[ Corporate Tax - Intermediate Sanctions Excise Taxes ]
If I discover a potential violation of the Intermediate Sanctions rules,
what should I do and is there any way to get the excise taxes abated?
If you do become aware of any potential violations of the Intermediate
Sanctions rules in a transaction that involves Penn, you need to contact one of the
individuals shown on the Penn Intermediate Sanctions Web site as technical experts
in this area. They will be able to give you comprehensive advice on exactly what
needs to be done to rectify the situation and how to best protect yourself and Penn.
I would like to get some basic education for certain members of my
department to help ensure that we do not unintentionally violate the Intermediate Sanctions
rules. Where can I go for assistance in presenting an educational session on this topic or
getting some summary information that I could provide to members of my department?
Penn has comprehensive training material on Intermediate Sanctions available for
use throughout the Penn organization. These materials include a short video, a
PowerPoint presentation, an Intermediate Sanctions Web site, and various brochures
and participant handouts to help explain these rules and serve as handy references
on the topic. Penn’s technical experts in this area, as identified on the Intermediate
Sanctions Web site, have already presented a number of seminars on Intermediate
Sanctions on campus and are prepared to assist you with your training needs.
Is there a threshold or de minimis amount below which the Intermediate
Sanctions rules do not apply? In other words, do we only really need to be concerned about
very large transactions or dollar amounts?
There is no such threshold or de minimis amount with Intermediate Sanctions.
Technically, even one dollar of unreported compensation to a “disqualified person” is
defined as an “excess benefit transaction” subject to the Intermediate Sanctions excise
tax. While the IRS, upon audit, might chose to focus on larger transactions, as a matter
of policy Penn and its trustees, officers, and employees should avoid violating these rules
regardless of the amount involved.
What is the statute of limitations for violations of the Intermediate Sanctions rules?
The general period in which the IRS could assess an Intermediate Sanctions excise tax
would be three years from the date the transaction occurred. However, certain exceptions
to this general rule, including the failure to disclose the transaction on a timely filed return,
could double the statute of limitations to six years or even eliminate the statute of limitations
altogether. Any concerns regarding a potential “excess benefit transaction” should be discussed
with one of the Penn experts identified on the Intermediate Sanctions Web site. These experts
can help you address all relevant questions including the statute of limitations applicable to your
Does Penn have a list of potential “disqualified persons” that I can refer to when approving
contracts or other transactions that might become “excess benefit transactions?”
Penn does not currently have a comprehensive list of potential “disqualified persons”,
although efforts are underway to compile such a list. Until such a list is available, you will need
to make the necessary inquiries of parties involved in any potential “excess benefit transaction”
to determine if any of them may meet the definition of a “disqualified person.”
I was invited to an Intermediate Sanctions training course at Penn, but really do not feel
that I meet the definition of an “organization manager”. Do I really need to worry about the Intermediate
For training purposes Penn has elected to take a broad, liberal approach to the definition of an
“organization manager”. Even if you do not meet the definition of an “organization manager”,
you still can play a vital role in helping identify and prevent potential “excess benefit transactions”
from occurring at Penn. An “organization manager” includes any Penn officer, trustee, or any individual
having similar powers or responsibilities, regardless of title. A person is considered for these purposes
to be an officer of Penn if that person regularly exercises general authority to make administrative
or policy decisions on behalf of Penn. Any person who has authority merely to recommend particular
administrative or policy decisions at Penn, but not to implement them without approval of a superior,
is not an officer.
As an “organization manager”, can I avoid personal tax liability from an “excess benefits
transaction” if I personally do not sign off or approve the transaction?
A 10 percent excise tax is imposed on any “organization manager” who knowingly participates in
the “excess benefit transaction”, unless such participation is not willful and was due to reasonable
cause. For this purpose, participation includes silence or inaction on the part of an “organization
manager” where the manager is under a duty to speak or act, as well as any affirmative action by
such manager. An “organization manager” is not considered to have participated in an “excess
benefit transaction”, however, where the manager has opposed the transaction in a manner consistent
with the fulfillment of the manager’s responsibilities to Penn.
What if I find myself in a situation where I suspect the potential for an “excess benefit
transaction”, but my boss at Penn orders me to approve the transaction anyway?
Obviously your first course of action should be to express your concerns and the reasons for your
concerns to your boss to ensure that the communication lines are working appropriately. If after doing
so, you are still uncomfortable with what you are being asked to do, you are strongly encouraged to
call one of the individuals shown on the Penn Intermediate Sanctions Web site. If you are reluctant
to contact a member of the Intermediate Sanctions team to discuss your concerns, you may call Penn’s
Compliance Hotline and receive further guidance on how you should proceed. Remember that all
Penn employees have a responsibility to adhere to all of Penn’s policies and procedures.
