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Highlights of the Redesigned

Form 990 – Part I

(September 27, 2007)

James R. King, Jones Day

Robert F. Waitkus, Cleveland Clinic Foundation

Gerald M. Griffith, Jones Day

Daniel J. Bacastow, Jones Day

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Form 990 -- Key Enforcement &

Transparency Tool

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General Background• Timing

• Use for 2008 tax year (filed in 2009)

• 90-day comment period (September 14, 2007)

• Largest 1% of Public Charity Form 990 Filers

• 61% of assets

• 66% of revenues

• Hospitals and education largest sub-sectors

• Fee for service and investment earnings

• Issue bonds

• “Hardest” hit by new Form

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10-Page Core Form & 15 Supplemental

Schedules• Schedule

A

B

C

D

E

F

G

H

I

J

K

L

M

N

R

• Description

• Public Charity Status

• Contributions

• Political & Lobbying Activities

• Financial Statement (including FIN 48)

• Schools

• Foreign Activities

• Fundraising & Gaming

• Hospitals

• Grants

• Compensation

• Tax-exempt Bonds

• Loans

• Non-cash Contributions

• Termination Significant Disposition Assets

• Related Organizations

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New 990 Core Form Sections

Part I. Summary

Part II. Compensation and Other Financial Arrangements

Part III. Governance, Management, and Financial Reporting

Part IV. Statement of Revenue

Part V. Statement of Functional Expense

Part VI. Balance Sheet

Part VII. Statements Regarding General Activities

Part VIII. Statements Regarding Other IRS Filings

Part IX. Statement of Program Service Accomplishments

Part X. Signature Block

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Key Acronyms for Review of 990

• Alphabet Soup:

• BOD = Board of Directors

• DP = Disqualified Person (equivalent to insider)

• D&O = Directors & Officers

• EBT = Excess Benefit Transaction

• EO = Exempt Organization (for health care, typically any organization described in Sections 501(c)(3) or 501(c)(4) of the Internal Revenue Code)

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Schedule J – Supplemental

Compensation Information

• Mind-numbing (7-part) detail & definitions

• Line 1 -- Compensation from EO & related organizations

• Base W-2 compensation

• Bonus & incentive W-2 compensation

• Severance or change of control compensation

• All other W-2 or 1099 compensation

• Nonqualified deferred compensation

• Nontaxable fringe benefits

• Expense reimbursements per accountable plans

• Supplemental nonqualified retirement plans

• Equity-based compensation

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Schedule L – Supplemental Information on

Loans

• Two Parts

• Part I – Loans to Listed Persons

• Part II – Loans from Listed Persons

• Report each loan separately & provide

• Original amount

• Balance due at year end

• Date of original loan

• Maturity date

• Interest rate

• Security

• Purpose for making loan

• Evidenced by written agreement

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Schedule H – Hospitals

• Quantify community benefit standard • IRS view of substantive law?

• Doesn’t say how much is enough

• But identifies principal components

• IRS view of • Stakeholder transparency needs

• IRS compliance & enforcement needs

• Data gathering for policy makers

• Compare to • IRS Guide Sheet & Reference Guide for Processing Health

Care Provider Exemption Applications (08/03/06)

• Online at www.irs.gov/foia/content/0,,id=160630,00.html

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Part I – Community Benefit Report

(Overview)

• “For purposes of advancing discussion,” based on CHA Model

• Charity Care at cost

• WS 1 & WS 2 -- Unreimbursed cost of “traditional” charity care

• WS 3, Col a -- Unreimbursed cost of Medicaid

• WS 3, Col b -- Unreimbursed cost of Other Government Programs

• Other Benefits at cost -- WS 4, 5, 6, 7 & 8

• Community benefit report for public

• Scope & coverage of charity care policy

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Other Benefits

• WS 4 -- Community Health Improvement Services

• WS 4 -- Community Benefit Operations

• Community needs assessments & asset/cost assessments

• WS 5 – Health Professions Education

• Negative margin of training healthcare professionals

• WS 6 – Subsidized Health Services

• Not charity care or government programs

• Negative margin service to meet identified needs

• WS 7 – Unsponsored Cost of Publicly Available Rs

• WS 8 – Cash/In-Kind Contributions Community Groups

• To improve health of community

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Part II – Billings and CollectionsSection A – Billing

