In a recently released technical advice memorandum, the IRS ruled that reliance on counsel must be reasonable in order to seek abatement of excise taxes resulting from an excess benefit transaction. 

In general, when an exempt organization engages in an excess benefit transaction with certain "insiders" of the exempt organization, the IRS will assess excise taxes against the exempt organization and the insider(s) involved in the transaction.  These excise taxes can be abated, however, if the parties can prove that they relied on the advice of counsel when entering into the underlying transaction.

In TAM 201503019, a note held by an exempt organization was sold at a foreclosure auction.  The buyer was a partnership, which was owned by an "insider" of the exempt organization.  Upon receipt of the sale proceeds from the note, the exempt organization then loaned those sale proceeds back to the partnership, thus creating an excess benefit transaction.

Prior to the transaction, the exempt organization's counsel orally advised the partnership that the transaction was not an excess benefit transaction.  To assist the partnership in seeking abatement of the excise taxes, the exempt organization's counsel submitted a letter to the IRS reflecting that it had incorrectly concluded that the transaction would not violate the excess benefit transaction rules. 

The IRS ruled that the partnership's reliance on the exempt organization's counsel was unreasonable because:

  1. There was no evidence that the partnership ever sought the exempt organization's counsel's advice on the matter; instead, only the exempt organization sought guidance, which was then provided to the partnership;
  2. There was no evidence that the exempt organization's counsel received accurate information on which to base his opinion;
  3. There was no evidence that the exempt organization's counsel was experienced in the rules regarding excess benefit transactions; and
  4. There was no evidence that the partnership considered the exempt organization's counsel's advice when considering whether to move forward with the proposed transaction.

Based on the above, the IRS refused to abate the excise taxes incurred from the excess benefit transaction. In sum, exempt organizations and their "insiders" need to be extremely careful in considering any transactions between themselves; and, before proceeding with transactions that could be deemed excess benefit transactions, exempt organizations and their insiders should both retain knowledgeable counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.