What other colleges and universities have already been involved in transactions where
Intermediate Sanctions excise taxes have been assessed? What was the nature of the transactions
deemed to have violated these rules?
There has not yet been any assessment of these taxes on transactions involving colleges or universities.
You should not take any false comfort from this fact. The final IRS regulations for Intermediate Sanctions
were not finalized until January 2002. The IRS was reluctant to start aggressively holding individuals
liable for these penalty taxes until the guidance of these regulations had been released. Since the release
of the regulations, however, there has been a major court case involving the assessment of Intermediate
Sanctions taxes as well as the release of other IRS technical guidance. As the IRS goes through its normal
audit cycle involving 2002 and later years, you should begin to see more aggressive assessment of these
taxes including against individuals associated with colleges and universities.
I am confused about the definitions of an “organization manager” and a “disqualified person”
because there seems to be some overlap in who may meet these definitions. Is that correct?
It is possible for someone to meet both the definition of an “organization manager” and a “disqualified person”
and, in fact, be subject to both the 10% and the 25% excise taxes pertaining to a single “excess benefit
transaction.” It may not always be perfectly clear as to whether a person meets the definition of either
an “organization manager” or a “disqualified person.” When in doubt, please refer to the definitions contained
on Penn’s Intermediate Sanctions Web site or seek advice from a member of the Intermediate Sanctions team
listed on the Web site.
I understand the importance of avoiding any violations of the Intermediate Sanctions rules, but if
I am ever assessed a tax under these rules, won’t Penn indemnify me and pay any tax liability on my behalf?
There are no current Penn policies or legal requirements that Penn indemnify you from the Intermediate
Sanctions taxes if they are ever assessed against you. Based upon the specific facts and circumstances,
Penn at its sole discretion, may or may not decide to pay the taxes on your behalf. If it did so, the
amount paid is required by law to be treated as additional taxable compensation to you. Your best
defense against exposure to personal tax liability from violations of the Intermediate Sanctions rules
is simply to avoid any violations in the first place.
If I am involved in an Intermediate Sanctions violation and assessed an excise tax, does that
become public information?
Yes, the IRS requires full disclosure on Penn’s annual Federal Form 990, Return of Organization Exempt
from Income Tax, of the details of any “excess benefit transactions” which involve Penn. This includes
listing the names of any “disqualified persons” involved in the transactions. The Federal Form 990 is a
public document available for inspection by anyone. Penn’s Form 990 is regularly reviewed by the local
Philadelphia press looking for potential stories and is available on the internet.
What if we discover that we failed to report an element of employee compensation, say spousal
travel, on an employee’s annual Form W-2, but we determine that the employee does not meet the definition of a
“disqualified person.” Isn’t it true that in such a case, we really will not have exposure to the Intermediate
If you are positive that the employee does not meet the definition of a “disqualified person” (you may want
to seek help from one of the Penn Intermediate Sanctions experts in making that determination), then the
Intermediate Sanctions rules will not apply. However, other tax rules may apply. Under the stated facts, it
appears that the employee’s Form W-2 erroneously omitted a taxable benefit and that the Form W-2 should
be amended to protect both the employee and Penn from possible future tax penalties. Penn’s Corporate
Tax Department can advise you on the necessary steps to resolve any payroll related matters.
Does Penn really expect me to be an expert on Intermediate Sanctions and specific related details
such as when to utilize the Rebuttable Presumption Safe Harbor?
Fortunately, Penn employs a number of highly qualified professionals in this area such that you do
not need to be an Intermediate Sanctions expert. These Penn professionals include those located
in Penn’s Office of General Counsel, Office of the Comptroller-Tax Department, and Office of Audit
and Compliance. What Penn does expect of you is a general awareness of the Intermediate Sanctions
rules such that you can recognize when a potential exposure may exist and then seek the advice and
counsel of these Penn technical experts. It would be prudent for the appropriate individuals in your
department to regularly review (annually, for example) the Intermediate Sanctions educational
materials so that you can maintain a general awareness of the rules. The Penn experts can also
advise you on Penn resources available to help with these periodic reviews.
Is Penn working on additional policies and procedures that will make it administratively easier for
me to identify applicable conflicts-of-interest or other situations that may result in an “excess benefit transaction?”
Penn currently is working on a significant review of its conflict-of-interest procedures in an effort to streamline
the related reporting process. Penn is willing to consider and implement other helpful and productive new policies
relative to Intermediate Sanctions as they are identified. If you have an idea for a new policy or procedure that
could assist you and others in avoiding “potential excess benefit transactions,” you are strongly encouraged to
discuss that idea with one of the Penn Intermediate Sanctions experts.