The rebuttable presumption of reasonableness

IRC 4958 can impose excise tax on a disqualified person in an excess-benefit transaction and, when all statutory conditions are met, on an organization manager whose participation was knowing, willful, and not due to reasonable cause. A qualifying compensation arrangement may receive the rebuttable presumption of reasonableness if the regulatory requirements are satisfied.

1. An authorized body free of conflicts

The compensation arrangement must be approved in advance by an authorized body composed entirely of people who have no conflict of interest concerning it. Depending on applicable law and delegation, the authorized body may be the governing body, a committee, or another properly authorized party.

2. Appropriate comparability data

Before deciding, the authorized body must obtain and rely on appropriate data about compensation for comparable services under comparable circumstances. For an organization with annual gross receipts of less than $1 million, the regulation includes a special rule involving data from three comparable organizations in the same or similar communities for similar services. A PeerBasis report supplies one candidate dataset using role, NTEE sector, a disclosed filing-size measure, and geography; the board must verify that the data are appropriate for its facts.

3. Concurrent documentation

The authorized body must adequately document the basis concurrently. Under the regulation, records generally must be prepared by the later of the authorized body's next meeting or 60 days after final action, then reviewed and approved within a reasonable time. Form 990 Part VI, Line 15 asks Form 990 filers whether their process for top management and certain other officers or key employees included conflict-free review and approval, comparability data, and contemporaneous documentation; a “Yes” answer does not itself establish the §53.4958-6 presumption.

References: IRC 4958; 26 CFR 53.4958-6; IRS Form 990 Part VI, Line 15.