© 2008 Venable LLP

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The New Form 990:Defusing Governance, Political Activities,

Compensation, and Other IssuesJEFFREY S. TENENBAUM

RONALD M. JACOBS

AARON H. HILLER

DECEMBER 4, 2008

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Schedule C

– Political Activities

– Lobbying Activities

Part VI of the Core Form

– Governance

– Policies

Political Issues and Governance

The New Form 990

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Concept for the New 990 and Schedules

Enhance transparency to provide the IRS and the

public with a realistic picture of the organization,

along with the basis for comparison to other

organizations

Promote compliance by accurately reflecting the

organization’s operations so the IRS may efficiently

assess the risk of noncompliance

Minimize the burden on filing organizations

IRS Guiding Principles

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Format of Redesigned Form

Core form, including summary page

16 schedules with applicability based on

organization’s specific indicators

For complete set of Form 990 and final

instructions, go to

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

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the road ahead for ABC CORPORATION Schedule C

Political Activities and Lobbying

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Section I

– Political Activities

• Expenses

• Volunteer Time

Section II

– Lobbying Activities for 501(c)(3) Organizations

Section III

– Lobbying Activities and Proxy Tax for Other 501(c) Organizations

Three Areas of Disclosure

Schedule C

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Political Campaign Activities– All activities that support or oppose candidates

for elective federal, state or local public office. It does not matter whether the candidate is elected. A candidate is one who offers himself or is proposed by others for the public office.

– Political campaign activity does not include any activity to encourage participation in the electoral process, such as voter registration or voter education, provided that the activity does not directly or indirectly support or oppose any candidate.

Political Campaign Activities

Section I

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Narrative description of direct and indirect political campaign

activities

Amount of political expenditures– Any expenditure for political campaign activities are

political expenditures. An expenditure includes a payment, distribution, loan, advance, deposit, or gift of money, or anything of value. It also includes a contract, promise, or agreement to make an expenditure, whether or not legally enforceable.

– Key Points:– 501(c)(3) should not have political expenditures– Other organizations could trigger tax consequences

Volunteer hours

501(c) and 527 Groups

Section I-A

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Amount of any excise tax paid

Amount of excise tax incurred

Did the organization file Form 4720

501(c)(3) Organizations

Section I-B

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Amount of direct expenses for 527 exempt function– All functions that influence or attempt to influence the

selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed

Amount of internal funds contributed to other organizations for political activity– Not PAC contributions– Again, could have tax consequences

Identification of all 527 organizations to which funds were given– Includes transfers to PAC (e.g., combined

dues/contribution payment

501(c) (other than (c)(3))

Section I-C

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Lobbying in the tax code is not clearly defined

Only test for excessive lobbying is if lobbying is

“substantial part” of organization’s activities

501(h) provides clear definitions of lobbying, but

sets caps

501(h) Election Versus No 501(h) Election

Section II

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Fairly straightforward application of 501(h)

Information– Grass roots lobbying expenditures– Direct lobbying expenditures– Total lobbying– Exempt purpose expenditures– Total of exempt purpose and lobbying– Tax amount

4-Year Average

Amount reported on 1c would be used as basis

for LDA number, if using Method B

501(c) (3) Making 501(h) Election

Section II-A

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Series of questions designed to determine

whether lobbying was “substantial”

Same as old 990

No requirement to describe activities (was

required on old 990)

Yes/No questions and amounts expended

Section asking to confess to engaging in

“substantial” lobbying

501(c) (3) Not Making 501(h) Election

Section II-B

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Applies to 501(c)(4), (5), and (6) organizations

Amount spent on lobbying is either:

– Not deductible by members

– Subject to a proxy tax

Section 162(e) – the nondeductibility/proxy tax

section of the Code – provides Method C for the

LDA

Definition of lobbying in 162(e) is different than

501(h) definition

Nondeductibility and the Proxy Tax

Section III

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Lobbying includes:

– Influencing legislation

– Influencing actions of covered officials

Methods of Calculation

– Reasonable methods acceptable

– Specific methods from IRS regulations

162(e) Lobbying

Section III

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Same set of questions from old 990

Were substantially all dues received nondeductible by

members– New form uses 90%– Old form did not have a percentage for

“substantially all”

Did the organization make only in-house lobbying

expenditures of $2,000 or less

Did the organization agree to carryover lobbying and

political expenditures from the prior year

501(c) (4), (5), (6) Organizations – Screening Questions

Section III-A

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Used if answered “Yes” to:

– Did the organization agree to carryover lobbying and political expenditures from the prior year

Or answered “No” to both:

– Were substantially all dues received nondeductible by members

– Did the organization make only in-house lobbying expenditures of $2,000 or less

501(c) (4), (5), (6) Organizations (in certain circumstances)

Section III-B

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Report information about dues, lobbying, and

nondeductibility – similar to old 990 questions:– Dues, assessments, and similar amounts– Section 162(e) non-deductible expenditures

• Lobbying and political• But not political activity for which taxes

were paid under section 527(f)– Carryover from prior year– Total– Aggregate amount reported as nondeductible

on dues notices

If required by III-A

Section III-B

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Determine Excess:

– If total exceeds amount from dues notices, how much will be carried forward to next year?

