UBTI and UBIT for Exempt Organizations: Mastering Form 990-T

Transcription

1 UBTI and UBIT for Exempt Organizations: Mastering Form 990-T Getting Calculations Right and Avoiding Audit Traps TUESDAY, JULY 21, 2015, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 UBTI and UBIT for Exempt Organizations July 21, 2015 Brenda Blunt Eide Bailly Michele A. W. McKinnon McGuireWoods

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 UBTI and UBIT for Exempt Organizations: Mastering Form 990-T Unrelated Business Taxable Income: Overview Michele A. W. McKinnon McGuireWoods LLP Richmond, Virginia

6 General Rule Internal Revenue Code section 511 imposes a tax on the unrelated business taxable income of an exempt organization. Applies to all 501(c) organizations and state educational instrumentalities under Internal Revenue Code section 115. An activity must meet three criteria to be an unrelated trade or business: It must be a trade or business. It must be regularly carried on. It must not be substantially related to the organization s exempt purpose. Exempt organizations report unrelated business income and compute the tax on Form 990-T. McGuireWoods LLP 6 CONFIDENTIAL

7 Definition of Trade or Business A trade or business is generally defined as any activity carried on for the production of income from the sale of goods or performance of services. McGuireWoods LLP 7 CONFIDENTIAL

8 General Concepts Fragmentation Rule An activity will not lose its identity as a trade or business merely because it is carried on within a larger aggregate of similar activities that may, or may not, be related to an organization s exempt purposes. Examples: Advertising Museum gift shop item by item analysis PLR Seminary providing rental housing for students, faculty, potential students, family members of students, and guest speakers found to have UBTI from income from all users other than students because the housing was operated in a manner similar to a commercial hotel. McGuireWoods LLP 8 CONFIDENTIAL

9 General Concepts (continued) Exploitation Rule Generally, selling items produced in connection with an exempt function activity is not an unrelated trade or business, but this rule will not apply if the organization has exploited the exempt function in excess of what is necessary to accomplish the exempt purpose. Examples Sale of furniture that has been renovated by handicapped individuals. Sale of apple butter at agricultural fair after demonstration on how to prepare apple butter. McGuireWoods LLP 9 CONFIDENTIAL

10 General Concepts (continued) Dual Use Rule The dual use rule recognizes that a facility may be used for both exempt and nonexempt or commercial functions. Example A university-owned ski facility primarily for students is also made available to the general public. Income from the use of the ski lift by the general public is unrelated trade or business income. McGuireWoods LLP 10 CONFIDENTIAL

11 Meaning of Regularly Carried On A business is regularly carried on if it is conducted with a frequency and continuity that is similar to a commercial or for profit business. If the organization conducts the business only infrequently or intermittently, the business will not be regularly carried on. Examples Fundraising gala held once every year. Annual advertising book distributed to members at the annual convention, where advertising is solicited yearround. McGuireWoods LLP 11 CONFIDENTIAL

12 Specific Exclusions from UBTI There are a number of exclusions under the unrelated trade or business income rules. Income will not be subject to unrelated business income tax if: Substantially all of the work in carrying out the activity is carried out by volunteers. The trade or business is carried on for the convenience of members, students, patients, etc. Student bookstore or dormitory Hospital pharmacy for patients Hospital gift shop, parking lot, cafeteria Substantially all of the merchandise sold is donated (referred to as the thrift shop exception). McGuireWoods LLP 12 CONFIDENTIAL

13 Specific Exclusions from UBTI (continued) Income will not be subject to unrelated business income tax if: It is derived from bingo games that are legal under state law and are not regularly conducted by for profit organizations. It is attributable to the distribution of low cost items in connection with a charitable solicitation. It is a qualified sponsorship payment. McGuireWoods LLP 13 CONFIDENTIAL

14 Modifications to Computation of UBTI The following items are generally excluded from unrelated business taxable income (unless attributable to debt-financed property): Dividends, interest, payments with respect to securities loans, and annuities. Royalties (from intangible property rights but not services). Rents. Gains from the sale or exchange of property (unless inventory or held primarily for sale to customers in the ordinary course of a trade or business). Additional income excluded from UBTI includes: Income from charitable gift annuities over the life or lives of one or two individuals. Certain research income. McGuireWoods LLP 14 CONFIDENTIAL

