T.C. Memo. 2021-94
UNITED STATES TAX COURT
GLORIA ONONUJU, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22401-18. Filed July 26, 2021.
Gloria Ononuju, pro se.
Marissa R. Lenius and Jeremy H. Fetter, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LAUBER, Judge: Section 4958 imposes an excise tax on a “disqualified
person” who engages in an “excess benefit transaction” with a tax-exempt charity.1
1 All statutory references are to the Internal Revenue Code (Code) in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.
Served 07/26/21 -2-
[*2] The Internal Revenue Service (IRS or respondent) determined that petitioner
was a disqualified person with respect to American Medical Missionary Care, Inc.
(AMMC), an organization tax exempt under section 501(a) and (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 peti-
tioner 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 section 6651(a)(1) and (2). We will sustain respondent’s
determinations to the extent set forth in this opinion.
FINDINGS OF FACT
The following facts are derived from the pleadings, a stipulation of facts,
the exhibits attached thereto, the trial testimony, and documents admitted into
evidence at trial. Petitioner resided in Georgia when the petition was filed. An
attorney filed the petition on her behalf, but he withdrew shortly thereafter.
Petitioner has been married to Chidozie Ononuju at all relevant times. Mr.
Ononuju, then a licensed medical doctor, incorporated AMMC in 1998. It was
organized as a Michigan corporation to operate a medical facility in Saginaw,
Michigan. -3-
[*3] In 2000 AMMC applied to the IRS for recognition of tax-exempt status. In
its application it described its exempt purpose as the operation of a clinic to pro-
vide medical examination and treatment services for individuals unable to afford
such services. In December 2000 the IRS granted its application and recognized
AMMC as tax exempt under section 501(a) and (c)(3). AMMC has filed an
annual return on Form 990, Return of Organization Exempt From Income Tax, for
all relevant years. Its returns for 2013 and 2014 were prepared by a professional
preparer.
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 was listed as its secretary and treasurer in an annual report filed in October
2012 with the State of Michigan. She was listed as its secretary and as a director
on its Form 990 for 2013, and as its secretary on the Form 990 for 2014. 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 -4-
[*4] 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, U.S. Individual Income Tax Return.
On its Form 990 for 2014 AMMC reported that petitioner and Mr. Ononuju
had each received “reportable compensation from the organization” of zero.
AMMC issued neither of them a Form W-2 for 2014. AMMC recorded no officer
or director salaries in its general ledger for 2014. There is no indication in the
minutes of its board meetings that AMMC intended to provide compensation to
petitioner during 2014.
On their Form 1040 for 2014 petitioner and Mr. Ononuju reported no sala-
ries or wages from any source. They included with the return two Schedules C,
Profit or Loss From Business. Petitioner reported gross receipts of $20,000 and
expenses of $25,096 from a beauty salon business. Mr. Ononuju reported gross
receipts of $39,000 and expenses of zero for providing services as a medical doc-
tor.
During 2014 AMMC maintained at financial institutions at least three
checking accounts: a Bank of America account ending in 4070; a Saginaw Med-
ical Federal Credit Union account ending in 7728 (Saginaw account); and a Finan- -5-
[*5] cial Plus Credit Union account ending in 8723 (Financial Plus account).
Petitioner had signature authority over all three accounts.
During 2014 AMMC issued petitioner biweekly checks drawn on the
Saginaw account. Each check was in the amount of $1,000. At trial petitioner
testified that this “was my paycheck because Dr. Ononuju put me on [AMMC’s]
payroll.” These checks totaled $27,000 during 2014.
During 2014 AMMC issued petitioner monthly checks drawn on the Finan-
cial Plus account. These were all certified checks in amounts ranging from $6,000
to $10,000, and they totaled $88,000 during 2014. During the previous year
AMMC had also issued petitioner monthly certified checks, in amounts ranging
from $5,000 to $10,000, drawn on the Financial Plus account. In response to re-
quests for information during the IRS examination, AMMC stated that the latter
checks provided petitioner with a “living allowance.” 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 the Michigan Board of Medicine (Board) received complaints about
certain practices in which Mr. Ononuju had engaged. The Board commenced an
investigation, which led to the revocation of his license to practice medicine in
Michigan. Petitioner testified at trial that AMMC by late 2014 “was going down, -6-
[*6] was already closing up.” In 2017 Mr. Ononuju departed from the United
States for Nigeria. Petitioner testified that the Board required Mr. Ononuju to
“pay a huge sum of money” and that they were “just broke by the time he left.”
