Under the old regulations, an organization that wanted to be recognized by the IRS as a publicly supported charity instead of a private foundation had to go through an extended two-step process. First, the organization had to declare that it expected to be publicly supported on an on-going basis. Then, after five years, it had to file Form 8734, Support Schedule for Advance Ruling Period, showing the IRS that it actually met the public support test. If it didn't meet the test, it was designated a tax-exempt private foundation and would be subject to stricter rules.

The new rules no longer require the organization to file Form 8734 after completing its first five tax years. Moreover, the organization retains its public charity status for its first five years regardless of the public support actually received during that time. Instead, beginning with the organization's sixth taxable year, it must establish that it meets the public support test by showing that it is publicly supported on its Schedule A to Form 990, Return of Organization Exempt From Income Tax.   Transition rules apply to organizations that have previously received advance rulings.

The upcoming release of revised Form 990 (2008) instructions will be accompanied by background documents which will explain changes made to the draft instructions in response to public comments.  These changes will include the following: 

1. A revised definition of key employee for purposes of reporting executive compensation, transactions with interested persons, and other items.  In general, the three prong definition will require reporting as a key employee only those persons, other than officers, directors, and trustees, who (a) had reportable compensation exceeding $150,000 for the year (the “$150,000 test”); (b) had or shared organization-wide control or influence similar to that of an officer, director, or trustee, or managed or had authority or control over at least 10 percent of the organization’s activities (the “responsibility test”); and (c) were within that group of the organization’s top 20 highest paid persons for the year who satisfied both the $150,000 test and the responsibility test.
2. A list of foreign countries within each of nine geographic regions to be used for reporting foreign activities on the Form 990, Schedule F, Statement of Activities Outside the United States.
3. Specific reporting requirements for which the reporting organization may rely on reasonable efforts to obtain information required from interested persons or third parties.  These will be limited to (a) Part VI, Governance, Management, and Disclosure, line 1b (determining the number of voting members of the governing body that are independent) and line 2 (determining whether an officer, director, trustee, or key employee had a family relationship or a business relationship with any other officer, director, trustee, or key employee); (b) Part VII, Section A, Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees, line 1a (determining compensation paid to such persons by related organizations); and (c) Schedule L, Transactions with Interested Persons, Part III, Grants or Assistance Benefiting Interested Persons, and Part IV, Business Transactions Involving Interested Persons.  The revised instructions will provide examples of how the organization may satisfy the reasonable efforts standard with respect to each of these separate reporting requirements.
4. A revised standard for determining independence of a voting member of the organization’s governing body, which replaces the previously proposed “material financial benefit” test by looking to whether the member or a family member was involved in a transaction or relationship that was reportable on the current year’s Schedule L, Transactions with Interested Persons.
5. For Schedule H, Hospitals, a revised definition of facility for purposes of completing Part V, Facility Information, for 2008 tax years (2009 filing season).  Beginning with 2008 tax years, organizations completing Schedule H will be required to list in Part V each hospital or other facility that is licensed, registered, or similarly recognized by a state as a health care facility, including facilities other than licensed hospitals.  This does not alter the definition of hospital for purposes of determining whether the organization must complete Schedule H.  The revised Schedule H instructions will also clarify that physician clinics and skilled nursing facilities will be eligible for treatment as a subsidized health service in accordance with the generally applicable rules regarding subsidized health services.
6. For Schedule K, Supplemental Information for Tax-Exempt Bonds, the revised instructions will provide relief for refunding bonds issued after 2002 to refund pre-2003 bonds, by exempting such refunding bonds from having to be reported in Part III, Private Business Use.  All other parts of the schedule must be completed with respect to such refunding bonds under the generally applicable rules.  This change does not alter the generally applicable transition relief for Schedule K, which requires completion of only Part I, Bond Issues, for 2008 tax years (2009 filing season).

The IRS anticipates the complete revised set of draft instructions for the core form and all schedules will be posted on the IRS web site by August 15, 2008.  Because IRS Forms and Publications will not complete its review and formatting of these instructions until later this year, the upcoming release will be in regular text format rather than the standard triple-column format used for official and final forms.

IRC 4966(d)(1) defines a “sponsoring organization” as an organization that (1) is described in IRC 170(c), e.g., a charitable organization, including domestic fraternal organizations, war veterans organizations, and cemetery companies; (2) is not a private foundation (as defined in IRC 509(a)); and (3) maintains one or more donor-advised funds.

