On July 26, 2021, the Tax Court issued a Memorandum Opinion in the case of Ononuju v. Commissioner (T.C. Memo. 2021-94). The primary issue presented in Ononuju v. Commissioner was whether the petitioner was liable for excise tax pursuant to IRC § 4958 as a “disqualified person” who engages in an “excess benefit transaction” with a tax-exempt charity.
Background to Assessment in Ononuju v. Commissioner
The IRS determined that the petitioner was a disqualified person with respect to American Medical Missionary Care, Inc. (AMMC), an organization tax exempt under IRC § 501(a) and IRC § 501(c)(3), and that she engaged in excess benefit transactions with it during 2014. The IRS accordingly determined a first-tier tax of $32,500 under section 4958(a) and (because petitioner failed to correct the improper transactions during the applicable period) a second-tier tax of $260,000 under section 4958(b). The IRS also determined additions to tax under IRC § 6651(a)(1) and IRC § 6651(a)(2).
The petitioner’s husband, then a licensed medical doctor, incorporated AMMC in 1998. In December 2000 the IRS granted its application and recognized AMMC as tax exempt. Mr. Ononuju was the founder of AMMC and served as its president from its inception through 2014. Petitioner has been shown as holding various positions in AMMC over time. In 2000 she was listed as a member of its board of directors. She regularly attended AMMC’s board meetings during 2013 and 2014. Neither she nor Mr. Ononuju had an employment contract with AMMC in either year.
On its Form 990 for 2013, the year preceding the tax year in issue, AMMC reported providing petitioner, in her capacity as “Secretary/Dir,” compensation of $21,000. AMMC concurrently reported providing compensation of $21,000 to Mr. Ononuju in his capacity as “Pres/Dir.” AMMC issued Forms W-2, Wage and Tax Statement, for 2013, reporting that it had paid petitioner and Mr. Ononuju wages of $26,000 apiece.
They reported these amounts as wages on a jointly filed Form 1040. On its Form 990 for 2014 AMMC reported that petitioner and Mr. Ononuju had each received “reportable compensation from the organization” of zero. However, substantial amounts were paid to the petitioner as a “paycheck” ($27,000) and a “living allowance” ($104,000). During 2014 AMMC also paid $15,000 to Blue Cross Blue Shield of Michigan for health insurance covering Mr. Ononuju, petitioner, and their family.
In 2014, Mr. Ononuju’s medical license was revoked. In 2017 Mr. Ononuju departed from the United States for Nigeria. Petitioner testified that the Michigan Board of Medicine required Mr. Ononuju to “pay a huge sum of money” and that they were “just broke by the time he left.” It is unclear what Mr. Ononuju’s “certain practices” were, but clearly, they were not above board.
The Exam and Notice of Deficiency
The IRS determined that the petitioner received excess benefits from AMMC. It determined that the checks and certified checks were used to defray the personal living expenses of the Ononuju family, including the petitioner, her husband, and their eight children. The IRS further determined that the petitioner was required to file, by May 2015, a return reporting the excess benefit transactions on Form 4720 (Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code). Neither AMMC nor the petitioner filed such a return.
The IRS issued the petitioner a timely notice of deficiency for 2014. This notice determined a first-tier excise tax of $32,500 and a second-tier excise tax of $260,000 under IRC § 4958(b). The second-tier tax, computed as 200% of the excess benefit, is imposed when a disqualified person fails to correct the excess benefit transaction in timely fashion.
The notice also determined an addition to tax of $7,313 under IRC § 6651(a)(1) for failure to file a return on Form 4720 and an addition to tax of $5,525 under IRC § 6651(a)(2) for failure to pay the excise tax shown on the SFR. Petitioner timely petitioned this Court for redetermination.
Excess Benefit Transactions
IRC § 4958(c)(1)(A) defines an “excess benefit transaction” to mean “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 if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.” An “applicable tax-exempt organization” is defined to include an organization described in IRC § 501(c)(3) and exempt from tax under IRC § 501(a). See IRC § 4958(e)(1).
IRC § 4958(a)(1) imposes on each excess benefit transaction an excise tax “equal to 25 percent of the excess benefit” and provides that this tax “shall be paid by any disqualified person referred to in IRC § 4958(f)(1) with respect to such transaction.” If the excess benefit transaction is not corrected in timely fashion, the disqualified person is liable for a second-tier tax equal to 200% of the excess benefit. See IRC § 4958(b). A “disqualified person” is defined to include (among others) “any person who was, at any time during the 5-year period ending on the date of an excess benefit transaction, in a position to exercise substantial influence over the affairs of the organization.” IRC § 4958(f)(1)(A).
An applicable tax-exempt organization includes any organization (other than a private foundation) described in IRC § 501(c)(3) and exempt from tax under IRC § 501(a). See IRC § 4958(e); Treas. Reg. § 53.4958-2(a). Persons holding specified powers and responsibilities with respect to a charity are automatically deemed to be “in a position to exercise substantial influence over * * * [its] affairs.” Treas. Reg. § 53.4958-2(c).
These officials include voting members of the governing body, presidents, chief executive officers, chief operating officers, treasurers, and chief financial officers. Treas. Reg. § 53.4958-2(c)(1)-(3). The category of “treasurers and chief financial officers” includes “any person who, regardless of title, has ultimate responsibility for managing the finances of the organization.” Treas. Reg. § 53.4958-2(c)(3). “A person who serves as treasurer has this ultimate responsibility unless the person demonstrates otherwise.” Id.
The Excise Tax
IRC § 4958(a) imposes a first-tier tax equal to 25% of the excess benefit, payable by the disqualified person. IRC § 4958(a)(1) thus imposes on the petitioner a first-tier tax of $28,750.
IRC § 4958(b) provides that, if a first-tier tax is imposed “and the excess benefit involved in such transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 200 percent of the excess benefit involved.” This second-tier tax, like the first-tier tax, is imposed on the disqualified person. IRC § 4958(b), (f)(1). The second-tier tax is not discretionary with the IRS but is statutorily mandated.
“Correction” of an excess benefit transaction means “undoing the excess benefit to the extent possible, and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards.” IRC § 4958(f)(6). The “taxable period” during which correction must occur (assuming the tax has not yet been assessed) is the period beginning with the date of the transaction(s) and ending on “the date of mailing a notice of deficiency with respect to the tax imposed by IRC § 4958(a)(1).” IRC § 4958(f)(5)(A).
The “taxable period” during which the petitioner was obligated to make correction thus closed on August 13, 2018, when the notice of deficiency was mailed. The petitioner did not correct the excess benefit transactions within the “taxable period.” Thus, she was liable for the second-tier tax of $230,000, or 200% of the excess benefit transaction.
(T.C. Memo. 2021-94) Ononuju v. Commissioner
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