Mr. Ononuju has resided in Abuja, the capital of Nigeria, since 2017.
In October 2015 the IRS commenced an examination of AMMC’s Form 990
for 2013. The revenue agent (RA) later expanded the examination to include
AMMC’s Form 990 for 2014 and potential excise tax liability of petitioner and
Mr. Ononuju. The RA found that Mr. Ononuju during 2014 had received un-
explained payments from AMMC in the form of cash, checks, money orders,
certified checks, and other benefits with a total value of $658,168. The RA de-
termined that these were excess benefits, the bulk of which was reflected in
AMMC’s general ledger as an “officer’s receivable.” AMMC’s Form 990 for
2014 showed that the receivable due from Mr. Ononuju had increased from
$79,181 at the beginning of 2014 to $615,284 at the end of 2014. The Form 990
reported that there existed no written loan agreement covering this receivable.
The RA determined that petitioner had also received excess benefits from
AMMC. He calculated these excess benefits as $130,000, consisting of $27,000
of checks drawn on AMMC’s Saginaw account, $88,000 of certified checks drawn
on AMMC’s Financial Plus account, and $15,000 of health insurance benefits. -7-
[*7] The RA determined that the checks and certified checks were used to defray
the personal living expenses of the Ononuju family, including petitioner, her
husband, and their eight children.
The RA determined that petitioner was required to file, by May 15, 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 petitioner filed such a return. On May 9, 2018, the examining agent
prepared on her behalf a substitute Form 4720 reporting for 2014 a first-tier excise
tax of $32,500 under section 4958(a), computed as 25% of the excess benefits the
RA determined petitioner to have received. This substitute for return (SFR)
satisfied the requirements of section 6020(b).
On August 13, 2018, the IRS issued 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 section 4958(b). The second-tier tax, computed
as 200% of the excess benefit, is imposed when a disqualified person fails to cor-
rect the excess benefit transaction in timely fashion. The notice also determined
an addition to tax of $7,313 under section 6651(a)(1) for failure to file a return on
Form 4720 and an addition to tax of $5,525 under section 6651(a)(2) for failure to -8-
[*8] pay the excise tax shown on the SFR. Petitioner timely petitioned this Court
for redetermination.
On August 10, 2018, the IRS issued Mr. Ononuju a notice of deficiency
determining excise tax deficiencies and additions to tax in substantially larger
amounts. He timely petitioned for redetermination, and his case was docketed at
docket No. 22414-18. On October 9, 2018, the IRS issued AMMC a final adverse
determination letter revoking its tax-exempt status retroactively to January 1,
2014. The IRS determined that AMMC had failed to establish that “no part of [its]
earnings inures to the benefit of any private shareholders or individuals” or that it
was “operating exclusively for an exempt purpose.” AMMC timely petitioned for
a declaratory judgment, and its case was docketed at docket No. 318-19X.
After granting several continuances, we set petitioner’s and Mr. Ononuju’s
cases for remote trial via Zoomgov on September 24, 2020, with the place of trial
being set for administrative purposes in Atlanta, Georgia, where petitioner then
resided. Mr. Ononuju did not appear for trial. On October 5, 2020, we dismissed
his case for lack of prosecution and sustained the excise tax deficiencies and addi-
tions to tax that the IRS had determined against him. Mr. Ononuju likewise de-
clined to prosecute the revocation case for AMMC. On November 6, 2020, we -9-
[*9] dismissed that case for lack of prosecution and sustained revocation of
AMMC’s tax-exempt status retroactively to January 1, 2014.
At the conclusion of trial in petitioner’s case we directed the parties to file
seriatim briefs. Respondent timely filed his brief. Petitioner did not file a brief.
OPINION
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency are generally
presumed correct, and the taxpayer bears the burden of proving them erroneous.
Rule 142(a); see Welch v. Helvering, 290 U.S. 111, 115 (1933). In certain cir-
cumstances section 7491 may shift the burden of proof to the Commissioner. But
that section applies only for purposes of ascertaining a taxpayer’s liability “for any
tax imposed by subtitle A or B,” which govern income, estate, and gift taxes. Sec.