This new guildeline is separated into three (3) parts to help organizations determine the likelihood of obtaining exemption as a 501(c)(3) sponsoring organization:

PART I is directed toward identifying whether the organization is a sponsoring organization because it maintains one or more donor-advised funds. If the answer to questions 1 through 3 is “Yes” and the answer to question 4a is No, the organization is a sponsoring organization to which this guide sheet applies. Otherwise, the organization is not a qualifying sponsoring organization, and the guide sheet does not apply.

PART II asks a number of questions that are directed to whether an organization is in a position to ensure the accomplishment of charitable purposes, including whether it has ultimate authority over its accounts or funds.

PART III asks a number of questions that are directed to concerns regarding prohibited benefits, including private benefits that are inconsistent with exempt status. An organization will be denied exemption if it fails to establish that it satisfies all the requirements for exemption, including furthering private interests instead of public interests.

Visit the IRS webpage for Donor-Advised Funds for more information or to access their new guidelines.

The first of these documents, Background Paper – Summary of Form 990 Redesign Process, provides a 5-page explanation of the redesign process, from the release of the form’s discussion draft in June 2007 to today’s release of the new form’s instructions. Topics include reasons for the redesign, the public comment process, key changes from the old to the new form, and some next steps organizations and their preparers should consider as they get ready for the 2009 filing season. This document also summarizes the transition relief available to many smaller organizations for the 2008 and 2009 tax years.

The second document, Background Paper – Form 990, Moving from the Old to the New, lists and summarizes the parts and schedules of the new form, highlights which portions are new or significantly revised from the 2007 form, and compares material differences between the 2007 and the 2008 forms and instructions. This document contains a separate description of each part of the core form and each schedule, which explains the purpose, rationale and overview, key points, and effect on reporting relating to that part or schedule. The description of each schedule also includes an explanation of how an organization determines whether it must complete that schedule.

The third document, Background Paper – Changes to April Draft Instructions, provides an overview of significant changes to the April draft instructions and lists areas requiring further study for future years. The document also includes a detailed list of material changes to the April draft instructions, prepared in the order in which they appear in the instructions – first - the general instructions, and then the specific instructions for each part and schedule of the new form. 

The issuance of the revised instructions and these accompanying background documents will help organizations and practitioners prepare to file the new 2008 Form 990 as the 2009 filing season approaches.  The Internal Revenue Service intends to release draft instructions to the Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, in the next few weeks.

There is an increasing demand for charities and organizations to become more donor-friendly through the use of the web. Websites, such as GlobalGiving.com, are meeting the demands of small donors who want to be involved in large charitable projects but on a much smaller scale. Some small donors want to be involved on a bigger scale but don't have the means to accomplish it. Whatever the demands are, there is a big financial challenge ahead for nonprofit websites, such as GlobalGiving.com, that enable small donors to make gifts or loans directly to charities, low-income individuals, and schools.
 
These sites are popular among large foundations and wealthy individuals, who have contributed money to help these organizations get started, and the number of small donors making gifts or loans through these sites are rising rapidly. But as the number of small donors are rising, so are the administrative costs of maintaining these sites. Even as these websites enjoy early success, most of them want to find a financing approach that will allow them to thrive over the long haul. They know they cannot keep relying on wealthy benefactors, since most of the donors and foundations say they want the charities to be able to make it own their own financially in the next three to five years. Most of these charities pay their bills in part by charging administrative (mandatory or voluntary) fees for each gift made through their sites ranging from 10-25% of the donation. But when making charitable gifts, some donors think twice if they know the middleman is taking a cut, which is the reason why sites like Kiva.org, a San Francisco based charity which allows people to lend funds at 0% interest to entrepreneurs in developing countries, have avoided mandatory administrative fees for each donation and have made it optional instead.

Charles Best, founder and CEO of DonorsChoose, which connects donors to classroom projects in public schools, says their charity charges an optional 15% fee for gifts to schools because he wanted no one to be discouraged from giving through the site. "Our website does attract some people who have become skeptical about writing checks to big institutions," he says. "They didn't know where their money was going, and didn't have a connection to people touched by their gifts. Given that profile, we felt we needed to let donors 'choose' when it comes to our operating costs, as well as with the classroom projects on our site." He further notes that 90% of the charity's donors have opted to pay the optional fee, which helps to cover roughly 30% of the charity's budget. Mr. Best predicts the optional fees will cover 100% of the budget within the next three years assuming the number of donors continues to grow.

Unrelated business income (“UBIT”) is defined as the gross income derived by any organization from any unrelated trade or business (as defined in IRC 513) regularly carried on by it (less certain allowable deductions) which are directly connected with the carrying on of such trade or business.  Section 512(b)(2) of the Internal Revenue Code specifically excepts from UBIT royalty payments:  “There shall be excluded all royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with such income.” 

