2008 Form 990 Instructions by jzz14414


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									                                   Jeff rey S. T enenbaum          202-344-8138      jstenenbaum@venable.com

                                                   April 9, 2008

by Jeffrey S. Tenenbaum, Esq., Kristen E. Sitchler, Esq., and Aaron H. Hiller, Esq.
Venable LLP
Washington, DC

On April 7, the IRS released its first draft of the instructions to be used in completing the
redesigned 2008 Form 990. The draft instructions are open to public comment until June 1, 2008.

The redesigned 2008 Form 990, released by the IRS five months ago, represents the first major
overhaul of the form in nearly thirty years. It contains a new “snapshot” summary page, an eleven-
page core form, and sixteen supplemental schedules requesting detailed governance, management,
and financial information. Although the new form was designed to increase clarity (for both the
filer and the IRS) and to better reflect how a modern tax-exempt entity operates, its December
release did not include a set of instructions. The scope of many of the questions asked on the new
form was left in question.

The wait, in large part, is over. According to the IRS, the draft instructions include a number of
tools “intended to provide specific and clear guidance for completing the core form and each
schedule.” The draft includes separate instructions for each schedule, and a new sequencing list
that helps organizations complete the form in the correct order. Perhaps most importantly, the
draft and its glossary of 176 key terms provide new definitions for terms that are essential to
complete and accurate reporting.

Key Employees. Part VII of the new Form 990 requires an organization to report the compensation
of officers, directors, trustees, and key employees. Many in the association community had called
for a more specific definition of “key employee,” and, according to a recent press release, the IRS
“really struggled” with an appropriate description. The draft instructions propose a three-part
definition: a key employee (1) “has responsibilities, powers or influence over the organization as a
whole that is similar to those of officers, directors, or trustees”; (2) “manages a discrete segment or
activity of the organization that represents 5% or more of the activities, assets, income, or expenses
of the organization”; or (3) “has or shares the authority to control or determine 5% or more of the
organization’s capital expenditures, operating budget, or compensation for employees.” To reduce
the reporting burden, the instructions stipulate that organizations are only required to report “key
employees” earning more than $150,000 per year.

  April 9, 2008
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Independent Board Member. The definition of “independent board member” is one of the more
complicated terms outlined in the draft. A “member of the governing body” of an organization is
“independent” if four conditions are met at all times during the taxable year: (1) the member “was
not compensated as an officer or other employee of the organization or of a related organization”;
(2) the member “did not receive total compensation or other payments exceeding $10,000” from
the organization, except as reimbursement for expenses or reasonable compensation for “services
provided in the capacity as a member of the governing body”; (3) the member “did not otherwise
receive, directly or indirectly, material financial benefits from the organization”; and (4) the
member “did not have a family member that received compensation or other material financial
benefits from the organization.” Board members do not lose their independence simply because
they are major donors to the organization, or because they receive certain benefits as general
members of the organization.

Volunteer. The “Summary” portion of Part I requires the filing organization to estimate its total
number of volunteers. In the new Schedule O, organizations may—but are not required—to
explain how the number of volunteers was determined, and the types of services or benefits that
such volunteers might provide. The draft instructions help clarify the reporting required here by
defining a “volunteer” as any individual, full-time or part-time, who provides any volunteer service
to an organization during the reporting year. The instructions also note that an organization that
does not keep records of volunteer activities may use any reasonable method to estimate the

Related Organizations. Schedule R of the new Form 990 requires organizations to provide
information on related organizations and on certain unrelated partnerships through which the
organization conducts significant activities. The draft instructions define “related organizations”
broadly: the term includes parent organizations, subsidiaries, supporting organizations, and brother
and sister organizations controlled by the same entity as the filing organization. Although an
organization that has earned a group exemption is not required to list any of its subsidiaries, it is
required to report any transactions with related organizations in Part II of Schedule R.

Beyond clarifying specific terms, the draft instructions also provide additional guidance regarding
the scope of information requested by the IRS under the redesigned Form 990. Prior to the release
of the draft instructions, organizations were left to speculate as to the extent and type of reporting
required under many of the new questions.

Mission Statement. For example, the “Summary” section of Part I and again in Part III of the Form
990’s new core form, asks the filing organization to state its mission and list its most significant
activities. Prior to the release of the instructions, it seemed the IRS might be satisfied with a
restatement of the purposes recited in an organization’s articles of incorporation. However, the


  April 9, 2008
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instructions suggest that more specific information will be necessary. According to both the
instructions and the glossary, the organization’s reported “mission statement” should establish
“why the organization exists, what it hopes to accomplish, who it intends to serve, and what
activities it will undertake and where.”

Use of Association Management Companies. In addition, there was some concern among
associations as to the extent of the reporting required under Part VI, which reflects the delegation
of certain management duties to a management company. The draft instructions to Part VI direct
the filing organization to report use of a management co mpany or any other person that performs
“management duties customarily performed by or under the direct supervision of officers,
directors, trustees, or key employees.” Such management duties may include “hiring, firing, and
supervising personnel, planning or executing budgets or financial operations, or supervising
exempt operations or unrelated trades or businesses of the organization.” The instructions state
that a filing organization need not report the use of an investment management company, unless
the organization itself provides such services to others.

Whether the draft instructions will answer the questions and concerns that linger in the association
community remains to be seen. As noted above, the IRS is soliciting comments from the public on
the draft instructions, including suggestions on how to further reduce their complexity. In
particular, the IRS is interested in feedback on the instructions addressing new or significantly
revised areas of the Form 990, the definitions contained in the glossary and elsewhere, and
examples of program service accomplishments for specific sub-sectors (as referred to in Part III of
the new Form). The IRS will continue to accept such comments until June 1, 2008, and plans to
publish a final version of the instructions by the end of 2008.

Comments on the instructions may be sent to the IRS (in text format) at
Form990Revision@irs.gov, or mailed to: IRS, Draft 2008 Form 990 Instructions, SE:T:EO, 1111
Constitution Ave., NW, Washington, DC 20224.

For more information on the new Form 990 itself, please see our February article, available on the
Venable LLP Website (at www.venable.com/associations/publications) and at
www.associationtrends.com. Contact the authors at jstenenbaum@venable.com,
kesitchler@venable.com, and ahhiller@venable.com.


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