BP - Health Care Compliance Association

independence for board members in this context using a three-part
test, and all three parts must be met:
1. No compensation to the member as an officer or employee of any
related entity;
2. Total of all other payments to the member for the tax year from
any related entity do not exceed $10,000 (reasonable directors’
fees for board service and reimbursement of expenses under a plan
requiring documentation of amounts and business purpose do not
count toward the $10,000); and
3. Neither the member nor his/her family were directly or indirectly
involved in a transaction with any related entity that must be
reported on Schedule L (or would be reportable on Schedule L if
the related entity were a 501(c)(3) organization). 30
IRS compliance checks
The IRS, however, is doing more than just talk about the compensation
process – it is also examining developing trends among nonprofits
and building a database for more effective, focused audits. For
example, the report on the IRS Executive Compensation Initiative
noted among other things that:
n Over 30% of the organizations surveyed did not report compensation
correctly on Form 990;
n Form 990 reporting requirements for executive compensation
needed clarification (which the IRS has since addressed);
n The IRS should revisit (i.e., expand) the circumstances under which
it assesses penalties for filing an incomplete Form 990;
n Following the rebuttable presumption procedure to establish executive
compensation levels is a common practice, though only 51%
of organizations surveyed addressed all three requirements for the
presumption and many organizations may have difficulty in understanding,
applying or meeting all of the requirements;
n Future compliance initiatives should focus on the correlation
between meeting the rebuttable presumption requirements and reasonableness
of compensation (including 5% of organizations where
the affected person did not leave the meeting prior to a vote on his
or her own compensation); and
n Loans to insiders present a high potential for abuse (followed by
excessive compensation and personal use of exempt organization assets
– likely a reference in part to employer-provided cell phones). 31
responses (to February 6, 2009). With the substantial increase in
disclosure requirements for executive compensation in the new Form
990 (described above), it is also likely that the IRS will continue to
use similar compliance checks to find potentially abusive or excessive
compensation arrangements among nonprofits nationally, including in
health care. Those compliance efforts at the IRS likely will be aided to
some extent by whistleblowers, who are able to recover a bounty of up
to 30% of the taxes and penalties collected by the IRS in cases over $2
million, or 15% in smaller cases. 32 n
Part 2 of this article will appear in the April issue of Compliance Today
and will address comparability data and compensation plan design.
1 See J. Carlson, “Healthcare Nears 10-year Record for Mass Layoffs,” ModernHealthcare.com (Nov. 21, 2008)
(mass layoffs are more than 50 employees from a single employer).
2 See J. Greene, “Beaumont Hospitals to lay off employees, cut millions from 2009 budget,” Crain’s Detroit Business
(Nov. 17, 2008).
3 The November 19, 2008 news release is available on the Committee’s website at http://finance.senate.gov/press/
Bpress/2008press/prb111908e.pdf.
4 See Notice 2008-94, 2008-44 I.R.B. 10.
5 15 U.S.C. § 7243.
6 G. Griffith and J. King: “The dollars and sense of executive compensation,” Compliance Today p. 20 (HCCA,
April 2007).
7 Press Release, “IRS report on non-profits’ executive compensation” (March 1, 2007), available online at http://
finance.senate.gov/press/Gpress/2007/prg030107.pdf.
8 Remarks of Steven T. Miller, Commissioner TEGE (IRS), Western Conference on Tax-exempt Organizations
(Nov. 20, 2008), available online at http://www.irs.gov/pub/irs-tege/stm_loyolagovernance_112008.pdf.
9 F. Stokeld, “IRS Interest in EO Executive Compensation Strong, Official Says,” Tax Notes Today, 2008 TNT
226-3 (Nov. 21, 2008).
10 Two such websites are http://www.vault.com and http://swz.salary.com/.
11 SEC filings are available on the EDGAR system at http://www.sec.gov/edgar.shtml.
12 Forms 990 can be accessed free of charge for three years on www.guidestar.org, or for all available years with a
paid subscription.
