The Pension Protection Act of 2006 (PPA) not only doubles the excise tax on excess benefit transactions, but it also creates new rules that apply to situations where no abuse may be present. One such situation applies to nonprofit organizations that are classified as donor advised funds. Where a nonprofit donor-advised fund pays compensation to a donor or someone related to the donor who advises the fund, that payment is automatically considered an excess benefit transaction. The entire amount of compensation will be treated as an excess benefit, regardless of the value of the service rendered. For example, under this automatic excess benefit transaction rule, even though a donor’s family member may provide reasonable necessary personal services that are necessary to accomplish the nonprofit’s mission to a donor-advised fund, the entire amount of compensation paid to the donor’s family member can still be considered an excess benefit transaction. This subjects the unsuspecting family member to excise taxes.
Similarly, expense reimbursements to any family member of a donor (even if related to the benefit of the nonprofit) will be considered an automatic excess benefit transaction. The PPA’s penalty provisions impose much stricter rules on donor-advised funds than on private foundations. Of particular importance, however, is that a donor, as well as his or her family members and related parties, are now subject to the excise tax penalties.
