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Tax and Legal Hot Topics for Tax Exempt Organizations 2008 Annual Meeting & Exposition Tax and Legal Hot Topics for Tax Exempt Organizations Ona Alston Dosunmu Christopher C. Scarpa James A. Woehlke August 18, 2008 2:30 – 3:45 p.m. Tax Matters - Chris Governance - O G Ona Odds and Ends - Jim Connecting Great Ideas and Great People Hot Topics: Tax Matters I. II. III. 2008 Political Activities Compliance Project Guidance on Forms 990-T – IRS Notices 200745 and 2008-49 Form 990-N – Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required to File Form 990- or 990-EZ Voluntary Compliance Program for Form 990 Nonfilers Hot Topics: Tax Matters V. Final Regulations On Excess Benefit Transactions; Recognition of Exempt Status VI. New Section 403(b) Regulations VII. Section 409A Compliance Deadline VIII. Form 990 Redesign IV. 1 Hot Topics: Tax Matters 2008 Political Activities Compliance Project A. Electioneering Prohibition–4 Requirements “Organized and operated exclusively for” an exempt purpose. Earnings must not “inure to the benefit of any g y private shareholder or individual.” No substantial part of activities for lobbying or attempts to influence legislation. Must not participate or intervene in a political campaign in support of or in opposition to a candidate for public office. Hot Topics: Tax Matters 2008 Political Activities Compliance Project B. Recent IRS Guidance IRS Fact Sheet 2006-17 Revenue Ruling 2007-41 2008 Political Activities Compliance Initiative Cases involving issue advocacy Internet cases Political contributions § 501(c)(4) organizations engaging in electioneering C. Honest Leadership and Open Government Act of 2007 (HLOGA) Hot Topics: Tax Matters Guidance on Forms 990-T Hot Topics: Tax Matters Guidance on Forms 990-T IRC § 6104(d) Public Inspection Requirement Extended to Form 990-T Regulations on The Public Inspection Requirement § 301.6104(d)-1 – When To Provide Returns § 301.6104(d)-2 – Returns Widely Available § 301.6104(d)(3) – Harassment Campaign IRC § 6104(d) Penalty For Non-Compliance – IRC § 6652(c)(1)(C) IRS Notices 2007-45 and 2008-49 2 Hot Topics: Tax Matters Form 990-N Hot Topics: Tax Matters Voluntary Compliance Program for Form 990 Nonfilers IRC § 6033(i)(1) – small orgs to file 990-N IRC § 6033(i)(2) – notice of termination IRC § 6033(j) – noncompliance for 3 yrs = termination of exempt status IRC § 6652(c)(1)(E)–No monetary penalty Form 990-N: availability, due date: 15th day of 5th month, open to public inspection Form 990 – Filing Requirement & exceptions Penalties $20 a day up to $10,000 or 5% of gross receipts for the year If gross receipts > $1 Million, then $100 a day up to Million $50,000 IRC § 6033(j) – 3 yrs failure to file = loss of exemption Possible compliance program under development Hot Topics: Tax Matters Final Regulations On Excess Benefit Transactions Hot Topics: Tax Matters New Section 403(b) Regulations Regulations Summary Private Benefit and Other Restrictions Private Benefit Examples in the Regulations – Economic & Non-Economic Benefits Intermediate Sanctions New Regulations issued July 26, 2007 Generally effective January 1, 2009 Plan document Required Plan Pl needs to specify if participants may d if i i transfer funds between investments. If yes an information sharing agreement, ISA is required with each investment vendor. 3 Hot Topics: Tax Matters Section 409A Compliance Deadline Hot Topics: Tax Matters Section 409A Compliance Deadline § 409A does NOT apply to 401(k) plans SIMPLE Plans SEPs § 457(b) arrangements IRC § 409A was passed in 2004 dramatically changing nonqualified deferred compensation. Effective 2005, but . . . Final regulations not issued until April 17, 2007, effective January 1, 2009 All deferred comp plans must be amended by December 31, 2008 to bring into compliance. Otherwise quite broad. In addition to Traditional deferred comp arrangements employment agreements, severance arrangements, bonus programs split-dollar life insurance arrangement But § 457(f) may limit impact on tax exempts Hot Topics: Tax Matters Section 409A Compliance Deadline Should take the following steps identify all plans, arrangements, agreements and policies that may contain elements of nonqualified deferred compensation review all of the above to determine what changes need to be made to the extent necessary, and in many cases it will be necessary, secure the consent of employees covered by those plans, arrangements, agreements and policies to the changes necessary to achieve compliance with the regulations. Hot Topics: Tax Matters Form 990 Redesign Effective Date: 3-year phase in 2008 tax year – Organizations over $1 million of gross receipts or $2.5 million in assets 2009 tax year – Organizations over $500,000 of gross receipts or $1.25 million in assets 2010 tax year – Organizations with $200,000 in gross receipts or $500,000 in assets 4 Hot Topics: Tax Matters Form 990 Redesign Hot Topics: Tax Matters Form 990 Redesign Compensation Compensation Procedures Conflicts policy How compensation determined p Governance Size and composition of governing body How many are independent Governance Policies Conflicts, Whistle-blower, Document retention Expense Reimbursements Schedule J and expense reimbursement policies Reporting Threshold for reporting highly compensated raised to $100,000 from $50,000 