- 98 -
B. Did Any of Petitioner’s Net Earnings Inure to W&H?
Petitioner points out that respondent has the burden of
proof, and contends that respondent has failed to carry this
burden.
Respondent acknowledges having the burden of proof, but
contends that this burden has been carried because it was shown
that W&H received “excessive and unreasonable compensation (and
other private benefit)” from petitioner.
Mailers argues that private inurement does not result from a
third-party contract for fair market value and contends that the
Contract was at “Market Rate”, especially in light of all the
facts and circumstances when the Contract was executed.
We agree with respondent’s conclusion.
An organization’s payment of reasonable compensation to an
insider for services performed for the organization would not
constitute inurement of net earnings,26 but payment of excessive
compensation would. United States v. Dykema, 666 F.2d 1096, 1101
(7th Cir. 1981); Unitary Mission Church v. Commissioner, 74 T.C.
507, 514 (1980), affd. without published opinion 647 F.2d 163 (2d
Cir. 1981). Whether the compensation in question is reasonable
26 Neither side suggests that we should examine the
statutory term “net earnings”, and so we do not. See People of
God Community v. Commissioner, 75 T.C. 127, 132 n.5 (1980); Alive
Fellowship of Harmonious Living v. Commissioner, T.C. Memo. 1984-
87 n.21; see also discussion in B. Hopkins, The Law of Tax-Exempt
Organizations, sec. 13.4 (6th ed. 1992).
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