15 Special Rules All income from an S corporation, including gain on the sale of shares, is subject to UBIT. Income from partnerships is analyzed under a look-through rule. Special rules apply to income derived from a controlled subsidiary that would otherwise be excludable. Under these rules a controlled entity is one owned more than 50% by the organization. Interest, rents, royalties, or annuities will not be excluded from UBTI to the extent that such amounts reduced the net unrelated income or increased the net unrelated loss of the subsidiary. Example A university receives royalty income from a taxable subsidiary established for the purpose of commercializing pharmaceutical products resulting from scientific research conducted at the university. PLR McGuireWoods LLP 15 CONFIDENTIAL

16 Debt-Financed Property Income otherwise exempt from UBIT is taxable to the extent it is derived from debt-financed property. Debt-financed income can arise in a number of ways: Investing on margin. Investing in leveraged investment funds. Investing in a partnership that carries on a trade or business or invests in a trade or business that is conducted by a partnership. McGuireWoods LLP 16 CONFIDENTIAL

17 UBTI and UBIT for Exempt Organizations: Mastering Form 990-T Form 990-T Filing Thresholds Brenda A. Blunt, CPA, CGMA

18 Form 990-T Filing Thresholds Organizations required to file form 990-T: The following organizations with gross UBI of $1,000 or more: Exempt organizations under 501(a); Qualified Tuition Programs under 529; Colleges and universities of states and other governmental units (but not instrumentalities of the United States organized and exempt from tax by an Act of Congress); Trustees of IRA, SEP IRA, SIMPLE IRA, Roth IRA, Coverdell education savings accounts, Archer medical savings accounts and Health savings accounts trusts Applicable reinsurance entities under the ACA 1341(c)(1) Gross income = Gross receipts less Cost of Goods Sold 18

19 Form 990-T Filing Thresholds Organizations required to file form 990-T: Organizations liable for other taxes or recapture of taxes 1291 interest on tax deferral under the PFIC rules Look back rules for construction contracts Investment tax credit recapture Recapture of low income housing credit Etc. Organizations liable for the Proxy Tax 19

20 Form 990-T Filing Thresholds Also use the 990-T to claim relevant credits, such as: Small Employer Health Insurance Premiums Federal Fuels Tax Credit Credit for Employer Social Security and Medicare Tax paid on Certain Employee Tips Any other applicable credits 20

21 Form 990-T Filing Thresholds Also use the form 990-T when certain disclosures must be made with an income tax return Form 5713 International Boycott Report Form 8865 Return of U.S. Persons with Respect to Certain Foreign Partnerships Form 8886 Reportable Transaction Disclosure Statement Form 926 US Transferors of Property to a Foreign Corporation Form 8621Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund Etc. 21

22 Form 990-T Filing Thresholds A Note about the public disclosure of the 990-T 1. It is subject to public disclosure rules similar to those for the 990 return 2. Only those forms, schedules and attachments related to the imposition of tax on unrelated business income must be made available for public inspection. Specific forms, (arguably not all inclusive) are enumerated in the instructions, but include many of the forms on the previous two slides 22

23 Form 990-T Filing Thresholds Organizations with $10,000 or less in total UBI income only need to the header; Part I, lines 1-13 for Col A; Part I, line 13 for Col B and C; Part II, lines 29-34; Parts III-V and the signature area. 23

24 UBTI and UBIT for Exempt Organizations: Mastering Form 990-T UBTI Calculations and Schedules Brenda A. Blunt, CPA, CGMA

25 Tax Computation 25

26 Tax Computation Unrelated Business Income Tax ( UBTI ) is based on the net Unrelated Business Taxable Income ( UBTI ) times the applicable income tax rate. In other words, organizations will pay tax on the gross income from UBI activities, less expenses directly connected with generating that income, less charitable contributions, less net operating losses carrying from other years, less the specific deduction. 26