7491(a)(1). Section 7491 has no application to a case such as this, which involves
petitioner’s liability for an excise tax determined under subtitle D. See Paschall v.
Commissioner, 137 T.C. 8, 17 (2011); Repetto v. Commissioner, T.C. Memo.
2012-168, 103 T.C.M. (CCH) 1895, 1900. Petitioner thus bears the burden of
proving that respondent’s determinations are incorrect. - 10 -
[*10] II. Excise Tax Liability
A. Statutory Structure
Section 4958 is captioned “Taxes on Excess Benefit Transactions.” Section
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 sec-
tion 501(c)(3) and exempt from tax under section 501(a). See sec. 4958(e)(1).
Section 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 subsection (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 sec. 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.” Sec. 4958(f)(1)(A). - 11 -
[*11] Congress enacted section 4958 not to collect revenue but to “deter insiders
of an organization from using their positions of influence to receive unreasonable
compensation.” See U.S. Department of the Treasury’s Proposals to Improve
Compliance by Tax-Exempt Organizations: Hearing Before the Subcomm. on
Oversight of the H. Comm. on Ways & Means, 103d Cong., 2d Sess. 15 (1994)
(statement of Leslie B. Samuels, Assistant Secretary for Tax Policy, Dep’t of the
Treasury). “Before the enactment of section 4958, if an organization * * * did not
comply with the rules regarding tax exemption, the Commissioner’s only recourse
was to revoke the organization’s exemption.” Caracci v. Commissioner, 118 T.C.
379, 414 (2002), rev’d, 456 F.3d 444 (5th Cir. 2006). Because revocation “falls
on the organization[] rather than benefited individuals,” Congress recognized the
need for “intermediate sanctions.” Boris I. Bittker & Lawrence Lokken, Federal
Taxation of Income, Estates & Gifts, para. 100.5 (2021), Westlaw FTXIEG. In-
termediate sanctions are intended to deter malfeasance and incentivize insiders to
restore the charity to the status quo ante. See ibid.; see also sec. 4958(b) (elimi-
nating the 200% tax if the insider corrects the excess benefit transaction). - 12 -
[*12] B. Analysis
1. “Applicable Tax-Exempt Organization”
An applicable tax-exempt organization includes any organization (other
than a private foundation) described in section 501(c)(3) and exempt from tax
under section 501(a). See sec. 4958(e); sec. 53.4958-2(a), Foundation Excise Tax
Regs. In December 2000 the IRS recognized AMMC as an organization exempt
from tax under section 501(a) and (c)(3). AMMC notified the IRS of its continued
operation as a section 501(c)(3) organization by filing Forms 990 for all relevant
years, including 2013 and 2014.
In October 2018 the IRS issued AMMC a final adverse determination letter
revoking its tax-exempt status retroactively to January 1, 2014. In November
2020 we sustained that determination. See Am. Med. Missionary Care, Inc. v.
Commissioner, T.C. Dkt. No. 318-19X (Nov. 6, 2020) (order of dismissal and de-
cision). Despite that revocation AMMC remained, for purposes of section 4958,
an “applicable tax-exempt organization” in 2014. That is because AMMC was de-
scribed in section 501(c)(3) at least during 2010-2013 and thus “at any time during
the 5-year period ending on the date of the transaction.” Sec. 4958(e)(2); see sec.
53.4958-2(a)(5), Foundation Excise Tax Regs. - 13 -
[*13] 2. “Disqualified Person”
The Department of the Treasury has issued comprehensive regulations
under section 4958, including an elaboration of what it means to be a “disqualified
person.” See sec. 53.4958-3, Foundation Excise Tax Regs. 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.” Id. para. (c). These officials include voting members of the governing
body, presidents, chief executive officers, chief operating officers, treasurers, and
chief financial officers. Id. subparas. (1), (2), and (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.” Id.
subpara. (3). “A person who serves as treasurer * * * has this ultimate respon-
sibility unless the person demonstrates otherwise.” Ibid.
Petitioner was listed as AMMC’s treasurer and secretary on an annual report
filed with the State of Michigan in October 2012. She was listed as its secretary
and as a director on the Form 990 for 2013, and as its secretary on the Form 990
for 2014. Neither Form 990 showed any person as occupying the office of “trea-
surer.” Petitioner had signature authority over at least three of AMMC’s bank ac- - 14 -
[*14] counts during 2013 and 2014, and she regularly attended AMMC board
meetings during both years.
