IRS Form 990 Preparation

Dollars & Cents, July 2009
By: Charles F. Tate and Deborah G. Kosnett

As everyone knows by now, the 2008 Form 990 requires more information from nonprofits than ever before, especially regarding dealings with others, both individuals and other entities. In the May issue of Dollars & Cents, we discussed the interested person disclosures required by Schedule L (see "CFO Hotline: Form 990's Schedule L Short (But Not Sweet)" ). This issue, we'll continue our look at organizational relationships via the new Schedule R, "Related Organizations and Unrelated Partnerships."

Schedule R was added to capture the increasingly complex organizational structures of tax-exempt organizations and improve transparency with respect to such structures. Schedule R asks for information on certain transactions with related organizations, as well as with any unrelated partnerships through which an organization conducts significant activities.

Prior 990s required all organizations to give information regarding disregarded entities and controlled entities, but they did not require reporting of similar information for joint ventures or investments in unrelated for-profit organizations, even though the IRS's tax compliance concerns may be greater in many of those cases. Schedule R adds new reporting for unrelated partnerships through which the organization conducts significant activities. Schedule R also expands, to all types of exempt organizations, the previous Form 990's reporting of various transfers to and from charities, although it eliminates this reporting with respect to tax-exempt transferees that are not controlled by the organization.

What is a Related Organization?

Filling out Schedule R properly requires a thorough understanding of the various relationships to be reported. An organization is considered related to the filing organization if it is controlled by the filing organization. Control may be direct or indirect. The following Quick Reference Table summarizes the different types of direct control:

Schedule R - Quick Reference Guide For Determining Control:

Nonprofit Organizations

·         Parent/Subsidiary: The power to remove and replace (or to appoint or elect, if such power includes a continuing power to appoint or elect periodically or in the event of vacancies) a majority of the nonprofit organization's or other organization's directors or trustees.

·         Parent/Subsidiary: A management or board overlap where a majority of the subsidiary organization's directors or trustees are trustees, directors, officers, employees, or agents of the parent organization.

·         Brother/Sister: The same persons constitute a majority of the members of the governing body in both organizations.

Stock Corporations

·         Ownership of more than 50 percent of the stock (by voting power or value) of a corporation.

Partnerships

·         Ownership of more than 50 percent of the profits or capital interest in a partnership.

·         Being a managing partner in a partnership that has three or fewer managing partners (regardless of which partner has the most actual control).

Limited Liability Company (LLC)

·         Ownership of more than 50 percent of the profits or capital interest if treated as a partnership for federal tax purposes and regardless of ownership interests as stock membership shares, or otherwise.

·         Being a managing member in a LLC treated as a partnership which has three or fewer managing members (regardless of which member has the most actual control).

Disregarded Entity

·         Being the sole member.

Trust

·         Ownership of more than 50 percent of the beneficial interests.

The constructive ownership rules of section 318 are used to determine the existence of indirect control of a corporation, partnership, or other entity. Under this rule, an individual or organization is considered to own shares of stock, or partnership interests, owned by related individuals or entities. The Schedule R instructions provide several examples of indirect control.

Schedule R, Part by Part

Part I requests information on disregarded entities (chiefly single member limited liability companies, or SMLLCs). Because a disregarded entity is considered to be a mere division of the organization that owns it, its financial information is already included in the filing organization's Form 990. Accordingly, separate identification of the disregarded entity's total income and end-of-year assets will be needed for this section.

Part II asks for information on related tax-exempt organizations. While the previous form 990 asked for similar information, more detail is required for 2008 and forward. Generally speaking, parent/subsidiary, brother/sister, and supporting/supported control relationships are the pertinent to Part II. Disregarded entities or central and subordinate organizations under a group exemption should not be included in this section.

Part III requests information regarding related organizations taxable as partnerships (including LLCs and partnerships). Organizations that are direct partners or members must fill out the entire schedule. Organizations that are related to a partnership or LLC solely in a parent or brother/sister capacity will fill out only the first three columns of this section (name/address/EIN, primary activity, and legal domicile).

Part IV asks for identification of related subchapter C and S corporations, as well as related trusts. Organizations that have an ownership interest in a related C corporation, S corporation, or trust must fill out the entire schedule. Organizations related solely in a parent or brother/sister capacity, with no ownership interest, will fill out only columns A, B, C, and E of this section (name/address/EIN, primary activity, legal domicile, and type of entity).

Part V combines and expands the related organization reporting requirements of the old Form 990 and Schedule A, extending formerly limited reporting requirements to all organizations. Organizations are to complete this section if they engaged in any of the enumerated transactions with any related organizations reported in Parts II though IV.

Part VI asks for information on unrelated organizations, taxed as partnerships, in which an organization has a partner or member interest, and through which it conducts more than 5 percent of its activities, as measured by its total assets at the end of the year, or gross revenue for the tax year (whichever percentage is greater). Unrelated partnerships that meet the following conditions are not to be reported in this section:

• Ninety-five percent or more of the gross revenue from the partnership is composed of interest, dividends, royalties, rents, and capital gains (including unrelated debt-financed income).
• The partnership investment is primarily for the production of income or appreciation of property, rather than for the conduct of a section 501(c)(3) charitable activity (such as program-related investing).