• Gross Charges by Category

• Medicare, Medicaid, Other Govt, Private, & Uninsured

• Net Expected after “discounts”

• Discount

• Amounts never enter into revenue stream

• Can be 100%

• Doesn’t include incentives to encourage payment

of delinquent amounts

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Part II – Billings and CollectionsSection B – Collections

• Fees Collected

• Have written debt collection policy?

• How & when inform patients about policy?

• How collect from patients?

• Whether, how & when referred to collection?

• Whether charity care amounts referred to collection?

• Before or after charity care determination made

• HFMA Statement 15 standard

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Part IV – General Information

• How assess healthcare needs of

community?

• How does patient intake process inform &

educate patients about eligibility for

assistance?

• Describe ER policies & procedures & hours

of operation

• Anything else for the good of the order?

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Part V – Facility Information

• Column A

• Facility (building, structure, or campus)

• Type of service (e.g., hospital, rehab, outpatient,

skilled nursing, mental health or drug rehab)

• Column B

• Describe activities & programs at each facility

• Appears to ask only for information about clinical

care, not other facilities, e.g., rs or educational

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Schedule D – Supplemental

Financial Statements

• Compilation of typical financial statement

attachments

• Investments, Other Assets, Other Liabilities

• Uncertain Income Tax Positions – FIN 48

footnote

• Art collection valuation

• Endowment funds

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Schedule D – FIN 48 Disclosure

• Uncertain Income Tax Positions – FIN 48 footnote

• Service has determined disclosure is necessary since audited financials may not be readily available

• Service is not changing position relating to request for tax accrual workpapers

• Form 990 disclosure may be misleading or inconsistent if footnote is prepared for consolidated financial statements versus separate entity 990 filings

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Fiduciary Duties

• Duty of Care: D&O must discharge duties with same degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances and in a manner he/she reasonably believes to be in the best interests of the corporation

• Duty of Loyalty: D&O must faithfully pursue the interests of the corporation over personal financial gain or interests of others

• Duty of Obedience: D&O must act with fidelity to the corporation’s mission and purposes as expressed in the governing documents, to the extent consistent with law

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Fiduciary Duties

• Good Faith: D&O are required to discharge their duties in good faith, consistent with the duty of loyalty and without unjust enrichment, bad faith or fraud

• Business Judgment Rule: If D&O have followed their fiduciary duties and acted in good faith, courts ordinarily willnot substitute their judgment for the business judgment of the D&O

• Reliance on Advisors: State nonprofit laws typically allow reliance on professional advisors and committees unless there is reason to believe that such reliance is inappropriate under the circumstances

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Fiduciary Duties: IRS Good

Governance Practices

• Board Composition: appropriate size and experience

• Duty of Obedience to Mission

• Code of Ethics and Whistleblower Policies

• Duty of Care and importance of due diligence

• Duty of Loyalty: avoiding & disclosing conflicts of interest

• Transparency in mission, activities, finances, compensation, loans

• Monitor professional fundraisers

• Financial Oversight (including appointment of an Independent Audit Committee and 5 year rotation of auditors)

• Limit compensation to reasonable amounts; volunteer boards

• Appropriate document retention policy

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Fiduciary Duties: Form 990

Revisions (2008)

• Good Governance Questions Asked in New Form 990 (Part III)

• Size of BOD; number of independent directors (i.e., no employment, financial or family ties)

• Implementation of conflicts of interest policy

– Is there a written policy?

– How many transactions were reviewed?

– How is the policy made available to the public?

