The Madoff Aftermath and Charities: Should the IRS Adopt the New Requirements for Amending Form 990 for Form 990-PF? – Installment 26

May 17, 2010Articles White Collar Defense & Compliance Blog

This is the twenty-sixth in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal. Against the backdrop of the Madoff scandal, prior Installments of this series have discussed and analyzed new disclosure requirements for public charities adopted by the Internal Revenue Service (“IRS”) in its new Form 990 (the “New Form 990”). Forms 990 filed by public charities and Forms 990-PF filed by private charitable foundations are universally available on the Internet on Guidestar and other sites.

One important change in the New Form 990 that has received relatively little notice, perhaps because it has not yet been greatly utilized, is the following highlighted addition to the first paragraph of instructions for filing an amended Form 990.

G. Amended Return/Final Return

To change the organization’s return for any year, file a new return including any required schedules. Use the version of Form 990 applicable to the year being amended. The amended return must provide all the information called for by the form and instructions, not just the new or corrected information. Check the Amended Return box in the heading of the return. Also, state in Schedule O which parts and schedules of the Form 990 were amended and describe the amendments

The addition to the New Form 990 amendment instructions was clearly intended to give reviewers a roadmap to isolate and analyze why an amendment was necessary and the changes that were made. Since many New Forms 990 can run 40 pages or more, such assistance to the reader is vital for a meaningful review.

In contrast, the Form 990-PF and its instructions for preparation and filing with the IRS by private charitable foundations has not gone through a recent major revision. The instructions for filing an amended Form 990-PF read in part as follows:

To change the organization's return for any year, file an amended return, including attachments, with the correct information. The amended return must provide all the information required by the form and instructions, not just the new or corrected information. Check “Amended Return” in block G at the top of page 1.

Clearly, the Form 990-PF instructions do not require the identification and a description of amendments as the New Form 990 instructions do. My view is that an amended Form 990-PF should have the same mandatory roadmap for identifying and explaining changes in an amendment as New Form 990.

Amendments to Forms 990-PF for private foundations that were affected by Madoff are now becoming available on Guidestar. A number of private foundations have filed amended Forms 990-PF to reflect losses in fair market value of assets and investment income on Madoff investments that they had previously reported to the IRS, presumably to recover refunds from the IRS for excise tax paid on the Madoff “investment income” that turned out to be fallacious. These foundations may have been fully compliant with the instructions for amended Forms 990-PF but have not necessarily demonstrated “best practices” in meaningful disclosure.

A case in point is the 2007 Form 990-PF originally filed on May 15, 2008 (the “Shapiro 2007 990-PF”), by the Carl & Ruth Shapiro Family Foundation (the “Foundation”). The Shapiro 2007 990-PF reflected fair market value of assets at the end of 2007 of $323,912,042 and investment income of $43,654,002.

On November 18, 2009, the Foundation filed an amended Form 990-PF (the “Shapiro Amendment”) that reported fair market value of assets at the end of 2007 of $132,908,113 and investment income of $4,700,096.

Therefore, the Shapiro Amendment reflects the disappearance for the Foundation for 2007 of (i) $191,003,929 in fair market of assets and (ii) $38,953,906 in investment income previously reported in the Shapiro 2007 990-PF.

The Shapiro Amendment gave no explanation for the disappearances and said nothing of Madoff, even though the schedules in the Shapiro 2007 990-PF had referred to him 10 times by name. Unless a reader has both documents available side-by-side, it is virtually impossible to understand the changes. The Shapiro Amendment may have been compliant with the Form 990-PF instructions; however, had the Foundation been a public charity, it would have presumably been required to make significantly greater disclosure in a Form 990 amendment.

As a side note, the Foundation changed its Paid Preparer to Caras and Shulman, PC of Burlington, MA for the Shapiro Amendment from Konigsberg, Wolf & Co., P.C., the Paid Preparer for the Shapiro 2007 Form 990-PF. Query whether that change would have required a description if the filing had been an amendment to a Form 990.

In conclusion, the IRS has greatly enhanced the quality of disclosure in the New Form 990. It should review and consider some revisions for the Form 990-PF to require more meaningful explanation of material matters and events.

[To be continued in Installment 27]