Resources: Intermediate Sanctions
Stanford is subject to IRS regulations that prohibit private inurement--the transfer of assets to a person or other entity in excess of value received from that person or entity (known as an excess benefit transaction (EBT).
Section 4958 contains provisions to tax EBTs when provided to what is known as a disqualified person (DP). The DP is subject to a 25% tax on the EBT and must return the entire value of the EBT to Stanford within a reasonable period after the EBT determination. If this is not done, an additional 200% tax on the EBT is levied. An additional 10% tax on the EBT is due from a manager who allowed the EBT to occur up to $10,000 per occurrence. The 25% tax may be refunded by the IRS if the EBT is corrected quickly and there is a reasonable cause for the error.
A DP is any person who was at any time in the five year period ending on the date of the EBT, in a position to exercise substantial influence over the affairs of the organization. These include members of the Board of Trustees, officers having the ultimate responsibility for implementing the decisions of the Board and supervising the management of the organization and those who manage finances. Other factors that may determine that a person is a DP include significant donors, persons whose compensation depends on revenues from the area they control, those with the ability to control capital budgets, operating budgets or employee compensation, the manager of a discrete part of the organization which represents substantial assets and revenues. Factors that may determine that a person is not a DP include those who do not participate in management decisions, outside professional advisors and those receiving less than $80,000 in annual compensation.
Section 4958 requires that compensation paid to a DP must be reasonable. Compensation is defined comprehensively to include cash, deferred compensation, bonuses, severance and fringe benefits.
The law provides that compensation will be deemed reasonable if it is approved by a compensation committee of the Board, composed entirely of individuals who have no conflict of interest. The committee must have obtained and relied upon appropriate comparable data and its decisions must be adequately documented. Such data may come from published sources or from private surveys done by competent analysts.
All aspects of the DP's compensation must be reviewed by the Compensation Committee and approved in order to receive the “safe harbor” protection of Section 4958. If an item is not reviewed and not reported on the DP's W-2 or the University Form 990, it may be considered an automatic EBT and subject to the 25% tax.
Stanford managers should identify prospective DP's and verify with the Compensation Office in Human Resources that their compensation is being reviewed by the Compensation Committee of the Board of Trustees. Managers should also be particularly careful when dealing with firms in which a member of the Board of Trustees, a significant donor, an officer or other DP has a material financial interest. Wherever possible, transactions should be based upon published fee structures available to a broad range of customers.
Disclaimer: Stanford University does not offer personal tax advice. Nothing on this web site shall be construed as the offering of tax advice. Stanford recommends seeking professional tax counsel whenever necessary.