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Exempt Organizations

Exempt Organizations
February 2002

Final Regulations on Intermediate Sanctions

On January 22, 2002, the IRS released final regulations on intermediate sanctions (IRC §4958). The final regulations are substantially similar to the temporary regulations issued in early 2001 and do not offer significant additional guidance.

The final regulations do not address the issue of “revenue sharing arrangements.” While there was an attempt to provide some guidance on this issue in the 1998 proposed regulations, the 2001 temporary regulations eliminated such guidance. The final regulations continue to reserve this issue for the future. Thus, the only formal expression of the rule is that contained in the Internal Revenue Code—

The term “excess benefit transaction” includes any transaction in which the amount of any economic benefit provided to or for the use of a disqualified person is determined in whole or in part by the revenues of one or more activities of the organization, but only if such transaction results in inurement not permitted under paragraph (3) or (4) of section 501(c).

This is a provision with potentially broad reach and the lack of guidance from the IRS continues to make planning difficult, particularly with respect to certain incentive compensation arrangements.

Form 990 - A Little History

The recently-released IRS Continuing Professional Education Technical Instruction Program for 2002 includes a chapter devoted to the Form 990. While it does not provide a line-by-line analysis of the form, it highlights certain areas in which taxpayer compliance often falls short. There is also an introductory discussion of some of the history of the form.

Form 990 has been around since 1941. It was a two-page form at the time, requiring an income statement, balance sheet and yes/no responses. Details were required for payments to individuals of $4,000 (four thousand!) or more, or with respect to contributions received exceeding $4,000.

By 1947, Form 990 had reached four pages, although this included instructions. In 1976, Form 990 was two pages, with schedule A adding an additional four pages. There were four pages of instructions.

For 2001, Form 990 and Schedule A are both 6 pages, and Schedule B adds another two. The instructions, however, now tip the scales at 45 pages for Form 990 and 14 pages for Schedule A. Interestingly, the CPE text comments that although the length of the forms have increased, there has not been a requisite increase in reporting. In fact, some of the added length is due to larger print! It leaves one to wonder what the dramatic increase in the length of the instructions signifies, though.

Quality of filings

The CPE text cites a number of statistics regarding the quality of filings as reported by several outside studies. Among the common errors: failure to include Schedule A, failure to sign the return, filing the incorrect return (Form 990-EZ instead of Form 990).

Other common errors include the following:

  1. Reporting contributions on a net basis (i.e., net of fundraising expenses) rather than gross.
  2. Incorrectly distinguishing “dues” from other types of income—
    1. Dues are generally payments in consideration of certain membership benefits, e.g., subscriptions to publications or discounts on goods.
    2. If the purpose of a “dues” payment is primarily for the support of the organization and not for the receipt of more than nominal benefits, the payment should be classified as a contribution on Form 990.
    3. If dues or membership fees are used to sell goods or services to members of the public who have no common goal or interest, the payment may constitute something other than dues—e.g., income from a special event.
  3. Including the value of donated services in compensation. Such amounts should not be reported on Form 990.
  4. Misclassification of fundraising costs as program service or G & A costs, or as an offset to revenue.
  5. Improper reporting of compensation
    1. Form 990 requires reporting of all compensation, whether or not includible in gross income.
    2. The return requires compensation information for “key employees,” whether or not they are formally classified as officers.
    3. Compensation from related organizations must be disclosed when total compensation from the related organization exceeds $10,000 and the total compensation from the reporting organization and related organization exceeds $100,000.

The CPE text correctly notes that the universal availability of Form 990 via the internet has changed the value of the disclosure to the public and to the IRS. “Public disclosure promotes accountability and discourages inappropriate activities which, in turn, enhances voluntary compliance and thereby assists the IRS in the administration of the tax law.”

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.


The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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