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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #2 - Vendor Contract
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Lucy Beyer is the head of purchasing for the University of Pennsylvania Health System and has authority to approve major purchases and transactions. Robert Smart is a board member for the University of Pennsylvania. Robert is also the CEO of a major medical equipment company, Medix. Robert only owns a 2% interest in Medix and his two children each own a 1% interest. Medix has its own private foundation that it uses to support various charitable causes. Since the Foundation receives all of its funding from Medix, the Foundation’s board is comprised of members of Medix’s board. The Medix Foundation has been a major donor to Penn over the years. In fact, last year it made a donation to the School of Medicine that was so large it exceeded 2% of the total donations made to Penn over the last 5 years.

Robert has come to Lucy as part of a competitive bid process to discuss a major, multi-year contract with UPHS to purchase a large variety of items that Medix manufactures. This would be a major contract for Medix. Robert has assured Lucy that if Medix wins the contract, UPHS can rest assured that it will be receiving absolutely world-class service from someone who is totally loyal to the school. Robert is very committed to Penn and would make sure that it is taken care of. Besides, Robert has always felt that, where possible, it is prudent to deal with alumni and vice-versa.

Lucy believes that Medix’s prices are considerably higher than the other competitors. In fact, Medix’s proposal of $20,000,000 for a five-year contract may be as much as 15% higher than the next highest bidder. Robert’s response to this is that Medix’s quality is far superior to that of the competition and that Medix’s overall service approach justifies the premium. Lucy is unable to place a value, if any, on Medix’s additional quality or service, but she has a lot of respect for Robert. Besides, Lucy reasons, even if UPHS paid Medix some premium it would be totally insignificant to the large charitable donation that Penn received from the Medix Foundation. Lucy Beyer awarded the contract to Medix.

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