Bench & Bar

JAN 2018

The Bench & Bar magazine is published to provide members of the KBA with information that will increase their knowledge of the law, improve the practice of law, and assist in improving the quality of legal services for the citizenry.

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| JANUARY/FEBRUARY 2018 16 a simple yes or no check-the-box answer. It is self-evident that a negative answer is not the better of the two. In this aspect (as well as others), the Form 990 invites extensive scrutiny (from the public, the IRS and self-examination) without the necessity of an audit. 21 As a real and considerable threat, the intermediate sanctions law is often overlooked. Certain organizations and individuals might not be as willing to push the envelope if they knew how the risks can fall right back on them. ere are certain safeguards, including one that allows an organization to obtain a "rebuttable presumption" that a transaction is reasonable 22 , that the knowledgeable disqualified person should insist be followed for his or her own protection. Certain benefits that are common and accepted in the for-profit world can create a host of problems in the tax-exempt one, and many influential individuals would insist on compliance with these rules if they understood the personal risk they pose. One particularly concerning area is referred to as "automatic excess benefits." 23 e essence of these rules is that, if a disqualified person receives a benefit that is not contemporaneously treated as compen- sation, he or she cannot come back later and claim that the benefit is reasonable and meets fair market value standards. Here's an example: a corporate officer takes his or her spouse on a business trip and the exempt organization pays for the spouse's airfare. e flight cost (let's say $500) is not treated as compensation to the officer and there is no other contemporaneous documentation that it was considered compensatory. Even if the organization can show Features: NONPROFIT LAWS & REGULATIONS that a $500 boost to the officer's salary is still well within reason, the airfare would likely be considered an "excess benefit." 24 Another way one could be blindsided by these rules would be if he or she gets tagged for the excess benefit penalties via attribution, either as a family member of a disqualified person or as a related entity, especially if the individual with the "influential" connection that gave rise to disregarded person status had been separated from the exempt organization for a while. us, the spouse of a brother of a former board member could get penalized under the excess benefit regime for receiving a benefit that the person next to her receives without concern. is underscores another feature of the tax on excess benefits: it is a no-fault penalty. It does not matter whether the parties had the best of intentions so long as there is a difference between fair market value and value received in return that tilts in favor of the disqualified person. In such case, disgorge- ment is mandatory. Full stop. Even if you or a family member or a related entity do not receive anything from a charitable organization that you serve as a board member, Section 4958 can still sink its canines into you. ose who "participate" in the transaction can be assessed an "organization manager" excise tax. 25 While lesser in amount, imposition of this tax does not require that the individual be a disqualified person, but only that he or she be in a position to approve or participate in the approval of the penalized transaction. 26 Once an excess benefit transaction is identified and reported, Sched- ule L of the Form 990 zeroes in on whether this tax also applies. Other than an early case, we have not seen intermediate sanctions litigation, which may be a testament to the threat posed by the Section 4958 penalties as they mount up. In that case, Caracci v. Commissioner, 27 a money-losing home health agency was purchased from a tax-exempt organization by disqualified persons in exchange for assumption of debt. Before the Tax Court was unceremoniously reversed by the Fifth Circuit, the IRS assessed excise taxes total- ing some $46.5 million (in addition to other taxes). While the case was overturned (due to a "cascade" of legal and factual errors), it serves as a reminder of how the penalties can ratchet up quickly under this law and, if you're not looking, can bite you a lot easier than if you are.

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