Court Cases

(1) In Caracci v. C.I.R., 456 F.3d 444 (5th Cir., 2006), the Appeals court reversed the

Tax Court ruling because the record establishes as a matter of law that the taxpayers didn’t receive any "net excess benefit" and therefore weren’t liable for the excise taxes assessed. The taxpayers brought action against the Commissioner of Internal Revenue challenging deficiency notices finding that the taxpayers received a "net excess benefit" in the amount of $18.5 million and assessed over $250 million in excise taxes under Section 4958(a) and (b). The excess benefit was based on a valuation of assets and liabilities transferred when the agencies converted from exempt to nonexempt status.

(2) In Farr v. Commissioner, T. C. Memo 2018-2, (2018), aff’d 738 Fed. Appx. 969

(10th Cir. 2018), cert. denied 139 S.Ct. 1263 (2019), the court confirmed that the taxpayer, chief executive officer and member of the board of directors of the ATEO, was a “disqualified person” during the three taxable years. Additionally, the court determined that Farr was liable for initial taxes under Section 4958(a)(1) as well as the additional taxes under Section 4958(b) because the transactions were not corrected.

(3) In Vincent J. Fumo v. Commissioner, T.C. Memo 2021-61, (2021), the court held

that Petitioner, a former state legislator, “is a “disqualified person” under Section 4958 with respect to a Section 501(c)(3) organization,” although he held no title or position within the organization.

a. The court stressed that Treas. Reg. 53.4958-3(e)(2) reads that the facts and

circumstances tending to show that a person has substantial influence, “include, but are not limited to,” the seven factors listed. The court also noted that when the verb “includes” is used in statutes and regulations, it is “nonexclusive.” In other words, the court stated because of the term “include,” the facts and circumstances considerations are not limited to only the seven factors listed in the regulation.

b. The court found that the petitioner in the role of chief fundraiser was an

“unlisted factor” that strongly supported, by analogy with the second listed factor (as substantial contributor to the organization), his status as a disqualified person.

c. The judge held that petitioner was “in a position to exercise substantial

influence over the affairs of an organization” because he:

• Founded the organization

• Was a substantial contributor to the organization

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• Had or shared authority to determine a substantial portion of its capital

expenditures or operating budget

• Managed a substantial portion of its activities, assets income or expenses

• Used his status and position within the state legislature to obtain

government funding for the organization

(4) In Gloria Ononuju v. Commissioner, T.C.M. 2021-094 (T.C. 2021), the court ruled

that the taxpayer engaged in excess benefit transactions under Section 4958 with American Medical Missionary Care, Inc., an organization exempt under Section 501(c)(3). The court made the following conclusion in its analysis of the facts:

a. Applicable Tax-Exempt Organization

Despite the revocation of the organization’s exempt status effective January 1,2014, it was an applicable tax-exempt organization with respect to Section 4958 because it was described in Section 501(c)(3) during the 5-year look-back period before the date of revocation. See Section 4958(e)(2).

b. Disqualified Person

The taxpayer was held to be a disqualified person because she was the spouse of the president and founder of the organization, which makes her a disqualified person under Section 4958(f)(1)(B). The court chose not to further analyze if the taxpayer was a disqualified person by reason of her status as an officer and director of the organization.

c. Excess Benefit Transactions

The examiner identified multiple payments to the taxpayer from two of the organization’s bank accounts totaling $115,000 during the year under examination. The taxpayer was unable to establish that the payments were compensation for services or that they were used to further the exempt purposes of the organization. The court ruled that $15,000 in payments paid for health insurance coverage wasn’t an excess benefit transaction because the taxpayer’s husband was an employee of the organization and therefore the benefit was a nontaxable fringe benefit.

d. Failure to File/Pay Penalties

The court also confirmed that the taxpayer was liable for the failure to file and failure to pay penalties for not filing the Form 4720 or paying the tax due. The court stated that a taxpayer’s belief that no return is required, and ignorance of the law isn’t sufficient to establish reasonable cause for failure to file a return.