Part III of the Form 990 includes spaces

for reporting activity codes to characterize certain program service activities. The instructions ask filers to leave these spaces blank for tax year 2010, because the IRS has not decided which, if any, coding system would best facilitate research on exempt organizations by the IRS

and the public. All such coding systems that the IRS is familiar with, including the National Taxonomy of Exempt Entity (NTEE) codes, the North American Industry Classification System (NAICS) Business Activity Codes and the IRS’s internal activity codes, have significant limitations. In particular, these systems do not adequately reflect the wide range of program service activities provided by tax-exempt organizations. These systems also lack the consistency, flexibility, and real-time adaptability that would be needed to facilitate complete and accurate reporting.

In light of these limitations, the IRS is considering removing the spaces in Part III for reporting activity codes. We request comments on whether removal is preferable to the adoption of a coding system.

2. Reporting compensation to management companies and leasing companies owned or controlled by directors, officers, trustees, or key employees.

In 1999, the Service added the following instruction to the Form 990 to address the practice of officers, directors, trustees, and/or key employees (ODTKEs) organizing management companies and other separate legal entities to avoid reporting of their compensation on the Form 990:

If you pay any other person, such as a management services company, for the services provided by any of your officers, directors, trustees, or key employees, report the compensation and other items as if you had paid them directly. The instruction generated controversy and much commentary. Some argued that these reporting requirements were burdensome, requiring the organization to obtain detailed information from third-party contractors; others argued that the requirements invaded the privacy of individuals who were not employees of the filing organization. In Announcement 2001–33, the IRS said it would not penalize an organization if it reported in the compensation section of its Form 990 the name of a management company it paid for services rather than the person who provided services to the organization on behalf of that management company.

2011–26 I.R.B. 933 June 27, 2011

The redesigned 2008 Form 990 expanded upon Ann. 2001–33 by stating in the Part VII instructions that the filing organization should not report a payment to a management company as a payment directly to an ODTKE, even if that ODTKE owned or controlled the management company. Rather, the compensation to the management company would only be reported in Part VII, if at all, as compensation to one of the organization’s five most highly compensated independent contractors. The one exception to this rule is to report employees of a management company as the organization’s own employees if they are common law employees of the organization under state law. (Also, if an ODTKE of the organization received compensation through a management company of which the ODTKE or a family member was a 35% owner, director, officer, or key employee, then the transaction may need to be listed and explained in Schedule L, Part IV, including the amount of the payment to the management company and the ODTKE’s relationship with the management company.) The Form 990 instructions also state that payments to leasing companies should be treated in the same way as payments to management companies.

Some have expressed concern that this type of reporting allows organizations to shield compensation to highly-paid executives from disclosure by paying those executives indirectly through management companies. Others have explained the difficulty of determining whether a person is a common law employee under state law.

In light of these concerns, the IRS requests further comments on how a filing organization’s payments to management companies and other third parties ( e.g., leasing companies, affiliates of filing organization, professional employer organizations) for an ODTKE’s services to the filing organization should be reported on the Form 990. For instance, should an organization’s payments to another person or entity, such as a management company, for the services provided by any of the organization’s ODTKEs be reported on the Form 990 as compensation by the filing organization to the ODTKEs? Should the IRS retain its current instructions for reporting compensation in this scenario? Should the IRS ask about such third party compensa

tion arrangements in a separate section of Part VII, to increase transparency?

3. Thresholds for reporting compensation to key employees, highest compensated employees, independent contractors, and former officers, directors, trustees, and key employees.