AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

Comments on the Instructions to Line 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

March 31, 2006

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

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 with the Service on the importance of increasing transparency in the charitable sector and enforcing the statutory prohibition against private inurement. 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.

We believe that the Instructions to Question 75c should be clarified to indicate that these reporting rules do not applywhen (1) a charity is “connected” or “related” to a for-profit organization by a single individual; or (2) no funds flow from the charity to the related organization,as demonstrated in the examplesbelow.

We believe this clarification is needed immediately. Fortunately, much of this clarification can be accomplished, at least initially, by using an FAQ document on the IRS Charities Webpage.

SPECIFIC COMMENTS

The new language in the Instructionsfor Line 75c is unclear. We believe it is too broad and results in unintended consequences. We have posed a number of questions regarding how these Instructions apply to various common fact patterns in the examples below. In many non-abusive situations, compliance with a broad interpretation of the Instructions could result in a perception of unfairness and may well cause many excellent board members to reconsider their willingness to serve on boards of many charities and other not-for-profit organizations.

Although we understand the need for transparency with respect to relationships between tax-exempt organization and other parties, the AICPA has serious concerns about both the interpretation and the application of the Instructions as currently written. We urge the Service to clarify the Instructions.

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.

[Is this based on the statute or regulations? Is the IRS just creating this? Do we gain anything by referring to the narrowness (or lack thereof) in the statute or regs?

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 Instructions also list several governance or relationship factors that, if present,could result in the filer and another organization being deemed to have a “close connection,” including:

  • organizations created at approximately the same time and by the same persons; and
  • cases where the same persons exercise substantial influence over both the filer and the other organization.

QUESTIONS

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. However, there is no guidance on what level of coordination or influence would result in the requisite close connection that creates the relationship necessitating disclosure.

Coordination of operations as to facilities, programs, employees or other activities – Is the use of “or” intended to deem an organization which shares any level of operating resources to have a “close connection” with the other organization?

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 become judgment calls. 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.

Common persons exercising substantial influence over all of the organizations – The Instructions should clarify whether the presence of a single common person with influence is enough to cause the organizations to have a close connection or whether some threshold level of common influence must be crossed to reach “substantial influence.”

Applying a standard that one common, influential individual would be sufficient for a determination that two organizations are related does not seem reasonable, particularly given the use of the word “persons” plural. Does this mean that, to be deemed related, organizations must share at least two influential people in common? What other factors – such as the total size of the board, the stature and influence of other board members, etc. should also be considered? Regardless of which interpretation applies, organizations could be “related” one year, but not the next (or maybe even for a partial year) strictly due to normal board changes.

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.

“Substantial Influence” – This term is not defined in the 2005 Instructions. Did the Service intend to apply in manner consistent with section 4958? If so, this would result in every board member being automatically considered to exercise substantial influence, negating other factors such as total board size, etc.

The definition of substantial influence should be clarified to avoid another source of difficult and inconsistent compliance among similar organizations

EXAMPLES

The following examples further illustrate our concerns.

Example 1

A professional sports team forms a charity to support local children’s and seniors’ charities. Typical grantees include boys and girls clubs, the local children’s hospital, and local charities serving the indigent and the elderly. The charity is a publicly-supported charity pursuant tosections 509(a)(1) or 509(a)(2). The board of the charity is composed of executives of the sports team including the majority owner and the CFO. The back office functions of the charity (accounting, etc) are performed by employees of the team and the charity’s offices are in office space owned by the team. The team donates these services to the charity. No charges are made to the charity by the sports team, nor are any other services shared between the charity and the sports team.

Under the 2005 Instructions, it is arguable that all compensation paid by the team to employees who either sit on the board of the charityor serve as its officers (including the majority owner) would have to be disclosed in the charity’s Form 990. This seems to result despite the fact that the compensation paid by the team to individuals such as the team’s majority owner is completely unrelated to the charity’s activity and has no effect on the charity’s ability to carry out its functions. As an unintended consequence, the team and its owner may decide that it will no longer support the charity rather than have their salaries disclosed in a public document where disclosure could result in a competitive disadvantage.

Example 2

A well-known celebrity founds a public charity to raise funds for research for a particular disease. The celebrity is the public face of the charity and is active in its fundraising efforts. Both the celebrity and his spouse sit on the board of the charity. The celebrity owns various other business enterprises, from each of which he draws compensation greater than $50,000. These business enterprises have no relationship with the charity other than through the celebrity being affiliated with each.

Under the 2005 Instructions, the charity and the celebrity’s business enterprises may be deemed to have a close connection. This result is due to the fact that the celebrity arguably has substantial influence over the charity (that he founded) and the business enterprises he owns. Therefore,the salary (and other forms of compensation) that the celebrity earns from the business enterprises would be required to be disclosed in the charity’s Form 990. It should be noted that the charity may have difficulty in accessing this information and would be dependent on the voluntary disclosure of this information from the celebrity.

Example 3

The Chair of the Board of a public charity is also the president of a sizable corporation which is one of many large contributors to the charity. The charity makes no payments to the Chair of the Board.

It is arguable under the 2005 Instructions that the charity and the corporation would be considered to have a close connection due to a common person exercising substantial influence over the two organizations. As such, the total compensation paid by the otherwise unrelated corporation to the charity’s Chairman of the Board must be disclosed. Again, it should be noted that this information is only available to the charity if provided by the corporation or the individuals as the charity has no access to his information directly. It would be completely understandable if these parties resisted disclosure of information that might lead to a competitive disadvantage.

Example 4

The board of a community foundation (CF) consists in great part of representatives (perhaps Chief Executive Officers) of a number of public charities active in the community. Assuming that all of these individuals are each in a position to exercise substantial influence on the affairs of the organizations they represent, CF appears to be in “close connection” with each of these charities such that disclosure by CF of all remuneration being paid to each board member by each of those public charities is required. In this instance we would find again that compensation paid by the participating organizations has no effect on the operations of the community foundation. Disclosure of all those third parties’ possible remunerative arrangements with each of CF’s board members would neither promote the community’s trust, nor add to enforcement data, but would significantly increase the burden on the filing organization.

It should be noted that the same result might occur if an executive of a not-for-profit organization is a board member of an industry trade association. The trade association would be required to disclose compensation paid to the board member by the member’s employer. Again, a situation where disclosure could easily result in a competitive disadvantage

Example 5

The law firm of Wee Love Charity and Howe has provided funds to a charity that was created as a supporting organization to a local community foundation, the Wee Love Charity and Howe Foundation (Foundation). The managing partner of the firm is the President of the Foundation and the law firm appoints 50 percent of the Foundation’s Board. Although the firm’s lawyers volunteer at the Foundation upon occasion, there are no financial transactions between the two organizations. Under the 2005 Instructions, the Foundation would have to disclose the compensation provided by the law firm to the firm’s managing partner (as well as any other partner who is included on Part V-A of the Foundation’s Form 990), regardless of the fact that these individuals receive no compensation from the Foundation. Again, this is a situation where disclosure could easily result in a competitive disadvantage

1