How are they related?

1. How are they related? Intermediate Sanctions, the IRS, Penn, and You

2. Questions to Ask What are Intermediate Sanctions? How can they hurt me ? How can they hurt Penn ? How do we protect against them ?

3. Session Agenda Understanding the “Intermediate Sanction” rules. Case studies—practical application of the rules. Group discussion—how the rules apply to Penn and you. Introduction of Penn “Intermediate Sanctions” Web site. Action steps—develop procedures that provide adequate protection.

4. What are Intermediate Sanctions? • Excise taxes • Imposed by the IRS • On individuals • As penalties • For use of substantial influence • Over certain tax-exempt organizations • For inappropriate personal gain

5. History of Intermediate Sanctions • Old rules—IRS only had the option to revoke tax exemption for misappropriating charitable assets for personal gain. • IRS was reluctant to use such an extreme penalty. • Revocation hurt the organization (already a victim) rather than responsible persons receiving inappropriate benefits. • Intermediate Sanctions gives the IRS an effective “intermediate” solution to discourage certain individuals from misusing their influence over a tax exempt entity for personal benefit.

6. PENN Anatomy of an Intermediate Sanctions Event Excess Benefit Transaction Transaction Approval Compensation* Disqualified Person Organization Manager Services Management Authority IRS *An excess benefit transaction can include compensation /benefit arrangements as well as other transactions such as asset sales, rental agreements, or service contracts.

7. PENN Anatomy of an Intermediate Sanctions Event Imposition of Excise Penalty Taxes • Negatives for Penn • Adverse publicity • Disclosure of events on annual IRS form 990 available for public inspection Return Excess Benefit Cash Cash Organization Manager Disqualified Person IRS 25% excise tax (200% additional excise tax possible) 10% excise tax

8. Individuals Impacted by Intermediate Sanctions • Any “disqualified person” • Who benefits from an “excess benefit transaction” with Penn • Is liable for the tax • “Organization managers” can be liable for an additional tax

9. Effective date for Intermediate Sanctions • The excise taxes generally apply to “excess benefit transactions” occurring on or after September 14, 1995.

10. Excise Tax Rates • Disqualified Person who receives an excess benefit: • Disqualified Person who receives an excess benefit, and does not return such excess benefit to the organization within a prescribed time frame: • Organization Manager, who knowingly approves an excess benefit transaction: (Limited to $10,000 per Transaction) 25% Excise Tax 200% Excise Tax 10% Excise Tax

11. Excise Tax – Corrective Action • The disqualified person is required to correct the transaction by returning to the organization an amount equal to the excess benefit plus interest for the period the excess benefit was held. • The IRS Form 990 Annual Information Return (available for public inspection) requires the organization to disclose each excess benefit transaction and the amount of excise taxes paid.

12. Disqualified Person • Any person who is in a position to exercise substantial influence over the affairs of an organization. • The IRS will consider the person’s influence during the five-year period preceding the transaction (the lookback period).

13. Disqualified Person • Include certain family members of an individual with substantial influence. • Include corporations, partnerships, or trusts in which a disqualified person owns more than a 35 percent interest. • Individuals may be deemed to have substantial influence based upon all relevant facts and circumstances.

14. Disqualified Persons • Voting members of the governing body. • CEOs, COOs, CFOs, and Treasurers. • Department heads that manage a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization.

15. Trustees Overseers Donors Officers Deans & Vice Deans Department Chairs Basic Science Chairs Physicians Faculty Others ? The University’s Potential Disqualified Persons

16. Organization Manager • An officer, director, or trustee. • Any individual having powers or responsibilities similar to those of officers, directors, or trustees regardless of title. • Certain individuals serving on committees of the governing body even if not an officer, director or trustee.

17. Organization Manager • An organization manager must knowingly participate in the excess benefit transaction, unless such participation was not willful and was due to reasonable cause. • Participation includes silence or inaction on the part of an organization manager where the manager is under a duty to speak or act. • Knowing includes negligently failing to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction.

18. Excess Benefit Transaction • 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, • And the value of the economic benefit exceeds the value of the consideration received for providing the benefit.

19. Potential Excess Benefit Transactions • Compensation arrangements including fringe benefits (both reported and unreported). • Property transactions including both real and personal property and both sales, purchases, or uncompensated use of assets. • Rental agreements. • Other contractual arrangements; vendor relationships.

20. “Rebuttable Presumption” • For transactions that satisfy the rebuttable presumption, the burden of proof shifts to the IRS. Payments under a compensation arrangement are presumed to be reasonable and a transfer of property, or the right to use property, is presumed to be at fair market value, if three conditions are satisfied.

21. “Rebuttable Presumption” Advance approval by the governing body (or authorized committee) that is comprised of individuals entirely without conflict. Adequately documenting the basis for the board’s determination concurrent with making its decision. Reliance upon appropriate data as to comparability prior to the board making its determination.

22. Intermediate SanctionCase Studies • Group application of basic rules to real-life scenarios

23. Case Study Questions to Consider • Who are the disqualified persons and organization managers ? • Does a potential excess benefit transaction exist ? • Could a similar factual situation ever occur at Penn? • What steps could be taken to protect Penn and its leaders from exposure to this scenario?

24. Group Discussion Applying the Rules to Penn and You

25. Introduction of the New Penn Web Site on “Intermediate Sanctions” Discussion on how to use and benefit from the Web site.

26. Thank You!