We need not decide whether petitioner was a disqualified person with re-
spect to AMMC by virtue of being a director or having “ultimate responsibility for
managing the finances of the organization.” Sec. 53.4958-3(c)(3), Foundation
Excise Tax Regs. She was a disqualified person in any event because she was
married to Mr. Ononuju. Family members of disqualified persons, down to the
level of great-grandchildren, are disqualified persons with respect to the charity.
See id. para. (b)(1). As the president and founder of AMMC, Mr. Ononuju was
clearly a disqualified person. See id. paras. (c)(2), (e)(2)(i). Petitioner is auto-
matically deemed to be a disqualified person because she was Mr. Ononuju’s
“spouse.” See id. para. (b)(1)(i).
3. “Excess Benefit Transactions”
“The term ‘excess benefit transaction’ means any transaction in which an
economic benefit is provided by an applicable tax-exempt organization * * * [to]
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.” Sec. 4958(c)(1)(A). The statute further provides: “For
purposes of the preceding sentence, an economic benefit shall not be treated as - 15 -
[*15] consideration for the performance of services unless such organization
clearly indicated its intent to so treat such benefit.” Ibid. (emphasis added).
As a rule, an organization “is treated as clearly indicating its intent to pro-
vide an economic benefit as compensation for services only if the organization
provides written substantiation that is contemporaneous with the transfer of the
economic benefit at issue.” Sec. 53.4958-4(c)(1), Foundation Excise Tax Regs.
“If an organization fails to provide this contemporaneous substantiation, any
services provided by the disqualified person will not be treated as provided in
consideration for the economic benefit.” Ibid.
The “contemporaneous substantiation” requirement can be satisfied in two
ways--by timely reporting or by “other written contemporaneous evidence.” Id.
para. (c)(3). Timely reporting occurs if the organization reports a payment to the
disqualified person as compensation on a Form W-2 or a Form 990 filed before the
IRS commences its examination. Id. para. (c)(3)(i)(A)(1). Timely reporting also
occurs if the disqualified person reports the payment as income on an original or
amended Form 1040 filed before the earlier of the date on which the IRS com-
mences its examination or supplies written documentation of a potential excess
benefit transaction. Id. para. (c)(3)(i)(A)(2). - 16 -
[*16] The “contemporaneous substantiation” requirement can also be satisfied by
“other written contemporaneous evidence” showing that “the appropriate decision-
making body or an officer authorized to approve compensation approved a transfer
as compensation for services in accordance with established procedures.” Id.
para. (c)(3)(ii). Such evidence includes “[a]n approved written employment con-
tract executed on or before the date of the transfer,” other documentation showing
that “an authorized body [contemporaneously] approved the transfer as compensa-
tion for services,” and contemporaneous written evidence establishing “a reason-
able belief by the * * * organization that a benefit was a nontaxable benefit.” Ibid.
During 2014 petitioner received biweekly checks totaling $27,000, drawn
on AMMC’s Saginaw account, and monthly certified checks totaling $88,000,
drawn on AMMC’s Financial Plus account. With respect to the biweekly $1,000
check, she testified that this “was my paycheck because Dr. Ononuju put me on
[AMMC’s] payroll.” But she offered no testimony or other evidence that she
performed any services for AMMC. She consistently referred to AMMC as her
husband’s “business” and as “the name of his medical practice.” She insisted: “I
don’t know about the business. The business is solely his.” She testified: “I don’t
know anything about this case. I’m just a mother of eight children, and that was
my job at that time.” She testified that she had “a full-time job in whatever I do in - 17 -
[*17] the family” and that she did not “know about finance or work for American
Medical Missionary.”
In any event petitioner supplied no contemporaneous substantiation to show
that AMMC “clearly indicated its intent,” sec. 4958(c)(1)(A), to treat the $27,000,
much less the $88,000, as compensation for her services. AMMC did not report
any of those payments as compensation to petitioner on a Form W-2, and petition-
er did not report any of those payments as income on her Form 1040. AMMC
explicitly stated on its Form 990 for 2014 that petitioner had received zero “re-
portable compensation from the organization” in that year. That statement was a
clear contrast with AMMC’s Form 990 for 2013, which stated that petitioner had
received “reportable compensation from the organization” of $21,000.
