Issue

Many institutions honor long-time board members with “gifts” that could be deemed compensation for tax purposes.

Situation

Saltwater Christian College (SCC), a public charity under I.R.C. section 501(c)(3) (and I.R.C. section 170(b)(1)(A)(ii)), has provided a board member and their spouse with a “gift” trip for 20 years of service on the board of directors. SCC sponsors a “Footsteps of the Apostle Paul” cruise each year where professors and other leaders act as tour guides through the Mediterranean Sea. This “gift cruise” was valued at $16,500 for the couple. After the cruise, SCC’s CFO calls to ask how this should be reported on Form 990 – if at all.

We respond that the value of the “gift cruise” should be reported on Form 1099-MISC, Box 7 to the board member (taxable) and in Form 990, Part VII, Section A, Column D. Ultimately, this amount would be considered payment/compensation for board services. Not reporting this compensation would result in an “excess benefit transaction” under I.R.C. section 4958 and generally trigger the excise taxes thereto. There may be legal and/or public relations issues regarding compensating some board members and not compensating others – but that is beyond the accounting purview.

Potentially, this treatment could be different (non-taxable) if the board member and their spouse have a bona fide business/ministry purpose for being on the cruise as volunteers. However, we caution the CC folks to beware of the “luxury water travel” limitations stipulated by the IRS (see below).

Rules

From Form 990 instructions glossary:
Compensation – Unless otherwise provided, all forms of cash and noncash payments or benefits provided in exchange for services, including salary and wages, bonuses, severance payments, deferred payments, retirement benefits, fringe benefits, and other financial arrangements or transactions such as personal vehicles, meals, housing, personal and family educational benefits, below-market loans, payment of personal or family travel, entertainment, and personal use of the organization’s property. Compensation includes payments and other benefits provided to both employees and independent contractors in exchange for services. See also deferred compensation, nonqualified deferred compensation, and reportable compensation.

Reportable compensation – In general, the aggregate compensation that is reported (or required to be reported, if greater) on Form W-2, box 1 or 5 (whichever amount is greater); and/or Form 1099-MISC, box 7, for the calendar year ending with or within the organization’s tax year. If the amount reported on Form W-2, box 5 is zero, or less than the amount in Form W-2, box 1, such as for certain clergy and religious workers not subject to social security and Medicare taxes as employees, reportable compensation includes the box 1 amount rather than the box 5 amount. For foreign persons who receive U.S. source income, reportable compensation includes the amount reportable on Form 1042-S, box 2. For persons for whom compensation reporting on Form W-2, 1099-MISC, or 1042-S is not required (certain foreign persons, institutional trustees, and persons whose compensation was below the $600 reporting threshold for Form 1099-MISC), reportable compensation includes the total value of the compensation paid in the form of cash or property during the calendar year ending with or within the organization’s tax year.

From Form 990 instructions, Appendix G:
An excess benefit transaction generally is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the applicable tax-exempt organization exceeds the value of the consideration (including the performance of services) received for providing the benefit, but see the special rules below for donor advised funds and supporting organizations. An excess benefit transaction also can occur when a disqualified person embezzles from the exempt organization.

From Treasury Regulation 31.3401(c)-1(f):
All classes or grades of employees are included within the relationship of employer and employee. Thus, superintendents, managers, and other supervisory personnel are employees. Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is not considered to be an employee of the corporation. A director of a corporation in his capacity as such is not an employee of the corporation. (Underline added.)

From Form 1099-MISC instructions:
Directors’ fees. You must report directors’ fees and other remuneration, including payments made after retirement, on Form 1099-MISC in the year paid. Report them in box 7.

From IRS Publication 463:
Luxury Water Travel
If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a daily limit on the amount you can deduct. The limit is twice the highest federal per diem rate allowable at the time of your travel. (Generally, the federal per diem is the amount paid to federal government employ-ees for daily living expenses when they travel away from home, but in the United States, for business purposes.)

Cruise Ships
You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise ships. All ships that sail are considered cruise ships.
You can deduct these expenses only if all of the following requirements are met.

The convention, seminar, or meeting is directly related to your trade or business.
The cruise ship is a vessel registered in the United States.
All of the cruise ship’s ports of call are in the United States or in possessions of the United States.
You attach to your return a written statement signed by you that includes information about:
The total days of the trip (not including the days of transportation to and from the cruise ship port),
The number of hours each day that you devoted to scheduled business activities, and
A program of the scheduled business activities of the meeting.

Bottom Line

There is a lot going on in this edition of “Tax Tips”! Any “compensation” or “gifts” to board members should be carefully accounted for in order to ensure that you are complying with the applicable tax laws. It makes sense to consult with your qualified, knowledgeable tax advocates in order to “get it right”.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.