Notes for Lawyers and Accountants
Reference Notes for Attorneys, Appraisers, Accountants and/or Other Service Providers

Selection of an Appropriate Professional or Survey Related to Intermediate Sanctions Reasonable Compensation Analyses

Due Care Protection - the "Knowing" Test
(iii) Reliance on professional advice. An organization manager's participation in a transaction is ordinarily not considered knowing within the meaning of section 4958(a)(2), even though the transaction is subsequently held to be an excess benefit transaction, to the extent that, after full disclosure of the factual situation to an appropriate professional, the organization manager relies on a reasoned written opinion of that professional with respect to elements of the transaction within the professional's expertise. For purposes of section 4958(a)(2) and this paragraph (d), a written opinion is reasoned even though it reaches a conclusion that is subsequently determined to be incorrect so long as the opinion addresses itself to the facts and the applicable standards. However, a written opinion is not reasoned if it does nothing more than recite the facts and express a conclusion. The absence of a written opinion of an appropriate professional with respect to a transaction shall not, by itself, however, give rise to any inference that an organization manager participated in the transaction knowingly. For purposes of this paragraph, appropriate professionals on whose written opinion an organization manager may rely, are limited to-- "

  1. Legal counsel, including in-house counsel;
  2. Certified public accountants or accounting firms with expertise regarding the relevant tax law matters; and
  3. Independent valuation experts who--
    1. Hold themselves out to the public as appraisers or compensation consultants;
    2. Perform the relevant valuations on a regular basis;
    3. Are qualified to make valuations of the type of property or services involved; and
    4. Include in the written opinion a certification that the requirements of paragraphs (d)(4)(iii)(C)(1) through (3) of this section are met.


Look for a Compensation Consultant That

  1. R holds a license for use (along with state Charities Bureaus and the IRS) to ERI's Nonprofit Comparables Assessor & Tax-Exempt Survey software databases; this software program is used by the IRS (17 subscriptions) and over a dozen state members of the National Association of State Charity Officials (NASCO), the association of state offices charged with oversight of charitable organizations and charitable solicitation in the United States.

    R derived from optically read and manually inputted data by US citizens (not outsourced for foreign pre input analysis and input)
    R does not "not include" favored organizations nor exclude Form 990EZ or PF (foundation data); reports/comparables (full data, all found)
    R utilizes ERI's proprietary industry NTEE assignments (as 60+% of IRS Master File has no assignments, nor do Form 990s report industry)
    R includes data from Private Foundations; when complete datasets for all reports logged/scanned in Ogden from Jan 2000 - Present.
    R contains both taxable and tax-exempt data – Assessor Series used by IRS National Office for reviews since 1989, often used in Federal Tax Court
    R features Form 990/PF/EZ retrievals of source documentation and Internet communications and interfaces, now US Patent holder
    R allows for custom grouping of comparables by organization size, zip code ranges/areas, industry
    R accesses comparables data updates on a monthly basis, as inputted, and before ERI testing
    R coordinates with PAQ's eDOT Skills Project to match similar executive functions and

  2. R utilizes PAQm and eDOT job analyses, in use since 1972 and accepted by the Courts, to identify functionally comparable executive positions
  3. R totally independent and provides no other services for tax exempt client organizations
  4. R written reports & opinions with written certifications from valuation experts with PhDs, ASA, CCPs fully certifying to (d)(4)(iii)('C)(1-3)
  5. R includes with all its written reports, one annual subscription to ERI's Nonprofit Comparables Assessor & Tax-Exempt Survey software , so that mid-year maintenance may be handled by the clients
  6. R safe harbor provider of facts & writers of opinion regarding compensation, never interfering with other/in-place service providers' client relationships
  7. R Univ Penn position is that it's problem of employee, not organization; if so organization tax or legal work might then be an "excess benefit" in itself if focus on an individual; a compensation study focused on future, competitive position, and performance metrics is an organizational need.
  8. R provide a complementary safe harbor preliminary report intended to satisfy needs of non economically serviced small organizations (< $1 million)
  9. R will not study or comment on past years plans, payments, or reporting; services only forward looking.
  10. R services are ready to go, reports available 24/7."

