Intermediate Sanctions

Revenue-sharing arrangements

The previous discussion of executive compensation suggests that compensation tied to organizational performance is important in rewarding executives. This type of compensation system for tax-exempt organizations has been problematic.

The original proposed regulations for intermediate sanctions dealt with this issue by stating that any benefit paid could only increase in proportion to the actual services being rendered. However, the final regulations are silent on this issue.

In general, the IRS feels that revenue-sharing transactions or percentage payments are a form of private inurement that may endanger the tax-exempt status of exempt organizations.

Let's examine the rules for revenue sharing in the private-inurement area…

Profit-sharing plans. This type of incentive offers definite advantages to organizations. These advantages have led the IRS to accept the fact that nonprofits can have profits (defined as excess of revenues over expenses), which in the context of non-profits is the fiscal budget less expenses. Any excess can be shared with employees. The IRS believes its role is to ensure that the plan is properly conceived and administered.

Percentage-based compensation. This form of compensation ties payment to the increase in the fiscal budget (similar to revenue in for-profits) of the organization in some manner. The IRS has approved this type of arrangement as long as the compensation is not unreasonable in magnitude and properly conceived. Under the proposed regulations, one of the relevant factors was whether there was a cap on the agreement.