The United States Tax Court ruled that the wife of the founder of a medical missions charity had received an excess benefit from the charity subjecting her to a “first-tier” penalty of 25 percent of the amount of the excess benefit, and an additional “second-tier” tax of 200 percent of the excess since it had not been returned to the charity.
Note. It is important for church leaders to be familiar with this case since excess benefit transactions are common among churches and expose ministers and possibly others to significant penalties under section 4958 of the tax code. These penalties are assessed against the minister, not the church.
Background
In 2000, a medical missions charity (the “charity”) applied to the Internal Revenue Service (IRS) for recognition of tax-exempt status. In its application, it described its exempt purpose as the operation of a clinic to provide medical examination and treatment services for individuals unable to afford such services. The IRS granted the exemption.
The founder of the charity served as its president from its inception through 2014. His wife (the “petitioner”) held various positions with the charity. In 2000, she was listed as a member of its board of directors. In an annual report filed in October 2012 with the state of Michigan, she was listed as its secretary and treasurer. She was listed as its secretary and as a director on its Form 990 for 2013, and as its secretary on its Form 990 for 2014.
She regularly attended the charity’s board meetings during 2013 and 2014. Neither she nor her husband had an employment contract with the charity in either year.
On its Form 990 (the annual federal information return for tax-exempt charities) for 2013, the charity reported providing the petitioner, in her capacity as “Secretary/Director,” compensation of $21,000. The charity also reported providing compensation of $21,000 to her husband in his capacity as “President/Director.” The charity issued Forms W-2 for 2013, reporting that it had paid the petitioner and her husband $26,000 each. They reported these amounts as wages on a jointly filed Form 1040, U.S. Individual Income Tax Return.
On its Form 990 for 2014, the charity reported that the petitioner and her husband each received “reportable compensation from the organization” of zero. The charity issued neither of them a Form W-2 for 2014. The charity recorded no officer or director salaries in its general ledger for 2014. There is no indication in the minutes of its board meetings that the charity intended to provide compensation to the wife during 2014.
However, during 2014, the charity issued the wife biweekly checks in the amount of $1,000. At trial, she testified that this “was my paycheck because [my husband] put me on [the charity’s] payroll.” These checks totaled $27,000 during 2014.
Also during 2014, the charity issued the wife monthly checks in amounts ranging from $6,000 to $10,000. They totaled $88,000 for the year.
In October 2015, the IRS commenced an examination of the charity’s records. The agency determined the wife received excess benefits from the charity in the amount of $115,000, all consisting of the checks she had received. The IRS determined that the checks were used to defray the personal living expenses of the wife’s family (husband, wife, and eight children).
In 2018 the IRS issued the wife a notice of deficiency for 2014. This notice determined a first-tier excise tax of $28,750 and a second-tier excise tax of $230,000 under section 4958(b) of the federal tax code. The second-tier tax, computed as 200 percent of the excess benefit, is imposed by law when a disqualified person fails to correct the excess benefit transaction in a timely fashion.
The wife sought relief in the Tax Court. Later that year, the IRS issued the charity a determination letter revoking its tax-exempt status retroactively to January 1, 2014. The IRS determined that the charity had failed to establish that “no part of [its] earnings inures to the benefit of any private shareholders or individuals” or that it was “operating exclusively for an exempt purpose.”
The wife and charity appealed the IRS determinations to the Tax Court. However, the charity declined to pursue its challenge to the revocation of its tax-exempt status and so the Court dismissed its appeal for a “failure to prosecute.”
The Tax Court applies Section 4958
Section 4958 imposes an excise tax on a “disqualified person” who engages in an “excess benefit transaction” with a tax-exempt charity. Section 4958(c)(1)(A) defines an “excess benefit transaction” to mean
any 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 if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.
An “applicable tax-exempt organization” is an organization described in tax code section 501(c)(3), including churches and other religious organizations.
Section 4958(a)(1) imposes on each excess benefit transaction an excise tax “equal to 25 percent of the excess benefit” and provides that this tax “shall be paid by any disqualified person . . . with respect to such transaction.” If the excess benefit transaction is not corrected in timely fashion, the disqualified person is liable for a second-tier tax equal to 200 percent of the excess benefit.
