Final Regs Implement Form 990 Changes

The IRS issued final regulations on September 7 (T.D. 9549) implementing extensive revisions made in 2008 to Form 990, Return of Organization Exempt from Income Tax. The final regulations provide new threshold amounts for reporting compensation, require that compensation be reported on a calendar-year basis and modify the rules requiring information reporting upon a substantial contraction. The final regulations adopt with some modifications temporary and proposed rules the Service issued in September 2008 (T.D. 9423 and REG-142333-07).

The final regulations eliminate the advance ruling process for new organizations. Instead of requesting a determination of its public charity or private foundation status in its application for recognition of tax-exempt status, an organization will qualify as a publicly supported organization (and thus a public charity) in its first five years if it can show in its application that it reasonably expects to receive the requisite level of public support during that period.

For purposes of the Sec. 509(a) public support test, the regulations lengthen the timeline for computing public charities’ level of public support from four prior years to five years: four prior years plus the current tax year. Charities that fail the public support test must be classified as private foundations. The public support test requires a charity to receive more than one-third of its support each tax year from qualifying gifts, grants, contributions or membership fees, or gross receipts from activities that are not an unrelated trade or business. Under the temporary and proposed regulations, those that fail to meet the test in one tax year could be reclassified as a private foundation as of the first day of the next succeeding tax year if they also continue to fail the test in that succeeding year.

The final regulations modify the temporary and proposed regulations to provide that charities that fail to meet the public support test for two consecutive tax years will be treated as a private foundation as of the beginning of the second year of such failure, but only for purposes of Secs. 507 (termination of private foundation status), 4940 (excise tax on investment income), and 6033 (organizations required to file). An organization otherwise will be treated as a private foundation as of the first day of the third consecutive tax year.

The regulations require an organization to use the same accounting method for computing its public support that it uses to keep its books and that it uses to report on Form 990. Previously, organizations were required to use the cash method when computing public support and reporting on Schedule A, Public Charity Status and Public Support.

The final regulations also restore language inadvertently deleted from the temporary and proposed regulations allowing grantors and donors a limited ability to rely in certain instances on a written statement by the organization of its authorization to receive tax-deductible donations. They also provide that for purposes of Sec. 4966 (excise tax on a sponsoring organization of a donor-advised fund), sponsoring organizations may rely on an IRS determination letter or ruling that a grantee organization has similar authorization.

In late 2007, the IRS released the redesigned Form 990, which introduced new schedules and reporting requirements and thresholds (see “The Redesigned Form 990,” Journal of Accountancy, March 2009). Exempt organizations required to file Form 990 have been required to use the new form for tax years beginning in or after 2008.

Among areas subject to greater details of disclosure (to both the IRS and the public) in the revised form are reportable compensation to officers, related organizations and key employees; organizational structure, including relationships to other organizations or unrelated partnerships; and internal policies including those addressing conflicts of interest, whistleblowers and document retention. The form now also delves deeper into organizations’ activities, including those furthering their exempt purposes or potentially at odds with them, such as political and lobbying activities. It has new reporting requirements for tax-exempt hospitals and requires more details regarding grants exempt organization make to others.

The final regulations are effective September 8, 2011, and apply to tax years beginning on or after January 1, 2008.