Tax Challenges for NPO Counsel: Excess Benefit Transactions for Executive Comp and Other Financial Dealings

Transcription

1 Presenting a live 110-minute teleconference with interactive Q&A Tax Challenges for NPO Counsel: Excess Benefit Transactions for Executive Comp and Other Financial Dealings Identifying Prohibited Transactions and Disqualified Persons, Reporting Improper Benefits, Maintaining the Exemption, and Avoiding Excise Taxes TUESDAY, JANUARY 7, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: David A. Levitt, Principal, Adler and Colvin, San Francisco Douglas Mancino, Partner, Hunton & Williams, Los Angeles The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial and enter your PIN when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 FOR LIVE EVENT ONLY For CLE credits, please let us know how many people are listening online by completing each of the following steps: Close the notification box In the chat box, type (1) your company name and (2) the number of attendees at your location Click the SEND button beside the box For CPE credits, attendees must listen throughout the program, including the Q & A session, and record verification codes in the corresponding spaces found on the CPE form, in order to qualify for full continuing education credits. Strafford is required to monitor attendance. If you have not printed out the CPE Form, please print it now (see Handouts tab in Conference Materials box on left-hand side of your computer screen). Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

4 FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: Click on the ^ symbol next to Conference Materials in the middle of the lefthand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

5 Excess Benefit Transactions for Executive Compensation and Other Financial Dealings January 7, 2014 David A. Levitt Adler & Colvin Douglas M. Mancino

6 Section 4958 Excess Benefit Transactions What is an excess benefit transaction? A transaction in which an economic benefit is provided by a (c)(3) or (c)(4) or (c)(29) organization to a disqualified person and the value of the economic benefit provided to the disqualified person exceeds the value of the benefit the organization receives in return 6

7 Section 4958 Excess Benefit Transactions Who is a disqualified person? - Substantial influence over affairs of the organization - Directors, officers (e.g., President, Treasurer) - Others? facts and circumstances - Family members - 35% controlled entities - 5 yr look-back period - Special rules for DAFs and SOs 7

8 Section 4958 Excess Benefit Transactions Who is not a disqualified person? An employee who is not highly compensated ($115,000 in 2014) and who is not - a trustee/director or executive officer - or a substantial contributor Section 501(c)(3) orgs Section 501(c)(4) orgs with respect to transactions with other 501(c)(4) orgs 8

9 Section 4958 Excess Benefit Transactions Examples of typical excess benefit transactions: Compensation arrangements Purchase or sale of assets Rental arrangements Must consider all benefits rec d by DP 9

10 Slide Intentionally Left Blank

11 Section 4958 Excess Benefit Transactions except certain disregarded benefits: nontaxable fringe benefits expense reimbursement through an accountable plan Initial contract exception 11 Must also consider indirect benefits Through controlled entity or intermediary

12 Section 4958 Automatic Excess Benefit Transactions Must clearly indicate intent to treat a benefit as compensation for services when the benefit is paid Written contemporaneous substantiation Reasonable cause exception Expense Reimbursement - Meeting Accountable Plan Requirements: Business connection Substantiation Return of amounts in excess of substantiated expenses 12

13 Section 4958 Excess Benefit Transactions Excise Taxes: On DP: 25% of excess benefit, plus correction; 200% if not corrected in time On organization managers who knowingly and willfully approved: 10% of excess benefit ($20,000 cap) Joint and several liability Reasonable cause exception Penalties can be doubled under section 6684 (and typically are) if act is not due to reasonable cause and is either a willful and flagrant act or person has previously been liable 13

14 Section 4958 Required Reporting Form 990 disclosure: Part IV and Schedule L Requirements for organization Form 990 disclosures Requirements for disqualified persons and organization managers Form 4720 Failure to file Form 4720 penalty Interest on late payment accrues from due date of

15 Section 4958 Excess Benefit Transactions Correcting the transaction: Place organization in a financial position not worse than that in which it would be if DP were dealing under the highest fiduciary standards Correction amount = excess benefit plus interest Cash and/or return of specific property 15

16 Section 4958 Excess Benefit Transactions Obtaining a Rebuttable Presumption Governing body or committee must: Approve transaction in advance Rely on appropriate comparability data Adequately document basis for decision, including comparability data obtained Body must be composed entirely of individuals with no conflict of interest 16

17 Slide Intentionally Left Blank

18 Section 4958 Excess Benefit Transactions Appropriate comparability data includes: Compensation paid by similarly situated organizations (both for-profit and tax-exempt) for functionally comparable positions Availability of services in same geographic area Current independent compensation surveys (or appraisals for property transfers) Actual written offers from similar orgs competing for individual s services 18

19 Section 4958 and Revocation of Tax Exempt Status IRS also can revoke tax exempt status will consider all relevant facts and circumstances, including: Size/scope of org s regular and ongoing activities Size/scope of excess benefit transaction(s) (EBTs) in relation to activities Multiple EBTs with one or more persons? Implemented safeguards reasonably calculated to prevent future EBTs? Has EBT been corrected? (Or has the org made good faith effort to seek correction?) 19

20 Section 4958 Special Rules for Donor Advised Funds EBT includes any grant, loan, compensation or similar payment Imposed on donor and donor advisor Automatic, i.e., makes no difference if payment was reasonable 20

21 Section 4958 Special Rules for Supporting Organizations EBT includes any grant, loan, compensation, or similar payment to Substantial contributor Family member Controlled entity Reasonableness is irrelevant 21

22 Statutes of Limitation Generally, 3 years starting with the filing of the organization s return A 6-year statute applies if nature and amount of potential EBT is not disclosed on Form 990 Answers to questions on Form 990 are not controlling And, a Form 1040, 4720 or 1120 filing is irrelevant 22

23 How Do EBT Examinations Get Started Routine audits of applicable organizations State charity regulator public findings prior to IRS involvement, e.g., Bishop Estate Newspaper reports, e.g., Rutherford case Whistle blowers 23

24 Slide Intentionally Left Blank

25 Planning for Audits Planning for an IRS audit commences when transactions with insiders are being considered Compliance with rebuttable presumption requirements Compliance with State s and organization s conflict of interest requirements Obtain quality appraisals and reasonableness opinions, before the transaction takes place or compensation is paid Church audit procedures do not apply to individuals, only to the church involved 25

26 Corrective Actions Identify policies and practices that can be improved More rigorous conflict of interest policies Expand number of independent directors on Board Adopt more specific committee charters Amend/update contracts, leases and employment agreements Consider other best practices for adoption Initiate corrective measures early rather than wait for IRS to require them as part of settlement 26

27 Once the Audit Starts Determine the interests of the organization and the disqualified person aligned or adverse? If aligned, sign joint defense and common interest agreements to protect attorney-client privilege and work product protection (e.g., for new appraisals or reasonableness opinions) If not aligned, consider separate counsel evaluate indemnification obligations of organization Evaluate criminal exposure Rutherford case is good example 27

28 IDR Process IRS obtains information through use of Information Document Requests Accounting data, such as general ledger in searchable form Expect to produce all relevant documents except those that are privileged Relevant documents and information may include items developed during period closed by statute of limitations 28

29 Audit Resolution ADR options Fast track mediation Technical advice Agreed cases No change letter or no change with advisories letter for organization Provide evidence of correction and pay nondeductible excise taxes by disqualified persons Unagreed cases 30-day letter and go to Appeals 90-day letter and go to court 29

30 Decided and Pending Cases Caracci v. Commissioner Dzina v. United States Approximately 25 cases filed in Tax Court 30

31 Concluding Observations and Questions 31