According to San Francisco AP on January 5, 2009, California’s supreme court ruled Monday that three Southern parishes that left the U.S. Episcopal Church cannot retain ownership of their church buildings and property. The three California parishes include: St. James Church in Newport Beach, All Saints Church in Long Beach and St. David’s Church in North Hollywood. In 2004 these three parishes pulled out of the 2.1 million-member national Episcopal Church, and have sought to retain property ownership. Each church held deeds in their names to the property. The court ruled that Episcopal Church canons made it clear the property belonged to the individual parishes only as long as they remained part of the bigger church. “When it disaffiliated from the general church, the local church did not have the right to take the church property with it,” Supreme Court Justice Ming Chin wrote for the seven-member court.

This court decision will affect other Episcopal Church property issues in Pittsburgh (see related link), Fort Worth, Texas, and Quincy, Ill., where dioceses recently voted to split from the national church. The lessons we continue to learn from this court ruling relate to substance over form. According to the California case, the Episcopal Church canons dictated the property ownership, not the deed. Difficult dilemma faced by these congregations and the related diocese.

Does your church have an operating agreement that designates property ownership? Who bears the risk of ownership?

Over the last few years, the IRS has become very concerned that tax-exempt organizations are using their nonprofit status to avoid paying taxes on certain transactions, investments or business activities that are unrelated to their tax-exempt purpose.

In October 2008, the IRS sent 400 letters to colleges and universities requesting detailed information about executive compensation and business activities. Now the IRS is considering expanding its investigation to include endowment investments.

Although schools are not required to respond to the inquiries, not doing so could invite further scrutiny by the IRS, or even an audit.

As quoted in a recent New York Times article, IRS commissioner Douglas H. Shulman said, “Universities are really part of a rapidly evolving sector, and as sectors evolve and the economy evolves, we’re going to periodically take a hard look.”

If the IRS finds that certain colleges and universities have avoided paying taxes on unrelated business income, my guess is that it won’t take the IRS long to expand the scope of its investigation to include private schools.  How will your institution respond?

If you’ve got questions about unrelated business income, take a look at this post.

Changes to the data collection form have been released by the Federal Audit Clearinghouse to be effective for audits with fiscal periods ending in 2008 through 2010. Click to find the new form and filing instructions.

What changes were made?
Primary changes include those in terminology, due to provisions of SAS 112. The term reportable condition has been changed to significant deficiency in Part II-items 3 and 4, and Part III – items 4, 5 and 10a.

These changes are consistent with the Federal Register Notice dated June 26, 2007, which addressed how to handle new AICPA, OMB and Yellow Book guidance on the applicability of SAS 112 to single audits.

Also, the form will be required to be submitted electronically. To assist in the preparation of the new filing requirements, the Federal Audit Clearinghouse provides a Form SF-SAC Worksheet & Single Audit Component Checklist that can be downloaded and used to assist in preparing the form.

As part of our firm’s client service, we prepare this form electronically. Our clients receive notification via e-mail to accept the submission. Auditees will only have to submit one copy of the reporting package along with the data collection form and the Federal Audit Clearinghouse will distribute the required copies to the appropriate federal agencies.

If you prepare your entity’s form and need assistance, give us a call.

In redesigning Form 990 for tax exempt organizations, the IRS has over and over again called for transparency in the industry.  In fact, in a background paper summarizing the redesign process, the IRS said the 990 is “the key transparency tool relied on by the public, state regulators, the media, researchers, and policymakers to obtain information about the tax exempt sector and individual organizations.”

So what exactly is transparency?  It’s just honest communication, right?  Not so fast.

Chris Freeland, who is a pastor at McKinney Memorial Bible Church, wrote in his blog about the difference between honesty and transparency.

“Honesty” means I choose the topic, and speak honestly about it. . . “Transparency” involves honesty, but the two words aren’t synonymous.  Transparency is more than pervasive honesty; it’s open and honest about everything.

