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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Suggested Answers : Case Study #3 - Unreported taxable fringe benefits<
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

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

    Disqualified person
    As dean of the business school at Premier University Bill appears to have substantial influence over the affairs of the business school that represents a substantial portion of Premierís income. As such, under the facts and circumstances test, Bill would be a disqualified person with respect to Premier. Susan, as Billís spouse, is also a disqualified person by definition.

    Organization managers
    Morris Pennypacker, as provost of Premier, is an officer and, therefore, meets the definition of an organization manager at Premier.

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

    Since Susan is not an employee of Premier, the payment of her spousal travel expenses by Premier is additional taxable compensation to Bill. It does not matter that Susanís presence will assist in social settings in promoting her husband and Premier. It is also not relevant that many of the other educators will be bringing their spouses. Also, some portion of Billís travel costs may be deemed personal as opposed to business expenses which would also be additional compensation to Bill. It is unlikely that Bill could successfully argue that his expenses for eight days in Paris after the conference to allow him the opportunity to start preparing a new strategic plan for the school are ordinary and necessary business expenses. The Intermediate Sanctions rules deem any taxable benefit to a disqualified person not properly reported as taxable income to be an excess benefit transaction, even if the disqualified personís total compensation is otherwise reasonable. If these expenses are not reported on Billís W-2 as taxable compensation, there would be a per se violation of the Intermediate Sanctions rules.

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

    If the taxable expenses are not reported on Billís W-2, Bill should repay to Premier all of Susanís travel costs including her $6,000 air fare, the incremental cost of the hotel room for double occupancy, her $650 conference registration fee, and any other travel cost paid by Premier for Susan. In addition, rules for foreign travel would require Bill to allocate his travel cost between personal and business based on the number of days spent on each activity. Based on the stated facts, it appears that 80% of his travel costs (only two days of the total ten day trip related to the conference) would be personal and therefore an excess benefit that he would need to repay to Premier. Also, there may be an issue on whether his first class airfare is a ďreasonable and necessaryĒ business expense depending on Premierís travel policies. Bill could be assessed an excise tax equal to 25% of the amount of the travel costs which were personal and which he would have to repay to Premier.

    Morris as an organization manager for this transaction could be subject to the 10% excise tax on Bill and Susanís total personal travel costs on the trip. Morrisí maximum liability as an organization manager could not exceed $10,000 on this single transaction. Although Morris is an organization manager, Bill, as dean, could also be argued to have played a role in approving the transaction, in which case he would be deemed an organization manager. In such a case, he and Morris would be jointly liable for the 10% tax with an aggregate $10,000 limit of liability.

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