CUNA Regulatory Comment Call

April 15, 2008

EXECUTIVE SUMMARY

• The IRS has released draft instructions for the newly redesigned Form 990 for public comment.
• The new Form 990, Return of Organization Exempt from Income Tax, is effective for the 2008 tax year, for returns filed in 2009. See CUNA’s Final Rule Analysis.
• The draft instructions are much more comprehensive than previously and have been modified to accommodate the new format of Form 990. They detail how to complete the core form as well as each of the supplemental schedules.
• We have identified a number of concerns regarding the instructions which are addressed below. We plan to raise these issues and others credit unions raise with the IRS in our comment letter.
• The draft instructions list the individuals whose compensation must be reported, including “key employees” and up to five of the highest compensated employees.
• Instructions require that reported compensation is that which is included on Form W-2 or Form 1099-MISC.
• A new Appendix was added to provide specific instructions for filing group returns.
• The new Appendix for group returns clarifies when a central organization must aggregate data or list individual information for each subordinate.
• Please submit your comments to CUNA by May 23, 2008. Comments are due to the IRS by June 1, 2008.

Please feel free to email your comments to SVP and Deputy General Counsel Mary Dunn at mdunn@cuna.com or Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail letters to Mary or Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of the comment request.

CONCERNS

• The thresholds for reporting employee compensation is too low.
• The definition of “key employee” is too broad and may unintentionally include non-crucial employees without sufficient authority.
• For group returns, the special instructions regarding the compensation section should include an option to aggregate information from all organizations included in the return.
• Also for group returns, parent organizations should be permitted to change the option regarding the method of filing without having to receive IRS consent. Alternatively, providing a notice of change to the IRS should be sufficient.

BACKGROUND

IRS Form 990 “Return of Organization Exempt from Income Tax” is an annual return required to be filed by tax-exempt organizations (filing organizations) to report information about their operations.

State chartered credit unions are required to file Form 990 with the IRS annually. (A few states still permit group 990 filings.) Federal credit unions are not required to file, since they are not subject to unrelated business income taxes.

The newly redesigned Form 990 was released in December of 2007 prior to the release of the draft instructions for completing the form. The new Form 990 is structured differently than its predecessor in that it includes a core reporting section, applicable to all filers, and fifteen different schedules, applicable only to certain types of organizations. This structure is intended to reduce the burden on filing organizations by requiring them to file only the core and the select schedules that pertain to them.

DISCUSSION OF DRAFT INSTRUCTIONS

Core Form Part VII: Compensation

The draft instructions have been modified to accommodate the new format of Form 990. While there are many changes to the format and content of the instructions, the changes closely mirror the changes to the new form. Specifically, instructions for Part VII of the Core Form 990 covers compensation of certain individuals. It must be completed by all Form 990 filers and requires the listing of the organization’s officers, directors, trustees, key employees and up to five of the highest compensated employees.

While this is not a new requirement, Form 990 was redesigned to require certain compensation information in the Core section filed by all filers and additional detailed information reported on Schedule J when certain thresholds are met. The draft instructions follow this format and provide a list and definitions of the individuals that must be reported.

An organization must list the following individuals whose compensation from the organization and related organizations is greater than following thresholds:

• current officers, directors, and trustees (no minimum compensation threshold);
• current key employees ($150,000);
• current five highest compensated employees other than officers, directors, trustees, or listed key employees ($100,000);
• former officers, key employees, and highest compensated employees ($100,000); and
• former directors and trustees ($10,000 in the capacity as a former director or trustee).

The draft instructions give definitions for the individuals and provide several examples to help filers determine whether individuals should be listed. Additionally, there is a compensation table that may be useful in determining how and where to report compensation and benefits. The list is provided as a guideline to report amounts for those persons required to be listed.

Schedule J: Compensation

Schedule J, Compensation Information, is used to report additional compensation information for the individuals whose compensation is reported in the Core section when certain thresholds are met. Certain former officers are covered by Schedule J as well.

Generally, Schedule J must be completed for individuals listed in Form 990, Part VII, who:

• are current or former officers, directors, trustees, key employees, and five highest compensated employees for whom compensation is greater than $150,000;
• are former officers, former key employees, and former five highest compensated employees who received more than $100,000;
• are former directors or trustees who received, solely in the capacity as a former director or trustee, more than $10,000; and
• are current or former officers, directors, trustees, key employees, or five highest compensated employees who received compensation for services rendered to the organization from an unrelated organization.

Reported compensation includes base, bonus and incentive payments, which are included on Form W-2 or Form 1099-MISC issued to the individual. The filer must also report all deferrals of compensation for the listed person under any retirement or other deferred compensation plan that is established, sponsored, or maintained by the organization as well as any nontaxable benefits not reported on Form W-2 or Form 1099-MISC. The instructions provide examples to assist the filer in reporting deferred compensation.

Part I of Schedule J, Questions Regarding Compensation, requires a filer to disclose certain benefits it provided to selected individuals, including travel for companions, which may be of relevance to some credit union filers. The draft instructions for Schedule J define travel for companions as, “any travel of a listed person’s guest that is not traveling primarily for bona fide business purposes of the organization. It also refers to any travel of a listed person’s family members, whether or not for bona fide business purposes.”