Nor did petitioner supply any other type of contemporaneous substantiation.
Specifically, she offered no evidence (such as an employment contract or minutes
of board meetings) showing that “the appropriate decision-making body or an
officer authorized to approve compensation approved * * * [her payments] as
compensation for services in accordance with established procedures.” Sec.
53.4958-4(c)(3)(ii), Foundation Excise Tax Regs. In the absence of contempora-
neous substantiation, “any services provided by the disqualified person will not be
treated as provided in consideration for the economic benefit.” Id. para. (c)(1). - 18 -
[*18] Petitioner is thus foreclosed from contending that the $115,000 she received
was not an “excess benefit” because paid in consideration of her performance of
services.2
Petitioner’s principal submission at trial was that the $88,000 of checks
drawn on the Financial Plus account, while made out to her, did not benefit her
personally. She testified that she withdrew these funds from AMMC’s account, at
her husband’s request, for distribution to needy people in Saginaw--e.g., to help
them pay rent and utilities, to pay for children’s after-school programs, and to re-
ward children who got good grades at school. Mr. Ononuju allegedly asked her to
do this because he was “a workaholic” who could not leave his medical practice.
She testified: “I was just like a messenger. * * * [Mr. Ononuju would] say, go and
get me a check and bring it to the office, or go and get a check and give [it] to
these certain poor people.”
2 The regulations provide an exception whereby an organization will be treated as having “clearly indicated its intent” to provide a payment as compen- sation for services if “reasonable cause” is shown for its failure to report the pay- ment as the Code requires. See sec. 53.4958-4(c)(3)(i)(B), Foundation Excise Tax Regs. To qualify for this exception, it must be established that “there were sig- nificant mitigating factors with respect to its failure to report” or that the failure “arose from events beyond * * * [its] control,” and that it “acted in a responsible manner both before and after the failure occurred.” Ibid. Petitioner did not rely on this exception at any point in this litigation, and she supplied no evidence at trial to establish that any of these conditions was satisfied. - 19 -
[*19] For a variety of reasons we did not find this testimony credible. The RA
determined that Mr. Ononuju himself had taken several hundred thousand dollars
from AMMC’s accounts during 2014 via cash withdrawals, bank checks, certified
checks, and money orders. Petitioner could not explain why this cash was not suf-
ficient to enable her husband to make the alleged distributions.
The $88,000 paid to petitioner from AMMC’s Financial Plus account, more-
over, uniformly consisted of certified checks. These checks were issued to her on
a regular monthly basis, generally in multiples of a thousand dollars. If petitioner
was being sent to the bank as a messenger to get cash for distribution to those in
need, it is counterintuitive that she would have brought back certified checks is-
sued in this manner. She testified that she would hold these certified checks for a
period of time and, when her husband needed money to give away, she would re-
turn to the bank, cash the check, and give the cash to her husband. We did not
find this story line credible.
Petitioner admitted that she had no records to establish what she did with
any of this money. She had no net income of her own for 2014; indeed, she re-
ported a loss of $5,096 on her Schedule C. She testified that her husband likewise
had little income in 2014 because AMMC was “going down.” When asked how
she was paying the living expenses of a family that included eight children, she - 20 -
[*20] asserted that she was “getting help from family and friends.” We did not
find this testimony credible.
Far more plausible was the RA’s determination that petitioner used the
$88,000 to defray personal living expenses of the Ononuju family. Indeed, in
response to the RA’s requests for information, AMMC stated that the monthly
certified checks issued to petitioner during 2013 constituted a “living allowance.”
Petitioner supplied no evidence to support a different conclusion regarding the
monthly certified checks issued to her during 2014.
The balance of the excess benefits that the IRS determined petitioner to
have received consisted of the $15,000 that AMMC paid Blue Cross Blue Shield
to provide health insurance coverage for Mr. Ononuju, petitioner, and their family.
The regulations supply a special rule for “nontaxable benefits” such as these. For
purposes of section 4958(c)(1)(A), which defines “excess benefit transaction,” an
organization “is not required to indicate its intent to provide an economic benefit
as compensation for services if the economic benefit is excluded from the disqual-
ified person’s gross income for income tax purposes.” Sec. 53.4958-4(c)(2),
Foundation Excise Tax Regs. Examples of such nontaxable benefits include
“employer-provided health benefits.” Ibid. - 21 -
[*21] The evidence showed that Mr. Ononuju during 2014 was an employee of
AMMC, serving both as its president and as a medical doctor rendering services to
AMMC’s clients. The Blue Cross Blue Shield coverage that AMMC provided to
Mr. Ononuju and his family thus constituted “employer-provided health benefits.”
