Issue

The “Governance Section” of Form 990 has several questions regarding policies.  Form 990, Part VI, Lines 16a and 16b ask about whether an institution invests in, contributes assets to, or participates in a “joint venture” and whether or not you have a written joint venture policy.  Does your team know how to answer these items?

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.  Their CFO is reviewing a draft of the Form 990 that we have prepared in collaboration with his team.  He notes the “No” answers at Form 990, Part VI, Lines 16a and 16b and calls to ask about whether SCC might be participating in any “joint ventures.”

We explain that the Form 990 instructions define a “joint venture” fairly broadly to include any joint effort to undertake a specific business enterprise, investment, or exempt-purpose activity with a taxable person.  The instructions allow the institution to disregard any ventures or arrangements that meet two conditions.  The activities that may be disregarded center around the “modifications” set forth in Internal Revenue Code section 512(b)(1) – (5).  These include interest, dividends, royalties, rents, income from debt-financed property, and gains/losses from the sale, exchange, or other disposition of most property.

Rules

From 990 instructions (Part VI, Line 16a):

Line 16. Answer “Yes” on line 16a if at any time during its tax year the organization invested in, contributed assets to, or otherwise participated in a joint venture or similar arrangement with one or more taxable persons. For purposes of line 16, a joint venture or similar arrangement (or a “venture or arrangement”) means any joint ownership or contractual arrangement through which there is an agreement to jointly undertake a specific business enterprise, investment, or exempt-purpose activity without regard to (1) whether the organization controls the venture or arrangement, (2) the legal structure of the venture or arrangement, or (3) whether the venture or arrangement is treated as a partnership for federal income tax purposes, or as an association, or corporation for federal income tax purposes. Disregard ventures or arrangements that meet both of the following conditions.

  1. 95% or more of the venture’s or arrangement’s income for its tax year ending with or within the organization’s tax year is described in section 512(b)(1)–(5) (including unrelated debt-financed income).
  1. The primary purpose of the organization’s contribution to, or investment or participation in, the venture or arrangement is the production of income or appreciation of property.

Bottom Line

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.” Next week, we’ll take a look at Joint Venture policies and whether or not your institution should adopt one.  Check this out with your skilled, knowledgeable, and experience tax advisor.  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.