27 Tax Computation The specific deduction is $1,000 per tax return. There is an exception for a diocese, province of a religious order, or a convention or association of churches. They may take a specific deduction of $1,000 per each parish, individual church, district, or local unit ( component units ) that regularly conducts unrelated trade or business up to the gross UBI generated by each component unit and only if such components are not separate legal entities. 27

28 Tax Computation A charitable contribution is allowed for contributions made to other governmental units and organizations (other than itself) as described in 170(c). The charitable contribution deduction does not need to be directly connected to the activity that generated the UBI. 28

29 Tax Computation Beyond that, the limitations and definitions that apply to the charitable contribution deduction follow the rules for corporations or trusts, depending on the organizational structure of the filing entity. Example One An accrual corporation may deduct accrued contributions actually paid within two and ½ months following the year end, if the contributions are authorized by the board and the required statements are attached to the return. This rule is not available to trusts. 29

30 Tax Computation Example Two Corporations are limited to a deduction equal to 10% of taxable income before any deduction for contributions, the DPAD, NOL s an any capital loss carrybacks. Trust contributions are limited to 50% of UBTI before the deduction for charitable contributions for contributions to 170(b)(1)(A) organizations. And limited to the smaller of 30% of UBTI before this deduction or the amount by which 50% of the UBTI is more than the deduction for 50% charitable contributions for contributions to other qualified charities. 30

31 Tax Computation Having arrived at taxable income, you must apply the applicable tax rate. Organizations taxed as corporations, which include incorporated exempt organizations, unincorporated associations and limited liability corporations who elected to be taxed as corporations, use the C corporation tax rates and rules. Trusts follow the trust rates and rules. Alternative minimum tax applies to both using the respective rules. 31

32 Tax Computation Corporations and entities taxed as corporations must follow the controlled group rules under 1561 and 1563 to allocate the tax brackets, and other tax benefits, among members of the controlled group. (Other than 501(c)(2) Title Holding Companies and the organization(s) they support, exempt organizations are not permitted to file consolidated returns.) Other apportionable tax benefits include, AMT exclusion, 179 limitation, research credit, Domestic Production Activities Deduction, general business credit, etc. 32

33 Tax Computation Corporate Tax Rates Trust Tax Rates 33

34 Tax Computation Credits allowed 34

35 Allocation of Expense Deductions 35

36 Allocation of Expense Deductions Expenses can be deducted against UBI to the extent the expenses are directly connected with the carrying on of such trade or business (Reg (a)-1) To be directly connected, a deduction must have a proximate and primary relationship to carrying on of that business. Expenses must also be ordinary and necessary under 162 and other normal tax limitations for example, meals and entertainment expenses are normally limited to 50%, UNICAP and tax depreciation rules apply. 36

37 Allocation of Expense Deductions Dual use of personnel and facilities Many times people and facilities are directly used in both related and unrelated activities. In this case, the expense may be allocated to the unrelated business activity using a reasonable method consistently applied. 37

38 Allocation of Expense Deductions Dual use of personnel and facilities Example One Unrelated business income is 10% of the organization s overall revenues. The organization does not have records to show how much time and facilities are dedicated to the unrelated business activity so the organization allocates 10% of all expenses to UBI. This would NOT be considered a reasonable method. 38

39 Allocation of Expense Deductions Dual use of personnel and facilities Example Two Unrelated business income is 10% of the organization s overall revenues. Through the use of time cards or a time study, the organization can show the executive directors spends 5% of her time on the unrelated business activity. It would be reasonable to allocate 5% of her salary and benefits to the UBI activity. It may also be reasonable to allocate 5% of her office space and related expenses. 39

40 Rent Income Schedule C 40

41 Rent Income Most organizations should use Schedule C to report: 1. Personal Property rentals that are rented with real estate if the personal property rents are more than 10% of the rental contract. 2. Rents from Real and Personal Property contracts if more than 50% of the contract is for the rental of personal property or the rent depends on the income or profits derived by the person renting the property (except amounts that are a fixed percentage of sales). 41