Family or business relationships of governing body and key employees Has the governing body reviewed the Form 990 Disclosure of transactions w/“interested persons” Hot Topics: Tax Matters Form 990 Redesign Hot Topics: Tax Matters Form 990 Redesign Governance (continued) Policy on participation in joint ventures Discussion draft of 501(c)(3) good governance practices “While adopting a particular practice is not a requirement for exemption, an organization that adopts some or all of these practices is more likely to be successful in pursuing its exempt purposes and earning public support. Moreover, any decision by the Service to conduct a review of operations subsequent to exemption…will be influenced by whether an organization has voluntarily adopted good governance practices.” Financial Information Income must be allocated between Related / exempt income Unrelated business income Income exempt f I t from UBIT 501(c)(3) and (c)(4) Organizations must also allocate expenses as among program services, management, and fundraising Additional Information on balance sheet items 5 Hot Topics: Tax Matters Form 990 Redesign Hot Topics: Tax Matters Form 990 Redesign Public Support Test Two tables instead of current single table Measured over 5 years rather than 4 Currently cash basis is used for test regardless of the organization’s accounting method. The new 990 will use the accounting method used elsewhere on the form. Related Orgs & Unrelated Partnerships New Schedule R seeks information on any disregarded entities related tax-exempt organizations p g related organizations taxed as partnerships related organizations taxed as corporations or trusts unrelated organizations taxable as partnerships (excluding investment partnerships) Foreign Activities Hot Topics: Governance I. II. Introduction Hard governance Hot Topics: Governance Introduction “Hard” Governance Common law duties of care loyalty good faith possibly obedience III. “Soft” governance Governing documents Generally accepted best practices “Soft” Governance Managing Human Relationships 6 Hot Topics: Governance Hard Governance Revised Form 990 Policies implied by revised 990 SOX Requirements Whistleblower policy Document retention/destruction policy Hot Topics: Governance Hard Governance 10 SOX Principles Principle 1—Role of the Board Principle 2—Importance of Independent Directors Principle 3—Audit Committee Principle 4—Governance and Nominating Committees Principle 5—Compensation Committee Hot Topics: Governance Hard Governance 10 SOX Principles Principle 6—Disclosure & Integrity of Institutional Info Principle 7—Ethics and Business Conduct Codes Principle 8—Executive and Director Compensation Principle 9—Monitoring Compliance and Investigating Complaints Principle 10—Document Destruction and Retention Hot Topics: Governance Soft Governance Universal Considerations Maybe the difficult board member has a point Consider mechanisms other than board membership to reward people who make major contributions to the organization Careful vetting of prospective board members and thorough orientation of new board members solves many problems 7 Hot Topics: Governance Soft Governance Universal Considerations There’s often no substitute for direct, frank but compassionate communication Enforce term limits if you have them Consider probationary or 1-year initial terms Hot Topics: Governance Soft Governance Problems Inappropriate interference, overengagement, meddling Disengagement and related sins “Agenda wrestling” Other inappropriate, distracting, disruptive behaviors Major crises Hot Topics: Odds and Ends Intellectual Property Copyright Violation by Competing Association Found; Alleged Trademark Violation Found to be Fair Use Association Member Sets Up Blog to Discuss Association Issues and Uses Association’s Name Hot Topics: Odds and Ends Anti-trust Illegal Boycotts by two chiropractic associations of health-cost saving plan ssoc at o s lawyer joined consent Associations’ lawye jo ed in co se t agreement Remember anti-trust is an important element of association law 8 Hot Topics: Odds and Ends Human Resources Remember Jury Duty is a Protected Activity Overtime Ruminations Blackberries, etc. NYC fire inspectors case Overly active volunteer Board chair found liable as a responsible person for the payment of unpaid employment taxes Hot Topics: Odds and Ends Accounting and Auditing Matters SAS’s 104 to111, Risk Assessment Stds SAS 112, Communicating Internal Control Related Matters Identified in an Audit Practice Alert 2007-1 Revised GAO Yellow Book TPA 6140.20 re fundraising expenses Hot Topics: Odds and Ends Accounting and Auditing Matters Fair value accounting – FASB 157 & 159 FASB 158, Accounting for Defined Benefit & Other Post Retirement Plans Post-Retirement UPMIFA Hot Topics: Odds and Ends Governance Remember: Good due process provisions are necessary when disciplining members 9 Contact Information: Christopher C. Scarpa, Esq. Partner Stradley Ronon Stevens & Young, LLP Phone: 215.564.8106 E-mail: cscarpa@stradley.com p y Websites:www.stradley.com Moderator James A. Woehlke, Esq. General Counsel, NYSSCPA Phone: 212-719-8347 E-mail: jwoehlke@nysscpa.org Website: www.nysscpa.org Ona Alston Dosunmu, Esq. General Counsel The Brookings Institution Phone:(202) 797-6428 E-mail:ODOSUNMU@brookings.edu g Websites www.brookings.edu Connecting Great Ideas and Great People 10