Compare Consulting Services

Law
Accounting
Other Independent Valuation Experts
Corporate Counsel
In-House Counsel
CPA
Tax Firms
Appraiser
Comp Consultant

£ Independent

£ Access to current database used by IRS

£ Uses defensible job function analyses method

£ Willing to accept controversy, client rejection

£ Able to produce an annual written opinion

£ Opinion reviewable by organization managers

£ Both taxable & tax-exempt comparables data

£ Can cost-effectively charge hours of analyses

£ Qualified as executive compensation expert

 

£ Independent

£ Access to current database used by IRS

£ Both taxable & tax-exempt comparables data

£ Uses defensible job function analyses method

£ Willing to accept controversy, client rejection

£ Able to produce an annual written opinion

£ Opinion reviewable by organization managers

£ Opinion reviewable by organization managers

£ Can cost-effectively charge hours of analyses

£ Wish to provide after Enron, Adelphia, and SEC call for consultant fiduciary responsibility

£ Independent

£ Access to current database used by IRS

£ Uses defensible job function analyses method

£ Willing to produce an annual written opinion

£ Opinion reviewable by organization managers

£ Holds services out to public as expert

£ Qualified as executive compensation expert

£ Performs these valuations on a regular basis

£ Performs no other services for organization

£ Both taxable & tax-exempt comparables data

£ Provides certification (d)(4)(iii)('C)(1-3)"


A Service Provider's # 2 Concern - Appropriate and Independent Data

(2) Appropriate data as to comparability--(i) In general. An authorized body has appropriate data as to comparability if, given the knowledge and expertise of its members, it has information sufficient to determine whether, under the standards set forth in 53.4958-4(b), the compensation arrangement in its entirety is reasonable or the property transfer is at fair market value. In the case of compensation, relevant information includes, but is not limited to, compensation levels paid by similarly situated organizations, both taxable and tax-exempt, for functionally comparable positions; the availability of similar services in the geographic area of the applicable tax-exempt organization; current compensation surveys compiled by independent firms; and actual written offers from similar institutions competing for the services of the disqualified person.

(ii) Special rule for compensation paid by small organizations. For organizations with annual gross receipts (including contributions) of less than $1 million reviewing compensation arrangements, the authorized body will be considered to have appropriate data as to comparability if it has data on compensation paid by three comparable organizations in the same or similar communities for similar services. No inference is intended with respect to whether circumstances falling outside this safe harbor will meet the requirement with respect to the collection of appropriate data.


Special Note for Attorneys
NYSE & Executive Compensation Reasonableness Opinions
It is reported that "the law firm of Vedder, Price had given the NYSE a reasonableness opinion. Levin stated that such opinions are typically given by compensation consultants, not law firms, so that at the time he found it highly unusual that Vedder, Price had issued the reasonableness opinion. He recalled telling Ashen (VP HR) that Proskauer didn't give reasonableness opinions." Page 90 - Report to the New York Stock Exchange on Investigation Relating to the Compensation of Richard A. Grasso, Dan K. Webb, Winston & Strawn LLP, December 15, 2003. Postscript: quote cited, SalaryExpert finds no evidence that an opinion was provided; this example illustrates, in "real life," attorneys' role and non-role and the commonly held belief by many, that attorneys and CPAs provide written business valuations.

Special Note for CPAs - see Circular No. 230 (Rev.7-2002) 10.33
Two States Are Worthy of Special Attention
Nonprofits are governed, in most part, by the applicable laws of the states in which they are formed (IRS tax-exemption is a separate matter)

New York Not-for-Profit Law requires
that compensation for executives be "reasonable" and "commensurate with services provided."

CA Nonprofit Integrity Act of 2004 requires
that charitable corporations and unincorporated associations must have their governing board or authorized board committee review and approve the compensation of the CEO or President, and the compensation of the CFO or Treasurer, to ensure that the payment is "just and reasonable."


If you are an organization's service provider described above and would wish to discuss any of these points and issues, please call SalaryExpert at (877) 799-3427 or visit any of the websites below and select an executive compensation

Path to Safety

www.erieri.com ** www.paq.com ** www.eri-nonprofit-salaries.com
** www.intermediate-sanctions.com ** www.salaryexpert.com