The Pension Protection Act of 2006 (“the Pension Act”), which President Bush signed into law on August 17th, makes wholesale changes in retirement plan law. It also mandates changes that expand the filing, reporting, and disclosure requirements for many exempt organizations (including very small ones), and makes certain minor (and perhaps only temporary) changes in the taxability of payments from a controlled organization.

Annual Notices for Small Organizations

An exempt organization with gross receipts that are normally $25,000 or less for the year isn’t required to file Form 990 or 990-EZ. (This filing exemption doesn’t apply to private foundations. The purpose of this exemption is to avoid imposing an administrative burden on small organizations. However, in the absence of an annual information return, the IRS can’t monitor an organization’s continuing existence, and often the public has difficulty obtaining basic information about it.

Accordingly, for tax years beginning after 2006, the Pension Act requires organizations exempt from filing an annual return under the gross receipts test to file an annual notice with the IRS. This notice will include basic contact and financial information.

There will be no monetary penalty for the failure to submit an annual notice. However, an organization’s exemption will be revoked for such a failure for three consecutive years.

Failure to File Information Returns

An organization that is required to file an annual information return (e.g., Form 990) is generally subject to a late filing penalty, the amount of which depends on whether the organization has gross receipts of more than $1 million for the year. The Pension Act provides that, in addition to the monetary penalty, an organization’s exemption will be revoked if it fails to file the required return for three consecutive years.

Example: Exempt Organization A, a calendar-year entity, has gross receipts of $20,000 during 2007 and is required to file the new annual notice. Gross receipts grow to $50,000 in 2008 and $75,000 in 2009, so that A should file Form 990-EZ for those years. However, A doesn’t file either the annual notice for 2007 or a return for 2008 or 2009 (i.e., three consecutive years) and cannot show reasonable cause for its failures. A’s exemption will be revoked, and it will have to apply to the IRS for reinstatement.

Reporting Certain Property Dispositions

An organization that receives certain property as a charitable contribution must now file Form 8282 with both the IRS and the donor to report a disposition of such property within three years after its receipt (versus two years under pre-Pension Act law). Form 8282 is due 125 days after a reportable disposition. This requirement covers property, other than publicly traded securities, when the donor’s claimed value of the property plus the claimed value of similar property given to other charities exceeds $5,000.

In addition to the information already required by Form 8282, a donee organization will have to provide a statement describing its use of the property and whether such use was related to the organization’s exempt purpose. Under certain circumstances, a certification of such use will also need to be provided

The expanded reporting requirements apply to returns filed after 9/1/06.

Transactions with a Controlled Entity

An organization that is a controlling entity (defined in a moment) must include the following information as an attachment to its Form 990, 990-EZ, or 990-PF due after 8/17/06

The amount of any interest, annuities, royalties, or rents received from each controlled entity.

• A list of any loans made to each controlled entity.
• The details of any fund transfers with each controlled entity.

An organization is a controlling organization if it owns more than 50% of the stock (by vote or by value) of a corporation or more than 50% of the profits, capital, or beneficial interest of a partnership or other entity. Constructive ownership rules apply, so that a parent organization is also deemed to control any subsidiary in which it holds more than 50% of the voting stock indirectly, such as in a second-tier subsidiary.

New Unrelated Business Income Rules for Payments from a Controlled Entity

Interest, rents, royalties, and annuities (specified payments) are normally excluded from the calculation of an organization’s unrelated business income (UBI). One of the exceptions to this rule under pre-Pension Act law was that specified payments from a controlled entity (as previously defined) were UBI to the extent the payment reduced the net unrelated income (or increased any net unrelated loss) of the controlled entity, determined as if the controlled entity were tax exempt.

The Pension Act liberalizes these UBI rules to include only the portion of a qualifying specified payment that exceeds fair market value. For example, a rent payment that reduces the net unrelated income of a controlled entity is now UBI to the parent only to the extent that it exceeds what should have been paid on an arm’s-length basis. A qualifying term specified payment is a specified payment that is made under a binding written contract in effect 8/17/06, or pursuant to a renewal of such a contract upon substantially similar terms.

Form 990-T Now Subject to Public Inspection

Tax-exempt organizations must allow public inspection of their annual returns. Under pre-Pension Act law, the list of returns subject to this disclosure rule included Form 990 (Return of Organization Exempt From Income Tax), Form 990-PF (Return of Private Foundation), any other version of Form 990 (such as Forms 990-EZ or 990-BL), and Form 1065 (U.S. Partnership Return). However, Form 990-T (Exempt Organization Business Income Tax Return) was not subject to this rule.

The Pension Act extends this disclosure rule to Forms 990-T filed after 8/17/06 by Section 501(c)(3) organizations. Section 501(c)(3) organizations are entities organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals. [Organizations exempt under other provisions of IRC Sec. 501(c) still aren’t required to make their Form 990-T available for public inspection.

Bottom Line: Form 990-T filed by 501(c)(3) organizations is now subject to the same disclosure requirements and penalty rules applicable to Form 990.

As in the case of Form 990, certain Form 990-T information may be withheld from public inspection if public availability would adversely affect the filing organization. For example, information relating to a trade secret, patent, or process can be withheld if the IRS agrees that public disclosure thereof would adversely affect the organization.

Tougher Reporting for Supporting Organizations

An organization can qualify as a public charity even though it doesn’t satisfy the various public support tests if it’s organized and operated to support another exempt organization that isn’t a private foundation. These supporting organizations must satisfy an organizational test and one of three relationship tests. They are categorized as a Type I, Type II, or Type III supporting organization, based upon the relationship test met.

The IRS believes that supporting organizations are increasingly being employed as personal tax shelters for private gain by the persons who create them. Considerable testimony concerning the abusive use of supporting organizations was presented in Congressional hearings. Therefore, it isn’t surprising that the Pension Act expands reporting requirements for supporting organizations.
The Pension Act requires supporting organizations to include the following information on annual returns filed for years ending after 8/17/06:

• A list of the organizations supported.
• The type (i.e., I, II, or III) of organization that it is.
• A certification that it isn’t controlled directly or indirectly by disqualified persons (other than foundation managers). Specifically, Congress expects evidence that the majority of the organization’s governing body is made up of individuals who were selected based on their special knowledge or expertise in a particular field or discipline in which the supporting organization is operating, or because they represent the particular community that is served by the supported public charities.

Conclusions

The Pension Act expands the filing, reporting, and disclosure requirements for many exempt organizations (including very small ones). Organizations impacted by the new reporting requirements should review their recordkeeping and accounting programs to ensure that the necessary data can be captured efficiently. They should also make sure their future filings comply with these new requirements.

— Stapp Financial Planning, PLLC

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