Ibid. Respondent does not dispute that these benefits were properly “excluded
from the disqualified person’s gross income for income tax purposes.” Ibid. With
respect to these health benefits, AMMC was “not required to indicate its intent to
provide an economic benefit as compensation for services.” Ibid. We accordingly
conclude that AMMC’s provision of health insurance benefits did not constitute
an excess benefit transaction.
C. Applicable Excise Taxes
During 2014 AMMC provided $115,000 of excess benefits to petitioner.
Section 4958(a) imposes a first-tier tax equal to 25% of the excess benefit, payable
by the disqualified person. Section 4958(a)(1) thus imposes on petitioner a first-
tier tax of $28,750.
Section 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. - 22 -
[*22] Sec. 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.”
Sec. 4958(f)(6). The “taxable period” during which correction must occur (assum-
ing 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 subsection (a)(1).” Sec. 4958(f)(5)(A). The “taxable
period” during which petitioner was obligated to make correction thus closed on
August 13, 2018, when the notice of deficiency was mailed.
Petitioner did not correct the excess benefit transactions within the “taxable
period” as thus defined. There is no evidence that she returned to AMMC, at any
time, any portion of the $115,000 at issue. Nor did she show that she made any
effort to place AMMC “in a financial position not worse than that in which it
would be if * * * [she] were dealing [with it] under the highest fiduciary stan- - 23 -
[*23] dards.” Sec. 4958(f)(6). We accordingly hold that she is liable for a second-
tier tax of $230,000 (200% × $115,000).3
D. Availability of Abatement
Section 4961(a) affords a disqualified person an additional opportunity to
avoid the second-tier tax. It provides that, if the taxable event is corrected “during
the correction period,” the second-tier tax “shall not be assessed, and if assessed
the assessment shall be abated, and if collected shall be credited or refunded as an
overpayment.” For this purpose, the “correction period” means, with respect to
any taxable event:
the period beginning on the date on which such event occurs and end- ing 90 days after the date of mailing under section 6212 of a notice of deficiency with respect to the second tier tax imposed on such taxable event, extended by--
(A) any period in which a deficiency cannot be assessed under section 6213(a) * * * , and
3 Although petitioner testified that she and her husband were “just broke by the time he left” for Nigeria in 2017, she supplied no documentary evidence about her actual financial circumstances at that time. Assuming arguendo that inability to pay could be relevant under section 4958(b), petitioner was obligated to estab- lish, at the very least, that she endeavored to place AMMC “in a financial position not worse than that in which it would be if * * * [she] were dealing [with it] under the highest fiduciary standards.” Sec. 4958(f)(6). At no point in this litigation did she attempt to make such a showing. - 24 -
[*24] (B) any other period which the Secretary determines is reasonable and necessary to bring about correction of the taxable event. [Sec. 4963(e)(1).]
Under these rules, the “correction period” will remain open at least until this
Court’s decision has become final following any appeal. See secs. 6213(a),
7481(a). Section 4961(b) grants us jurisdiction “to conduct any necessary supple-
mental proceeding to determine whether the taxable event was corrected during
the correction period.” Any such proceeding must begin within 90 days “after the
last day of the correction period.” Sec. 4961(b). Petitioner thus retains the
opportunity to avoid assessment and collection of the second-tier tax.4
III. Additions To Tax
A. Failure To File
Section 6651(a)(1) provides for an addition to tax of 5% of the tax required
to be shown on a return for each month or fraction thereof for which there is a
failure to file the return, not to exceed 25% in toto. Respondent determined that
4 Somewhat similarly, section 4962 provides for nonassessment or abatement of the first-tier tax in certain circumstances. To qualify for this treatment, the disqualified person must establish two facts “to the satisfaction of the Secretary.” Sec. 4962(a). Specifically, she must show (1) that the taxable event “was due to reasonable cause and not to willful neglect” and (2) that the event “was corrected within the correction period for such event.” Ibid. The “correction period” for the first-tier tax is the same as for the second-tier tax. See sec. 4963(e)(1) (defining correction period “[f]or purposes of this subchapter”). - 25 -
[*25] petitioner was required to file, by May 15, 2015, a return on Form 4720
reporting the excess benefit transactions. Because petitioner did not file such a
return, the RA determined an addition to tax of $7,313 under section 6651(a)(1).
