Executive compensation reporting and taxation of automatic excess-benefit transactions.

• Author: Bernschein, Christine
• Position: For tax exempt organizations

In recent months, charitable organizations have come under increased scrutiny by Congress, the IRS, state attorneys general and the public. The news media have publicized allegations of failures to exercise fiduciary responsibility by charity and foundation board members, misuse of charitable funds and excessive executive compensation. Partly as a result, the IRS has stepped up enforcement of existing rules on disclosure of compensation on Form 990, Annual Information Return of Organizations Exempt from Income Tax, to increase the transparency of transactions between exempt organizations and their top executives (For more details, see Anderson, Tax Clinic, "Form 990: More than Just a Tax Return," TTA, April 2004, p. 200).

Open for public inspection, Form 990 is commonly the first source of information for the news media, donors, grant applicants and others to learn about an exempt organization's activities and operations. Further, the IRS announced in December 2003 that the Sec. 4958 intermediate sanctions excise taxes, which penalize individuals and exempt organization managers who participate in "excess benefit" transactions, will apply automatically in certain situations.

Reporting Rules

Sec. 6033 requires all Sec. 501(a) tax exempt organizations to file Form 990 annually, stating specifically the items of gross income, receipts, disbursements and such other information prescribed by the form and regulations. Regs. Sec. 1.6033-2(a)(2)(ii)(g) provides that an exempt organization has to include on Form 990 a list of its officers, directors and trustees (and any person having responsibilities or powers similar to those of such individuals, commonly referred to as "key employees"). Per Form 990, Sec. 501(c)(3) organizations also have to attach a schedule showing the names and addresses of the five employees (if any) who received the greatest amount of annual compensation in excess of $50,000 and who otherwise are not listed as officers, directors, trustees or key employees.

Under Regs. Sec. 1.6033-2(a) (2)(ii)(h), an organization has to show on Form 990 the compensation and other payments made during the organization's annual accounting period (or during the calendar year ending within such period) that are includible in the gross income of each individual listed. As specified in the Form 990 instructions, the types of payments requiring disclosure (in Part V and Schedule A, Part I, of Form 990) include salary, bonus and severance pay...