The Court stressed that Congress enacted section 4958 not to collect revenue but to deter insiders from influencing their organizations in order to receive unreasonable compensation.
Disqualified persons
Intermediate sanctions only apply to “disqualified persons,” which include:
- Voting members of the governing body, presidents, chief executive officers, chief operating officers, treasurers, and chief financial officers. The category of “treasurers and chief financial officers” includes “any person who, regardless of title, has ultimate responsibility for managing the finances of the organization.” A person who serves as treasurer “has this ultimate responsibility unless the person demonstrates otherwise.”
- Family members of disqualified persons, down to the level of great-grandchildren, are disqualified persons with respect to a charity.
- A “first-tier” penalty of 25 percent of the amount of the excess benefit.
- A “second-tier” penalty of 200 percent of the amount of the excess benefit. The second-tier penalty is not discretionary with the IRS.
- The organization made auto loan payments on vehicles used solely by the officers.
- The organization did not maintain any documentation to show the business use of the vehicles used by the officers. No mileage logs were provided with specific dates, miles driven, and locations of travel, and no receipts or business purpose for the use of the vehicles were provided.
- The officers used the organization’s corporate credit cards for personal purchases. The amounts were not repaid by the officers and were not reported as compensation.
- The organization made no-interest loans to the CEO that were not reported as compensation. There was no contemporaneous documentation of the loan, nor were there any security or repayment provisions.
The Tax Court concluded that the wife was a disqualified person because she served as a director and executive officer of the charity, and she was the spouse of a disqualified person (the president).
Excess benefit transactions
The term “excess benefit transaction” is defined by section 4958 as any transaction in which an economic benefit is provided by a tax-exempt organization to a “disqualified person” if the value of the economic benefit provided exceeds the value of the services received for providing the benefit.
Section 4958 further provides that an economic benefit is not treated as consideration for the performance of services unless the charity clearly indicates its intent to so treat it. And, a charity
is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefit at issue. If an organization fails to provide this contemporaneous substantiation, any services provided by the disqualified person will not be treated as provided in consideration for the economic benefit.
The “contemporaneous substantiation” requirement can be satisfied in two ways: by timely reporting or by “other written contemporaneous evidence.”
Timely reporting occurs if the organization reports a payment to the disqualified person as compensation on a Form W-2 or a Form 990 filed before the IRS commences its examination. Timely reporting also occurs if the disqualified person reports the payment as income on an original or amended Form 1040 filed before the earlier of the date on which the IRS commences its examination or supplies written documentation of a potential excess benefit transaction.
The “contemporaneous substantiation” requirement can also be satisfied by “other written contemporaneous evidence” showing that “the appropriate decision-making body or an officer authorized to approve compensation approved a transfer as compensation for services in accordance with established procedures.”
Such evidence includes “an approved written employment contract executed on or before the date of the transfer,” other documentation showing that “an authorized body contemporaneously approved the transfer as compensation for services,” and contemporaneous written evidence establishing “a reasonable belief by the . . . organization that a benefit was a nontaxable benefit.”
The Tax Court’s conclusion
During 2014, the wife received biweekly checks totaling $27,000, and monthly certified checks totaling $88,000, for a total of $115,000. If these checks constituted compensation for services provided by the wife to the charity, and were contemporaneously substantiated as noted above, then there would be no excess benefit transaction, since section 4958 provides that an economic benefit is not treated as consideration for the performance of services unless the charity clearly indicates its intent to so treat it.
Reviewing the facts surrounding the wife’s case, the Tax Court concluded:
[The petitioner] supplied no contemporaneous substantiation to show that [the charity] “clearly indicated its intent” to treat the $27,000, much less the $88,000, as compensation for her services. The charity did not report any of those payments as compensation to petitioner on a Form W-2, and petitioner did not report any of those payments as income on her Form 1040. . . . Nor did petitioner supply any other type of contemporaneous substantiation. Specifically, she offered no evidence (such as an employment contract or minutes of board meetings) showing that “the appropriate decision-making body or an officer authorized to approve compensation approved . . . her payments as compensation for services in accordance with established procedures.” In the absence of contemporaneous substantiation, “any services provided by the disqualified person will not be treated as provided in consideration for the economic benefit.” Petitioner is thus foreclosed from contending that the $115,000 she received was not an “excess benefit” because paid in consideration of her performance of services (emphasis added).