That’s the standard the IRS has called for, and it’s a high standard to achieve.  But don’t the communities served by nonprofit organizations and the people who support them deserve that kind of accountability?

I had a question posed to me recently about Form 8282, Donee Information Return, and Form 8283, Noncash Charitable Contributions. The question was who is responsible for filing these returns.

Filing of Form 8283, Noncash Charitable Contributions, is the responsibility of the donors (examples – individuals, partnerships and S-Corps). Tax-exempt and non-profit organization (donee organization) need to pay attention to this form and how the donated property was listed either as Section A or Section B property.
Per the IRS, Section A property includes only the following items:

• Items, or groups of similar items, for which the donor claimed a deduction of $5,000 or less per item or group.
• Publicly traded securities even if the deduction is more than $5,000.  Publicly traded securities are securities listed on an exchange in which quotations are published daily (New York Stock Exchange NYSE), regularly traded in national or regional over-the-counter markets for which published quotations are available, or shares of a mutual fund for which quotations are published on a daily basis in a newspaper of general circulation throughout the United States.

Section B property (charitable deduction property) includes items, or groups of similar items, for which the donor claimed a tax deduction of more than $5,000. Publicly traded securities listed in Section A are not include in Section B. I do want to make a note that there are special rules for certain C corporations for contributions of inventory or scientific equipment.

Section B items require a written appraisal by a qualified appraiser to be attached for filing.  Certain exceptions apply to this rule. The Form 8283 is required to be signed by the donor, the qualified appraiser, and the donee organization (i.e. the non-profit organization receiving the items). The donor should attach this form with their personal/partnership tax return.

Form 8282:  Now for the tax-exempt organizations responsibilities…
The not-for-profit organization (NPO) who received the charitable deduction property (donated property) is required to file the Form 8282 if the charitable deduction property was sold or disposed of within 3 years of receiving the property. The Form 8282 is filed with the IRS and a copy is given to the donor.

Now, for those who paid attention to the categories of the property, the Form 8282 is only required to be filed for the property listed in Section B of the Form 8283 (see above). If the NPO received donated items that are not considered Section B items, then the Form 8282 is not required to be filed.

If the NPO did not receive the Form 8283, but has reason to believe they should have received it, then the organization is still required to file the Form 8282.

Exceptions of when Form 8282 does not have to be filed when:

• Section B items had an original appraisal value of $500 or less
• Section B items were used to fulfill the purpose of the tax-exempt organization (i.e. medical supplies used by a tax-exempt relief organization in aiding disaster victims).

If you have further questions, please give me a call.

Ask most parents, teachers, administrators and board members at a private school the following three questions:
Would you prefer high or low:

• tuition?
• student/teacher ratio?
• teacher pay?

You are most likely to hear a desire for low tuition, low student to teacher ratio and high teacher pay.  This sounds great and appeals to almost everyone…until the bankruptcy.

The trick is to find a balance among these key, interrelated factors. Read the rest of this entry »

The majority of not-for-profit organization revenue is generated from donor contributions.  But donors also contribute services, property and/or equipment and volunteer hours.  How are these donations recognized in the financial statements?

If the services require a specialized skill and you would have typically paid for them had they not been donated, then you must recognize them as contributions at the price and/or rate of the amount received.  You may ask the service provider to provide an estimate of the fair value of the services, in order to substantiate the estimated value.

Perhaps your organization received several laptops from a local business. These materials should be reflected as contributions at their estimated fair (market) values on the date you received them.  A way of establishing a record of ownership and value of the property is to ask the donor for documentation when the property is provided.

It is very common for individuals to donate their time assisting with fundraising efforts or program services.  It can be difficult to find a basis for these donated services and these services may not require specialized skills.  The contribution is valid, however not recognized in the financial statements, but may be disclosed in the footnotes.

In late December the IRS announced the release of the final 2008 Form 990, Return of Organization Exempt From Income Tax.