Tax-exempt organizations are required to file Form 4720 to report liability
for various excise taxes, including taxes imposed for self-dealing (sec. 4941),
excess business holdings (sec. 4943), investments that jeopardize charitable
purpose (sec. 4944), political expenditures (sec. 4955), and excess benefit trans-
actions (sec. 4958). See sec. 53.6011-1(b), Foundation Excise Tax Regs. (im-
posing this filing requirement). AMMC did not file a Form 4720 for 2014. The
RA concluded that petitioner was therefore required to file a separate return on
Form 4720 by May 15, 2015. See ibid. (providing that “[e]very person” liable for
tax imposed by section 4958(a) shall file such a return); 2014 IRS Instructions for
Form 4720, at 2 (“[D]isqualified persons * * * who owe tax under Chapter 41 or
42 * * * [and] do not sign the return of the entity, must file a separate return on
Form 4720 showing the tax owed and the name of the entity for which you owe
tax.”).
We have not previously addressed, at least not squarely, whether additions
to tax apply when a disqualified person fails to file timely a Form 4720 reporting
excess benefit transactions. Cf. H. Fort Flowers Found., Inc. v. Commissioner, 72 - 26 -
[*26] T.C. 399, 410-411 (1979) (holding that a tax-exempt organization had
reasonable cause for failure to file Form 4720 reporting section 4942 excise tax for
failure to distribute income). In analogous contexts we have ruled that additions
to tax may apply when individuals affiliated with tax-exempt entities failed to file
other IRS forms reporting excise taxes under other Code provisions. In those
cases we reasoned that section 6651(a)(1) generally applies to the nonfiling of
“any return required under authority of subchapter A of chapter 61,” and that the
filing requirement in question was imposed by regulations issued under section
6011, which is included within subchapter A of chapter 61. See, e.g., Janpol v.
Commissioner, 102 T.C. 499, 500 (1994) (failure to file Form 5330 reporting
section 4975 excise tax on prohibited transactions), supplementing 101 T.C. 518
(1993); Morrissey v. Commissioner, T.C. Memo. 1998-443, 76 T.C.M. (CCH)
1006, 1013 (same); see also Repetto, 103 T.C.M. (CCH) at 1904 (failure to file
Form 5329 reporting section 4973 excise tax on excess IRA contributions).
Section 6011(a) provides that, “[w]hen required by regulations prescribed
by the Secretary any person made liable for any tax imposed by this title * * *
shall make a return or statement according to the forms and regulations prescribed
by the Secretary.” The Secretary has prescribed regulations under section 6011
mandating that “[e]very person liable for tax imposed by section[] * * * 4958(a) - 27 -
[*27] * * * shall file an annual return on Form 4720.” Sec. 53.6011-1(b),
Foundation Excise Tax Regs. Because this filing requirement was promulgated
under the authority of section 6011(a), petitioner’s failure to file Form 4720 may
subject her to liability for an addition to tax. See Janpol, 102 T.C. at 500.
To avoid liability petitioner must demonstrate that her failure to file was
“due to reasonable cause and not due to willful neglect.” Sec. 6651(a)(1). Rea-
sonable cause exists “if the taxpayer exercised ordinary business care and pru-
dence but, nevertheless, was unable to file the return within the time prescribed by
law.” Niedringhaus v. Commissioner, 99 T.C. 202, 221 (1992). “A taxpayer’s
belief that no return is required in itself is not sufficient to show that the failure to
file was due to reasonable cause.” Ibid. “[C]ircumstances considered to constitute
reasonable cause arise as a result of factors beyond a taxpayer’s control,” such as
“postal delays, timely filing of a return with the wrong office, death or serious
illness of the taxpayer or a member of his immediate family, [or] the taxpayer’s
unavoidable absence from the United States.” Paschall, 137 T.C. at 21. Petitioner
did not file a brief, and she did not allege at trial that any such events prevented
her timely filing.