Discussion of Sierra Club Case

Courts have created differing opinions regarding the definition of royalty, which seems to hinge on whether the monies are earned passively or actively.  In Sierra Club v. Commissioner IRS (86 F. 3d 1526 (1996)), the court considered whether the payments received by the Sierra Club in connection with the licensing of their name and trademark to a credit card company for use on the credit card were royalty payments.  In this case, Sierra Club also had the option to generate higher royalty payments if the organization elected to pay production and mailing costs associated with the card.  In its decision, the court laid out the basic framework surrounding royalty payments and nonprofit organizations: 

A tax-exempt organization under I.R.C. § 501(c) must pay taxes at normal corporate rates on “unrelated business taxable income.” UBIT is defined as “the gross income derived by any organization from any unrelated trade or business ... regularly carried on by it, less the deductions allowed ... both computed with the modifications provided in subsection (b).” Section 512(b)(2) provides that “[t]here shall be excluded all royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with such income.” …

“Royalties” as used in § 512(b

501(c)(6) organizations are defined as “Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.”  (Internal Revenue Code Section (“IRC”) 501(c)(6)).  More specifically, a 501(c)(6) organization must meet certain basic tests in order to be exempt under 501(c)(6):

A.     It must be an association of persons having some common business interest, and its purpose must be to promote this common business interest.

B.     It must not be organized for profit.

C.     It must be a membership organization and have a meaningful extent of membership support.

D.     No part of its net earnings may inure to the benefit of any private shareholder or individual.

E.      Its activities must be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons.

F.      Its purpose must not be to engage in a regular business of a kind ordinarily carried on for profit, even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining.

The free online workshop – Stay Exempt – Tax Basics for 501(c)(3)s – consists of five interactive modules on tax compliance topics for exempt organizations:

• Tax-Exempt Status – How can you keep your 501(c)(3) exempt?
• Unrelated Business Income – Does your organization generate taxable income?
• Employment Issues – How should you treat your workers for tax purposes?
• Form 990 – Would you like to file an error-free return?
• Required Disclosures – To whom do you have to show your records?

Users can access this new training program at Stay Exempt. Users can complete the modules in any order and repeat them as many times as they like.  The online training website does not require registration and its visitors will remain anonymous.

• Charitable trusts recognized as tax-exempt under section 501(c)(3); and
• Non-exempt charitable trusts that are treated as section 501(c)(3) organizations for certain purposes.

The procedures will allow affected trusts to continue to file Form 990, and relieve them from paying excise tax on net investment income, for tax year 2007. 

Trusts that become private foundations by virtue of Pension Protection Act of 2006 must file Form 990-PF for tax years beginning on or after January 1, 2008.  New procedures require such trusts to highlight the change by filing a paper Form 990-PF for 2008.

Charitable organizations are frequently subject to intense public scrutiny, especially where they appear to have inappropriately benefited their officers, directors, or trustees.  The IRS also has an oversight role with respect to charitable organizations.  An important part of this oversight is providing organizations with strategies that will help avoid the appearance or actuality of private benefit to individuals who are in a position of substantial authority.  The recommended conflict of interest policy is a strategy we encourage organizations to adopt as a means to establish procedures that will offer protection against charges of impropriety involving officers, directors, or trustees.

A conflict of interest occurs where individuals’ obligation to further the organization’s charitable purposes is at odds with their own financial interests.  For example, a conflict of interest would occur where an officer, director, or trustee votes on a contract between the organization and a business that is owned by the officer, director or trustee.  Conflicts of interest frequently arise when setting compensation or benefits for officers, directors, or trustees.  A conflict of interest policy is intended to help ensure that when actual or potential conflicts of interest arise, the organization has a process in place under which the affected individual will advise the governing body about all the relevant facts concerning the situation.  A conflict of interest policy is also intended to establish procedures under which individuals who have a conflict of interest will be excused from voting on such matters.

Apart from any appearance of impropriety, organizations will lose their tax exempt status unless they operate in a manner consistent with their charitable purposes. Serving private interests more than insubstantially is inconsistent with accomplishing charitable purposes.  For example, paying an individual who is in a position of substantial authority excessive compensation serves a private interest.  Providing facilities, goods, or services to an individual who is in a position of substantial authority also serves a private interest unless the benefits are part of a reasonable compensation arrangement or they are available to the public on equal terms and conditions.

In a ruling that could have implications for many charities, the Internal Revenue Service has denied a tax exemption to an organization in part because the group did not spend enough of its money on charitable programs.

This is the first public sign that the revenue service is measuring how much charities spend by using a controversial approach that the government has recently decided to apply. 

