The IRS Director of Exempt Organizations, Lois Lerner, recently conveyed that the IRS will be looking into the results of its May compensation survey for executives of colleges and universities.  More than one-half of the colleges and universities surveyed reported that they followed the procedures set forth in Treasury Regulation 53.4958-6 to establish a rebuttable presumption that executive compensation is reasonable (such procedures are discussed in a prior blog entry).  The IRS will now be digging further to determine whether the colleges and universities precisely satisfied these procedures, with a particular focus on whether peer compensation is truly comparable and the decision was properly documented.   It is my belief the IRS will continue to focus on executive compensation and will not limit its inquiries to colleges and universities.  Therefore, it is strongly recommended that your charity precisely follow the procedures set forth in the Regulations now to protect the compensation from scrutiny.

   Milton S. Hershey, confectioner, philanthropist, and founder of The Hershey Chocolate Company.

A self-proclaimed watchdog group, Protect The Hersheys’ Children, Inc., recently sent two letters to Congress and the Pennsylvania Attorney General’s office alleging board compensation abuse and misuse of funds at the Milton Hershey School Trust (the “Trust”) and the Milton Hershey School, both Section 501(c)(3) organizations.  The alleged compensation abuses relate to the purported payment of excessive compensation to the Directors of the Hershey Trust Company, a wholly-owned for profit subsidiary of the Trust, reported to total $1,118,146 for the part time work of ten directors.  Among the allegations regarding the misuse of funds include the Trust’s purchase of an insolvent luxury golf course. 

The Trust is now forced to defend its decisions in the “court of public opinion.”  In addition, it is quite likely that the IRS and Pennsylvania Attorney General will initiate investigations.  It is now up to the Trust to demonstrate there has been no wrong-doing.  In our experience, a charity’s ability to defend its decisions before the IRS and Attorney General will depend in part on its ability to provide adequate documentation regarding its decision making process.   Keeping detailed minutes and records to support each decision is a cumbersome process, however, every board (regardless of size) should ensure such a process is in place.  We will continue to follow the Hershey Trust allegations.  In the meantime, we encourage boards to consider whether it could support its decisions, often times several months or years in the future, with adequate documentation.

The IRS has announced a free webinar that will provide a fast-paced overview by two experienced IRS agents on what new tax-exempts need to do (and what they will want to avoid) to follow IRS rules and keep their tax status in good standing in years to come. This 45-minute session will be held November 18 at 2 p.m. EST.  If you are a newly formed 501(c)(3) organization or an organization that wants a refresher, you can register and start off right by clicking here.

In Rolfs v. Commissioner, 135 T.C. No. 24, the taxpayers donated the lake house they had been living in to an exempt organization but were denied any charitable deduction.  The grounds for the denial were that the lake house’s value did not exceed the benefit the taxpayers received in return.  That return benefit was valued at $10,000.  The lake house was a “typical, albeit modest” lake house.  So, how in the world could you donate such a house and have it not be worth at least $10,000?  (more…)

The IRS recently announced that it has revised IRS Publication 557, Tax-Exempt Status for Your Organization.  Publication 557 provides guidance regarding organizational issues, on-going filing obligations, and other tax rules impacting exempt organizations.  The Publication is an important resource for any tax-exempt organization and it is advisable that management review the Publication to help analyze whether the organization is complying with the tax law.