On January 23, 2007, the Internal Revenue Service (“IRS”) issued revised instructions for Form 990 information returns to be filed by tax-exempt organizations for the 2006 taxable year. These revisions came in response to legislative changes enacted in 2006 and public comments on the revised Form 990 and instructions released in 2006 for 2005 returns.

Line 75c of Form 990 requires exempt organizations to report compensation paid to their directors, offi cers, highest-compensated employees and highest-compensated independent contractors (for ease of reference, “Covered Individuals”) by “related organizations.” The revised instructions for 2005 had provided a new defi nition of the term “related organization” which dramatically expanded the list of individuals whose compensation needed to be disclosed on Form 990. According to the 2005 instructions, “related organizations” are “tax-exempt or taxable entities with a close connection.” In turn, a “close connection” may include: common control of one or more of the organizations; direct or indirect control of one organization by another through common governance; direct or indirect ownership of one organization by another; control of one organization by another through authority to approve budgets or expenditures; coordination of operations as to facilities, programs, employees, or other activities; or common persons exercising substantial infl uence over all of the organizations. The 2005 instructions also state “the close connection that creates related entities includes, but is broader than direct ownership or control.” A literal reading of the 2005 instructions posed signifi cant concerns for many tax-exempt organizations, suggesting, for example, that an exempt hospital whose board of directors includes a private business owner would be required to report on the organization’s Form 990 the compensation paid to that board member by his or her own company (on the basis that he or she is in a position to exercise substantial infl uence over both the hospital and his or her company).

After substantial feedback from the exempt organization community, the instructions for 2006 returns now clarify the defi nition of “related organizations” by listing eight specifi c relationships: one organization owns or controls the other organization; the same person(s) owns or controls both organizations; the organizations have a relationship as supporting and supported organizations under Section 509(a)(3); the organizations use a common paymaster arrangement (as defi ned in Treas. Reg. § 31.3121(s)-1(b)); the other organization pays part of the compensation that the organization would otherwise be legally contractually obligated to pay; the organizations are partners in a partnership or members in an LLC or other joint venture (other than a publicly traded partnership); the organizations conduct joint programs or share facilities or employees; or one or more persons exercise substantial infl uence over both organizations (under Code § 4958(f)(1) and Treas. Reg. § 53.4598-3).

For arrangements involving any of the foregoing eight relationships, certain information must be reported, including the name of the Covered Individual receiving compensation from a related organization, the name and EIN of each related organization that provided such compensation, and a description of the relationship between the organization and the related organization. As to the fi rst six relationships, the disclosure must also include the amount of compensation paid by the related organization to the Covered Individual. However, where the relationship is limited to the conduct of joint programs or the sharing of facilities or employees, or where one or more persons exercise substantial infl uence over both organizations, it is no longer necessary for the organization to report on Form 990 the compensation paid by the related organization to the Covered Individual. This change should alleviate many of the concerns expressed by the exempt organization community based on the 2005 instructions.