AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

Comments on the Instructions to Lines 25, 75b and 75c of the 2005 Form 990,

Return of Organization Exempt from Income Tax

Developed by the

2005 Form 990 Task Force

Mary Rauschenberg, Task Force Chair

Harvey Berger

Jody Blazek

Howard Donkin

John Valenzuela

Patricia O’Malley

Naomi Horsager

Jane Searing

Marie Arrigo

Diane Cornwell

Fred Rothman

Jeffrey Schragg

Eve Borenstein

June 15, 2006

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

Comments on the Instructions to Line 25 of the 2005 Form 990,

Return of Organization Exempt from Income Tax

GENERAL COMMENTS

Line 25 of Form 990 reports officer compensation expense for the organization’s fiscal year and allocates the compensation to functional categories (i.e., program services, management and general, and/or fundraising). This compensation amount is calculated based upon the method of accounting used for the organization’s books and records.

The 2005 Instructions require organizations to attach a schedule to Form 990 providing detail for each executive supporting the components that make up the officer compensation amount. The instructions are not clear about the required level of detail, such as base pay, bonus, specific benefits, etc. We understand that the goal of the schedule is to provide the user of Form 990 with more details regarding the individual components of each officer, director, trustee or key employee’s compensation. We strongly agree with the Service on the importance of increasing transparency in the charitable sector and enforcing the statutory prohibition against private inurement. Presenting additional information regarding the components of such compensation would certainly increase transparency. However, as presently structured, the information will be confusing at best and possibly misleading.

RECOMMENDED CLARIFICATION

We believe the requirement to attach a schedule supporting Line 25 to the return should be removed immediately. If transparency is the goal, we recommend modifying Part V in a way that would be more informative to users.

SPECIFIC COMMENTS

Officer, director, trustee and key employee compensation is presented in two places in the Form 990: Part II on Line 25 and Part V. While the two disclosures may be similar they are not necessarily identical. Line 25 disclosures are based upon amounts reported in an organization’s books and records. The method of accounting for this disclosure will most likely be cash or accrual. The measurement period will be the fiscal year of the organization. The purpose of this disclosure is to show how organization funds are spent both by natural account classification as well as by functional category.

In contrast, Part V disclosures are made based upon compensation paid to the individual. Typically the cash-basis method of accounting is used with specific modifications. One of the most common modifications is related to nonqualified deferred compensation which is reported in the year earned and then again in the year paid. Likewise, severance arrangements are reported in the year earned and when paid. For book purposes, these items are expensed only once. Imputed value of life insurance over $50,000 is reported in Part V based upon Service-provided tables, not actual cost (which is used for book). Many organizations estimate the cost of employer-provided medical insurance (especially when the organization is self-insured) or the value of a defined benefit plan retirement benefit. The value of benefits such as qualified tuition reductions and employer provided housing reported in Part V will not equal the expense reported on the books.

Adding to the confusion, the regulations under section 6033 provide that an organization may report the requested information for Part V on the basis of its fiscal year or the calendar year that ends within the fiscal year. Many fiscal year organizations choose to use a calendar year reporting in order to reconcile amounts back to their payroll records, which helps assure complete and accurate information in the disclosure.

Thus, for these reasons, the two schedules oftenresult in reporting different amounts for each executive. Users of Form 990 would find it difficult to knowwhich schedule should be used to determine what economic benefits a given individual received from the organization. Rather than increasing transparency, the required schedule for Line 25 may actually result in a decrease in transparency. Also, the instructions’ ambiguity about the detail required will result in reporting differences which will impair the comparability of information among similar organizations.

Comments on the Instructions to Line 75b of the 2005 Form 990,

Return of Organization Exempt from Income Tax

GENERAL COMMENTS

Line 75b of Form 990 asks the reporting exempt organization to disclose whether any officers, directors, trustees, key employees, highest compensated employees, highest compensated professional and other independent contractors, are related to each other through family or business relationships. In the absence of specific instructions for Line 75b defining family and business relationships, FAQs posted on the IRS website refer to the Line 51 instructions for the definition of family and business relationships. The Instructions also state that organizations must make reasonable efforts to obtain the required information and provide accurate information on the return.

The purpose of Line 75b is to help identify abusive transactions or situations, and the AICPA strongly supports this goal. However, we believe that the burden imposed on exempt organizations will outweigh the benefit to the IRS. Much of the information being sought with respect to section 501(c)(3) organizations is already required. Any additional information reported would be merely incidental to the activities of the filing organization. We are also concerned that the broad reach of the inquiry may result in non-compliance in those situations where the relationships are merely incidental to an organization’s activities.

RECOMMENDED CHANGE

The Instructions to Line 75b should be clarified to require a response only when the business and/or family relationship directly impacts the reporting organization. This clarification should permit an organization to refer to information submitted in response to other parts of Form 990 and Schedule A without repeating the information. In all but a limited number of instances, the persons described by Line 75b will lack sufficient knowledge to provide a complete and accurate response. Board members will likely perceive the disclosures as an unnecessary invasion of their privacy and may be reluctant to continue their involvement with charitable organizations.

SPECIFIC COMMENTS

Line 75b asks whether any officers, directors, trustees, or key employees, or highest compensated employees listed in Schedule A, Part I, or highest compensated professional and other independent contractors, listed in Schedule A, Parts II-A and II-B, are related to each other through family or business relationships.

