Intent to Treat Benefit as Compensation

Note: This section doesn’t apply to the special definition of excess benefit transactions for certain transactions involving DAFs and supporting organizations. Please see sections II.C.8 and II.C.9 below for the special rules.

(1) An economic benefit isn’t treated as consideration for the performance of services

unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. See Treas. Reg. 53.49584(c)(1).

(2) An ATEO (or entity that it controls) is treated as clearly indicating its intent to

provide an economic benefit as compensation for services only if the organization provides written substantiation that’s contemporaneous with the transfer of the economic benefits under consideration. See Treas. Reg. 53.4958-4(c)(1).

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(3) Such intent to provide an economic benefit as compensation for services isn’t

required if the economic benefit is excluded from the disqualified person's gross income for income tax purposes based on Chapter 1, Subtitle A of the Internal Revenue Code provisions. Examples of these benefits include, but are not limited to, employer-provided health benefits and contributions to a qualified pension, profit-sharing, or stock bonus plan under Section 401(a), and benefits described in Sections 127 and 137. See Treas. Reg. 53.4958-4(c)(2).

(4) Contemporaneous Substantiation - An ATEO provides contemporaneous

written substantiation of its intent to provide an economic benefit as compensation if:

a. The ATEO reports the benefit as compensation on an original federal tax

information return (for example, Form W-2, Wage and Tax Statement, Form1099-MISC, Miscellaneous Information, Form 1099-NEC, Nonemployee Compensation, or Form 990, Return of Organization Exempt From Income Tax), or

b. The ATEO reports the benefit as compensation on an amended federal tax

information return filed before the IRS examination starts on the organization or the disqualified person for the taxable year in which the transaction occurred, or

c. The recipient disqualified person reports the benefit as income on an original

federal tax return (for example, Form 1040, U.S. Individual Income Tax Return), or

d. The recipient disqualified person reports the benefit as income on an

amended federal tax return filed before the earlier of (1) the start of an IRS audit of the ATEO or the disqualified person for the taxable year when the transaction occurred, or (2) the IRS’s first written documentation of a potential excess benefit transaction. See Treas. Reg. 53.4958-4(c)(3)(i)(A).

(5) Other Evidence - Other written contemporaneous evidence may be used to

demonstrate that the appropriate decision-making body, or an officer authorized to approve compensation, approved a transfer as compensation for services. This evidence includes, but is not limited to, the following:

a. An approved written employment contract executed on or before the date of

the transfer. See Treas. Reg. 53.4958-4(c)(3)(ii)(A).

b. Documentation satisfying the requirements of Treas. Reg. 53.4958-6(a)(3)

indicating that an authorized body approved the transfer as compensation for services on or before the date of transfer. See Treas. Reg. 53.49584(c)(3)(ii)(B).

c. Written evidence in existence on or before the due date of the applicable

federal return (including extensions but not amendments) where the ATEO has a reasonable belief that a benefit was nontaxable under Treas. Reg. 53.4958-4(c)(2). See Treas. Reg. 53.4958-4(c)(3)(ii)(C).

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(6) No Contemporaneous Written Substantiation - If an ATEO fails to provide

contemporaneous written substantiation of its intent to provide an economic benefit as compensation, any services provided by the disqualified person won’t be treated as provided in consideration for the economic benefit. See Treas. Reg 53.4958-4(c)(1). Therefore, the economic benefit may be treated as an excess benefit under Section 4958 unless the organization provided the economic benefit in exchange for consideration other than the performance of services.

(7) Reasonable Cause - The organization will be treated as having clearly indicated

its intent to provide an economic benefit as compensation for services if an ATEO’s failure to report an economic benefit as required under the Internal Revenue Code is due to reasonable cause. See Treas. Regs. 53.49584(c)(3)(i)(B) and 301.6724-1. To show reasonable cause, the ATEO must establish that:

a. Significant mitigating factors regarding its failure to report exist (See Treas.

Reg. 301.6724-1(b)), or

b. The failure arose from events beyond the organization’s control (See Treas.

Reg. 301.6724-1(c)). In addition, the organization must establish that it acted in a responsible manner both before and after the failure occurred. See Treas. Reg. 301.6724-1(d).

(8) Theft or Fraud - An economic benefit that a disqualified person obtains by theft or

fraud is never consideration for the performance of services. See Treas. Reg. 53.4958-4(c)(1).