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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Suggested Answers : Case Study #9 - Compensation Arrangement
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

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

    Disqualified person
    Dr. Lean is a disqualified person for purposes of this transaction. As dean, he has authority over a substantial portion of the organizationís capital expenditures, operating budget, and employee compensation.

    Organization managers
    President Jim Bond, who approved the transfer of the award to Dr. Lean, is an organization manager by virtue of his position as president of the university.

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

    The $25,000 entertainment system does appear to be an excess benefit transaction when transferred to Dr. Lean, a disqualified person. He used his new influence as dean to obtain the system which will be additional compensation to him. Since Dr. Leanís compensation was already at the highest end of the range for reasonable compensation for his services according to the compensation consultant, the $25,000 value of the system could be considered an excess benefit even if properly reported on the federal Form W-2 and Dr. Leanís individual income tax return. As a cash basis taxpayer, Dr. Lean should recognize the $25,000 fair market value in the year he receives the system, which would be in 2003. Dr. Lean does not challenge that he must report the income on his tax return for 2003. For Intermediate Sanctions purposes, however, Dr. Lean wants to argue that the $25,000 should be considered part of his compensation package in the prior year before he was promoted to dean. Dr. Lean actually presented his technical paper, the event that really earned the reward, in 2002 before his promotion and when he may not have been receiving compensation at the highest end of the range reasonable for his services. Premier was very careful to meet the requirements for the Rebuttable Presumption safe harbor for Dr. Leanís compensation package as dean. By arguing that the $25,000 was really earned in 2002, Dr. Lean is simply trying to protect the validity of the Rebuttable Presumption safe harbor without Jim Bond having to go back to the compensation committee for a $25,000 adjustment to the deanís compensation package. Besides, the compensation committee might well decide that, based on the consultantís advice, they could simply not approve any further increases. Unfortunately, Dr. Leanís logic is flawed. The $25,000 award was not made until the year 2003, it was really made to Premier, and Jim Bondís agreement to transfer it to Dr. Lean, of course, was also a 2003 event. For Intermediate Sanctions purposes, the $25,000 is compensation to Dr. Lean in 2003.

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

    The fact that President Bond did not wish to take the additional $25,000 to the compensation committee means that there is no protection under the Rebuttable Presumption safe harbor. President Bond is subject to a potential $2,500 penalty as the organization manager who approved the transaction. Dr. Lean is subject to a potential $6,250 (25% x $25,000) Intermediate Sanctions excise tax in addition to having to return the entertainment system to the University.

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