Petitioner represented that she had no involvement in AMMC, that it was
her husband’s “business,” and that her husband and his accountant handled all tax - 28 -
[*28] return preparation. She testified that the accountant became ill in 2014,
suggesting that his illness caused the failure to file. But “reliance on a tax adviser
to prepare the return does not constitute reasonable cause.” Paschall, 137 T.C. at
22 n.16. In any event a different accountant prepared AMMC’s Form 990 and her
Form 1040 for 2014, and she offered no explanation why that accountant failed to
file Form 4720. Nor did she allege that the accountant advised her that it was
unnecessary to file that form. Cf. United States v. Boyle, 469 U.S. 241, 251-252
(1985) (noting that a taxpayer might reasonably rely on a tax professional’s advice
that no return was required to be filed). Petitioner has thus failed to meet her
burden.
The Form 4720 is admittedly an exotic species: The obligation to file this
return--unlike the obligation to file (say) Form 1040--is far from common knowl-
edge, especially for someone not actually involved in a charity’s operations. Pe-
titioner had received monthly checks from AMMC for prior years, and we do not
believe that she understood that such transactions needed to be reported on an
excise tax return. “[I]gnorance of the law, however, does not amount to reason- - 29 -
[*29] able cause.” Rayhill v. Commissioner, T.C. Memo. 2013-181, 106 T.C.M.
(CCH) 100, 101.5
B. Failure To Pay
Section 6651(a)(2) provides for an addition to tax when a taxpayer fails to
pay timely the tax shown on a return unless the taxpayer proves that the failure
was “due to reasonable cause and not due to willful neglect.” To meet his burden
of production under section 7491(c) with respect to the section 6651(a)(2) addition
to tax, respondent must provide evidence of a tax return. See Wheeler v. Commis-
sioner, 127 T.C. 200, 208-211 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008). An
SFR that meets the requirements of section 6020(b) is treated as the “return” filed
by the taxpayer for this purpose. See sec. 6651(g)(2).
On May 9, 2018, the examining agent prepared on petitioner’s behalf a sub-
stitute Form 4720 reporting for 2014 a first-tier excise tax of $32,500 under sec-
tion 4958(a), computed as 25% of the excess benefits the RA determined peti-
tioner to have received. This SFR satisfied the requirements of section 6020(b).
Respondent has thus met his burden of production under section 6651(a)(2).
5 Petitioner was represented by counsel during the IRS examination, which began in 2015. We need not decide whether she might have shown “reasonable cause” by filing a Form 4720 at some point before the RA prepared the substitute Form 4720 in May 2018. - 30 -
[*30] This addition to tax will not apply if the taxpayer shows that the failure to
pay was “due to reasonable cause and not due to willful neglect.” Sec. 6651(a)(2).
“The determination of whether the taxpayer had reasonable cause pursuant to sec-
tion 6651(a)(2) is similar to the analysis of reasonable cause pursuant to section
6651(a)(1) except that undue financial hardship may be a defense to the failure to
pay.” Hardin v. Commissioner, T.C. Memo. 2012-162, 103 T.C.M. (CCH) 1861,
1863; see sec. 301.6651-1(c)(1), Proced. & Admin. Regs. “To establish undue
hardship, the taxpayer must show that making the tax payment on time would have
required ‘the risk of a substantial financial loss.’” Hardin, 103 T.C.M. (CCH)
at 1863 (quoting Merriam v. Commissioner, T.C. Memo. 1995-432, 70 T.C.M.
(CCH) 627, 636, supplemented by T.C. Memo. 2005-17, aff’d, 107 F.3d 877 (9th
Cir. 1997)).
We conclude that petitioner’s failure to pay, like her failure to file, was not
due to reasonable cause. She testified that the Michigan Board made her husband
“pay a huge sum” and that she was “broke” by the time he left the United States in
2017. But she provided no documentary evidence to establish either fact, and she
supplied no financial records to demonstrate that she would suffer undue hardship
if payment were made. Although petitioner may have faced challenges as a
mother of eight children, she produced no credible evidence that would enable us - 31 -
[*31] to conclude that paying the taxes would have caused “undue hardship.” See
Wilson v. Commissioner, T.C. Memo. 2012-229, 104 T.C.M. (CCH) 170, 174
(holding that a taxpayer failed to meet her burden where she asserted only that she
was “a single mother living * * * in tough economic times”).
To reflect the foregoing,
Decision will be entered under
Rule 155.