The National Association of Bond Lawyers has suggested several changes to the proposed instructions to the Internal Revenue Service's Form 990 Schedule K, including a modification to wording the organization fears could force compliant nonprofit organizations to admit the possibility of future noncompliance.
In a letter sent to the IRS Monday, NABL requested several modifications be made to the agency's draft instructions, which were finalized last December and explain to charities how to fill out the new Form 990 and Schedule K. The schedule requires nonprofit organizations to provide detailed information about their tax-exempt bonds that are outstanding.
Under the new form and schedule, charitable and other nonprofit tax-exempt organizations with more than $100,000 of bonds outstanding to list any bonds issued after 2002 that are still outstanding for the 2008 tax year in forms to be filed in 2009. The agency gave borrowers a one-year delay in responding to detailed questions about the bond issues in Part II-Part IV of Schedule K. Those questions must be answered for the 2009 tax year in forms to be filed in 2010. IRS officials have said the detailed questions also would apply to refundings, possibly capturing some bonds issued earlier than 2002 that were refunded.
Bond attorneys and other muni market participants have expressed concern in the past that the new form places a significant record keeping and reporting burden on issuers.
The attorneys said in the letter that the phrasing in the portion of the form pertaining to private business use could prove troublesome to otherwise compliant issuers.
In the current version of the instructions, the IRS requests issuers to indicate if they entered into any management or service contracts involving bond-financed property that "may result in private business use."
However, NABL said the wording could force issuers to respond affirmatively to the request, even if they are confident that no private business use has taken place.
"NABL is concerned that an organization could be required to answer 'yes' because the agreements 'may' result in private business use, even though the organization had determined, perhaps through routinely checking with bond counsel, that the agreement does not," the letter stated.
Frederic Ballard Jr., a partner at Ballard Spahr Andrews & Ingersoll LLP, who co-chairs the subcommittee that drafted the letter, said the current wording makes ambiguous what groups should report to the IRS.
"The problem that the [IRS] and our comment are struggling with is: Should every potential private use be reported, or only the cases where we recognize that there is a private business use?" he asked.
Another significant change proposed by the group is an alternative format for the section of the form where charities report information about how their bond proceeds were used and for what purpose. The attorneys said they believe their version falls more in line with the way post-issuance compliance is typically handled.
The NABL format "would reconcile sources and uses of proceeds in a manner that NABL believes would conform to typical post-issuance analysis by a bond user," the association stated in its letter.
Ballard said that since that proposed change would be made to the form itself and not the instructions, the IRS cannot consider it at this time, but that NABL still wanted to bring it to the agency's attention.
Several other suggestions included a number of changes to definitions or examples the IRS provided on the instructions to help organizations determine how to respond.
"One theme that many of the comments attempt to do is to help the [IRS] with their effort, which we support, to try to use plain English definitions for technical terms that are defined in the tax regulations," Ballard said. "As you can see, many of our comments do relate to trying to bridge that gap."