Lastly, note that lines 5-8 in Part I of Schedule J are only to be completed by 501(c)(3) and 501(c)(4) organizations—which excludes credit unions.

Appendix E: Group Returns

To help those filing group returns, the draft instructions have added Appendix E which details instructions specific to group filers.

Appendix E clarifies when an organization filing a group return (the central organization) on behalf of a group of entities (the subordinates), it must aggregate data or list individual data for each subordinate. The instructions state that when filing a group return unless “otherwise instructed,…, the central organization filing the group return must aggregate the data from all the subordinates included in the group return and report the aggregate number.” For example, in answering the question regarding the total number of volunteers (Core form, Part I, line 6), the central organization would report the total number of volunteers for all of the subordinate organizations. However, when listing the five highest compensated employees (Core form, Part VII, line 1a), the central organization must include the five highest compensated employees for each subordinate, not the five highest for the whole group.

The draft instructions attempt to clarify an area of previous confusion among many group 990 filers. If a certain line requires a “Yes” or “No” answer and the answer is not the same for all subordinates to which the line applies, then the central organization should answer “Yes” and explain the answer in the Schedule’s supplemental information (if applicable) or in Schedule O, Supplemental Information to Form 990.

There are certain questions, however, that must be answered with a “No” if the answer is “No” for any of the subordinates to which the line applies. The questions are listed in the instructions and include whether any subordinate failed to file a Form 990-T on unrelated business gross income of $1,000 or more.

Additionally, Appendix E contains special instructions regarding the compensation section of the core form (Part VII) and the compensation of individuals reported in Part II of Schedule J. When completing a group return, the central organization must either: (1) file separately these parts for itself with its return and with the group return for each subordinate; or (2) file a single consolidated form for itself and all included subordinates with the group return.

In either case, the five highest compensated employees and independent contractors earning above $100,000 for each subordinate must be reported. The central organization must state which method it is going to utilize in Schedule O. Once a method is adopted it can be changed only with IRS consent.

If the first method of reporting is chosen and one or more officers, directors, trustees, key employees, or highest compensated employees receive compensation from more than one organization in the group, the total of the individual’s compensation from the several organizations must be reported as one item. However, regardless of the method used, the organization(s) that paid the compensation must be reported.

Lastly, Appendix E gives further instructions regarding the reporting of other liabilities. Schedule D Part X clarifies how the parent organization should report the “FIN 48 footnote,” which is the accounting standard for GAAP users requiring uncertain tax positions be listed in the footnotes to their financial statements. Schedule D, Part X states, “The filing organization may summarize that portion, if any, of the FIN 48 footnote that applies to the liability of multiple organizations including the organization (for example, as a member of a group with consolidated financial statements), to describe the filing organization’s share of the liability.”

Definitions

The draft instructions include the addition of a comprehensive glossary containing almost 200 terms. Lack of a “glossary of key terms” was noted as a concern among those who commented on the old Form 990 and its instructions. While most of the terms in the glossary are clarifying existing uses, some definitions have been revised.

For example, a “key employee” is defined for purposes of 990 filing, as an employee of the organization (other than an officer, director, or trustee) whose reportable compensation exceeds $150,000 and who:

• has responsibilities, powers or influence over the organization as a whole that is similar to those of officers, directors, or trustees;
• manages a discrete segment or activity of the organization that represents 5% or more of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole;
• has or shares authority to control or determine 5% or more of the organization’s capital expenditures, operating budget, or compensation for employees; or
• is an individual that is not an employee of the organization is a key employee if he or she meets the standards of a key employee and serves as director or similar fiduciary of the organization’s “disregarded entity”(an entity wholly owned by the organization that is not a separate entity for Federal tax purposes).

This is different from the existing definition, which does not attempt to quantify an employee’s authority or control. The current instructions define “key employee” as any person “having responsibilities, powers, or influence similar to those of officers, directors, or trustees.” The term includes the chief management and administrative officials of an organization, such as an executive director or chancellor. The definition further clarifies that a “chief financial officer and the officer in charge of the administration or program operations are both key employees if they have the authority to control the organization’s activities, its finances, or both.”

1. The draft instructions clarify that compensation must be reported from IRS Form W-2 and IRS Form 1099-MISC. Do you agree with this method?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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2. Do you find the glossary of key terms helpful?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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3. The definition of “key employee” has been amended to include a threshold of managing or controlling 5% or more of the organization? Do you agree with this threshold?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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4. Applying the new definition of “key employee”, are there non-essential employees that would inadvertently fall into this category?
   
   a. Yes _____
   b. No _____
   
   If yes, please list the types of positions that would apply.
   
   

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5. The draft instructions include a new Appendix E for those who file group returns. Do you find this format helpful?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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6. Appendix E clarifies when a central organization filing a group return must aggregate the data of its subordinates and when information pertaining to each subordinate must be individually disclosed. Do you agree with these instructions?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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7. Appendix E requires a central organization to choose a method of reporting compensation – filing separately for itself with its return and with the group return or filing a single consolidated form. Do you agree with these options?
   
   a. Yes _____
   b. No _____
   
   If not, please provide suggestions for other options.
   
   

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8. Do you believe certain portions of the instructions could be streamlined or eliminated?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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9. Please provide any additional comments.
   
   

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10. Other comments?
    
    

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