– Amount not carried forward and subject to taxation

Tax Calculations

Section III-B

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the road ahead for ABC CORPORATION

Part VI Governance, Management & Disclosure

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Departure from typical tax form questions.

IRS rationale: an independent board of directors

and well-defined governance and management

policies increase likelihood of tax compliance,

safeguarding of charitable assets, and serving of

charitable interests.

Self-regulation and internal controls.

Transparency and accountability.

Introduction to Part VIRationale

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Number of independent voting members of the board of directors? (Line 1)

Independence Defined:– Not compensated as an officer or employee by

association or related organization (Schedule R);– Not compensated as independent contractor in excess of

$10,000, except for reasonable compensation for services provided; and

– Not involved, and no family member involved, in a financial transaction with the association (Schedule L).

– Do not lose independence because of charitable donation or member benefits.

– Required to put up reasonable effort to obtain information necessary to determine independence, and may rely on the responses provided.

Questions About Board & ManagementIndependent Board

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Family relationships and business relationships among

officers, directors, trustees, and key employees? Again,

reasonable effort. (Line 2)

Delegation of key responsibilities to a management

company? (Line 3)

Significant changes to your organizational documents?

(Line 4)

Do members elect or appoint members of the governing

body? (Line 7a & Schedule O)

Do members approve decisions of the governing body?

(Line 7b & Schedule O)

Questions About Board & ManagementOther Questions

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Do you document decisions taken in board

meetings? Committee meetings? (Line 8)

Does the governing body have an opportunity to

review the Form 990? What is the process for

review? (Line 10)

Use Schedule O

A “yes” or “no” answer is rarely enough!

Questions About Board & ManagementOther Questions (Continued)

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Do you have all of these policies in place?

– Conflict of Interest Policy

– Whistleblower Policy

– Document Retention and Destruction Policy

– Compensation Policy

– Joint Venture Policy

Written policies

Enforcement of policies

Questions About PoliciesPolicies Needed

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Acceptable policy:– “defines conflicts of interest, identifies the

classes of individuals within the organization covered by the policy, facilitates disclosure of information that may help identify conflicts of interest, and specifies procedures to be followed in managing conflicts of interest.”

“A ‘conflict of interest’ arises when a person in a

position of authority…may benefit financially from

a decision he or she could make in such

capacity.”

PoliciesConflict of Interest (Line 12)

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Conflict Defined:– “For this purpose, a conflict of interest does

not include questions involving a person’s competing or respective duties to the organization and to another organization, such as by serving on the boards of both organizations, that do not involve a material financial interest of, or benefit to, such person.”

Annual disclosure of potential conflicts? The bare minimum—of course “conflict of

interest” means more!

PoliciesConflict of Interest (Continued)

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Ongoing monitoring and enforcement of the

policy?

Often worse to have the policy and not enforce it

than to not have the policy at all!

PoliciesConflict of Interest (Continued)

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An acceptable policy “[e]ncourages staff and

volunteers to come forward with credible

information on illegal practices or violations of

adopted policies of the organization.”

“Specifies that the organization will protect the

individual from retaliation.”

“Identifies those staff or board members or

outside parties to whom such information can be

reported.”

PoliciesWhistleblower (Line 13)

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Sarbanes-Oxley: a federal crime to retaliate

against whistleblowers who report to federal law

enforcement authorities

Broad enough to cover legal questions and

association policy

PoliciesWhistleblower (Continued)

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An acceptable policy specifies the “[r]ecord

retention responsibilities of staff, volunteers,

board members, and outsiders for maintaining

and documenting storage and destruction of the

organization’s documents and records.”

Tailor specifically to your activities.

Seek advice of counsel—requirements vary from

jurisdiction to jurisdiction.

PoliciesDocument Retention (Line 14)

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2008 Form 990 requires all tax-exempt entities

(not just 501(c)(3)’s) to report five highest paid

employees.

Rebuttable presumption procedure from IRC

4958 and best practices:

– Formal approval by board or compensation committee.

– Comparability data.

– Timely documentation of the decision.

PoliciesCompensation (Line 15)

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Basic set of principals.

Every joint venture should be governed by a

written agreement, reviewed by counsel, and

designed to protect your tax-exempt status.

PoliciesJoint Venture (Line 16)

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Are the policies legally required?

This point clarified on Form 990 itself.

Presumption of wrongdoing, however, if not in

place?

Best practices, gather the information you need.

PoliciesOther Issues

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Next Steps

Dry run of new Form 990

Perform gap analysis regarding policies

Establish compensation approval procedures

Determine if new bookkeeping required

Select Form 990 team

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Contact InformationYOUR VENABLE TEAM

Jeffrey S. Tenenbaumjstenenbaum@venable.comt 202.344.8138f 202.344.8300

Ronald M. Jacobsrmjacobs@venable.comt 202.344.8215f 202.344.8300

Aaron H. Hillerahhiller@venable.comt 202.344.8289f 202.344.8300

www.Venable.com

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the road ahead for ABC CORPORATION

The New Form 990 Defusing Governance, Political Activities

Compensation, and Other Issues