Substantial penalties
Based on the Tax Court’s conclusion that the wife was a disqualified person, it then calculated penalties for her.
First-tier tax of 25 percent
Under Section 4958(a), a disqualified person who receives an excess benefit is penalized through a first-tier tax equal to 25 percent of the excess benefit. Based on $115,000 of excess benefits for the wife, the first-tier tax equaled $28,750.
Second-tier tax of 200 percent
Under Section 4958(b), if a first-tier tax is imposed on the excess benefit received by a disqualified person “and the excess benefit involved in such transaction is not corrected within the taxable period,” then, by law, a second-tier tax equal to 200 percent of the excess benefit must be imposed on the disqualified person.
A failure to correct
The Tax Court concluded the wife never corrected the excess benefit transaction. “Correction” means “undoing the excess benefit to the extent possible, and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards,” according to Section 4958.
The Tax Court then said:
[The] “taxable period” during which correction must occur (assuming the tax has not yet been assessed) is the period beginning with the date of the transaction and ending on “the date of mailing a notice of deficiency with respect to the tax imposed by section (a)(1)” [i.e., the 25-percent tax]. . . . The “taxable period” during which petitioner was obligated to make correction “thus closed on August 13, 2018, when the notice of deficiency was mailed” [to her by the IRS].
The Tax Court stated:
Petitioner did not correct the excess benefit transactions within the “taxable period.” There is no evidence that she returned to the charity, at any time, any portion of the $115,000 at issue. Nor did she show that she made any effort to place the charity “in a financial position not worse than that in which it would be if . . . she were dealing [with it] under the highest fiduciary standards.” We accordingly hold that she is liable for a second-tier tax of $230,000 (200% × $115,000).
The availability of abatement
The Tax Court also noted the ability for a disqualified person to abate both the first- and second-tier taxes.
To abate the second-tier tax, which helps further explain the abatement process for the first-tier tax (see below), the Tax Court said:
Section 4961(a) affords a disqualified person an opportunity to avoid the second-tier tax. It provides that, if the taxable event is corrected “during the correction period,” the second-tier tax “shall not be assessed, and if assessed the assessment shall be abated, and if collected shall be credited or refunded as an overpayment.” For this purpose, the “correction period” means, with respect to any taxable event:
the period beginning on the date on which such event occurs and ending 90 days after the date of mailing under section 6212(a) of a notice of deficiency with respect to the second tier tax imposed on such taxable event, extended by—
(A) any period in which a deficiency cannot be assessed under section 6213(a), and
(B) any other period which the Secretary [of the Treasury] determines is reasonable and necessary to bring about correction of the taxable event.
It then added:
Under these rules, the “correction period” will remain open at least until this Court’s decision has become final following any appeal. Section 4961(b) grants us jurisdiction “to conduct any necessary supplemental proceeding to determine whether the taxable event was corrected during the correction period.” Any such proceeding must begin within 90 days “after the last day of the correction period.” Petitioner thus retains the opportunity to avoid assessment and collection of the second-tier tax.
The Tax Court noted that section 4962 provides for non-assessment or abatement of the first-tier tax (25 percent) in certain circumstances, too. The court explained:
To qualify for this treatment, the disqualified person must establish two facts “to the satisfaction of the [IRS].” . . . Specifically, she must show (1) that the taxable event “was due to reasonable cause and not to willful neglect” and (2) that the event “was corrected within the correction period for such event.” . . . The “correction period” for the first-tier tax is the same as for the second-tier tax.
Additional penalty for failing to file Form 4720
The failure of the wife and charity to also timely file Form 4720 with the IRS resulted in an “addition to tax” penalty of $7,313 for the wife, which the Tax Court also upheld.
“Tax-exempt organizations are required to file a Form 4720 to report liability for various excise taxes, including taxes imposed for [excess benefit transactions],” the Tax Court said. But the charity did not file for 2014, leading the IRS to conclude the wife “was therefore required to file a separate return on Form 4720 by May 15, 2015,” which she did not, the Tax Court said.
“To avoid liability petitioner must demonstrate that her failure to file was ‘due to reasonable cause and not due to willful neglect’ [Tax Code section] 6651(a)(1)),” the Tax Court said.