The IRS said the organization did not carry on a charitable program “commensurate in scope” with its financial resources.

As is its policy, the IRS did not identify the group. But the organization was identified as the National Foundation of America, in Franklin, Tenn., by the Web site of a state government receiver in Tennessee who has been closing the organization.

The IRS ruling was released at a time when the tax agency has been signaling that it plans to take a more-aggressive approach to making sure the nation’s nonprofit organizations are not hoarding or wasting money.

Steven T. Miller, commissioner of the IRS’s tax-exempt and government-entities division, said in a speech last month that the agency would apply a standard that it had briefly embraced years ago but then set aside — a so-called commensurate test — to help determine whether charities were spending money efficiently and effectively.

Less Than 1% to Charity

In its private-letter ruling the IRS said the organization had said in its application for tax-exempt status that it planned “to coordinate and conduct, through its staff, evangelistic campaigns in a number of countries wherein the people are receptive to the Gospel of Jesus Christ.” The group’s initial two-person board of directors was a husband and wife.

The following organizations file another return in lieu of the Form 990:  

• Private foundations (Form 990-PF)

• Employee benefit trusts (Form 5500)

• Black lung benefit trusts (Form 990-BL)

PORT-AU-PRINCE (Reuters) - Haiti faces a "major crisis" if international donors fail to provide urgent aid to help feed its poor, a top official with the World Food Program said on Wednesday.

"It is not so important how much money we are able to raise for our cause," Pedro Medrano, the WFP director for Latin America and the Caribbean, told a news conference. "The question is how much the international community and all of us are prepared to pay for not doing what needs to be done."

The WFP appealed for $54 million in fresh funding to offset soaring food prices in Haiti and provide the country with about 50,000 metric tons of food between now and December.

"This is a major crisis. Are we going to intervene when it's too late?" asked Medrano, who spoke as he wrapped up a brief visit to the impoverished Caribbean nation, the poorest country in the Americas.

According to WFP figures, 66 percent of Haitians live on less than $1 dollar a day and 47 percent are undernourished.

At least six people were killed during riots in Haiti this month as protests against rising food prices and the high cost of living turned violent.

Lawmakers sought to quell the anger by dismissing Prime Minister Jacques Edouard Alexis, who was fired on April 12. But there are fears public unrest could erupt again and that the food crisis could spark an increase in the number of Haitians who attempt the dangerous 600-mile (966-km) sea journey to illegally enter the United States.

Angry protests over high food costs have rattled several countries in recent weeks as bad weather, competition with biofuels, market speculation and rising demand in Asia send the price of many staples skyrocketing.

The IRS is seeking comments from the public on the 2008 Form 990 instructions, in an effort to make sure the final instructions address the needs of the tax-exempt community. The comment period is open until June 1, 2008. Included with the instructions are special highlights lists indicating certain items in the instructions on which the IRS would especially like to receive public comments. As with comments received on the draft Form 990, the IRS plans to post comments on the instructions on its Web site.

The draft 2008 Form 990 instructions are organized according to a consistent format. There is a general overview of the form or schedule explaining its purpose, an explanation of who must file that particular schedule, and then line-by-line instructions to aid in answering each question on the form or schedule.

The draft instructions also contain a number of new tools designed to make it easier for the organization to answer the questions and to promote more uniform reporting. These tools include a comprehensive glossary of terms; a sequencing list to help organizations determine the order in which to fill out parts of the form; a compensation table to help organizations determine how and where to report items of compensation; and many illustrative examples. These aids were developed in response to comments received last year in connection with the draft Form 990.

Comments on the instructions should be e-mailed to the IRS at Form990Revision@irs.gov.   To facilitate posting on the IRS Web site, please e-mail comments in a text (not picture) format. Comments on the instructions received via e-mail will be posted on this website, after removing the submitter's e-mail address.  Comments may also be mailed to:

IRS
Draft 2008 Form 990 Instructions, SE:T:EO
1111 Constitution Ave., NW.
Washington, DC 20224

Every exempt charitable organization is classified as either a public charity or a private foundation. Generally, organizations that are classified as public charities are those that (i) are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, (ii) have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities, (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities. Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.

During its existence, a public charity has numerous interactions with the IRS – from filing an application for recognition of tax-exempt status, to filing the required annual information returns, to making changes in its mission and purpose. The IRS provides information, explanations, guides, forms and publications on all of these subjects – they are available through this IRS Web site. The illustration below provides an easy-to-use way of linking to the documents most charities will need as they proceed though the phases of their “life cycle.”

In addition to the following illustration, you can also download a graphical depiction of the life cycle, which includes functioning links back to our site.