Additional disclosures in the annual Form 990 and possible taxable implications — Many associations are investing in alternatives due to the ongoing economic recovery and low rate of returns from traditional investments. Endowment and board designated funds need to achieve investment targets, which can be near impossible to make with the average returns from mutual funds and managed accounts. Alternative investments provide the allure of increased returns, albeit at an increased risk. Many associations have been successful at hitting higher returns through alternative investments. These investments do come with added oversight and considerations for additional disclosures to the government in certain ownership situations or because of certain transactions.
Typical alternative investments are hedge funds, private equity funds, commodities, and private investment funds. When you dig a little deeper into the investment vehicle these alternatives utilize, you find partnerships and Limited Liability Companies (LLC). Most, with the exception of a select few, are not publicly traded on an open market. These investment types require careful analysis to value and record under Generally Accepted Accounting Principles (GAAP), as well as tax review for issues involving special disclosure options. Here are some of the main considerations an association’s financial officer should review annually with regard to alternative investment activity.
If invested in a LLC or partnership, it should be reviewed to understand the origin, whether foreign or domestic. Investment holdings of more than $100,000 in foreign sourced investments require disclosure in Schedule F of the annual Federal Form 990. Additionally, certain activity such as a current investment of $100,000 or more could require additional forms for completion and submission with Form 990. Potential forms can include Form 926 for foreign corporations, and Form 8865 for foreign partnerships. Form 8621 is necessary if the association is a shareholder in a Passive Foreign Investment Company (PFIC) or a qualified electing fund. Identifying these entities and determining the forms to complete may require assistance from an international tax specialist.
Partnerships and LLCs provide K-1s at year-end summarizing the taxable information for the recipient. An association could be subject to unrelated business income from debt-financed property reported on the K-1. Investment managers report details of nonprofit unrelated activity in a special place on a K-1 as footnotes or additional disclosures behind the printed form. This can require the association to file Federal Form 990-T. State taxable income can be disclosed in the K-1 nonprofit section, reporting the states that have nexus by location, requiring one or more state income tax returns in addition to Form 990-T.
On November 9, Aronson LLC, Arent Fox, and Morgan Stanley hosted an executive summit for exempt organizations that featured strategies for making and saving money, and tips on top governance issues. Missed the event? Here is a brief recap. The event kicked-off with keynotes delivered by former United Way CEO and Chair of the Alexandria Chamber of Commerce Joe Haggerty, and former US Senator and Congressman from North Dakota and current Senior Policy Advisor at Arent Fox Senator Byron Dorgan.
“Nonprofits should be providing the appropriate level of information to the public, this includes full disclosure, open conversations, innovate use of required reporting, and tying metrics to outcomes,” said Mr. Haggerty. “For example, instead of trying to hide salary info in an appendix, the United Way included its entire compensation plan in the 990 and added information on who they benchmark against and the overall philosophy of compensation.”
With a new administration and Congress set to take control in January, Senator Dorgan flagged several issues exempt organizations should be focused on. Including:
The first panel discussion featured Arent Fox Nonprofit Leader Richard Newman, Aronson LLC Nonprofit and Association Industry Services Group Partner Rob Eby, and Vice President and Financial Advisor for Morgan Stanley Matthew Teems. The group focused primarily on strategies for making and saving money. Those guidelines include:
Good governance was the central theme for the second panel, which included Mr. Teems, Aronson LLC Nonprofit and Association Industry Services Group Partner Gregory Plotts, Arent Fox Nonprofit Partner Sean Glynn, and Vice President of Commercial Insurance at Sahouri Insurance Allen Hudson. The group focused on investment committee responsibilities, audit committee responsibilities, and new accounting standards. Major takeaways include:
Additionally, three new Accounting Standards, which will take effect soon include: Financial Presentation for Exempt Organizations (Effective in 2018); Revenue Recognition (Effective in 2019); and Lease Accounting (Effective in 2020).
The New Markets Tax Credit (“NMTC”), under IRC §45D, was created as part of the Community Renewal Tax Relief Act of 2000. This act encouraged qualified equity investments (“QEIs”) in community development entities (“CDEs”) directed towards low-income communities. President Obama recently extended the NMTC in January of 2013 as a part of the American Taxpayer Relief Act of 2012. The NMTC rewards investors with a 39% tax credit of the total QEI, which is split over a seven year period. There is also additional return to investors who make a low-return project viable.
The CDEs also benefit with a 25% reduced cost of borrowing and lower interest rates than could otherwise be attained. Programs must apply to become CDEs; awards totaling up to 3.5 billion are announced annually. The stimulated investments lead to job and material improvement in the residents of struggling communities. Many CDEs serve as intermediaries for providing loans and investments in low income areas, which lead to increased economic activity.
To qualify as a CDE, the program must be located in a distressed community which displays at least one of the following characteristics:
For nonprofits, choosing the right investment strategy is a key factor in determining the future viability of your mission. Join Aronson LLC and American Asset Management Group, Inc. on October 17th for a webinar that will offer a brief overview of the differences between Relative Return and Absolute Return investment philosophies. Topics will include:
John O. Low, Institutional Investor Counsel with American Asset Management Group will share his perspective and help attendees understand the finer points of investment strategy. In addition to his work with AAMG, Mr. Low is passionate about serving the needs of the nonprofit community. He founded the Non-Profit Cooperation Circle – a model for peer to peer networking, education and support for association executives, board members and other nonprofit professionals.
|Date:||October 17, 2012|
|Time:||11:00 am – 12:00 pm|
U.S. District Court Judge Donovan Frank has shot down Wells Fargo’s request for dismissal of the civil trial following the 2010 verdict of fraud and breach of fiduciary duty by the bank. Blue Cross and Blue Shield of Minnesota, along with two other health care organizations, several pension funds, a college endowment fund, and a charitable foundation, sued Wells Fargo for misrepresenting the level of risk of their investment. The nonprofits stand to win $41 million at the civil trial in January 2013, not including punitive damages which could skyrocket into the hundreds of millions range.
The bank presented an investment program claiming it was safely conservative and could earn extra returns by lending the securities to brokers for short sale transactions. The lawsuit claims that the bank concealed the reality of the complex, long/short, structured investment which tanked along with the rest of the market in 2008.
The bank, now owned by Citigroup Inc., defends its investment vehicle, saying that the program was in accordance with investment guidelines and the investments were suitable at the time of purchase.
A word of caution: Investment brokers are ultimately selling a product. Unless they have certification as a financial planner (CFP), they owe professional due care, but not fiduciary responsibility, meaning, protecting your financial interest isn’t the top item on their list. Many brokers are also CFPs and it makes good financial sense to make sure your broker is one.
News Source: Star Tribune