Instructions For Form 990 And Form 990-Ez - 2003 Page 12
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46property, or the rights to future compensation
1099 or Form 990, or on an amended form
exercise of an option by the disqualified
or property, is not subject to a substantial risk
filed prior to the start of an IRS examination; or
person), or a more than incidental change to
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of forfeiture. Where the disqualified person
The disqualified person reports the benefit
the amount payable under the contract, is
elects to include an amount in gross income in
as income on the person’s original Form 1040
treated as a new contract as of the effective
the tax year of transfer under section 83(b), the
or on an amended form filed prior to the start of
date of the material change. Treatment as a
excess benefit transaction occurs on the date
an IRS examination.
new contract may cause the contract to fall
the disqualified person receives the economic
outside the initial contract exception, and it
Exception. To the extent the economic
benefit for Federal income tax purposes.
thus would be tested under the fair market
benefit is excluded from the disqualified
value standards of section 4958.
person’s gross income for income tax
Section 4958 applies only to
post-September 1995 transactions. Section
purposes, the applicable tax-exempt
Rebuttable Presumption of
organization is not required to indicate its intent
4958 applies to excess benefit transactions
Reasonableness
to provide an economic benefit as
occurring on or after September 14, 1995.
Payments under a compensation arrangement
Section 4958 does not apply to any transaction
compensation for services. (For example:
are presumed to be reasonable and the
employer provided health benefits, and
occurring pursuant to a written contract that
transfer of property (or right to use property) is
contributions to qualified plans under section
was binding on September 13, 1995, and at all
presumed to be at fair market value, if the
times thereafter before the transaction occurs.
401(a).)
following three conditions are met.
What benefits are disregarded? The
What is reasonable compensation?
1. The transaction is approved by an
following economic benefits are disregarded for
Reasonable compensation is the valuation
authorized body of the organization (or an
purposes of section 4958:
standard that is used to determine if there is an
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entity it controls) which is composed of
Nontaxable fringe benefits: An economic
excess benefit in the exchange of a disqualified
individuals who do not have a conflict of
benefit that is excluded from income under
person’s services for compensation.
interest concerning the transaction.
section 132.
Reasonable compensation is the value that
•
2. Prior to making its determination, the
Benefits to volunteer: An economic benefit
would ordinarily be paid for like services by like
authorized body obtained and relied upon
provided to a volunteer for the organization if
enterprises under like circumstances. This is
appropriate data as to comparability. There is a
the benefit is provided to the general public in
the section 162 standard that will apply in
special safe harbor for small organizations. If
exchange for a membership fee or contribution
determining the reasonableness of
the organization has gross receipts of less than
of $75 or less per year.
compensation. The fact that a bonus or
•
$1 million, appropriate comparability data
Benefits to members or donors: An
revenue-sharing arrangement is subject to a
includes data on compensation paid by three
economic benefit provided to a member of an
cap is a relevant factor in determining the
comparable organizations in the same or
organization due to the payment of a
reasonableness of compensation.
similar communities for similar services.
membership fee, or to a donor as a result of a
For determining the reasonableness of
3. The authorized body adequately
deductible contribution, if a significant number
compensation, all items of compensation
documents the basis for its determination
of nondisqualified persons make similar
provided by an applicable tax-exempt
concurrently with making that determination.
payments or contributions and are offered a
organization in exchange for the performance
The documentation should include:
similar economic benefit.
•
of services are taken into account in
Benefits to a charitable beneficiary: An
a. The terms of the approved transaction
determining the value of compensation (except
economic benefit provided to a person solely
and the date approved;
for certain economic benefits that are
as a member of a charitable class that the
b. The members of the authorized body
disregarded, as discussed in What benefits
applicable tax-exempt organization intends to
who were present during debate on the
are disregarded? below). Items of
benefit as part of the accomplishment of its
transaction that was approved and those who
compensation include:
exempt purpose.
