Freeman Law Tax Court In Brief: Case Of State Senator Convicted On Federal Criminal Charges Including Fraud

Written by Jason Freeman | Posted in Tax Fraud/Evasion/Crimes

Fumo v. Comm’r, T.C. Memo. 2021-31 | May 17, 2021 | Lauber, J. | Dkt. No. 17614-13

Opinion

Short Summary:

Taxpayer, a state senator with 30 years of service, was convicted on Federal criminal charges, including mail and wire fraud. One victim included a 501(c)(1) & (3) organization, exempt from Federal income tax. Taxpayer influenced the tax-exempt organization’s formation as, at his direction, three members of his senatorial staff incorporated the organization for the purposes of maintaining and improving the aesthetic appearance of the taxpayer’s district. At all periods in question, at least one member of the taxpayer’s staff worked for the charity organization as either President or Executive Director while remaining employed by the Senator. Taxpayer influenced, as chairman of a senate appropriations committee, funding for the charitable entity from public and private sources.

A Federal criminal court convicted the taxpayer on multiple accounts related to a scheme to defraud the organization of funds to purchase personal property for the taxpayer and ordered taxpayer to pay substantial restitution to the tax-exempt organization. The taxpayer’s criminal trial testimony revealed that the taxpayer would often derive benefits from the tax-exempt organization by simply emailing a member of his staff, who was a fiduciary of the organization. Further, at the criminal trial, the taxpayer admitted to influencing and making decisions on important topics for the organization, including admitting that he had substantial influence over the organization.

The IRS determined liability to the taxpayer under Section 4958(a)(1) for a 25% tax of excess benefit from any excess benefit transaction involving a charity by a disqualified person although the taxpayer was never employed by the 501(c)(3) as an officer, director, trustee, or employee.

Key Issues:

Whether the taxpayer was a “disqualified person,” although he was not an officer, director, or employee of the organization, within the meaning of Section 4958?

Primary Holdings:

Whether the taxpayer satisfies the definition of a disqualified person shall not determined by title or formal role within a tax-exempt organization but based on whether the individual or organization exercises substantial influence over the organization’s affairs.

Key Points of Law:

The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Comm’r, 116 T.C. 73, 74 (2001). We may grant partial summary judgment regarding an issue as to which there is no genuine dispute of material fact, and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party “may not rest upon the mere allegations or denials” of his pleadings but instead “must set forth specific facts showing there is a genuine dispute” for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.
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 [*4] (including the performance of services) received for providing such benefit.” An “applicable tax-exempt organization” is defined to include an organization described in section 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) .2 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).
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. See Treas. Reg. §53.4958-3(c). The persons include voting members of the governing body, presidents, chief executive officers (CEOs), chief operating officers, treasurers, and chief financial officers (CFOs). subparas. (1), (2), and (3). Family members of disqualified persons, down to the level of great-grandchildren, are also “disqualified persons” with respect to the charity. See id. para. (b)(1).
Apart from these enumerated officials, members of their families, and certain affiliated entities, the question whether an individual is a disqualified person generally “depends upon all relevant facts and circumstances.” para. (e)(1). The regulation specifies a nonexclusive list of factors “tending to show that a person has substantial influence over the affairs of an organization.” Id. subpara. (2). These include whether the person “founded the organization,” is “a substantial contributor to the organization,” has or shares authority to determine a substantial portion of its capital expenditures or operating budget, or “manages a discrete segment or activity of the organization that represents a substantial portion of its activities, assets, income, or expenses.” Id. subdivs. (i), (ii), (iv), (v).
The first factor listed in the regulation as tending to show that a person has “substantial influence” over an organization is whether he “founded the organization.” subdiv. (i).
The second factor listed in the regulation as tending to show that a person has “substantial influence” over an organization is whether he was “a substantial contributor to the organization (within the meaning of section 507(d)(2)(A)).” subdiv. (ii). A person may be a “substantial contributor” to an organization if his annual contributions constitute as little as 2% of its total contributions. See sec. 507(d)(2)(A).
The regulation indicates that a 2% contributor will tend to have “substantial influence” over a charity. Section 53.4958-3(e)(2)(ii), Foundation Excise Tax Regs. That is presumably because a threat by such a donor to terminate his current level of funding would give him meaningful leverage over the charity’s decision making.
The regulation provides that the facts and circumstances tending to show that a person has substantial influence “include, but are not limited to,” the seven factors listed therein. Sec. 53.4958-3(e)(2), Foundation Excise Tax Regs.; see Wnuck v. Comm’r, 136 T.C. 498, 507 (2011) (holding that the verb “includes,” when used in statutes and regulations, “is non-exclusive”).
The fourth factor listed in the regulation as tending to show that a person has substantial influence over an organization is whether he “has or shares authority to control or determine a substantial portion of the organization’s capital expenditures [or] operating budget.” Sec. 53.4958-3(e)(2)(iv), Foundation Excise Tax Regs.

Insight: The Fumo decision reminds all taxpayers that titles or employment status does not define the relationship between the taxpayer and a tax-exempt organization. A taxpayer that has the ear of a fiduciary of a 501(c)(3) opens himself or herself up to the scrutiny of the IRS or the Tax Court to formulate your level of influence.

Have a question? Contact Jason Freeman, Freeman Law, Texas.