In upholding the additional penalty for the wife, it noted:
Reasonable cause exists “if the taxpayer exercised ordinary business care and prudence but, nevertheless, was unable to file the return within the time prescribed by law. . . . A taxpayer’s belief that no return is required in itself is not sufficient to show that the failure to file was due to reasonable cause.”
The Court concluded that the petitioner failed to demonstrate reasonable cause to justify her failure to file Form 4720. As examples of reasonable cause, the Court cited “postal delays, timely filing of a return with the wrong office, death or serious illness of the taxpayer or a member of his family, [or] the taxpayer’s unavoidable absence from the United States.”
It added:
The Form 4720 is admittedly an exotic species: The obligation to file this return—unlike the obligation to file (say) Form 1040—is far from common knowledge, especially for someone not actually involved in a charity’s operations. Petitioner had received monthly checks from [her charity] for prior years, and we do not believe that she understood that such transactions needed to be reported on an excise tax return. “[I]gnorance of the law, however, does not amount to reasonable cause.”
What this means for churches
This case has many important lessons for church leaders, including the following.
Penalties for excess benefit transaction
If a church or other charity provides compensation or benefits to a disqualified person in excess of the value of services provided in return, and the excess is not “contemporaneously reported” as taxable income on a Form W-2 or the recipient’s Form 1040, then this constitutes an excess benefit transaction subjecting the recipient to the following penalties (known as “intermediate sanctions”):
In this case, the Tax Court concluded that the $115,000 the charity paid the wife was not contemporaneously reported on a Form W-2 or the wife’s Form 1040, and therefore it constituted an excess benefit to her. This triggered the first- and second-tier penalties of 25 percent and 200 percent of the amount of the excess ($28,750 and $230,000, respectively).
Correcting the excess benefit transaction
If the first-tier 25-percent excise tax is assessed against a disqualified person and he or she fails to correct the excess benefit within the taxable period (defined below), then by law, the second-tier 200 percent tax must be assessed.
Section 4958 specifies that the disqualified person can correct the excess benefit transaction by “undoing the excess benefit to the extent possible, and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards.”
The correction must occur by the earlier of the date the IRS mails a notice informing the disqualified person that he or she owes the 25-percent tax, or the date the 25-percent tax is actually assessed.
The definition of “disqualified person”
Since intermediate sanctions apply only to disqualified persons (and in some cases managers), it is important for church leaders to be familiar with the definition of “disqualified person.”
The regulations define it as any person who at any time during the five-year period ending on the date of an excess benefit transaction was in a position to exercise substantial influence over the affairs of the tax-exempt organization, or any family member of such a person.
Sanctions assessed against recipient
Intermediate sanctions are assessed against the recipient, not the church or charity.
Imposing an excise tax
An excise tax equal to 10 percent of the excess benefit may be imposed on the participation of an organization manager in an excess benefit transaction between a tax-exempt organization and a disqualified person.
This tax, which may not exceed $20,000 with respect to any single transaction, is only imposed if the 25-percent tax is imposed on the disqualified person, the organization manager knowingly participated in the transaction, and the manager’s participation was willful and not due to reasonable cause.
There is also joint and several liability for this tax, meaning a person may be liable for both the tax paid by the disqualified person and this organization manager’s tax in appropriate circumstances. This tax is explained more fully below.
Treating excess benefit as compensation
An excess benefit is treated as compensation when paid if the exempt organization reports the benefit as taxable income on a Form W-2 or Form 1099-NEC issued to the recipient or if the recipient reported the benefit as taxable income on his or her Form 1040.
Other written evidence may be used to demonstrate that the organization approved a transfer as compensation in accordance with established procedures, which include, but are not limited to, (a) an approved written employment contract executed on or before the date of transfer, (b) appropriate documentation indicating that an authorized body approved the transfer as compensation for services on or before the date of the transfer, and (c) written evidence that existed on or before the due date of the appropriate federal tax return (Form W-2, Form 1099-NEC, or Form 1040), including extensions, of a reasonable belief by the exempt organization that under the tax code the benefit was excludable from the disqualified person’s gross income.
