University of Pennsylvania
arrow Comptroller's Office
arrow Tax and International Operations
arrow Intermediate Sanctions
arrow Tax Research Topics
divider line
arrow Document/Forms
arrow Contact Information
arrow Feedback


Comptroller's Office
University of Pennsylvania
Suite 329 Franklin Building
3451 Walnut Street
Philadelphia, PA 19104
215.898.6291 (Phone)
215.746.7630 (Fax)

Penn Home Penn A-Z Directories Calendar Maps
Office of the Comptroller

[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

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

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

    Disqualified person
    Larry is by definition a disqualified person since he was a board member at Penn within five years of the date of the transaction. Also, his wife and Hallmark investments (majority owned by Larry and his wife) are disqualified persons by definition. Since Hallmark is a disqualified person, the new joint venture formed to commercialize the invention would, with Hallmark holding an 80% interest, also be a disqualified person. There is nothing in the case to suggest that Helen Duke is a disqualified person, although the right facts could certainly cause any faculty member to meet the definition of a disqualified person.

    Organization managers
    The case does not clearly identify all of the organization managers, i.e. the Penn executives who actually signed-off on the transaction. However, Sally, as a board member who used her influence to get all of the necessary approvals, clearly meets the definition of an organization manager.

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

    The facts of the case are not clear as to whether there is an excess benefit transaction. However, historically the IRS has frequently used 20/20 hindsight in building a case against a taxpayer. Penn did not engage an outside consultant to support the value of the Penn technology that was transferred to the joint venture. It is unclear from the case how Penn did document the determination of the value of the invention. The remarkable investment return that Hallmark received from this investment over an 18 month period may cause the IRS to question whether the technology had been fairly valued and whether Penn’s ownership interest in the venture was appropriately determined. It does not appear based on the facts of the case that Penn qualified the transaction for the Rebuttable Presumption safe harbor, i.e. the board did not rely on a current independent appraisal of the value of the property and it is unclear whether the board adequately documented the basis for its determination. During the IRS audit, without the protection of the Rebuttable Presumption, the burden of proof will be on Penn to show that the initial valuation was reasonable. One method that the IRS might use in analyzing the transaction is to attempt to assess whether the $100,000,000 sales value of the technology was value produced after the formation of the joint venture instead of being largely attributable to the original value of the invention at the time it was contributed to the joint venture. The IRS may argue that the invention had a much greater value than Larry acknowledged and the amount of that greater value is the amount of the excess benefit. The amount of any excess benefit would need to be returned to Penn and the 25% excise tax would be assessed against the joint venture. Although Helen Duke does not appear from the facts to be a disqualified person, the fair market value of her interest in the joint venture upon formation would appear to be taxable compensation to her. If this additional compensation, when added to her existing compensation as a faculty member, is greater than what is reasonable for her services, Intermediate Sanctions rules would not apply, but other tax rules may such as those relating to private benefit.

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

    The case does not give enough facts to be able to make an exact calculation of the excess benefit, if any. Suffice it to say that it appears that the Service may have the ability to argue that the excess benefit could be anywhere from zero to $80,000,000. The excise tax on the joint venture would be 25% of the excess benefit plus the requirement that the excess benefit be returned to Penn. Fortunately, the Intermediate Sanctions rules would limit the 10% excise tax on Sally and any other organization managers to a maximum of $10,000. The Service may also have concerns over Penn’s involvement in a joint venture with proprietary partners where Penn contributes charitable property and accepts a minority interest. The Service suggested in the “Redlands” case that this type of activity could potentially jeopardize an exempt entity’s tax-exempt status.

Comptroller Spotlights

GL Object Codes FY2018
Concur Expense Type/Object Code Matrix (2018)
FY2017 Closing Instructions
FY17 Closing Calendar QRG
Guide to Year-End Closing
School Closing Summary Template

Comptroller Offices

Accounts Payable
Tax and International Operations
Office of the President Home Page Penn A-Z Directories Calendar Maps
Copyright © , University of Pennsylvania
3451 Walnut Street, Philadelphia, PA 19104 · 215.898.5000
Copyright Information | Contact Us | Privacy Policy

Penn Home
Visit Penn's website