CUNA Files Comments on Draft 990 Form Instructions

May 30, 2008

FOR IMMEDIATE RELEASE
Contact: Patrick Keefe -- (202) 508-6765
pkeefe@cuna.com

Proposed changes to instructions for filing an IRS form that reports (among other things) the pay of executives at state chartered credit unions will result in filers reporting “inflated figures” that do not reflect true compensation, CUNA has told the tax-collecting agency in a comment letter.

CUNA was commenting on the IRS draft instructions and schedules to the redesigned Form 990, “Return of Organization Exempt from Income Tax” (which also includes reporting of the compensation of executive staff). Only state-chartered credit unions must file the forms; federal CUs are exempt.

In noting that the proposed instructions would result in inflated compensation figures for executives, CUNA suggested that nontaxable expense reimbursements and fringe benefits should not be included as “compensation.” Additionally, CUNA suggested setting compensation thresholds that are adjusted geographically to reflect differences in cost of living.

CUNA also stated that the threshold for reporting compensation for employees other than executives is too low, and would inaccurately include employees without “sufficient authority or control in the workplace.”

In other comments, CUNA suggested:

• ”Central organizations” should be allowed to aggregate compensation information from subordinate groups;
• The requirement to itemize specific data on group returns is unnecessary;
• Providing a notice of change of the method of filing to the IRS on group returns should be sufficient (rather than seeking agency consent);
• The definition of “key employee” is too broad, and could result in unintentionally including compensation information of such personnel as department heads, middle managers and others who lack responsibilities, power or influence of “key employees.”

The complete text of CUNA’s comment letter follows:

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VIA EMAIL: Form990Revision@irs.gov

June 1, 2008

Internal Revenue Service
Draft 2008 Form 990 Instructions
ATTN: SE:T:EO
1111 Constitution Avenue, NW
Washington, DC 20224

Re: REG-143787-06

Dear Madam/Sir:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Internal Revenue Service’s draft instructions and schedules to the redesigned Form 990, Return of Organization Exempt from Income Tax. By way of background, CUNA is the largest credit union trade organization in this country, representing approximately 90 percent of our nation’s approximately 8,300 state and federal credit unions, which serve more than 90 million members.

Summary of CUNA’s Views

The proposed changes to the draft instructions for completing IRS Form 990 reflect the recent changes to that form. The draft instructions include a general overview of the form and schedules explaining their purpose, description of who must file a particular schedule, and line-by-line explanations. The draft instructions also contain new information including a comprehensive glossary of terms, a compensation table, and illustrative examples.

We appreciate the need for the Internal Revenue Service (Service) to update the instructions consistent with the new form. However, we have a number of concerns regarding the draft. A summary of CUNA’s views is addressed below.

• The instructions for compensation will result in filers reporting inflated figures that reflect certain reimbursements not generally considered to be compensation.
• The thresholds for reporting employee compensation is too low and would include employees without sufficient authority or control at the workplace.
• The requirement to itemize specific data on group returns is unnecessary, and the information should be provided on a consolidated basis as permitted in the Internal Revenue regulations.
• Also for group returns, parent organizations should be permitted to change the method of filing without having to receive IRS consent. Providing a notice of change to the Service should be sufficient.
• The definition of “key employee” is overly broad and could result in unintentionally including the personal salaries of department heads, middle-managers and other employees who do not have the responsibilities, power or influence of “key” personnel.

Discussion of CUNA’s Views

Reporting Executive Compensation

CUNA is concerned that the requirement to report nontaxable expense reimbursements and fringe benefits will result in filers having to report figures that inflate compensation and do not reflect what most individuals consider to be compensation. We urge the Service to develop instructions that reflect reporting requirements that do not unintentionally result in compensation that is exaggerated. In that connection, nontaxable expense reimbursements and fringe benefits should not be included as “compensation.” Also, we suggest setting compensation thresholds that are adjusted geographically to reflect differences in cost of living.

