Question

Wish, Inc., a § 501(c)(3) organization, pays unreasonable compensation to Renata, the treasurer of Wish. Renata's compensation is $600,000. Assume that reasonable compensation would be $500,000.

a. Apply the rules for intermediate sanctions. Complete the paragraph below that outlines the tax consequences, if any, for Wish, Inc. Wish has engaged in an excess benefit transaction that is subject to excise taxes on the amount of the unreasonable compensation. Under the intermediate sanction rules, they are levied on the disqualified person and on the exempt organization's management .

If an intermediate sanction is applicable to Wish, Inc., what would the amount be? $ ___________

b. Determine any tax consequences for Renata. Renata is a disqualified person . Thus, the first-level excise tax imposed on her would be $___________ . The amount of the second-level tax would be $ .___________

Answer 1

Ans. Penalties for excess compensation range from fines to revocation of an organization’s tax-exempt status. Fines are the more likely consequence. Known formally as excess benefit transaction excise taxes and informally as intermediate sanctions, the fines can be levied on both the executive who received the overpayment and the board members who approved it or who knew about the excess but did nothing to prevent it.

A. If an intermediate sanction is applicable to Wish, Inc. then  each board member who approved the excess compensation, or any board member who knew about the excess but failed to prevent the overpayment, to pay an excise tax equal to 10 percent of the overpayment subject to a maximum of $20000

So here Excise tax = 10%($600000-$500000)

= 10% of $100000

= $10000/board member

B. Renata is a disqualified person . Thus, the first-level excise tax imposed on her would be $ 25000 (that is 25% of overpayment made to her $100000)

The amount of the second-level tax would be $ 200000 (that is if Renata fails to repay the overpayment then Excise Tax of 200% of the overpayment will be levied on her)

Explanation:

• First tier tax: 25% of the amount involved
• Second tier tax: an additional 200% of the amount involved where the excess payment is not corrected before the earlier of:
  • The date of mailing an IRS notice of deficiency –and–
  • The date on which the tax imposed is assessed