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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

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

  1. Identify, if any, disqualified persons and/or organization managers.

    Disqualified person
    Dr. Gotahave is a disqualified person by virtue of the five-year lookback rule since she was on the board of the University until three years ago. Billy Silverspoon is also a disqualified person for purposes of this transaction under the statutory category of family member because of his relationship as a grandchild to Dr. Pat.

    Organization managers
    Jerry Makeithappen is an organization manager because of his position as vice president of the University. The Universityís facilities manager could, depending on the level of general authority he regularly exercises to make administrative or policy decisions on behalf of the University, also be an organization manager.

  2. Describe any potential excess benefit transaction(s).

    Dr. Pat is using her substantial influence as a former board member and donor to obtain preferential treatment for her grandson, Billy, who is a disqualified person by virtue of his family relationship with Dr. Pat. Dr. Pat convinces the University to give Billy a three year lease on the retail space at $2,000 per month which is only 50% of the documented fair market value of the space. The case study states that the vacancy rates for retail space on campus had been much lower than originally projected which suggests that the University should have had no problem renting this premium space with frontage on the busiest street on campus to an unrelated party for the $4,000 per month market value. Dr. Patís inappropriate references to her estate planning and her suggestion that Billy would eventually also become a donor to the University should not have been factors influencing the Universityís decision on the lease.

  3. Who would be liable for any potential excise taxes and how much would they be?

    Although Dr. Pat states that she has no intention of abusing her power, her actions indicate that she was trying to take advantage of her position as both a former board member as well as a major donor. The below market lease that was granted to Billy, based on the facts stated, appears to clearly be an excess benefit transaction for the difference between market rent ($4,000 per month) and the actual lease rate ($2,000 per month). The excess benefit in this transaction could grow to $72,000 plus interest if it continues for the full three years of the lease. Billy would, upon challenge by the IRS, have to pay to the University the $72,000 of additional rent plus interest and pay a 25% Intermediate Sanctions excise tax of $18,000.

    Jerry, and potentially the facilities manager, would be liable for the 10% tax on organization managers, or $7,200.

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