The redesigned 990 consists of an 11-part core form required for all organizations that file a 990, with several additional schedules to be completed based on certain requirements.  Some of the most significant changes to the new 990 are the required disclosures related to governance and compensation of officers, directors and key employees.

Because of the new reporting requirements, many organizations will need to reevaluate their overall governance policies and procedures, as well as the composition and responsibilities of the board of directors.  In some cases these changes will be significant and will require considerable time and resources to implement. 

Through the revised form, the IRS is effectively imposing a new standard of governance on nonprofit organizations.  Don’t wait until it’s time to file your 990 to consider how these changes will affect your organization. For more information see the IRS website and one of our previous posts.

On Wednesday, January 7th, RCO sponsored the Executive Exchange at the Funding Information Center. At the beginning of the presentation Colleen Colton, Executive Director of Guardianship Services in Fort Worth, stood up and told a story she had heard during her childhood. We believe it is a very important concept to remember for these economic times. She graciously gave us permission to share it on our blog. The author is unknown. If you know who wrote this please let us know so we can give proper credit. It is a story of a man who sold hot dogs during the Great Depression.

THE MAN WHO SOLD HOT DOGS

There was a man who lived by the side of the road and sold hot dogs.
He was hard of hearing, so he had no radio.
He had trouble with his eyes, so he read no newspaper.
But he sold good hot dogs.
He put signs up on the highway telling how good they were.
He stood on the side of the road and cried “Buy a hot dog, Mister?”
And people bought.
He increased his meat and bun orders.
He bought a bigger stove to take care of his trade.

He finally got his son home from college to help him out.
But then something happened.
His son said, “Father, haven’t you been listening to the radio?”
“Haven’t you been reading the newspaper?”
There’s a big depression.”
“The European situation is terrible.
The domestic situation is worse.”
Whereupon the father thought, “Well, my son has been to college: he
reads the papers and listens to the radio, he ought to know.”
So his father cut down on his meat and bun orders, took down his
advertising signs, and no longer bothered to stand out on the highway
to sell his hot dogs.

And his hot dog sales fell almost overnight.
“You’re right, son.” the father said to the boy.
“We are certainly in the middle of a great depression.”

Now I am not advocating not listening to the radio and not reading the newspaper. I am not saying you shouldn’t prepare for and make decisions about your organization in light of the economy. What I do think this story is saying is if your hot dogs are still selling, why take down your signs, why stop spreading the word. There are still opportunities out there to sell hot dogs!

In today’s world, organizations must consider the strength of their internal controls more than ever.  It is important to periodically review your internal controls to ensure that they are well-designed and operating effectively.  To determine if your system is well designed, take a particular type of transaction and trace it from its origin to its ultimate conclusion, asking yourself, “What could go wrong with this system?”  To evaluate the operating effectiveness, ask the various personnel involved in processing the transaction how they perform the various tasks, and watch them actually do the work.  You will be better able to determine if they are following the appropriate procedures.

When going throught this review, it is important to take the “person” out of the control and ask yourself, “If I had an unknown person performing this taks, would I be concerned?”  Because of the very nature of the types of services that most not-for-profits provide, they tend to hire caring, trustworthy individuals to perform various tasks.  While trust is certainly a needed attribute to have in an employee, it cannot serve as your only internal control.  If you also believe that an employee would never do anything wrong, you may be under a false sense of security.  We usually suggest to our clients that the internal controls be designed in such a way that it eliminates the opportunity for an employee to commit fraud.  This design not only can protect you, but the employee as well.

A key component of a well-designed internal control system is segregation of duties.  Proper segregation also helps to eliminate the opportunity to make errors or commit fraud.  To create proper segregation, the following tasks should be performed by different personnel:

• Authority (approving purchases, writing off bad debt, authorizing salary increases, approving new vendors)
• Custody (ability to write checks, make bank deposits, process cash receipts, manage inventory, make electronic withdrawals from bank and investment accounts )
• Recordkeeping (posting transactions to the general ledger, recording receivables and payables)

Need help in segregating functions or duties. Contact me.