42 Rent Income Schedule C does not apply to 501(c)(7), (9) or (17) organizations. They should report Rent income on Part I and expenses on Part II. Debt-financed real estate rentals not meeting the description in item 2 from the previous screen should be reported on Schedule E. Personal Property rented separately from Real Estate should be reported on Part I, line

43 Unrelated Debt-Financed Income Schedule E 43

44 Unrelated Debt Financed Income Debt-Financed Property Property held to produce income when such property has acquisition indebtedness at any time during the year, or, if the property was disposed of, at any time during the 12 months prior to the disposition. Includes real estate rentals, interest, royalties, dividends, investment capital gains and similar other investment/passive income. There are numerous exceptions. 44

45 Unrelated Debt Financed Income Acquisition Indebtedness Debt incurred to acquire or improve the property Debt incurred before acquiring or improving the property if the debt would not have been incurred but for the acquisition or improvement Debt incurred after acquiring or improving the property if the debt would not have been incurred but for the acquisition or improvement and the need was reasonably foreseeable 45

46 Unrelated Debt Financed Income Acquisition Indebtedness Property acquired is subject to a mortgage, the debt secured by the mortgage is acquisition indebtedness even if the organization does not assume or agree to pay the debt. If property acquired by bequest or gift is subject to a mortgage, the debt is not acquisition indebtedness for the first 10 years. Includes bequest of a partnership interest with debt financed income inside the partnership (Ltr. Rul ) This exception does not apply if the organization assumes, agrees to pay, or makes payments on the debt. 46

47 Unrelated Debt Financed Income Report on Sch E: Gross Rents (Col 2) Directly Connected Expenses (Col 3a and 3b) Note: Depreciation must use straight line method 47

48 Unrelated Debt Financed Income Average Acquisition Indebtedness (Col. 4) Outstanding debt on the first day of each month Add together Divide by the total number of months the organization held the property (including any months the property is owned after pay-off) In the year of disposition, use the highest debt balance during the preceding 12 months. 48

49 Unrelated Debt Financed Income Average Adjusted Basis (Col. 5) Adjusted Basis Cost, plus additions less depreciation, (allowed or allowable) since acquisition. Use depreciation for all years the property was owned, not just subject to UBI. Average Adjusted Basis Adjusted Basis at the beginning and end of the year divided by 2. 49

50 Unrelated Debt Financed Income Col. 6 (Leverage) Average Acquisition Indebtedness (Col 4) Average Adjusted Basis of the Rental Property (Col 5) 50

51 Unrelated Debt Financed Income Debt-Financed Property Taxable Income Col. 6 (Leverage) Gross Income (Col. 2) Gross Reportable Income 51

52 Unrelated Debt Financed Income Debt-Financed Property Taxable Income Col. 6 (Leverage) Total Deductions (Col. 3a + 3b) Allocable Deductions 52

53 Interest, Royalties and Rents from Controlled Organizations Schedule F 53

54 Interest, Royalties and Rents from Controlled Organizations General Principle: When the reporting exempt organization has income from interest, annuities, royalties and rents that it received from a controlled organization subject to income tax, the income is UBI to the reporting exempt organization, if it reduces unrelated taxable income of the controlled organization. (IRC 512(b)(13)) From 12/31/05 12/31/14, only UBI if amounts exceeded FMV (Transfer Pricing rules) and paid pursuant to a written binding contract in place at 8/17/06 54

55 Interest, Royalties and Rents from Controlled Organizations The controlled organization could be either an exempt organization or an nonexempt organization. Either way, the net unrelated taxable income is the income of the controlled organization that would be unrelated (subject to UBIT) if it were an exempt organization AND had the same exempt purpose as the controlling organization. 55

56 Interest, Royalties and Rents from Controlled Organizations An entity is a Controlled Organization if the reporting entity owns: By vote OR by value more than 50% of a corporation s stock; More than 50% of a partnership s profits OR capital interest; or More than 50% of the beneficial interest in an organization. Ability to control more than 50% of the vote (through the power of appointment or otherwise) of an exempt organization. The constructive ownership rules of 318 apply. Use similar principles to determine interests in other organizations. 56

