Last week, we looked at the “Governance Section” (Part VI) of Form 990 which has two questions (16a, 16b) regarding whether an institution invests in, contributes assets to, or participates in a “joint venture”. What might a “joint venture policy” look like?
Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii). They are required to file Form 990 annually. Their CFO focuses in on Form 990, Part VI, Line 16b, which asks, “…did the organization follow a written policy or procedure requiring the organization to evaluate its participation in joint venture arrangements under applicable federal tax law, and take steps to safeguard the organization’s exempt status with respect to such arrangements?”
“What might a ‘joint venture policy’ look like?” asks the CFO.
We tell them about a recent NACUBO “Federal Tax News” article stating that a joint venture policy should contain five sections, summarized as follows:
- Introductory section that explains how joint ventures that the college may enter into will be consistent with its exempt purpose
- Definition section that defines what types of arrangements are included in the term “joint venture”
- Exclusion section that describes the type of arrangements/agreements that are not joint ventures – excluded from the college’s definition of the term “joint venture”
- Guidelines section that sets a “framework” for “joint ventures” and follows the safeguard tenets set forth in the Form 990, Part VI, Line 16b (below) instructions
- Approval section that clearly delineates the procedure for approving the entering into of a “joint venture”. (Note that your attorney should be involved in this process.
Also, we tell the CFO that the governing board of SCC should approve/adopt the joint venture party and record that adoption process in their board minutes.
From 990 instructions (Part VI, Line 16b):
Answer “Yes” on line 16b if, as of the end of the organization’s tax year, the organization had both:
- Followed a written policy or procedure that required the organization to negotiate, in its transactions and arrangements with other members of the venture or arrangement, such terms, and safeguards as are adequate to ensure that the organization’s exempt status is protected, and
- Taken steps to safeguard the organization’s exempt status for the venture or arrangement.
Some examples of safeguards include the following:
- Control over the venture or arrangement sufficient to ensure that the venture furthers the exempt purpose of the organization.
- Requirements that the venture or arrangement give priority to exempt purposes over maximizing profits for the other participants.
- The venture or arrangement does not engage in activities that would jeopardize the organization’s exemption (such as political intervention or substantial lobbying for a section 501(c)(3) organization).
- All contracts entered into with the organization be on terms that are at arm’s length or more favorable to the organization.
Over and over we hear from colleges who are confused about the “joint venture” reporting referred to above. It is important to understand the rules and to ascertain whether your institution is involved in reportable “joint ventures.” As you look at Joint Venture policies and whether or not your institution should adopt one, it makes sense to work closely with your skilled, knowledgeable, and experience tax advisor. He or she will be able to help your school set up a viable, appropriate policy.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.