January 15, 2014

Private Inurement: Excessive Compensation Issues

Question:

An American businessman runs a company as a ministry abroad, and also collects a salary from a U.S. mission agency for which he works 20-40 hours per week. Is there any risk of private inurement in this situation? (For a review of the concept of private inurement, follow this link: Private Inurement: Review and Application)

Answer:

The risk in this situation relates to potential excessive compensation by the mission agency: that the businessman is being paid more than is reasonable for the services he is performing. The IRS has laid out criteria for whether an organization has procedures set up to avoid private inurement. Form 1023, Sec. V, line 4 relates to reasonable compensation. The instructions for line 4g state, "'Reasonable compensation' is an amount that would ordinarily be paid by like organizations under like circumstances as of the date the compensation arrangement is made." Essentially, then, if his compensation has been set based on these guidelines, no private inurement has occurred.

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