[ Corporate Tax - Intermediate Sanctions Excise Taxes ]
Suggested Answers : Case Study #5 - Vendor Relationship
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions
Identify, if any, disqualified persons and/or organization managers.
Disqualified person
Jumpshot Jones, according to the case, meets the IRS definition of a substantial contributor to Penn. Under the facts and circumstances test, Jumpshot could be argued to have substantial influence over the affairs at Penn and could, therefore, be a disqualified person.
Organization managers
The Athletic Director, who signed the contract, appears to regularly exercise general authority to make administrative or policy decisions on behalf of Penn. As such, the Athletic Director meets the definition of an organization manager.
Describe any potential excess benefit transaction(s).
The potential excess benefit transaction is the multi-year contract for printing services with the Athletic Department. Jumpshot appears to meet the definition of a disqualified person, so the question is whether an excess benefit transaction has occurred. The proposed price for the printing services is higher than what the Penn Athletic Department was already paying, however, the business administrator discovered that Premier would provide a higher quality product that they currently receive. In addition, Premier already has contracted for similar services with Drexel and Temple at prices comparable to what was offered to Penn. Based on these facts, it appears that Premier’s price, although higher than the current provider, are, in fact, market prices. The contracts with Drexel and Temple provide the evidence of market value as long as those contracts were at arms length. Accordingly, there does not appear to be an excess benefits transaction under these facts.
Who would be liable for any potential excise taxes and how much would they be?
Since there is no excess benefit transaction, the Intermediate Sanctions rules do not apply. However, to adequately protect itself, since a disqualified person is involved in the transaction and since Premier’s price is higher than what Penn is currently paying, it would be very prudent for the business administrator to make certain that the contract file has adequate content to prove, if ever necessary, that Premier’s prices were at market value. Copies of the Drexel and Temple agreements may go a long way in achieving the necessary documentation.
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