Recent Intermediate Sanctions Tax Court Decisions
In Fumo v. Commissioner, T.C. Memo 2021-61, the Tax Court had little difficulty concluding that convicted former Pennsylvania state senator Vincent J. Fumo was a disqualified person because of his substantial influence over a charity, even though he did hold any formal position with the organization. More specifically, the court found that Fumo “used his power and influence as the chairman of a senate appropriations committee to obtain funding for the organization from a variety of public and private sources.” The amount obtained for the section 501(c)(3) Citizens Alliance totaled in the tens of millions of dollars. In addition, during his criminal trial Fumo testified that he approved most significant projects and directed many major expenditures, as well as receiving many perks and gifts from the charity. He further testified that he “viewed it as my entity, my baby.” The court therefore granted summary judgment to the IRS on the question of whether Fumo was a disqualified person, while denying summary judgment on the factual question of whether Fumo received excess benefits during the years at issue, leaving that issue instead for trial.
In Ononuju v. Commissioner, T.C. Memo 2021-94, the Tax Court concluded that the wife of a section 501(c)(3) charity’s founder and president was a disqualified person because of that relationship, choosing not to rely instead on the fact that she was listed on the charity’s Form 990 for the relevant years as also holding various positions with the charity, including as a director and as secretary. The court’s reluctance to rely on her apparent positions with the charity may have stemmed in part from evidence that it was the taxpayer’s husband who ran the charity while the taxpayer was fully occupied with caring for their eight children. Nevertheless, the court also found that she had received $27,000 in “payroll” payments from the charity that failed the contemporaneous substantiation requirement for such payments to be treated as compensation. The court also found her testimony that an additional $88,000 received from the charity she had just turned over to her husband was not credible because he received directly significantly more from the charity during the same year and she could provide no records regarding the disposition of those funds. The court therefore concluded that the petitioner had received $115,000 in excess benefits and so owed both the first-tier intermediate sanctions tax of $28,750 and the second-tier tax of $230,000, plus various penalties. But the court further noted that the petitioner could still avoid the second-tier tax (and possibly the first-tier tax as well) because the “correction period” for repaying the excess benefits remained open “at least until this Court’s decision has become final following any appeal.”
Lloyd Mayer