Part VII of the Core Form must be completed regarding an organization’s current officers, directors, and trustees regardless of the amount of compensation they receive as well as its five current highest compensated employees who receive reportable compensation of more than $100,000. Schedule J must be completed for any current individual whose reportable compensation was greater than $150,000.

While we appreciate the Service raising the threshold for reporting the five highest compensated employees from $50,000 to $100,000, we believe this step does not go far enough to prevent the inclusion of unintended employees. At a minimum, the threshold should be consistent with that of “key employee,” which is set at $150,000. Also, as suggested above for executive compensation generally, we believe the threshold should account for the geographical differences in cost of living.

Group 990 Filings

Appendix E has been added to the draft instructions, which details instructions directed to group filers. It clarifies that when an organization files a group return (the central organization) on behalf of a group of entities (the subordinates), it must aggregate data unless it is otherwise instructed to list individual data for each subordinate.

Appendix E further states that when listing the five highest compensated employees (Core form, Part VII, line 1a), the central organization may not aggregate the data and must include the five highest compensated employees for each subordinate.

We believe that a central organization should be permitted to aggregate this information regarding its subordinates. IRS rules regarding group returns state that when a central or parent organization provides information on the names, addresses and compensation of officers, directors, trustees, key employees and the five highest compensated employees of subordinates, it can provide the information on a consolidated basis for all subordinates. 26 CFR 1.6033-2(d)(5)(ii).

In our view, if the Service whishes to change this policy, it must do so only after a notice and comment procedure under the Administrative Procedure Act (APA).

Appendix E contains special instructions regarding the compensation section of the Core form (Part VII) and the compensation of individuals reported in Part II of Schedule J. The central organization must select a method of filing its group return, either filing separately these parts for itself or filing a single consolidated form. Once a method is adopted it can be changed only with IRS consent.

Parent organizations should be permitted to change the process they use to file their returns without having to receive IRS consent. We do not believe the Service has provided sufficient explanation for requiring advance permission and question why prior IRS approval is required. We believe providing a notice of change to the Service in advance of filing should be sufficient.

Concerns with Some Proposed Changes

The Service modified the definition of “key employee” in an effort to include those individuals who have executive authority, but do not fall under the Service’s definitions of director, officer, or trustee.

We have concerns that the proposed definition is overly broad and would result in unintentionally including non-crucial employees who do not have the kind of authority that would justify reporting their compensation.

We believe the five percent threshold is too low and would require organizations to include the individual salaries of department heads, middle-managers and other employees that do not have the level of responsibility, power or influence that warrants the reporting of their compensation. Additionally, it may be difficult for smaller organizations, such as credit unions, to identify and assign discrete activities to individual employees since functions often overlap within departments, and employees may share responsibilities.

Lastly, we appreciate the Service’s clarification of reporting “other liabilities” on Group 990 returns (Schedule D Part X), by stating that an organization may summarize the portion of the FIN 48 footnote that applies to the liability of multiple organizations. However, we disagree with the overall requirement to provide the text of the organization’s FIN 48 footnote in Part VII of Schedule D.

To our knowledge, this requirement does not exist on other tax forms, and does not serve the purpose for which Form 990 is intended, which is to provide an accurate picture of the organization allowing stakeholders to compare it to similar organizations, and to correctly reflect the organization’s operations and use of assets for tax purposes as stated by the IRS. Organizations must already report any unrelated business income on Form 990 and 990-T. Requiring the text of its FIN 48 footnote incorporates duplicate line-items which would likely be confusing to the general public.

Thank you for the opportunity to express our views on the proposed changes to the draft instruction to Form 990. If you have questions about our letter, please do not hesitate to give Lilly Thomas, Assistant General Counsel or me a call at 202-508-6736.

Sincerely,
Mary Mitchell Dunn
SVP and Deputy General Counsel

Copyright © 2008 - Credit Union National Association, Inc.