Excess benefit transactions – Tax Court clarifies definition of “disqualified persons”

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Abstract: Excess benefit transactions, where economic benefits provided to so-called “disqualified persons” are greater than the value of what was received by the nonprofit organization, can lead to hefty excise taxes for those individuals, as well as reputational damage to organizations themselves. Who are disqualified persons? This article summarizes a recent U.S. Tax Court ruling that rejected the notion that only people with a formal affiliation with an organization can be disqualified persons. A short sidebar reviews another Tax Court case illustrating the danger of not promptly addressing excess benefit transactions when the IRS flags them. Fumo v. Comm’r, T.C. Memo. 2021-61 (May 17, 2021); Ononuju v. Comm’r, T.C. Memo. 2021-94 (July 26, 2021).