Issue

One of the oft-encountered errors on Form 990 occurs in the “Governance” section (Form 990, Part VI, Section A) and concerns the answer to whether a family or business relationship exists between the organization’s current officers, directors, trustees, or key employees, as reported on Form 990, Part VII, Section A.

Situation

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.

SCC has 12 voting members of their board of trustees.  Mike Cain and Tim Pince are trustees of SCC. Mr. Pince is the owner and CEO of an automobile dealership, Pince Jeep. Mr. Cain purchased a $45,000 car from the Mr. Pince’s dealership during the organization’s tax year in the ordinary course of the dealership’s business, on terms generally offered to the public. The relationship between Mike and Tim is not a reportable business relationship because the transaction was in the ordinary course of business on terms generally offered to the general public.

Note that – according to item 2 below – that if Mr. Cain was given a discount that was greater than that which was customarily offered to the general public, a “Business relationship” may require SCC to answer “Yes” on Form 990, Part VI, Line 2.  Also, note that the transaction does not have to be described/detailed.  The instructions state, “It is sufficient to enter “family relationship” or “business relationship” without greater detail.”

Rules

From Form 990, Part VI, Line 2 Instructions:

Line 2. Answer “Yes,” if any of the organization’s current officers, directors, trustees, or key employees, as reported in Part VII, Section A, had a family relationship or business relationship with another of the organization’s current officers, directors, trustees, or key employees, as reported in Part VII, Section A, at any time during the organization’s tax year. For each family and business relationship, identify the persons and describe their relationship on Schedule O (Form 990 or 990-EZ). It is sufficient to enter “family relationship” or “business relationship” without greater detail. Business relationship. Business relationships between two persons include any of the following.

  1. One person is employed by the other in a sole proprietorship or by an organization with which the other is associated as a trustee, director, officer, or greater-than-35% owner, even if that organization is tax-exempt. However, do not report a person’s employment by the filing organization as a business relationship.
  2. One person is transacting business with the other (other than in the ordinary course of either party’s business on the same terms as are generally offered to the public), directly or indirectly, in one or more contracts of sale, lease, license, loan, performance of services, or other transaction involving transfers of cash or property valued in excess of $10,000 in the aggregate during the organization’s tax year. Indirect transactions are transactions with an organization with which the one person is associated as a trustee, director, officer, or greater-than-35% owner. Such transactions do not include charitable contributions to tax-exempt organizations.
  3. The two persons are each a director, trustee, officer, or greater than 10% owner in the same business or investment entity (but not in the same tax-exempt organization).

Ownership is measured by stock ownership (either voting power or value, whichever is greater) of a corporation, profits or capital interest in a partnership or limited liability company (whichever is greater), membership interest in a nonprofit organization, or beneficial interest in a trust. Ownership includes indirect ownership (for example, ownership in an entity that has ownership in the entity in question); there may be ownership through multiple tiers of entities.

Privileged relationship exception. For purposes of line 2, a “business relationship” does not include a relationship between an attorney and client, a medical professional (including psychologist) and patient, or a priest/clergy and penitent/communicant.

There are four further examples and a reasonable effort “exception” included in the Form 990 instructions.

Bottom Line

The “Governance” section of Form 990 is closely scrutinized by the IRS and the public.  Make sure you work with a qualified, knowledgeable tax advisor on your answers here and the related narrative required for Schedule O.  He or she will be able to help your school navigate the intricacies of the reporting requirements.

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.