The rebuttable presumption of reasonableness is a procedure that, once properly invoked, shifts the burden of proof regarding unreasonable compensation to the IRS for purposes of intermediate sanctions excise-tax penalties. Simply put, the presumption is established when: (1) the board or authorized committee, free of any conflict with the executive in question, determines the compensation arrangement prior to effectuating the arrangement, (2) the board or committee uses appropriate compensation comparability data in arriving at its decision and (3) the board or committee properly documents its decision in a timely manner.
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The IRS feels so strongly about the importance of these three factors, that documentation and disclosure of each factor is now part of the application used to obtain public charity status. Each public charity would benefit from following these factors and invoking the presumption whenever possible. This is especially true now that the IRS is more active in cracking down on excessive compensation arrangements within public charities as part of its executive compensation initiative.