“Reasonable Compensation”: Lessons From IRS’ 2013 College and University Report

Last week, the IRS released its final 37-page compensation report (“Report”), based on its five-year compliance review of 400 randomly selected colleges and universities.   The Report reflects the IRS’ increasing willingness to scrutinize public charities, particularly their comparability data used to set executive compensation.  Consequently, even though colleges and hospitals generally represent the largest and most complex of tax-exempt organizations under IRC Section 501(c)(3), the legal compliance concerns raised are worth a careful review by all tax-exempt public charities with employees.

IRC Section 4958 requires public charities to pay no more than reasonable compensation to their officers, directors, trustees, and key employees.  In the event an organization provides unreasonable compensation, significant excise taxes can be imposed on the recipients of the compensation and potentially on the board members and others who approved it.

What is reasonable or unreasonable compensation? Section 4958 provides a “safe harbor” margin for organizations that follow a three-step process:

Clergy Reporting Requirements

When a pastor learns of child abuse, what are his or her legal and ethical obligations to report the abuse to government agencies like Illinois’ DCFS?  On the one hand are the victim’s interests – those of the vulnerable child who has or who is suffering.  On the other hand are the interests of the confessing penitent, who usually receive assurances that their conversations with clergypersons are privileged.  Which interest prevails?  Which should prevail? What does the law require?

Beginning with the End in Mind: Legal Entity Selection for Social Ventures

It can be daunting to decide whether to organize a new venture as a nonprofit, tax-exempt organization or as a for-profit, business entity. Sometime an organization could be organized and operated both in a manner that qualifies for tax-exemption under Internal Revenue Code Section 501 or as a taxable business entity.  Toss in a number of recently developed “hybrid” legal entities like the L3C and the social benefit corporation, and it is easy to quickly become misguided and/or confused in the options.  Founders should thus heed Stephen Covey’s wisdom and begin with the end in mind.