On December 20, 2007, the Internal Revenue Service ("IRS") released a redesigned Form 990 - Return of Organization Exempt from Income Tax ("Form 990") that includes a newly created Schedule K - Supplemental Information on Tax Exempt Bonds ("Schedule K"). The breadth and depth of the new reporting requirements relating to tax-exempt bonds issued by or on behalf of 501(c)(3) organizations ("501(c)(3) Bonds") indicate that the IRS has increased its efforts to monitor compliance by 501(c)(3) organizations ("Organizations") with the federal tax laws and regulations applicable to 501(c)(3) Bonds. Each Organization with outstanding 501(c)(3) Bonds must carefully consider and respond to the Form 990 questions relating to its 501(c)(3) Bonds.
Form 990 imposes many new stringent annual reporting requirements on Organizations. Among, the most burdensome of the new reporting requirements are the questions relating to 501(c)(3) Bonds. The new Schedule K requires detailed annual reporting on each outstanding 501(c)(3) bond issue of an Organization, including, among other items, information relating to:
- the use of bond proceeds: Schedule K
requires information on: (i) unspent proceeds; (ii) the year
of substantial completion of the project financed with
proceeds of 501(c)(3) Bonds; and (iii) the maintenance of
adequate books and records to support the final allocation of
bond proceeds to expenditures;
- private business use of bond proceeds:
Schedule K requires information relating to: (i) membership
in a partnership or limited liability company that owned
property financed by 501(c)(3) Bonds; (ii) leases, management
or service contracts, and research agreements that may result
in private business use; and (iii) the percentages of private
business use of bond-financed property and of private
business use resulting from unrelated trade or business
activities. Schedule K also calls for information on whether
an Organization has routinely engaged bond counsel or outside
counsel to review management or service contracts or research
agreements relating to 501(c)(3) Bond-financed property, and
whether the Organization has adopted management practices and
procedures to ensure post-issuance compliance with its
tax-exempt bond liabilities; and
- arbitrage compliance: Schedule K also
requires information relating to hedges and guaranteed
investment contracts ("GICs"), including: (i)
whether the regulatory safe harbor for establishing the fair
market value of a GIC was satisfied; (ii) the amount, if any,
of gross proceeds of the 501(c)(3) Bonds that were invested
beyond an available temporary period; and (iii) whether the
501(c)(3) Bond issue qualified for an exception to
rebate.
The new reporting requirements appear to affirm the IRS's expectations as to tax compliance monitoring and record compilation and retention programs that Organizations should have in place. If an Organization with outstanding 501(c)(3) Bonds has not yet implemented such programs, such Organization must do so in order to respond adequately to Form 990. The process of designing and implementing compliance and record compilation and retention programs, as well as the completion and filing of Form 990, may be time consuming and burdensome, particularly for those Organizations with multiple outstanding bond issues.
To address transition concerns expressed by the 501(c)(3) community, the IRS has agreed to phase-in Form 990 by increasing filing thresholds for the Form 990-EZ to allow smaller Organizations the option to file either Form 990 or the Form 990-EZ for the 2008 and 2009 tax years. In addition, transition relief has been provided to Organizations required to complete the new Schedule K (i.e., Organizations with outstanding 501(c)(3) Bonds issued after December 31, 2002). In 2008, such Organizations will be required to file only Part 1 of Schedule K, which requests only basic, identifying information relating to each outstanding 501(c)(3) Bond issue. Organizations must file the entire Schedule K, however, if applicable, beginning with the 2009 tax year.
This alert summarizes the recent changes to Form 990 with respect to tax-exempt bonds issued by or on behalf of 501(c)(3) organizations and is intended to inform the reader of only certain general issues relating thereto.
The Public Finance attorneys at Blank Rome LLP are available to discuss these issues with you in more detail. If you have any questions or concerns regarding this alert, please contact one of the members of Blank Rome's Public Finance Practice Group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
