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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Suggested Answers : Case Study #7 - Sponsored Research
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

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

    Disqualified person
    Professor Star, as director of a major center at the School of Medicine which represents a substantial portion of the income for the School and for Penn, may under the facts and circumstances test be considered a disqualified person.

    Forever Young, Inc. would, assuming that Professor Star is a disqualified person, also be a disqualified person because it is more than 35% owned by Professor Star.

    Organization managers
    Both the Executive Director of Research Services and the Dean of the School of Medicine appear from the case study to be in positions that allow them to regularly exercise general authority to make administrative or policy decisions on behalf of the School of Medicine and Penn. As such, they would both appear to meet the definition of a disqualified person.

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

    The SRA may confer an excess benefit on Forever Young directly and indirectly on Professor Star as a shareholder to the extent of the difference between the University’s standard indirect cost rate 58.5% and the rate charged Forever Young of 30%. In order to avoid this exposure, the University would have to adequately document why it is reasonable under its cost structure to offer Forever Young the 28.5% discount from what other sponsors are paying.

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

    Unless the reduced indirect cost rate could be justified, the excess benefit would be $570,000 (28.5% x $2,000,000) for each year of the SRA, and the 25% excise tax which could be assessed against Forever Young would be $142,500 per year. In addition, Forever Young would need to pay to Penn the $570,000 shortfall for each year of the contract. The organization managers who approved the transaction, the Executive Director of Research Services and the Dean of the School of Medicine, could be subject to a 10% tax up to the $10,000 limit which would appear to be reached under the facts.

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