UNIVERSITY OF PENNSYLVANIA
How are they related?
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© 2002 Centurion Communications LLC
UNIVERSITY OF PENNSYLVANIA
Questions to Ask
What are Intermediate Sanctions?
How can they hurt me ?
How can they hurt Penn ?
How do we protect against them ?
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UNIVERSITY OF PENNSYLVANIA
Session Agenda
Understanding the “Intermediate Sanction” rules.
Case studies—practical application of the rules.
Group discussion—how the rules apply to Penn and you.
Introduction of Penn “Intermediate Sanctions” Web site.
Action steps—develop procedures that provide adequate
protection.
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UNIVERSITY OF PENNSYLVANIA
What are Intermediate Sanctions?
Excise taxes
Imposed by the IRS
On individuals
As penalties
For use of substantial influence
Over certain tax-exempt organizations
For inappropriate personal gain
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UNIVERSITY OF PENNSYLVANIA
History of Intermediate Sanctions
Old rules—IRS only had the option to revoke tax
exemption for misappropriating charitable assets
for personal gain.
IRS was reluctant to use such an extreme
penalty.
Revocation hurt the organization (already a
victim) rather than responsible persons receiving
inappropriate benefits.
Intermediate Sanctions gives the IRS an effective
“intermediate” solution to discourage certain
individuals from misusing their influence over a
tax exempt entity for personal
benefit.
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UNIVERSITY OF PENNSYLVANIA
Excess Benefit Transaction
Compensation*
PENN
Disqualified
Person
Organization
Manager
Services
Management Authority
IRS
*An excess benefit transaction can include compensation /benefit arrangements as
well as other transactions such as asset sales, rental agreements, or service contracts.
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UNIVERSITY OF PENNSYLVANIA
Imposition of Excise Penalty Taxes
Negatives for Penn
•Adverse publicity
•Disclosure of events on annual IRS
form 990 available for public
inspection
Return Excess
Benefit
PENN
Organization
Manager
IRS
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Disqualified
Person
UNIVERSITY OF PENNSYLVANIA
Individuals Impacted by Intermediate
Sanctions
Any “disqualified person”
Who benefits from an “excess benefit
transaction” with Penn
Is liable for the tax
“Organization managers” can be liable for an
additional tax
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Effective date for Intermediate Sanctions
The excise taxes generally apply to “excess
benefit transactions” occurring on or after
September 14, 1995.
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UNIVERSITY OF PENNSYLVANIA
Excise Tax Rates
Disqualified Person who receives an excess benefit:
25% Excise Tax
Disqualified Person who receives an excess benefit,
and does not return such excess benefit to the
organization within a prescribed time frame:
200% Excise Tax
Organization Manager, who knowingly approves an
excess benefit transaction:
10% Excise Tax (Limited to $10,000 per Transaction)
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Excise Tax – Corrective Action
The disqualified person is required to correct the
transaction by returning to the organization an amount
equal to the excess benefit plus interest for the period
the excess benefit was held.
The IRS Form 990 Annual Information Return
(available for public inspection) requires the
organization to disclose each excess benefit
transaction and the amount of excise taxes paid.
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UNIVERSITY OF PENNSYLVANIA
Disqualified Person
Any person who is in a position to
exercise substantial influence over the
affairs of an organization.
The IRS will consider the person’s
influence during the five-year period
preceding the transaction (the lookback
period).
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UNIVERSITY OF PENNSYLVANIA
Disqualified Person
Include certain family members of an
individual with substantial influence.
Include corporations, partnerships, or
trusts in which a disqualified person owns
more than a 35 percent interest.
Individuals may be deemed to have
substantial influence based upon all
relevant facts and circumstances.
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UNIVERSITY OF PENNSYLVANIA
Disqualified Persons
Voting members of the governing body.
CEOs, COOs, CFOs, and Treasurers.
Department heads that manage a discrete
segment or activity of the organization that
represents a substantial portion of the
activities, assets, income, or expenses of
the organization.
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UNIVERSITY OF PENNSYLVANIA
The University’s Potential
Disqualified Persons
Trustees
Department Chairs
Overseers
Basic Science Chairs
Donors
Physicians
Officers
Faculty
Deans & Vice Deans
Others ?
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UNIVERSITY OF PENNSYLVANIA
Organization Manager
An officer, director, or trustee.
Any individual having powers or
responsibilities similar to those of officers,
directors, or trustees regardless of title.
Certain individuals serving on committees of
the governing body even if not an officer,
director or trustee.
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UNIVERSITY OF PENNSYLVANIA
Organization Manager
An organization manager must knowingly
participate in the excess benefit transaction,
unless such participation was not willful and was
due to reasonable cause.
Participation includes silence or inaction on the
part of an organization manager where the
manager is under a duty to speak or act.
Knowing includes negligently failing to make
reasonable attempts to ascertain whether the
transaction is an excess benefit transaction.
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UNIVERSITY OF PENNSYLVANIA
Excess Benefit Transaction
Any transaction in which an economic benefit is
provided
By an applicable tax-exempt organization
Directly or indirectly
To or for the use of any disqualified person,
And the value of the economic benefit exceeds
the value of the consideration received for
providing the benefit.
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UNIVERSITY OF PENNSYLVANIA
Potential Excess Benefit Transactions
Compensation arrangements including fringe
benefits (both reported and unreported).
Property transactions including both real and
personal property and both sales, purchases, or
uncompensated use of assets.
Rental agreements.
Other contractual arrangements; vendor
relationships.
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UNIVERSITY OF PENNSYLVANIA
“Rebuttable Presumption”
Payments under a
compensation arrangement
are presumed to be
reasonable and a transfer of
property, or the right to use
property, is presumed to be at
fair market value, if three
conditions are satisfied.
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For
transactions
that satisfy the
rebuttable
presumption,
the burden of
proof shifts to
the IRS.
UNIVERSITY OF PENNSYLVANIA
“Rebuttable Presumption”
Advance approval by
the governing body (or
authorized committee)
that is comprised of
individuals entirely
without conflict.
Adequately
Reliance upon
documenting the basis
appropriate data as to
for the board’s
comparability prior to
determination
the board making its
concurrent with
determination.
making its decision.
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UNIVERSITY OF PENNSYLVANIA
Intermediate Sanction
Case Studies
Group application of basic rules to reallife scenarios
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UNIVERSITY OF PENNSYLVANIA
Case Study Questions to Consider
1.
Who are the disqualified persons and
organization managers ?
2.
Does a potential excess benefit transaction
exist ?
3.
Could a similar factual situation ever occur at
Penn?
4.
What steps could be taken to protect Penn and
its leaders from exposure to this scenario?
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Group Discussion
Applying the Rules to Penn
and You
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Introduction of the New Penn Web
Site on “Intermediate Sanctions”
Discussion on how to use and benefit
from the Web site.
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UNIVERSITY OF PENNSYLVANIA
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