IRS Answers Questions on Form 990, Schedule R – Related Organizations and Unrelated Partnerships

In our on-going series of articles discussing the newest Form 990, this issue we review Schedule R - Related Organizations and Unrelated Partnerships. Schedule R is used to identify and provide information on related organizations, certain transactions with related organizations, and certain unrelated partnerships through which the organization conducts significant activities. Not all transactions between the filing organization and its related organizations are reported on Schedule R, Part V. Line 1 of Part V is concerned only with the types of transactions indicated by the check boxes. However, two types of reported transactions must be explained more fully on line 2:

The Extent of Disclosure.

All transactions described in line 1a, which include all receipts or accruals of interest, annuities, royalties, or rent from a controlled entity, regardless of amount.

All other check box transactions [lines 1(b) through line 1(r)] when the amount involved during the tax year between the filing organization and a particular controlled entity exceeds $50,000. Do not report transactions involving amounts below this threshold.

Some wonder why Schedule R seeks detailed information about all transactions with a controlled entity (regardless of the amount involved) but not other reported transactions involving amounts of $50,000 or less. The IRS is interested transactions with controlled entities because they may result in unrelated business income.

Unrelated Partnerships.

Schedule R generally concerns transactions with related entities. So, why does Schedule R, Part VI ask for information about unrelated partnerships through which the filing organization conducted more than 5% of its activities (measured by total assets or gross revenue)? The IRS doesn't explain this inconsistency but does tell us why the requested information is important.

Some exempt organizations conduct significant activities by participating in partnerships and joint ventures that would not otherwise be reported in Schedule R because the organization does not have control. These arrangements can involve activities that produce unrelated business income, result in private benefit or inurement, or raise other exempt status issues, precisely because the organization does not control the partnership. Therefore, Part VI is designed to gather data that can reveal these types of potential tax issues.

Distant Relatives.

A filing organization reports in Schedule R indirectly controlled entities.

Example:　Exempt organization X owns 80% of taxable corporation Y. Y holds a 70% profits interest as a limited partner of limited partnership Z. X is deemed to own 56% of Z (80% of Y's 70% interest in Z). Thus, X controls both Y and Z, which are therefore both related organizations with respect to X. X reports Y in Schedule R, Part IV, and reports Z in Schedule R, Part III.

The constructive ownership rules (IRC Section 318) are used to determine whether there is control of a corporation, and similar principles are used to determine whether there is control of a partnership.

Group Returns.

Central and subordinate organizations generally are not reported as related organizations in Schedule R, Part II. All other related organizations of the central and subordinate organizations are required to be listed in Schedule R, Parts I–IV, as appropriate.

Transactions with these organizations must be reported in Part V, even if a central or subordinate organization in a group exemption is not required to be listed as a related organization.

If you are having trouble with the Form 990 and need a few questions answered, give us a call. We will be glad to help.