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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #10 - Lease vs. Rental
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Patricia Gotahave, Ph.D., is a former board member and alumnus of Ivy League University as well as a major donor. Jerry Makeithappen is vice president of the University and has been a close, personal friend of Dr. Pat since she retired from the Universityís board three years ago. At the time of Dr. Patís retirement, she made a pledge for a one million dollar donation to the University. The pledge is payable at $200,000 per year over the five-year period following Dr. Patís retirement.

Dr. Pat has approached Jerry for a personal favor. Dr. Patís favorite grandchild, Billy Silverspoon, is looking to start a new retail bike store. Dr. Pat is aware that the University owns and leases a number of retail spaces throughout its campus. There is one particular space that Dr. Pat is aware of that is currently available for rent. It is a premium location with frontage on the busiest street on campus. Dr. Pat feels that it would be superb for her grandsonís new store. Unfortunately, the well-established, standard market value for the space is $4,000 per month. Billy has done a financial projection for his new business and is nervous about spending more than $2,000 per month on rent.

Dr. Pat made it clear to Jerry that she would never misuse her influence or her friendships at the University, but she would like to help her grandchild get started without making Billy feel like he was just getting another handout. Dr. Pat argued to Jerry that having a bike store on campus could be really good for the students. She further argued that she knew that the store would be a success and that eventually Billy would be able to pay a market rental rate. In addition, once Billyís store was doing well, Dr. Pat was sure that Billy would start making annual donations to the University, just like she had done for the past 30 years and certainly intended to keep doing. In fact, Dr. Pat pointed out to Jerry that she was currently working on revising her estate plan with her attorneys and it looked pretty certain that the University was going to end up as an extremely large beneficiary of her estate.

Jerry discussed Dr. Patís request with his real estate manager who is responsible for all retail store leases on campus. The two of them, after much discussion and debate, concluded that since the vacancy rates had been much lower on campus than originally projected, they could probably lease Billy the space for $2,000 without adversely impacting their total revenue projections for the campus retail operations.

Besides, they both agreed that, considering all the facts, it seemed like the right long-term decision for the University. Billy was given a three year lease for his new bike store at $2,000 per month. He was ecstatic that his store was really going to open and that he finally would be standing on his own two feet.

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