IRS Declines to Abate Intermediate Sanctions Taxes, Finds Insufficient Reliance on Legal Advice

• DOI: http://doi.org/10.1002/npc.30043
• Date: 01 March 2015
• Published date: 01 March 2015

Bruce R. Hopkins’ NONPROFIT COUNSEL

March 20154THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

rect in stating that bright-line rules promote “equitable”

law administration. The court bemoaned the prospect of

“factual inquiries with regard to each individual conser-

vation easement donation.” Yet that is what courts are

supposed to do. ◆

IRS DECLINES TO ABATE

INTERMEDIATE SANCTIONS

TAXES, FINDS INSUFFICIENT

RELIANCE ON LEGAL ADVICE

The IRS has concluded that the first-tier excise tax due

under the intermediate sanctions rules on a disqualified

person’s automatic excess benefit transaction may not be

abated, because the person did not exercise ordinary busi-

ness care and prudence when it relied on the oral advice of a

public charity’s legal counsel (Tech. Adv. Mem. 201503019).

Facts

An individual, at one point a director of a supporting

organization, owned more than 35 percent of a limited

liability company as of the date of the taxable event. This

individual resigned from the charity’s board of directors

within five years of the date of the event.

The supporting organization held a note secured by

a company’s property and business assets that was in

default; it desired to sell the note at a public foreclosure

auction. This individual, acting through the LLC, desired

to purchase the note. The individual sought a loan from

the supporting organization to finance the purchase.

The supporting organization loaned the requisite

amount to the LLC, with interest. The LLC purchased the

note at the auction.

The supporting organization’s accountants subse-

quently informed the supporting organization the mak-

ing of this loan resulted in an automatic excess benefit

transaction because the LLC was a disqualified person

with respect to it (IRC § 4958(c)(3)(A)(i)(II)).

Less than 30 days after this excess benefit transaction

was discovered, the LLC returned the principal balance

and all accrued interest to the supporting organization.

About six months thereafter, legal counsel for the

supporting organization provided a letter describing the

advice provided concerning the transaction. This lawyer

stated that, around the date of the transaction, he orally

advised the supporting organization that neither the

individual nor the LLC were disqualified persons with

respect to the organization because the individual had

resigned from its board. That is, counsel failed to con-

sider the five-year look back rule (IRC § 4958(f)(1)(A)).

Thus, in fact, this individual was a disqualified person

with respect to the supporting organization because he

was a director of the organization within the five-year

period preceding the loan and the LLC was a disqualified

person because of the individual’s ownership of it. There-

fore, the loan was an automatic excess benefit transaction.

Law

For an abatement to occur under these circum-

stances, the transaction at issue must be timely cor-

rected, the taxable event must not be due to willful

neglect, and there must be reasonable cause. (The first

two of these elements were present in this case.)

The standard underlying reasonable cause is ordinary

business care and prudence. Generally, reliance in good

faith on advice of counsel may establish reasonable cause

where the advice is obtained from a competent tax

professional on the specific tax matter and the taxpayer

provided the advisor with all of the necessary and relevant

information. Moreover, a taxpayer may reasonably rely on

the advice of counsel, even if the advice is erroneous. All

relevant facts and circumstances must support reliance.

Analysis

In this case, the IRS stated that the LLC failed to offer

any evidence showing that its reliance on the advice of

counsel was reasonable. Here is what went wrong: (1)

there was no information about the lawyer’s expertise,

(2) there was no evidence that the LLC provided neces-

sary and accurate information to a lawyer, (3) the LLC

did not seek legal advice (the supporting organization

did so), (4) there was no information indicating that the

LLC considered legal advice when pursuing the transac-

tion, and (5) the LLC did not provide any facts indicating

the circumstances that would tend to support a finding

of reasonable cause. [21.10]

Note: This technical advice memorandum is a roadmap

of the factual presentations and advocacy needed to

support a successful abatement request these days.

Also, see the summaries of TAMs on tax abatement, in

the private foundation law context, in the February 2015

and the December 2014 issues. ◆

COMMERCIALITY, PRIVATE

BENEFIT PRECLUDE

EXEMPTION FOR CHARITABLE

GIVING FACILITATOR

A nonprofit organization planned to operate a

website, functioning as a social network, intended to

facilitate contributions from individuals to public chari-

ties. The website will allow organizations seeking gifts to

create a profile page so that individuals can read about

and donate to these entities. The organization’s services