Question

Jimmy Jones is an officer for a §501(c)(3) organization, and receives employee benefits that are inappropriate in the context of a charitable entity. The excess benefits are determined to be $35,000. Jones does not repay the excess benefits to the organization before the first-level tax is due.

a. Apply the rules for intermediate sanctions. What amount of first-level taxes are imposed on Jones? On the exempt organization management?

b. What amount of second-level taxes are imposed on Jones?

Answer 1

Part a)

As per the applicable rules, the first level taxes will be levied at a rate of 25% of the value of excess benefits so received by the employee. This tax is also known as excise tax. The tax rate on the exempt organization management will be at the rate of 10% of the excess benefit subject to a ceiling of $20,000 tax per transaction. The amount of first-level taxes are calculated as below:

First-Level Taxes on Jones = Amount of Excess Benefit*25% = 35,000*25% = $8,750

First-Level Taxes on Exempt Organization Management = Amount of Excess Benefit*10% = 35,000*10% = $3,500

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Part b)

The second level taxes that will be levied at a rate of 200% of the amount of excess benefit so received by Jones. The amount of second-levels taxes imposed on Jones is calculated as below:

Second-Level Taxes Imposed on Jones = Amount ot Excess Benefit*200% = 35,000*200% = $70,000