Failing to report excess benefit as compensation
If an excess benefit is not reported as taxable compensation when paid, the IRS will assume that the entire amount of the benefit exceeds the value of any services provided by the recipient, and therefore the entire benefit constitutes an excess benefit resulting in intermediate sanctions, regardless of the amount of the benefit.
Automatic excess benefit transactions for personal use of church property
In four private rulings issued in 2004, the IRS assessed intermediate sanctions against a pastor because of the personal use of church property by himself and members of his family, and the reimbursement of expenses by the church under a nonaccountable plan without any substantiation of business purpose.
Most importantly, the IRS concluded that these benefits were automatic excess benefit transactions resulting in intermediate sanctions, regardless of amount, since they were not reported as taxable income on the pastor’s Form W-2 or Form 1040 for the year in which the benefits were paid.
Churches that allow staff members to use a church-owned vehicle or other church property for personal use or that reimburse business or personal expenses of a staff member (or relative of a staff member) under a nonaccountable arrangement may be engaged in an automatic excess benefit transaction that will subject the staff member to intermediate sanctions under section 4958 regardless of the amount of the benefits.
This result can be avoided if the church or the pastor reports the benefits as taxable income during the year the benefits are received, and they may be partly or completely abated if the pastor corrects the excess benefit within the tax period defined by section 4958.
This generally means returning the excess benefit to the church by the earlier of (a) the date the IRS mailed the taxpayer a notice of deficiency with respect to the 25-percent excise tax, or (b) the date on which the 25-percent excise tax is assessed.
If a disqualified person corrects an excess benefit transaction during the taxable period, the 200-percent excise tax is automatically abated. If the disqualified person corrects the excess benefit transaction during the correction period, the 25-percent excise tax is abated only if the disqualified person can establish that (a) the excess benefit transaction was due to reasonable cause and (b) was not due to willful neglect.
Jeopardizing a church’s tax-exempt status
Section 501(c)(3) of the Internal Revenue Code prohibits tax-exempt organizations (including churches) from paying unreasonable compensation to any employee or other person. A violation of this requirement will jeopardize an exempt organization’s tax-exempt status.
The IRS can revoke an exempt organization’s tax-exempt status if it pays an excess benefit to a disqualified person. However, in most cases, the IRS will pursue intermediate sanctions rather than revocation of exempt status.
One of the requirements for tax-exempt status under section 501(c)(3) is that none of a church’s assets can inure to the benefit of a private individual other than as reasonable compensation for services rendered. The fact that the IRS assesses intermediate sanctions does not preclude a finding of “inurement” that may jeopardize a church’s tax-exempt status. In any excess benefit transaction, both outcomes are possible. The tax regulations specify:
In determining whether to continue to recognize the tax-exempt status of an applicable tax-exempt organization . . . that engages in one or more excess benefit transactions . . . that violate the prohibition on inurement under section 501(c)(3) the [IRS] will consider all relevant facts and circumstances, including, but not limited to, the following—
(A) The size and scope of the organization’s regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;
(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization’s regular and ongoing activities that further exempt purposes;
(C) Whether the organization has been involved in multiple excess benefit transactions with one or more persons;
(D) Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and
(E) Whether the excess benefit transaction has been corrected . . . or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction. Treas. Reg. 1.501(c)(3)-1(f)(2).
The factors listed in paragraphs (D) and (E) of this section will weigh more heavily in favor of continuing to recognize exemption where the organization discovers the excess benefit transaction or transactions and takes action before the IRS discovers the excess benefit transaction or transactions.
Case studies to illustrate rules
The following case studies will further illustrate these rules. Assume that each senior pastor in these case studies meets the definition of a disqualified person.
Case study 1. A church uses an accountable reimbursement arrangement for the reimbursement of its senior pastor’s business-related transportation, travel, entertainment, and cellphone expenses. The church only reimburses those expenses for which the pastor produces documentary evidence of the date, amount, location, and business purpose of each expense within 30 days. By the end of the year, the church has reimbursed $4,000 of expenses.
Since the church’s reimbursement arrangement is accountable, neither the church nor the senior pastor is required to report the reimbursements as taxable income and the reimbursements are not taken into account in deciding if the church has provided an excess benefit to the pastor.
