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Tax Court rules personal use payments for tax-exempt CEO subject to excise tax

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Tax Hot Topics newsletterThe Tax Court has ruled in Farr v. Commissioner (T.C. Memo. 2018-2) that payments made by a tax-exempt entity to its CEO for personal use were considered excess benefit transactions subject to Section 4958 excise taxes.

Farr was the CEO of the Association for Honest Attorneys (AHA), a tax-exempt entity organized under Section 501(c)(3). AHA maintained a checking account with a third-party bank, of which Farr had exclusive signature authority. During taxable years 2010, 2011 and 2012, Farr used AHA’s account to make various purchases and cash withdrawals. Review of the AHA checking account record for those years indicated that the purchases and cash withdrawals were all made by Farr for her personal use. Farr did not report any income from AHA for those years in which the purchases and withdrawals were made.

The IRS determined Farr was a disqualified person who had engaged in excess benefit transactions with AHA during those years. The Tax Court upheld the IRS determination, stating that Farr was subject to both the excise tax on the excess benefits and the excise tax for failure to timely correct the excess benefits in taxable years 2010, 2011 and 2012.

Section 4958 imposes excise taxes on the disqualified individuals of a tax-exempt entity for any occurrence of an excess benefit transaction. An excess benefit transaction is any transaction where an economic benefit is provided by a tax-exempt entity to a disqualified person, and the value of the economic benefit exceeds the value of the consideration provided by the disqualified person to the tax-exempt organization. This amount is considered the excess benefit. A disqualified person includes any individual who exercised substantial influence over the tax-exempt entity at any time within the five years prior to the excess benefit transaction date. For each excess benefit transaction, an excise tax is imposed on the disqualified person of 25% of the excess benefit. If the excess benefit is not timely corrected, an additional 200% excise tax of the excess benefit is imposed on the disqualified person.

Contact Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Partner, Washington National Tax Office
T +1 202 521 1526

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