13 Form 990 (2008), Schedule J, Part II, available at www.irs.gov/charities/article/0,,id=185561,00.html.
14 Form 990 (2008), Part VI, Line 15a & b, Schedule J, Part I, Line 3 and Schedule L, Part II, Column (f).
15 Form 990 (2008), Schedule J, Part I, Line 8; see also 26 C.F.R. § 53.4958-4(a)(3).
16 Copies of the questionnaire and IRS report are available online at http://www.irs.gov/charities/charitable/
article/0,,id=172267,00.html.
17 See F. Stokeld, “IRS to Ask About Internal Controls During EO Exams,” Tax Notes Today, 2008 TNT 226-3
(Nov. 21, 2008).
18 See Griffith & King, supra; Revised Model Nonprofit Corporation Act, § 8.30(a)(1) (1987) (the “Model Act”).
19 Model Act, § 8.30(b).
20 See, e.g., J. Glater & V. Bajaj, “Coumo Seeks Recovery of Bonuses at A.I.G.,” N.Y. Times (Oct. 16, 2008) (demand
for repayment of multimillion dollar bonuses citing “unwarranted and outrageous expenditures” including
“a lavish golf outing and an overseas hunting trip that cost nearly $100,000”); State v. Anclote Manor Hospital,
566 So. 2d 296 (Fla. Dist. Ct. App. 1990), rev. den., 576 So. 2d 296 (Fla. 1991) (suit to require directors of a
nonprofit to disgorge the profits from a self-dealing transaction); 2008 Fla. Stat. § 617.2003; E. Brody, “A Taxing
Time for the Bishop Estate: What Is the I.R.S. Role in Charity Governance?”
21 University of Hawaii Law Review 537 (Winter 1999) (removal and repayment of excessive compensation allegedly
paid to trustees of nonprofit school).
21 IRS Exempt Organizations Division Work Plan (FY2009), p. 20, available online at www.irs.gov/pub/irs-tege/
finalannualrptworkplan11_25_08.pdf.
22 26 C.F.R. § 53.4958-1(c)(4)(iv).
23 26 C.F.R. § 53.4958-6(c)(3)(i) & (ii).
24 26 C.F.R. § 53.4958-4(a)(3)(ii) & -6(d).
25 26 C.F.R. § 53.4958-6(c)(3)(ii).
26 See, e.g., Choate Construction Co. v. Commissioner, 74 T.C.M. (CCH) 1092 (1992); Medina v. Commissioner,
46 T.C.M. (CCH) 76 (1983); 26 C.F.R. § 53.4958-6(c)(2)(i). In one exempt organization case where such
arguments were made they were rejected for lack of substantiation. See Northern Illinois College of Optometry v.
Commissioner, 2 T.C.M. (CCH) 664 (1943).
27 26 C.F.R. § 53.4958-6(e).
28 The revised good governance guidelines are available on the IRS website at http://www.irs.gov/pub/irs-tege/
governance_practices.pdf. For a summary of the good governance guidelines and other considerations for good
governance please see the Commentary at http://www.jonesday.com/pubs/pubs_detail.aspx?pubID=S4013.
29 26 C.F.R. § 53.4958-6(c)(1)(iii) and 26 C.F.R. § 53.4958-3(b)(1).
30 Form 990, Instructions for Core Form, Part VI, Line 1.
31 The full report is available online at http://www.irs.gov/pub/irs-tege/exec._comp._final.pdf.
32 26 U.S.C. § 7623; 26 C.F.R. § 301.7623-1(c).
A report on the executive compensation phase of the Hospital Project
that started in May 2006 is expected to be released in early 2009.
Another compensation review project involving approximately 400
colleges and universities, including some academic medical centers, is
currently in progress, following an extension of the due date for initial
Health Care Compliance Association • 888-580-8373 • www.hcca-info.org
37
March 2009