The Tax Court granted partial summary judgment to the IRS, holding that the plaintiff was a disqualified person with respect to a tax-exempt organization for purposes of the excise tax imposed by Sec. 4958 on excess benefit transactions. It held that he was in a position to exercise substantial influence over the charity.
Facts: Vincent Fumo was a Pennsylvania state senator for decades whose tenure ended in 2009. In 1991, at his direction, members of his staff incorporated what later became Citizens Alliance for Better Neighborhoods. It was granted Secs. 501(a) and (c)(3) tax-exempt status. A member of Fumo's senatorial staff was its executive director during 2001—2004. Fumo was never formally affiliated with Citizens Alliance but used his senatorial position to obtain millions of dollars of funding for it.
In 2009, Fumo was convicted on federal criminal charges including offenses related to a scheme to defraud Citizens Alliance, to which he was ordered to pay restitution of $1,165,317.
Fumo testified during his criminal trial that he received many "perks and gifts" from Citizens Alliance. He admitted to having "a significant role" in it and making "a lot of decisions on important topics." He stated, "I viewed it as my nonprofit ... my entity, my baby. Gave it birth and nursed it along. ... And we ran it out of our office." Further, he testified, "I created it. ... I raised money for it. If it weren't for me, it wouldn't exist." Fumo also admitted during the criminal trial, "I did have substantial influence over the organization. So according to that I am a disqualified person."
In 2013, the IRS determined that Fumo was liable for excise taxes under Sec. 4958(a)(1) due to excess benefit transactions with Citizens Alliance during 2002—2004. Fumo challenged the IRS's determination in Tax Court, and the IRS moved for partial summary judgment.
Law and regulations: Sec. 4958(a)(1) imposes on each excess benefit transaction a tax equal to 25% of the excess benefit, to be paid by any disqualified person who receives the excess benefit.
Sec. 4958(c) defines an excess benefit transaction as "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."
Sec. 4958(e)(1) defines an applicable tax-exempt organization to include a Sec. 501(c)(3) entity exempt from tax under Sec. 501(a).
Sec. 4958(f)(1)(A) includes in the definition of disqualified person, with respect to any excess benefit transaction, any person who was at any time during the five-year period ending on the date of the transaction in a position to exercise substantial influence over the affairs of the organization.
Regs. Sec. 53.4958-3(e)(1) provides that, besides the criteria enumerated in the regulation, status as a disqualified person "depends upon all relevant facts and circumstances."
Regs. Sec. 53.4958-3(e)(2) provides that facts and circumstances tending to show a person's substantial influence over the affairs of an organization include that the person founded the organization; is a substantial contributor to it; has or shares authority to control or 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.
Issues: The IRS sought partial summary judgment in Tax Court on two issues: whether Fumo was a disqualified person with respect to Citizens Alliance and whether he received excess benefits from it.
Fumo argued that because he did not hold a position such as officer, director, or employee within Citizens Alliance and was not formally affiliated with it, he could not be considered to have wielded substantial influence and thus was not a disqualified person. He also denied being considered Citizens Alliance's founder for purposes of any excess benefit transaction because he was not among its incorporators.
Holding: The court held that Fumo was a disqualified person with respect to Citizens Alliance because he exercised substantial influence over the organization.
The court rejected Fumo's principal argument that to be a disqualified person with respect to a charity, a person must be formally affiliated with it. While persons who hold certain positions with a charity are disqualified persons under Regs. Sec. 53.4958-3(c), the status of most other individuals is governed by the "facts and circumstances" test of Regs. Sec. 53.4958-3(e). Under this test, an individual who has no formal job title or formal affiliation with the charity can be a disqualified person with respect to it.
In applying the facts-and-circumstances test, the court considered the seven factors listed in Regs. Sec. 53.4958-3(e)(2) as tending to show substantial influence and found that several of those factors applied to Fumo. Based on his testimony, and that Citizens Alliance was incorporated at his direction by his senatorial staff, the court found that in substance he founded the organization. The court also found that Fumo was a substantial contributor to the organization because, while he did not directly donate money to the organization, he was indirectly responsible for virtually all of Citizens Alliance's funding, which far exceeded the 2% threshold established in Sec. 507(d)(2)(A).
The court further found Fumo had or shared authority to control or determine a substantial portion of Citizens Alliance's capital expenditures and operating budget directly or indirectly, based on his testimony that he "did make a lot of decisions on important topics" for the organization, that the organization was operated from his office, and that his staff ran its daily affairs. Finally, the court noted that in the criminal case against him, the district court had determined that Fumo had extracted $1,165,317 of benefits from Citizens Alliance, which the Tax Court stated he could not have done without having substantial influence over the organization, and he had explicitly admitted in the criminal trial that he had substantial influence over it.
On the issue of whether Fumo had received excess benefits, the court denied the IRS's motion for partial summary judgment, finding that the issue was inextricably related to the issue of the amount, if any, of excess benefits he received, and thus this determination was better reserved for trial.
- Fumo, T.C. Memo. 2021-61
— By Mark Aquilio, CPA, J.D., LL.M., professor of accounting and taxation, St. John's University, Queens, N.Y.
