Definition of Substantial Contributor. The revised definition
           of substantial contributor for purposes of Part III (Grants or
           Assistance Benefitting Interested Persons) simplifies the
           definition to mean a person contributing at least $5,000 to the
           organization during the tax year required to be reported by
           name on Schedule B (Contributions).


   2.      Interested Person Reporting. The thresholds for reporting an
           interested person for Part IV (Business Transactions
           Involving Interested Persons) are revised to require reporting
           if:

           a. All payments during the tax year from a single
              transaction between the organization and the interested
              person exceeded the greater of 10% or 1% of the filing
              organization's total revenues;

           b. All payments during the tax year between the
              organization and the interested person, whether from one
              or from multiple transactions, exceeded $100,000; or

           c. The organization paid compensation greater than $10,000
              during the tax year to a family member of certain
              interested persons.

   3.      Payments Made During the Year. For purposes of reporting
           business transactions between a filing organization and an
           interested person in Part IV, reporting is based on payments
           made during the year, without regard as to when the
           transaction was entered into.


Schedule O: Other

The reporting in Schedule O is expanded to include required narrative
reporting for all filing organizations on several items. Specifically,
instructions have been added to require all filing organizations to
provide certain supplemental explanations and four specific attachments,
including:

1. Amendments to organizational documents in the case of a name
   change;

2. A list of subordinate organizations included in a group return;

3. Articles of merger or dissolution, resolutions; and/or

4. Plans of liquidation or merger required by Schedule N (Liquidation,
   Termination, Dissolution or Significant Disposition of Assets).

Areas Requiring Further Study

According to the IRS, the following areas, which the IRS intends to
study for possible additions or changes for the 2009 or later tax years,
were not revised or incorporated in the August Release:

•   Examples of Program Service Accomplishments;

•   Development of program service activity codes;

•   Development of an express reasonable effort process for use in
    reporting certain payments made to government officials or their
    family members;

•   Exploration of the expansion of community benefit reporting and
    other information reporting on Schedule H, to include benefits
    provided by an affiliated organization rather than by the filing
    organization, a disregarded entity of the filing organization, or a joint
    venture of which the filing organization is an owner.

Conclusion

The August Release of the Instructions represents the last piece in the
redesign of the Form 990. At this time, tax-exempt organizations can be
reasonably assured that the Redesigned Form 990, along with the
August Release, represents an accurate picture of the tax-exempt
community's new compliance and reporting obligations. Clearly, the
Redesigned Form 990 will require the disclosure of a significant amount
of new information for most tax-exempt organizations, and based on the
new disclosures, many organizations may identify a need for new or
revised organizational policies and procedures regarding governance
and/or operations.    Tax-exempt organizations are encouraged to
carefully read and scrutinize the Instructions in conjunction with the
Redesigned Form 990 to further understand and identify changes that
should be made within the organization to satisfactorily complete the
Redesigned Form 990.

Should you have any questions, please do not hesitate to contact your
regular Hall Render attorney, or Calvin R. Chambers at
cchambers@hallrender.com or 317-977-1459, or Andrea L. Impicciche
at aimpicciche@hallrender.com or 317-977-1578 or Chad P. Sukurs at
csukurs@hallrender.com or 317-977-1452 .

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The
reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific
circumstances.

								
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