• Disclose family or business relationships:

– Among “Listed Persons” (current or former – within past 5 years -directors, trustees, officers, key employees)

– With the EO either directly or through an entity owned more than35% by the Listed Persons or through family members

– By virtue of serving as part of the Listed Persons or a partner or member of another entity (or shareholder of a PC) doing business with the EO

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Fiduciary Duties: Form 990

Revisions (2008)

• Good Governance Questions (Part III) – Cont’d

• Whistleblower and record retention policies

• Public disclosure of financial statements and audit report

• Contemporaneous documentation of board and committee meetings

• Role of independent accountant in preparation and review of financial statements (compile, review or audit)

• Audit Committee (oversee financial reporting, monitor choice of accounting policies and internal controls, hire, fire and evaluate external auditors)

• BOD review of Form 990 prior to filing

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Joint Ventures: Core Form, Pt. VII

• Line 7b: related to any taxable entity (managing partner or more than 50% control) – complete Schedule R

• Line 8a: conduct all or substantial part of activities through partnership, LLC, corp.

• Report additional details if that other entity is owned or controlled 50% or less by the EO (8b) or if managed by for-profit (8c)

• Disclosure of whether EO has written policy/procedure for:

• Line 11 - review of investment or participation in disregarded entities, joint ventures, or other affiliated organizations (exempt or non-exempt)

• Line 12 - requiring EO to safeguard its exempt status with respect to its transactions/arrangements with related organizations (i.e., more than 50% control)

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Joint Ventures: Schedule H

• Identify all management companies and joint ventures in which the hospital is either a partner or shareholder if

• “Listed Persons” or physicians (whether or not DPs) own in the aggregate 5% or more of the profits interest or stock; and

• Joint venture either manages hospital or medical care operations for the filing organization or directly provides hospital or medical care, or owns any property used by the EO or others to provide hospital or medical care

• Required information includes name of entity, primary activity, and ownership percentages

• Would include reporting ancillary services joint ventures and various leasing joint ventures

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Joint Ventures: Schedule N

• Report any substantial contraction (defined

as the sale, exchange or disposition or other

transfer of more than 25% of its assets)

• Reporting requirement includes transfers to

a joint venture or to a for-profit company

even if the organization receives fair market

value in return as an equity interest in that

other entity

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Joint Ventures: Other Provisions

• Schedule J, Col. H: report all equity-based compensation, including equity interest in a partnership, limited liability company or corp.

• Schedule R: requires reporting of key metrics for all “related organizations” (>50% control or managing partner): assets; income; control; ownership; character of income (related, unrelated or investment); grants and loans; shared facilities, services and employees; and other transfers and reimbursements

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Draft Form 990: Tax Exempt

Bond Reporting Requirements

• Draft provides an information gathering

template that will easily enable the IRS to

review and challenge the tax-exempt status

of bond issues.

• Draft was prompted by IRS awareness of

“significant non-compliance” with record

keeping and arbitrage regulations.

1601784v1

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Draft Form 990:

Tax Exempt Bond Reporting

Requirements

• Form 990 requires self-reporting of unspent bond

proceeds beyond allowed temporary periods.

• If you have unspent project proceeds beyond the

temporary period, be prepared to explain “why” to

the IRS.

• Earnings on your unspent bond proceeds will also

have to be disclosed on Form 990; creating a

potential road map of any abusive investments for

the IRS.

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Draft Form 990: Schedule K

• As proposed, Schedule K requires detailed

and lengthy reporting on all “outstanding”

bond issues, including those which have

been defeased but not yet discharged or

retired.

• Requires reporting of all the joint venture,

LLC or partnership use of tax-exempt bond

financed property, identified by bond issue.

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Draft Form 990: Schedule K

• Requires disclosure of any management contracts

and research contracts associated with bond

financed property.

• If there are such contracts, Schedule K requires a

statement of whether or not the safe harbors of

Revenue Procedures 97-13 (for management

contracts) and 2007-47 (for research agreements)

are met, and requires disclosure of the percentage

of use of the “project” subject to each contract.

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Draft Form 990: Schedule K

• If adopted in the proposed form, the level of

diligence required to fully and accurately

answer the questions in Part III of Schedule

K will be significant, and on the scale of a

private use audit for each individual bond

issue of the organization.

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Question and Answer Period