Situation: Gentle Persuasion, Inc. (GentleP) and HammerItHome Foundation (Hammer) are 501(c)(3) charitable organizations with no overlapping boards of directors. Nevertheless, each has taken a particular interest in two other organizations called Goodness Gracious Community Center (GGCC) and Independent Thinker (Thinker). In addition, GentleP and Hammer each appoint 3 directors to each of GGCC’s and Thinker’s 9-person boards.
Dilemma: Thinker’s controller is completing its Form 990, Return of Organization Exempt from Income Tax. Form 990, Part IV, Question 34 asks whether the organization is related to any tax-exempt or taxable entity. If so, he wants to know whether or not he needs to complete Schedule R – Related Organizations and Unrelated Partnerships.
Rule: When the majority of two exempt organization’s boards are appointed by the same person or persons, then a “sibling” relationship exists between them.
Answer: In this case, GGCC and Thinker are related as sibling organizations because a majority of each board is appointed by the same persons. Six directors out of nine directors for both GGCC and Thinker are appointed by GentleP and Hammer.
Significance Sibling organizations should be reported on Form 990, Schedule R. Since each is a charitable organization, Schedule R, Part II should be completed, which identifies related Exempt organizations. Any transactions that occur between these organizations should be reported on Schedule R, Part V. The IRS has become increasingly sensitive to the relationships between exempt organizations and other organizations, whether the other organizations are also exempt, or they are business partnerships or corporations. The IRS is also interested in organizations that control other organizations. But since no organization appoints a majority of directors of Thinker, neither need be reported as a controlling organization on Thinker’s Form 990, Schedule R.
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