voted on it;
•
•
All forms of cash and noncash
Benefits to a governmental unit: A transfer
c. The comparability data obtained and
compensation, including salary, fees, bonuses,
of an economic benefit to or for the use of a
relied upon by the authorized body and how
severance payments, and deferred and
governmental unit, as defined in section
the data was obtained;
noncash compensation;
170(c)(1), if exclusively for public purposes.
d. Any actions by a member of the
•
The payment of liability insurance premiums
authorized body having a conflict of interest;
Is there an exception for initial contracts?
for, or the payment or reimbursement by the
and
Section 4958 does not apply to any ‘‘fixed
organization of taxes or certain expenses
e. Documentation of the basis for the
payment’’ made to a person pursuant to an
under section 4958, unless excludable from
determination before the later of the next
initial contract. This is a very important
income as a de minimis fringe benefit under
meeting of the authorized body or 60 days after
exception, since it would potentially apply, for
section 132(a)(4). (A similar rule applies in the
the final actions of the authorized body are
example, to all initial contracts with new,
private foundation area.) Inclusion in
taken, and approval of records as reasonable,
previously unrelated officers and contractors.
compensation for purposes of determining
accurate and complete within a reasonable
An ‘‘initial contract’’ is a binding written
reasonableness under section 4958 does not
time thereafter.
contract between an applicable tax-exempt
control inclusion in income for income tax
organization and a person who was not a
purposes.
Special rebuttable presumption rule for
•
disqualified person immediately prior to
All other compensatory benefits, whether or
nonfixed payments. As a general rule, in the
entering into the contract.
not included in gross income for income tax
case of a nonfixed payment, no rebuttable
purposes.
A ‘‘fixed payment’’ is an amount of cash or
presumption arises until the exact amount of
•
Taxable and nontaxable fringe benefits,
other property specified in the contract, or
the payment is determined, or a fixed formula
except fringe benefits described in section 132.
determined by a fixed formula that is specified
for calculating the payment is specified, and
•
Foregone interest on loans.
in the contract, which is to be paid or
the three requirements creating the
transferred in exchange for the provision of
presumption have been satisfied. However, if
Written intent required to treat benefits
specified services or property.
the authorized body approves an employment
as compensation. An economic benefit is not
contract with a disqualified person that includes
treated as consideration for the performance of
A ‘‘fixed formula’’ may, in general,
a nonfixed payment (e.g., discretionary bonus)
services unless the organization providing the
incorporate an amount that depends upon
with a specified cap on the amount, the
benefit clearly indicates its intent to treat the
future specified events or contingencies, as
authorized body may establish a rebuttable
benefit as compensation when the benefit is
long as no one has discretion when calculating
presumption as to the nonfixed payment when
paid.
the amount of a payment or deciding whether
the employment contract is entered into by, in
to make a payment (such as a bonus).
An applicable tax-exempt organization (or
effect, assuming that the maximum amount
entity that it controls) is treated as clearly
Treatment as new contract. A binding
payable under the contract will be paid, and
indicating its intent to provide an economic
written contract providing that it may be
satisfying the requirements giving rise to the
benefit as compensation for services only if the
terminated or cancelled by the applicable
rebuttable presumption for that maximum
organization provides written substantiation
tax-exempt organization without the other
amount.
that is contemporaneous with the transfer of
party’s consent (except as a result of
the economic benefits under consideration.
substantial non-performance) and without
An IRS challenge to the presumption of
Ways to provide contemporaneous written
substantial penalty, is treated as a new
reasonableness. The Internal Revenue
substantiation of its intent to provide an
contract, as of the earliest date that any
Service may refute the presumption of
economic benefit as compensation include:
termination or cancellation would be effective.
reasonableness only if it develops sufficient
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The organization produces a signed written
Also, a contract in which there is a ‘‘material
contrary evidence to rebut the probative value
employment contract;
change,’’ which includes an extension or
of the comparability data relied upon by the
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The organization reports the benefit as
renewal of the contract (except for an
authorized body. This provision gives
compensation on an original Form W-2, Form
extension or renewal resulting from the
taxpayers added protection if they faithfully find
-12-
General Instructions for Form 990 and Form 990-EZ
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