Notwithstanding the recent posting of 2005 Form 990 FAQ # 75-2, the absence of specific guidance in the Instructions poses a significant impediment to the submission of a complete and accurate Form 990.

Accordingly, the following specific recommendations are suggested:

  • The reference to the Line 51 instructions is confusing. The Line 51 instructions provide that family relationships,inter alia, include siblings. However, for purposes of Schedule A, Part III, Line 2, siblings are not included as family members. The instructions for Lines 75b and Schedule A, Part II, Line 2 should be consistent and should be revised to eliminate redundancies in required reporting.
  • The Line 51 instructions define business relationships as including “employment and contractual relationships, and common ownership of a business where any officers, directors or trustees, individually or together possess more than a 35-percent ownership interest in common.” It is unclear what is meant by “contractual relationships.” Merely maintaining a checking account at a bank where a fellow board member is also a director might be considered a “contractual relationship” thus being a “business relationship” for Line 75 purposes, but disclosing a board member’s personal banking (or other) relationships does not seem reasonable. “Contractual relationships” must be clarified.
  • Examples addressing the types of situations that the Service deems abusive would mitigate the Instruction’s lack of clarity and absence of specific instructions.
  • 2005 Form 990 FAQ # 75-2 givesthe distribution of a questionnaire as an example of a reasonable effort to obtain the required information. A sample questionnaire prepared by the IRS would be helpful and consistent with the issuance of the Sample Conflict of Interest Policy incorporated as Appendix A of the Form 1023 Instructions.
  • Schedule A, Part III, Line 2, requires disclosure of certain described transactions between certain persons and the organization, either directly or indirectly. To the extent such disclosure satisfies Line 75b, the organization should be permitted to simply reference the statement associated with Schedule A, Part III, Line 2in lieu of attaching a separate statement for Line 75b.

Comments on the Instructions to Line 75c of the 2005 Form 990,

Return of Organization Exempt from Income Tax

GENERAL COMMENTS

Line 75c of Form 990 asks the reporting exempt organization to disclose whether certain officers, directors, trustees, or key employees, or compensated professional and other independent contractors, receive compensation from any other organizations, whether tax exempt or taxable, that are related to the reporting organization through common supervision or common control. We strongly agree that increasing transparency in the charitable sector and enforcing the statutory prohibition against private inurement are important. However, the tools used to accomplish these goals should be based in a framework that does not unduly limit the ability of exempt organizations to work with other entities or burden exempt organizations with acquiring data from and about other entities.

RECOMMENDED CHANGE

The Instructions to Question 75c should be changed by immediately removingthe two newly added criteria used to determine if two organizations have a “close connection” and are thus considered to be “related.” If the new criteria are not removed, practical examples that more clearly illustrate Service’s intended interpretations of individual factors would be helpful.

Board members are expressing concern about the intrusive nature of these disclosure requirements and are beginning to question whether they should continue to be involved in charitable activities.

SPECIFIC COMMENTS

Question 75c asks whether any officers, directors, trustees or key employees listed in Part V-A, or highest compensated employees or independent contractors listed in Parts I, II-A and II-B of Schedule A, receive compensation from any organization “related” to the filer through common supervision or control.

The Instructions state that related organizations are “tax-exempt or taxable entities with a close connection,” indicating that a close connection mayinclude:

  • common control;
  • common governance;
  • direct or indirect ownership;
  • control through budgetary approval;
  • coordination of operations as to facilities, programs, employees or other activities; or
  • common persons “exercising substantial influence over all of the organizations.”

The last two criteria on this list were new with the 2005 Instructions.

The new language in the Instructionsfor Line 75c is unclear, too broad and will result in unintended consequences. Also, in many non-abusive situations, compliance with a broad interpretation of the Instructions could result in a perception of overreaching,causing many excellent board members to reconsider their willingness to serve on boards of many charities and other not-for-profit organizations.

Although the first four factors relate to control, the remainder relate to coordination and/or “substantial influence.” It appears that the Instructions give the coordination/influence factors the same “weight” as the control factors, but offer no guidance on what level of coordination or influence would result in the requisite close connection necessitating disclosure.

Coordination of operations as to facilities, programs, employees or other activities

Because the Instructions list these as factors that “may” create a close connection, we assume that a determination of whether the level of shared resources is significant enough to result in a close connection will be based on a subjective determination. This will likely result in a variety of interpretations by organizations and practitioners, making compliance difficult and inconsistent among similar organizations. It may also discourage organizations from sharing resources when it otherwise makes sense to do so, thereby negatively affecting efficient use of charitable and other resources.

Thus, we recommend clarifying that this criteria does not need to be considered for filing of 2005 Forms 990.

Common persons exercising substantial influence over all of the organizations

The Instructions imply that the presence of a single common person with influence is enough to cause the organizations to have a close connection. This does not seem reasonable, particularly given the use of the word “persons” plural. Other factors – such as the total size of the board, the stature and influence of other board members, etc. – should also be considered. The number of possible interpretations will render compliance difficult and inconsistent among similar organizations. In addition, this factor may also cause excellent board members to reconsider participating on charitable or other not-for-profit boards.

Thus, we recommend that clarifying that this criteria does not need to be considered for filing of 2005 Forms 990.

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