57 Interest, Royalties and Rents from Controlled Organizations 57

58 Other Schedules 58

59 Other Schedules Other Schedules in the Form 990-T include Investment Income of 501(c)(7), (9) or (17) organizations; Schedule G Exploited Exempt Activity Income, Other Than Advertising Income; Schedule I Advertising Income, Schedule J Compensation of Officers, Directors, and Trustees; Schedule K Due to the time allotted and the depth of the topics, we will only be covering Schedules G, I and J at an overview level. 59

60 Other Schedules Investment Income of 501(c)(7), (9) or (17) organizations; Schedule G 501(c)(7), (Social Clubs); (9), (Voluntary Employee Beneficiary Associations (VEBA s)); and (17) (Supplemental Unemployment Benefit Trusts (SUBT s)) fall under a complete separate structure for UBTI. Generally, these organizations are taxed on non-member (non-exempt function) income. 60

61 Other Schedules Investment Income of 501(c)(7), (9) or (17) organizations; Schedule G These organizations are allowed a deduction against nonexempt function income for amounts set aside for 1. Religious, charitable, scientific, literary or educational purposes or for the prevention of cruelty to children or animals; 2. Payment of life, health or accident insurance or other benefits by VEBA s and SUBT s; and 3. Reasonable administration costs for the above. 61

62 Other Schedules Exploited Exempt Activity Income, Other Than Advertising Schedule I There are times when an organization s exempt function activities generate goodwill or other services and products that can be exploited commercially. The revenue from the exploitation is generally UBI. Organizations may offset net UBI from exploited activities with the net losses of the exempt activity that generated them, but may not create a UBTI loss. 62

63 Other Schedules Exploited Exempt Activity Income, Other Than Advertising Schedule I Example: A photographic equipment manufacturer underwrites a photography exhibit at a local museum. In return for the underwriting, the manufacturer gets an advertisement in the exhibition catalog with also includes educational materials, pictures of the exhibited works, interviews with photographers, and other exempt-function content. The advertising revenue is exploited activity income. 63

64 Other Schedules Advertising Income Schedule J This is a subset of the Exploited Exempt Activity category and includes income from advertising sold in periodicals. Other advertising revenue should be reported on Schedule I. The general principles applicable to Exploited Exempt Activities apply here as well. 64

65 Other Schedules Advertising Income Schedule J Unique aspects include the ability to elect to combine all periodical advertising as a single activity (Sch I, Part I), or separately (Sch I, Part II). Also, if there is not a separate charge for the periodical, known as circulation income, then a portion of the member revenue is deemed to be circulation income, to determine the exempt function income from the periodical, (Rev. Rul ). 65

66 Other Schedules Compensation of Officers, Directors, and Trustees Schedule K List here all of the organization s Officers, Directors and Trustees where some or all of their compensation was directly attributable to unrelated business income. If a particular Officer, Director or Trustee spent 10% of his time (col. 3) devoted to the unrelated business activity, the deductible compensation is 10% of the total compensation (col. 4). This should include total compensation salary, allowances and other benefits. 66

67 UBTI and UBIT for Exempt Organizations: Mastering Form 990-T IRS Audit Triggers Michele A. W. McKinnon McGuireWoods LLP Richmond, Virginia

68 UBIT Concerns The IRS has indicated its concern that unrelated business income of nonprofits is being underreported. The college and university questionnaire responses appear to have confirmed the IRS s suspicions. IRS audits of colleges and universities focused in part on unrelated business taxable income. Of the colleges and universities responding to the questionnaire, the number of colleges and universities that reported conducting particular activities exceeded the number that reported the activity on a Form 990-T. All nonprofits can expect greater scrutiny of their unrelated trade or business activities as a result of this increased scrutiny of this area of the nonprofit tax laws. McGuireWoods LLP 68 CONFIDENTIAL

