January 11, 2006

The draft of the 2005 Form 990 information return released by the IRS in October includes new questions that will require tax-exempt organizations to disclose additional information about their relationships with current and former directors, officers, key employees and independent contractors. The new questions will also require disclosure of business and family relationships that may exist among those individuals and entities. Many exempt organizations may not currently be collecting all the information necessary to provide accurate answers to these questions.

Disclosures of Compensation Information

The draft returns will require tax-exempt charitable organizations to furnish detailed information about the compensation and benefits they have paid to:

• All current officers, directors, trustees and “key employees;”
• All former officers, directors, trustees and “key employees” currently receiving compensation from the organization (e.g. severance benefits or deferred compensation);
• The five most highly compensated employees who are not officers, directors or trustees;
• The five most highly paid independent contractors providing professional services; and
• The five most highly paid independent contractors furnishing other than professional services.

The draft returns will also require disclosure of the amounts of compensation being provided by related tax-exempt and taxable organizations to each of those individuals and organizations listed above (other than former directors, officers and key employees). If, for example, an accounting firm is a top contractor of one member of a large health care system, every organization in the group must disclose in its return the amounts all the organizations paid to the firm.

Disclosures of Outside Relationships

Another new question requires disclosure of “family and business relationships” among officers, directors, key employees, highly compensated employees and independent contractors. The term “business relationship” has not yet been fully defined, but it would apparently include both substantial ownership interests and employment and contractual relationships.

The number of “family and business relationships” that may have to be disclosed on the 2005 returns could be substantial, especially for organizations having large boards that include wealthy individuals. Unfortunately, the proposed tax form does not allow the omission of relationships that may be of limited relevance. For example, it may be significant that a hospital board member owns the company serving as the general contractor in the construction of a new hospital facility. It is much less significant, however, that a board member’s daughter-in-law works as a secretary in the Houston office of the architectural firm that did the plans for the building.

Even if exempt organizations are collecting conflict of interest disclosure forms from their board members, officers and senior management personnel on a regular basis, they may not be making all the inquiries necessary to respond to the new IRS questions. In order to comply fully, exempt organizations may need to create a list of the individuals and entities for which disclosure of compensation information will be required and provide that list to each of the individuals and organizations listed, requesting that they identify all business or family relationships with the others on the list.

Dykema Contact: Jane Forbes at 313/568-6792 or at [email protected].