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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #8 - Joint Venture
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Larry Bliss is a former trustee at the University of Pennsylvania. He resigned as trustee effective June 30, 1999 after serving in that role for over 15 years. Larry currently is Board Chairman and CEO for Hallmark Investments, a very successful investment-banking firm. The firm was started by Larry and continues to be a closely owned family company. Larry and his wife own a majority interest. Larry was highly respected as a board member and widely known for his business savvy and amazing ability in picking winning investments. He has utilized his old board contacts at Penn and his professional reputation to win the asset management responsibilities of a significant portion of Penn’s endowment fund.

Larry has become aware of an exciting invention by Helen Duke, an outstanding researcher and faculty member at Penn. The invention needs to be commercialized and Larry is certain that it has tremendous profit potential if properly managed. It will take $10,000,000 to successfully bring the product to market. Larry proposes to Sally Bye, a current and influential Penn board member who he has known for years, that a new joint venture be formed to commercialize the invention. Larry promises to raise the $10,000,000 and provide the management expertise necessary to make the venture successful. Larry has always been very loyal to Penn and he views this as just another way that he can add to the success of the institution. Hallmark will fund the joint venture through loans and a cash investment. Penn will contribute the patented invention that Larry argues has questionable current value without his efforts and expertise to successfully bring it to market. Larry did not feel that the use of an outside valuation expert was worth the cost.

The ownership in the venture negotiated by Larry will be Hallmark-80%, Penn-15%, and Helen-5%. Larry offered Sally and other current board members an opportunity to “get a piece of the action”, but they all declined due to Penn’s strict conflict–of-interest policies. Sally was convinced that Larry really is talented at these types of transactions so she used her board influence to get all the necessary approvals for the deal to move forward.

Larry really does have the Midas touch. Eighteen months after the formation of the joint venture Larry was able to negotiate a remarkable sale of the technology to a large Fortune 500 company for $100,000,000. Penn made $15,000,000 on the deal. Everyone was a winner. The President of Penn first found out about the great news when she received a phone call from a reporter for the Wall Street Journal wanting to interview her on the transaction. Shortly after the Wall Street Journal article was published, the Vice President of Finance and Treasurer at Penn received a phone call from the IRS informing him that Penn had been randomly selected to participate in the IRS Coordinated Examination Program. The agent sounded really nice on the phone and told the Vice President of Finance that he was certainly looking forward to working with him.

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