1. Janet Kleffner ACCT 530 Graduate Presentation

2.  If you pay management or executives an excessive amount, penalties can be imposed on the board members who approved the compensation.  The IRS has established new “safe harbor” provisions which relate to “intermediate sanctions” provisions for governments and not-for-profit organizations.

3.  Why should you care?  “Intermediate Sanctions” Defined  Caracci v. Commissioner (2002).  “Reasonable Compensation” ◦ Disclosures ◦ How to Report  Violation Consequences  Introduction to “Safe Harbor Provisions”

4.  Some of you may sit on a Board of Directors for a government or NFP organization  Some of you may be managers of a NFP organization or government workers  IRC 4958 is one of the most important regulation changes in history for governments and NFP organizations

5.  Exemption status revoked  Needed a less harsh punishment  “Effective January 1, 2010, board members who knowingly and willfully approve excess benefit transactions are joint and severally liable for a 10% tax (limited to $20,000 per transaction).”

6.  1996-2002: regulations developed ◦ January 2002: final implementation  No applicable to private foundations  “Excess-benefit transactions”  Penalize members with influence, not organization ◦ Board members ◦ CEO/CFO ◦ Compensated employee

7.  First case reported under IRC 4958  Family-owned  3 health care organizations (exempt)  Transfer of assets to become for-profit  Gain on assets far exceeded liabilities assumed ◦ Classified as “excess benefit transaction” ◦ Unreasonable compensation package  Exemption status revoked

8.  IRS: “An amount that would be ordinarily paid for like services by like enterprises under like circumstances”  Specific factors ◦ IRC 162 standards ◦ Similar positions ◦ Availability of services in the region ◦ Compensation surveys ◦ Offers from other firms for the position

9.  Unreasonable compensation=Excess Benefit Transactions (EBT)  Based on compensation increases and/or FV of assets transferred  Burden of proof ◦ IRS: “willful and flagrant” ◦ Defending parties: “reasonable cause”

10.  All compensation and benefits ◦ Automatic EBT if not reported  Any penalties must be disclosed ◦ Names and amounts  Form 990 –Schedule J ◦ http://www.irs.gov/pub/irs-pdf/f990sj.pdf http://www.irs.gov/pub/irs-pdf/f990sj.pdf

11.  Implemented by IRS ◦ Excise taxes ◦ Repayment of EBT ◦ Additional penalties ◦ Interest ◦ Revocation of tax exempt status  Compensated Individual ◦ 25% and 200% excise tax  Board members ◦ 10% tax (joint and severally liable)

12.  Reduces or eliminates the liability of the compensated party ◦ Good faith assumption ◦ Excuses “legitimate and excusable violations”  “Rebuttable presumption of reasonableness”  3 steps ◦ Review and approval of compensation by independent firm ◦ Decisions based on factors (similar positions, firms) ◦ Documentation of deliberations, determination process, and all decisions

13.  Romano, Dan, Eric Gonzaga, and Ken Cameron. "Not for Profit Executive Compensation Trends." Lecture. Grant Thornton LLP, 2010. Web. 6 Dec. 2010.  "Safe Harbor." Wikipedia.com. Wikimedia Foundation, Inc., 30 Nov. 2010. Web. 7 Nov. 2010..  Bright, Lauren M. "Understanding Intermediate Sanction Rules." Ed. Jerald A. Jacobs. ASAE (2010). Web. 7 Dec. 2010..  United Sates. Internal Revenue Service. U.S. Department of Revenue. By Lawrence M. Brauer and Leonard J. Henzke. Intermediate Sanctions (IRC 4958) Update. Internal Revenue Service, 2003. Web. 7 Dec. 2010..