A Manager’s Potential Participation in an Excess Benefit Transaction

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Situation:                    I. M. Boss, the Executive Director of A Good Show, a 501(c)(3) organization, receives a total compensation package of $300,000.  The HR Director reported to the Executive Committee the results of his survey, indicating that for comparably sized organizations, Executive Director compensation packages ranged from $150,000 to $225,000.  Given the particularly vulnerable position in which the Board and organization found itself (the start of a significant building campaign), the Executive Committee decided that a $300,000 compensation package would best serve A Good Show.  The Executive Committee, consisting entirely of independent, non-conflicted persons, contemporaneously documented the results of its performance review, and the basis for the compensation package that it awarded to Mr. Boss.

Dilemma:                    A Good Show’s Controller, Amber Sue Cautious, expressed concern to the Executive Committee concerning Mr. Boss’ level of compensation, indicating that she thought his compensation package might constitute an “Excess Benefit”, inasmuch as it clearly fell outside the boundaries of compensation packages paid to similarly situated Executive Directors.  Furthermore, Amber indicated that she considered herself vulnerable to IRS penalties for knowingly participating in a possibly excess benefit transaction.

Rule:                           An “Excess Benefit Transaction” generally is a transaction in which an applicable tax-exempt organization provides to or for the use of a disqualified person an economic benefit, the value of which exceeds the value of the consideration received by the organization.  An excise tax equal to 10% of the excess benefit can be imposed on an organization manager who knowingly participates in the payment of an excess benefit transaction to a disqualified individual.

Answer:                      An organization manager (Amber) is not considered to have participated in an excess benefit transaction where she has opposed the transaction in a manner consistent with the fulfillment of the manager’s responsibilities to the organization.  Furthermore, an organization manager will not be considered as knowingly participating in an excess benefit transaction if she relies on the fact that the requirements for the rebuttable presumption of reasonableness test has been satisfied.  Finally, an organization manager’s participation is due to reasonable cause if she exercises reasonable responsibility on behalf of the organization with ordinary business care and prudence, which would also exempt the manager from penalty.

Significance                The Controller’s position in questionable transactions can be particularly troublesome to a conscientious and honest person.  Considering the fact that, although a Controller is often seen as a person in a position of significant influence and control, she is also in a position of having to accept the decisions of others more superior to her and act according to the dictates of those superior decisions.  In the above situation, she is confronted with the potentially legal dilemma of deciding whether she can appropriately participate in a transaction with questionable legal justification.  In many situations, a Controller will also need to wrestle with the similarly vexing question of whether she can live with her own conscience, when transactions whose ethical or moral implications violate her own standards.

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