Case study 2. A church sends its pastor and his wife on an all-expense-paid trip to Hawaii in honor of their 25th wedding anniversary. The total cost of the trip is $8,000. The church treasurer assumes that this amount is a nontaxable fringe benefit and so does not report any of the $8,000 on the pastor’s Form W-2. The pastor likewise assumes that the cost of the trip is a nontaxable benefit.
The church’s payment of these travel expenses constitutes an automatic excess benefit resulting in intermediate sanctions, since it was not reported as taxable income by either the church or pastor in the year the benefit was provided. This is so even though the amount of the benefit by itself, or when added to the pastor’s other church compensation, is reasonable in amount.
This will result in (1) an excise tax of $2,000 (25 percent of $8,000), (2) an excise tax of $16,000 (200 percent of $8,000), and (3) a penalty for failing to file Form 4720 (assuming the church and pastor failed to do so).
If a disqualified person corrects an excess benefit transaction during the correction period, the 200-percent excise tax is automatically abated, and the 25-percent excise tax is abated if the disqualified person can establish that the excess benefit transaction was due to reasonable cause and was not due to willful neglect
For this purpose, reasonable cause means exercising “ordinary business care and prudence.” Not due to willful neglect means that the receipt of the excess benefit was not due to the disqualified person’s conscious, intentional, or voluntary failure to comply with section 4958 and that the noncompliance was not due to conscious indifference.
If the pastor cannot establish both of these requirements, he would be liable for the 25-percent excise tax even though he corrected the excess benefit transaction by paying $8,000 plus interest to the church and paid federal income tax on the $8,000 as additional compensation. Also, note that the senior pastor and his wife are jointly and severally liable for the intermediate sanctions, meaning that the IRS can collect them from either person.
Church board members who approve an excess benefit transaction are subject to an excise tax equal to 10 percent of the amount of the excess benefit—up to a maximum of $20,000 collectively.
Case study 3. A church collected a $4,000 “love offering” from the congregation during the Christmas season last year. The congregation was informed that donations would be tax-deductible, and donations were reported on the annual contribution summary provided to each member. Both the pastor and church treasurer assumed the total amount was a nontaxable gift, so neither reported it as taxable income (on Form W-2 or Form 1040).
The love offering constitutes an automatic excess benefit resulting in intermediate sanctions, since it was not reported as taxable compensation by either the church or pastor in the year the benefit was provided. This is so even though the amount of the benefit by itself, or when added to the pastor’s other church compensation, is reasonable in amount. This will result in (1) an excise tax of $1,000 (25 percent of $4,000), (2) an excise tax of $8,000 (200 percent of $4,000), and (3) a penalty for failing to file Form 4720 (assuming the church and the pastor failed to do so).
If a disqualified person corrects an excess benefit transaction during the correction period, the 200-percent excise tax is automatically abated, and the 25-percent excise tax is abated if the disqualified person can establish that the excess benefit transaction was due to reasonable cause and was not due to willful neglect.
If the pastor cannot establish both of these requirements, he would be liable for the 25-percent excise tax even though he corrected the excess benefit transaction by paying $4,000 plus interest to the church and paid federal income tax on the $4,000 as additional compensation.
Church board members who approve an excess benefit transaction are subject to an excise tax equal to 10 percent of the amount of the excess benefit—up to a maximum of $20,000 collectively.
Case study 4. In Private Letter Ruling 201517014 (2015), the IRS revoked an organization’s tax-exempt status because of its compensation practices. The organization was run by its founder and his wife, who served as its CEO and CFO, and their daughter (collectively, the “officers”). The IRS audited the organization and found the following:
The IRS noted that “fact patterns suggesting inurement frequently suggest excess benefit transactions between an exempt organization and a disqualified person under section 4958” of the tax code. The IRS noted that the income tax regulations instruct the IRS to consider a variety of factors to determine whether revocation is appropriate when section 4958 excise taxes also apply:
(A) The size and scope of the organization’s regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;
(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization’s regular and ongoing activities that further exempt purposes;
(C) Whether the organization has been involved in multiple excess benefit transactions with one or more persons;
(D) Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and
(E) Whether the excess benefit transaction has been corrected (within the meaning of section 4958(f)(6)), or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction.
Note. For additional case studies, see the “Compensation” section in the Legal Library.
Ononuju v. Commissioner, T.C. Memo 2021-94 (2021).
