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Nonprofit Law/Is answer regarding severance pay from 2008 still valid?


Harvey, Is this answer given in 2008 still applicable?
> Nonprofit Law/Severance pay
> Expert: Harvey Mechanic - 10/15/2008
> It appears that your sources were addressing employees in for-profit
> businesses. This forum is only for IRC 501(c)(3) issues of public
> charities
> as I have explained in my profile. It is against IRS regulations for
> a 501
> (c)3 organization to give
> "severance pay" or any substantial gift to an outgoing employee
> unless it is required by a long-standing employment contract. Such
> payments would be a prohibited use of funds as the funds would not
> be used for the benefit of the organization or pursuant to the
> exempt purposes of the organization and even worse, may be
> considered by the IRS to be a distribution similar to a profit
> distribution to an insider.  Of course nonprofits, by definition,
> may not distribute profits or surpluses to its employees or other
> insiders.
> I do not know of any section of the code or regs that specifically
> addresses the issue of a gift to someone going out the door.  I did
> write in an earlier answer on that a severance
> payment is allowed to be given to someone going out the door if
> there was something of equal value given to the employer by the
> employee, such as the agreement to terminate an existing employment
> contract. I believe that, otherwise, the IRS would be able to apply
> the excess benefit transaction rules.  Please note that the IRS
> defines a gift to an employee as compensation. IRC 102(c) provides
> that generally gifts are not income. However, see pdf page 15 of
> which discusses gift tax
> law in connection to grants by a nonprofit organization to an
> individual. Therein: "Transfers made in connection with employment
> constitute gifts only in the extraordinary instance."
> The IRS could state that compensation additions for no additional
> work in return would come under the excess benefit transaction
> rules. The IRS could then assess Intermediate Sanctions which is
> usually in the form of Excise Tax on Excess Benefit Transactions.

Yes. That answer that I gave in 2008 is still applicable. Also note that the Internal Revenue Code has, in part, that the 501(c)(3) organization must be "operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes ...
That is the main issue that needs to be addressed, as a 501(c)(3) organization is supposed
to use its assets for charitable, educational or religious purposes.

In fact, the IRS defines a severance payment in the instructions to the Form 990 (which is the annual form used by exempt organizations to report their activities to the IRS) as "payment
made if the right to the payment is contingent solely upon the person's severance from service in specified circumstance, such as upon an involuntary separation of service.... Treat as a severance payment any payment to a listed person in satisfaction or settlement of a claim for wrongful termination or demotion."

Many of the payments that companies call "severance" payments are not, therefore, acknowledged as such by the IRS, but are treated, instead as gifts or addition to normal compensation for the year.

Harvey Mechanic, Attorney at Law

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic


DO NOT GIVE ME INFORMATION THAT YOU WANT KEPT CONFIDENTIAL. I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "" without the quotes and then add your search terms before hitting enter.


I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.


B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.

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