CEO of Apparent Private Foundation Hit With Excess Benefit Transaction Taxes

• DOI: http://doi.org/10.1002/npc.30437
• Date: 01 March 2018
• Published date: 01 March 2018

Bruce R. Hopkins’ NONPROFIT COUNSEL

March 20184THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

Analysis

The donors contended that, because the notice of

deficiency omitted the 40 percent penalty, the requisite

procedure for imposing that penalty was not followed,

so that they were not liable for the penalty. The court

disagreed, noting that the IRS asserted the penalty in

the answer, which was signed by the government’s trial

counsel and her immediate supervisor.

The notice of deficiency included only the 20 percent

penalty. The donors claimed the reasonable cause excep-

tion. But the court ruled that the IRS has the authority

to assert additional penalties in an answer. The chief

counsel’s delegate, representing the IRS, was held to be

an eligible individual to assert additional penalties. Thus,

inasmuch as the procedure was followed by the IRS rep-

resentatives in this case and the 20 percent penalty rules

are inapplicable, the 40 percent penalty was held appli-

cable with respect to the tax underpayments. [10.14] ◆

CEO OF APPARENT PRIVATE

FOUNDATION HIT WITH EXCESS

BENEFIT TRANSACTION TAXES

An individual organized a nonprofit organization and

secured a favorable determination letter recognizing its

tax-exempt, charitable status; the name of this entity is

the Association for Honest Attorneys. At all relevant times,

this individual was the AHA’s chief executive officer and a

member of its board of directors, and maintained exclu-

sive signature authority over the AHA checking account.

For the three tax years involved, the AHA filed (sub-

mitted) the e-Postcard (Form 990-N) with the IRS. The

AHA did not file, for any of these years, as it apparently

should have, an annual information return on Form

990-PF (as a private foundation). The IRS revoked this

exemption in 2015, effective as of 2010, on the ground

that the AHA “ha[d] not operated in accordance with

the provisions of section 501(c)(3).”

During these years, the AHA CEO used the organiza-

tion’s checking account to make various purchases from

department stores, grocery stores, automotive establish-

ments, and home-related stores. Payments were made

to an animal clinic, for her son’s tuition, and for the

exhumation of her father’s remains. These purchases

totaled nearly $39,000. She did not report any income

from the AHA on her personal tax returns.

The IRS determined, in its notice of deficiency issued

to this individual, that she had engaged in certain excess

benefit transactions with the AHA. The US Tax Court

wrote that, before ruling on the government’s deter-

minations, “we summarize the statutory framework

within which we must make that decision,” launching

into a summary of the intermediate sanctions rules (IRC

§ 4958).

The court found that, through the period commenc-

ing with its inception in 2003 through 2009, the IRS

treated the AHA as a tax-exempt charitable organization.

“On that record,” the Tax Court wrote, it further found

that, during the years at issue, the AHA was an appli-

cable tax-exempt organization. The court went on to

additionally find that the CEO was a disqualified person,

the transactions were excess benefit transactions, the

first-tier taxes are valid, there was no correction, and the

second-tier taxes also were valid (Farr v. Commissioner,

January 9).

The definition of an applicable tax-exempt organiza-

tion states that it does not include a private foundation

(IRC § 4958(e)). That is, as to exempt charitable organi-

zations, the intermediate sanctions rules apply only to

public charities. Query: Why, then, did the court fault

the organization for not filing Forms 990-PF (filed only

by private foundations, of course) for the years involved?

If the court found that the AHA was a public charity at

some point during the five-year look-back period (IRC §

4958(e)(2)), it failed to include that finding in the opin-

ion. [12.1(a), 21.2] ◆

PERFORMANCE ART

ORGANIZATION DENIED

EXEMPTION ON BASIS OF

THREE APPLICATIONS OF

PRIVATE BENEFIT DOCTRINE,

ONE OF WHICH IS CORRECT

The IRS denied recognition of exemption to an arts

organization, in part because of unwarranted private

benefit flowing to a related for-profit company (Priv. Ltr.

Rul. 201801014).

Facts

A nonprofit corporation was formed to “provide

funding and promotion for creative individuals and small

organizations.” It will use “sponsorship, fund raising and

other activities to establish live or online contests, pro-

motional events, and marketing channels.” Its principal

activity “will be running a contest for amateur talent to

facilitate the funding and/or sale of creative content” to

prospective buyers; buyers include producers, distribu-

tors, and media outlets.

Participants are organizations and individuals submit-

ting content for consideration by contest judges, such as

videos, scripts, and artwork. This organization will make

grants to participants who “often struggle to find fund-

ing to pursue their creative contributions.” The organiza-

tion hopes to promote the work of creative individuals by

publicizing the contests and the names of winners to the