A “Related Organization” Land Mine

By admin 7 years ago
Home  /  Articles  /  Not For Profit  /  Tax Compliance  /  A “Related Organization” Land Mine

Situation:        A 5-member Board of Directors governs the Tragic Victims Relief Organization (TVRO).  The Bullied and Abused Responders Enterprise (BARE) appoints two of TVRO’s directors, while a 60% owned for-profit subsidiary of BARE, the Psychological Bandage Corporation (PBC), appoints a 3rd member of TVRO’s Board.  The remaining two members of TVRO’s Board are appointed by a majority vote of TVRO’s most recent Board.  Both TVRO and BARE are 501(c)(3) charitable organizations.

Dilemma:        TVRO’s Executive Director, Minnie Hatz, wants to know whether the IRS considers TVRO a “controlled nonprofit organization”?  If TVRO is a controlled organization, what are the implications?

Rule:               The IRS defines control of a nonprofit organization as the power to remove and replace a majority of the nonprofit organization’s directors or trustees, as exercised by one or more persons (individuals or organizations).

Answer:          TVRO is a controlled nonprofit organization.  BARE controls TVRO because BARE directly appoints two of TVRO’s directors and indirectly appoints one of TVRO’s directors, by virtue of its majority ownership of PBC.  The appointment of 3 of TVRO’s directors constitutes a majority of TVRO’s Board, therefore making BARE a controlling organization of TVRO.

Significance:   Since BARE controls TVRO, a parent/child relationship exists between these two organizations, requiring each of them to report the other as a “Related Organization” on their Form 990, Return of Organization Exempt from Income Tax.  This situation requires that each organization also complete Schedule R, Related Organizations and Unrelated Partnerships, as part of their Form 990 filing.  It also requires TVRO to consider whether BARE compensated former TVRO directors and trustees at all, and compensated TVRO’s current directors and trustees, and both current and former officers, key employees and highly compensated employees more than $10,000 during the year for which a Form 990 is being filed.  This requires that TVRO exercise a “reasonable effort” to find out this information from BARE and report it if the amount compensated by BARE meets the minimum threshold of $10,000.  The exercise of a “reasonable effort” can be a tricky proposition.  In effect, the IRS considers an organization to have fulfilled its reasonable effort requirement if it distributes a questionnaire to appropriate parties asking for the proper disclosure.  The questionnaire must include the name and title of the persons queried, blank lines for those person’s signatures and signature dates, and the pertinent instructions and definitions.  The pertinent instructions and definitions can be tricky because they effectively ask each organization to either copy or synthesize IRS instructions to Form 990.  Such instructions are not easily extracted without substantial editing and judgment applied.

We Can Help!:           JR Haeck CPA Firm helps nonprofit organizations, like yours, to prepare and file their annual Form 990, Return of Organization Exempt from Income Tax.  Haeck is expert in this field, and will gladly work with your auditor, if you have one, or directly with your controller to complete this very important annual responsibility.  Contact us, or check out our web site at JRHaeck.com, to find out more.

  Tax Compliance