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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

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

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

    Disqualified person
    Robert, as a board member, is by definition a disqualified person. He has substantial influence as a board member over the affairs of Penn. Under the statute, certain family members of Robert will also be considered disqualified persons. These family members include his wife and two children. The IRS would likely argue that Medix, under the facts and circumstances rules, is also a disqualified person as a major donor to Penn. Medix, through its private foundation, has donated more than 2% of the total donations received by Penn over the current and preceding four years. This meets the definition of a substantial donor under the Intermediate Sanctions rules. Although it was actually the Medix Foundation that made the donations, because all of the funding for the foundation originated with Medix and because all of the Foundationís board members are also board members of Medix, the IRS would likely argue that Medix controls the Foundation and would impute the donations back to Medix for purposes of the Intermediate Sanctions rules. Medix would otherwise not be a disqualified person since Robert and his two children own only 4% of the stock of Medix. The Medix Foundation would not be a disqualified person since Internal Revenue Code Section 501(c)(3) tax-exempt organizations, by definition, cannot be disqualified persons.

    Organization managers
    Lucy Beyer, as head of purchasing for Penn, could be argued to be someone who regularly exercises general authority to make administrative decisions on behalf of Penn. As such, she would be an organization manager.

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

    Because Medix could be argued to be a disqualified person, the awarding of the 5-year contract at what appears to be up to a $3,000,000 premium over fair market value (based on bids by competitors), would be an excess benefits transaction. The potential excess benefit could be reduced if Lucy could document the additional value that Medix suggests it delivers over its competition. Lucy should not consider the Medix Foundation donation in her decision to award the contract.

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

    The premium, which the case study suggests could be up to $3,000,000, would need to be returned unless the additional market value could be supported. The 25% tax on a disqualified person could be as much as $750,000 if $3,000,000 were determined to be the excess benefit. The tax could be assessed against Medix since it is a disqualified person that received an excess benefit.

    Lucy, as the organization manager, could be subject to a 10% tax not to exceed $10,000.

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