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2007 Issue 1
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IRS Issues Interim Guidance on Pension Protection Act Provisions Ex-CFO of the Milwaukee Public Museum Indicted in the Wake of Financial Crisis Getting Your Long-Distance Telephone Excise Tax Refund IRS Issues Interim Guidance on Pension Protection Act Provisions The IRS has issued interim guidance on those provisions of the Pension Protection Act of 2006 that pertain to supporting organizations and donor advised funds. As reported in Issue 3 of the 2006 Nonprofit Navigator, the new law adds significant new rules for these types of tax-exempt organizations. The new IRS guidance clarifying some of these rules can be found in IRS Notice 2006-109. This guidance is very limited in its scope and answers only three of the many questions raised by the act. It describes the circumstances under which a private foundation may rely on documents to protect itself from penalty taxes for grants to certain types of section 509(a)(3) supporting organizations. It provides relief for those supporting organizations that made payments to substantial contributors or their relatives between July 25, 2006, and August 17, 2006. Finally, it allows employer-sponsored disaster relief funds to provide benefits to employees and their families. Nonprofit Navigator will report on any further guidance relating to the PPA as it is issued. By Robert Johnson  New Pension Protection Act Modifies Recordkeeping and Substantiation Requirements for Certain Charitable Contributions The Pension Protection Act of 2006 increased recordkeeping and substantiation requirements for certain charitable contributions (See: "Rules for Charities Changing Again" in 2006 Nonprofit Navigator Issue 3). As of August 17, 2006, in order to claim a deduction for any monetary charitable contribution -- regardless of amount -- a donor must maintain written records of the transaction. Previously, cash contributions of less than $250 could be substantiated with a log maintained by the donor. Now, to claim a deduction, the taxpayer must have a cancelled check, a receipt or other written communication from the donee, or other reliable written records. Further, such records must contain the:
As before, the requirement to state affirmatively whether or not any goods or services were given in return for the payment only applies to gifts of $250 or more. In light of this change, charitable organizations should consider issuing receipts to all donors. This will be especially true for those that tend to receive donations in the form of cash. By Sara Tosdal and Robert Johnson Ex-CFO of the Milwaukee Public Museum Indicted in the Wake of Financial Crisis
In the late 1990s, the Milwaukee Public Museum, one of the nation's leading natural history museums, dramatically expanded its activities and services in an attempt to counteract stagnant fundraising. However, the projected surpluses from this development never materialized. Consequently, the Museum's debt apparently ballooned from $900,000 in 1992 to $28.8 million in 2005. Faced with weakening finances, Mr. Gaouette allegedly transferred money out of the Museum's endowment to cover normal operating expenses for 2004 and 2005, despite a policy limiting endowment withdrawals for general operations to 3-5% per year. In fact, the endowment dropped from $8.5 million in April 2002 to $387,000 in August 2005. Mr. Gaouette purportedly obfuscated the extreme financial crisis and the mismanagement of Museum funds with confusing financial statements, which went unquestioned by the Board. The extent of the Museum's debt finally came to light in the course of its 2005 annual financial audit. According to documents from the case, a number of factors made this misuse of funds possible. First, the Board of Directors commingled endowment funds with operating funds for investment purposes. Second, the Board gave the CFO the authority to make withdrawals from the endowment without a second signature. Finally, the Museum had a succession of Presidents and, for a time, no President at all. Instead, Mr. Gaouette served as both Chief Operating Officer and Chief Financial Officer. Combined, these factors enabled Mr. Gaouette to manage the Museum's finances unchecked and let the Board of Directors remain unaware of the scope of the organization's financial troubles. While the CFO appears to be the only person indicted on criminal charges in the scandal, Milwaukee County auditors found that weak oversight by the Board of the Directors set the stage for financial crisis. Financial statements should have been more closely questioned by the Board of Directors, who also "indirectly fostered a corporate culture that discouraged frank discussion of the 'downside' risks associated with the aggressive growth experienced by [the Museum]." The audit asserts that two-thirds of the organization's Directors have since been replaced. Criminal enforcement for this sort of endowment fund misuse is highly unusual. However, even if enforcement of endowment restrictions is ordinarily civil, the woes of the Milwaukee Public Museum demonstrate what not to do if one serves on a Board of Directors. Directors of nonprofit organizations should ensure that the Board has an accurate, detailed understanding of the financial situation of their organization, regardless of management's competency. Further, Directors should adopt, and, more importantly, follow, fiscal policies designed to promote openness and fiscal responsibility. For example, the Museum now requires two signatures on all expenditures over $50,000. Finally, Directors should meet regularly and ensure that their organization's structures and procedures enable them to exercise appropriate oversight abilities. By Sara Tosdal Getting Your Long-Distance Telephone Excise Tax Refund The IRS has described the process for organizations to apply for the refund they are due of more than three years worth of long-distance telephone excise taxes. Earlier this year, the Treasury Department announced that after August 1, 2006 it would stop collecting the excise tax on long-distance telephone calls for businesses and tax-exempt organizations. It also announced that it would provide refunds for any such excise tax billed after February 28, 2003. The IRS has published a formula that businesses and tax-exempt organizations can use to calculate the refund they are entitled to receive without having to review telephone records from the entire 41 months that the refund period covers. Instead, organizations need only review the April 2006 telephone bill, when excise tax on both local and long distance service was collected, and the September 2006 bill, when the excise tax on long distance service had expired. Organizations should determine what percentage of their telephone expenses were attributable to telephone excise tax for each of the two months in question and then subtract the resulting percentage for September from the percentage for April. This will provide an estimate of what percentage of the telephone excise tax for each month was attributable to the tax on only long-distance service. Businesses and exempt organizations should apply this calculated percentage to quarterly or annual telephone expenses covering the period from February 28, 2003 to August 1, 2006 to determine the amount of long-distance telephone excise tax refund due. The refund is capped at 2 percent of telephone expenses for entities with 250 or fewer employees and at 1 percent for entities with more than 250 employees. This means that even if an exempt organization with 300 employees uses the IRS-provided formula to calculate a refund of 1.4 percent of telephone service expenses, its actual refund will not exceed an amount equivalent to 1 percent of those expenses. To claim the telephone excise tax refund, exempt organizations should complete Form 8913, Credit for Federal Telephone Excise Tax Paid, and attach it to Form 990-T. For comprehensive guidance on the Long-Distance Telephone Excise Tax refund and detailed instructions on completing Form 8913, please see IRS Notice 2007-11, available on the IRS website. By Robert Johnson This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required. Newsletter Home | HarmonCurran Home | |