69 Activities Identified in College and University Questionnaire with Potential Underreporting of UBTI Advertising Corporate Sponsorships Rental Activities Others Catalog and internet sales Travel tours Broadcast rights Royalties from oil and gas interests Affinity cards and credit card promotions Mailing list rentals Logo usage Commercial research and patents Operation of hotel or conference center Restaurant and food and catering services Bookstore McGuireWoods LLP 69 CONFIDENTIAL

70 Common Reasons Provided for Underreporting Income was substantially related to exempt purpose Activity conducted primarily for convenience of student body or faculty Activity generated continuous losses over number of years and therefore not a trade or business Not regularly carried on Excludable under modifications of Section 512(b) McGuireWoods LLP 70 CONFIDENTIAL

71 Final Report on IRS Examination of 34 Colleges and Universities 100% required to file Form 990-T 90% underreported UBTI 70% had disallowed non-operating loss deductions 40% misclassified activities as related to exempt purpose 40% improperly calculated or were unable to substantiate NOLs 60% misclassified expenses UBIT was increased to $90M across 90% of the colleges and universities audited McGuireWoods LLP 71 CONFIDENTIAL

72 Tax Reform Proposals affecting UBIT Draft discussion of Tax Reform Act of 2014 released by former Rep. Dave Camp (R-MI), as Chairman of US House of Representatives Ways & Means Committee on February 26, 2014 Intended as a discussion draft for members of Congress The Draft s broad reforms include changes that directly impact exempt organizations, including changes to UBIT. McGuireWoods LLP 72 CONFIDENTIAL

73 UBIT Provisions in Tax Reform Act of 2014 Draft Increases specific deduction against UBIT from $1,000 to $10,000. Expands the impact of UBIT by: Subjecting organizations exempt from tax under sections of the IRC other than 501(a) (such as section 115) to UBIT. Limiting the deduction for trusts making charitable contributions for UBIT purposes to 10% of the trust s UBTI (to conform to the rules that apply to corporate entities). Including the gain or loss from the sale of distressed property in UBTI. Treating any income derived from the sale or licensing of a name or logo as per se unrelated trade or business income subject to UBIT. Excluding income derived from fundamental research from UBTI only if the results of the research are freely available to the public. McGuireWoods LLP 73 CONFIDENTIAL

74 UBIT Provisions in Tax Reform Act of 2014 Draft Conduct of Multiple Unrelated Trade or Business Activities The Draft eliminates an organization s ability to offset UBTI from one unrelated trade or business with losses from another unrelated trade or business. Organizations will be required to compute their UBTI separately for each trade or business activity and could not aggregate their income and losses derived from such activities. McGuireWoods LLP 74 CONFIDENTIAL

75 UBIT Provisions in Tax Reform Act of 2014 Draft Corporate Sponsorships Under the proposals, if an organization uses or acknowledges the name or logo of a sponsor s product line, the sponsor s payment will be treated as per se UBTI. If the organization receives more than $25,000 of qualified sponsorship payments for any one event, the use or acknowledgement of the sponsor s name or logo must appear with the names of a significant portion of the other donors to the event. McGuireWoods LLP 75 CONFIDENTIAL

76 UBIT Provisions in Tax Reform Act of 2014 Draft A new penalty would be imposed on the managers of any organization that substantially understates its unrelated business income tax liability. The penalty is 5% of the underpayment attributable to the understatement. Manager includes officers, directors, trustees, employees, and any other individual under a duty to perform an act in respect of which the underpayment occurred. There is joint and several liability if there are multiple managers. The penalty is capped at $20,000. McGuireWoods LLP 76 CONFIDENTIAL

77 Questions or Comments? McGuireWoods LLP McGuireWoods LLP 77 CONFIDENTIAL

78 This presentation is presented with the understanding that the information contained does not constitute legal, accounting or other professional advice. It is not intended to be responsive to any individual situation or concerns, as the contents of this presentation are intended for general informational purposes only. Viewers are urged not to act upon the information contained in this presentation without first consulting competent legal, accounting or other professional advice regarding implications of a particular factual situation. Questions and additional information can be submitted to your Eide Bailly representative, or to the presenter of this session. 78