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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #9 - Compensation Arrangement
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Dr. Evan Lean was promoted on March 1, 2003, to dean of the School of Business at Premier University, a tax-exempt organization. As dean, he has authority over a substantial portion of the organizationís capital expenditures, operating budget, and employee compensation. Dr. Leanís new compensation package resulted from a long, tough, negotiation process. His total compensation is on the highest end of what an outside compensation consultant concluded was reasonable. The compensation committee of the board, a committee totally independent from Dr. Lean, however, did use the services of one of the best compensation consultants in the area. The committee also approved the compensation package in advance of the offer and timely documented the approval in their committeeís minutes. Although the compensation was high, the consultant concluded that Dr. Leanís strong credentials justified the offer at the top end of compensation for similar positions in the geographic area.

Dr. Lean now has been notified that Sony just awarded the School of Business a new $25,000 entertainment system. Although the entertainment system was being donated to the School of Business on May 1, 2003, the award resulted from a technical paper that Dr. Lean presented on the consumer market opportunities for electronic manufacturers at an international conference sponsored by Sony in June of 2002, before his promotion to dean. Dr. Lean was quick to contact Jim Bond, President of Premier, to make sure that he was aware of the award. Dr. Lean argued that although the entertainment system was being donated to the School of Business, he had really earned it through his presentation at the conference and many long hours preparing for it. Dr. Lean argued that, since he really earned the system in 2002, the additional compensation resulting from the transfer should not be considered part of his deanís compensation package, which already was at the highest, reasonable level. In making this argument, Dr. Lean recognized that for individual income tax purposes the $25,000 of additional compensation would have to be reported on his Form W-2 for 2003.

Not wanting to start out on the wrong foot with Dr. Lean, President Bond approved the transfer with a note to the payroll department to add the $25,000 market value to Dr. Leanís 2003 Form W-2. President Bond was happy to agree with Dr. Leanís position, however, that since the award related to Dr. Leanís work in the prior year, the $25,000, for the Universityís purposes, should not really be viewed as part of his deanís compensation package. This conclusion allowed President Bond to avoid having to go back to the compensation committee for further approvals. President Bond was barely able to get Dr. Leanís compensation package as dean approved because of its size, and he feared that going back to the committee so soon with a request for an additional increase would almost certainly be rejected.

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