IRS Shows Continued Interest In Rebuttable Presumption Of Reasonableness And Seeks Comments On Recordkeeping Burden

On Aug. 9, 2013, the Internal Revenue Service published a notice in the Federal Register seeking comments on the recordkeeping burden placed on public charities and social welfare organizations (as well as qualified nonprofit health insurance issuers) subject to the excess benefit transaction rules. Specifically, the IRS is seeking comments on the burden associated with obtaining comparability data and documenting decisions as part of the process of establishing the rebuttable presumption of reasonableness. This notice may be indicative of the continued interest of the IRS in the executive compensation practices of organizations subject to the excess benefit transaction rules. While it is unclear what the specific concerns of the IRS are on these matters, public charities and social welfare organizations should monitor future developments because of the importance of the rebuttable presumption of reasonableness in protecting the organization's governing body from excise taxes and in minimizing the risk to its executives for excise tax liability.

Public charities and social welfare organizations (as well as qualified nonprofit health insurance issuers) wanting to avoid or minimize the risk of excise tax liability under the excess benefit transaction rules will take steps to raise the rebuttable presumption of reasonableness when setting the compensation of its executives. If an organization raises the rebuttable presumption of reasonableness, the executive's compensation is presumed to be reasonable. This presumption shifts the burden of proof to the IRS, offers some protection against tax to the executive, and should fully protect the directors involved in setting the executive's compensation from tax liability. Rather than the organization having to prove that compensation was reasonable, the burden shifts to the IRS to prove that the compensation was excessive.

One requirement that must be met in order to establish the rebuttable presumption of reasonableness is for the organization to obtain and rely upon appropriate comparability data. In addition, the organization must adequately and timely document the basis for its determination of reasonableness concurrently with making that determination. A small organization, meaning one with annual gross receipts of less than $1 million, is considered to have appropriate data as to comparability if it has data on compensation paid by three comparable organizations in the same or similar...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT