New Disclosure Requirements for Form 990-T

By Laura Kalick, J.D., LL.M.

Editor: Terence E. Kelly, CPA

Under new Sec. 6104(d)(1)(A)(ii),Sec. 501(c)(3) organizations now have to disclose publicly their Forms 990-T, Exempt Organization Business Income Tax Return. The penalty is the same as that for nondisclosure of Form 990, Return of Organization Exempt from Income Tax. Currently, this penalty is $20 per day for each day a failure occurs; the maximum penalty for any one return is $10,000. Returns for all open tax years are subject to the requirement.

Organizations will be able to keep from public review any information related to trade secrets, process, style of work, etc. Returns are to be made available for inspection during regular business hours at the organization’s principal office and at regional or district offices with three or more employees, or they can be posted on the Internet. The new disclosure provisions are contained in the Pension Protection Act of 2006, Section 1225, and are effective for Forms 990-T filed after Aug. 17, 2006.


Proposals for disclosure of Form 990-T were initially introduced by the staff of the
Senate Finance Committee, supported by the Joint Committee on Taxation and passed
by the Senate. In their original form, the disclosure provisions applied to all Sec. 501(c) organizations and also extended to the tax returns of their taxable affiliates. The proposals also required that large organizations (those with gross revenues or assets of at least $10 million) obtain certain reviews and unrelated business income tax (UBIT) certifications from independent auditors or counsel, and show that expense allocations complied with Treasury regulations (which require use of reasonable allocation methods).

The provisions were based on the concern that exempt organizations were funding taxable businesses with tax-subsidized capital. In the case of Sec. 501(c)(3) organizations, in addition to the income of the organization not being taxed, donors receive charitable deductions for funds donated to charities. The Joint Committee Report stated:

Some might argue that the justification for public access to information is even greater with respect to commercial activities of the organization, because such activities might be more likely to raise issues with respect to private inurement, private benefit, excess benefit transactions, and other matters that may affect the organization’s exempt status. Further the tax laws should not permit an organization to avoid making available to the public certain information regarding its activities by choosing to treat the activity as an unrelated trade
or business, instead of as an exempt activity, regardless whether the activity generates income subject to the tax. (Staff of the Joint Committee on Taxation, Options to Improve Tax Compliance and Reform Tax Expenditures (JCS 02-05, 1/27/05), p. 310–11.)

Inaccurate UBI: In addition to concerns about how tax-exempt dollars are being used, there has been evidence that UBI has not been accurately reported. Recently released IRS statistics for 2002 show a decline in the number of Forms 990-T filed and UBIT paid over the previous four years; four out of 10 Forms 990 filed could not be reconciled with Forms 990-T; and 28% of returns reported no gross UBI on Form 990 and net UBI losses on Form 990-T (see Riley, “Unrelated Business Income Tax Re-turns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality,” available at

There are several possible reasons for the decline in UBIT, such as a market downturn for the years in question or UBI activities transferred to taxable subsidiaries. However, if the decline is due to unreported or incorrectly reported UBI or excessive allocation of expenses, it is possible that the new disclosure rules will shed light on these issues.


Exempt organizations can expect that watchdog groups and the media will scrutinize Forms 990-T. Because Forms 990 are already available for public inspection, the two forms will be read in tandem; thus, all Sec. 501(c)(3) organizations should take the following steps:

  1. Perform an inventory of all revenue sources, including rents, royalties, interest, advertising, sponsorships, merchandise sales, income from affiliates, joint ventures, trade shows, certification programs, testing and Internet activities.
  2. Determine if the revenue is from a trade or business regularly carried on and not substantially related to the organization’s exempt purpose.
  3. Determine if any of the many exceptions, exclusions or modifications to UBIT apply to the activity (e.g., volunteer exception, donated-goods exception, etc.).
  4. Review all expense allocations. Expenses related to exempt activities cannot be used to offset UBI. Also, any allocation of a dual-use item expense to an unrelated activity must be on a reasonable basis.
  5. Ensure that UBI is accurately reported. Form 990-T requires an organization to report gross UBI, regardless of whether there is ultimately net taxable income.

Finally, although the Form 990-T disclosure requirement is currently imposed only on Sec. 501(c)(3) organizations, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, requires audit recognition of all uncertain tax positions for all organizations that prepare GAAP financial statements. This means that all exempt organizations that prepare GAAP financial statements will have to review UBIT positions and exemption and state income tax issues.

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