June 13, 2002 | Read Time: 2 minutes
The Internal Revenue Service has won its first big test of a 1996 law designed to crack down on people who receive improper financial benefits through their involvement with nonprofit organizations.
A Mississippi family and the group of health organizations it oversees are subject to so-called intermediate-sanctions fines of at least $1-million to $10-million because the family undervalued the assets of the health organizations when it converted them from nonprofit to for-profit status in 1995.
The Caracci family, of Jackson, Miss., had created three companies — the Sta-Home Health Agencies of Carthage, Greenwood, and Jackson — to take over the assets of the nonprofit groups they had started.
In each case, according to court documents, the appraiser hired by the family decided that the assets of the nonprofit groups had a negative value because the organizations had been losing money for years.
But the U.S. Tax Court, upholding the IRS position that the companies had a positive net worth, ruled that the appropriate value was actually $18.7-million — $5.2-million more than the liabilities that the for-profit groups assumed.
The court said the family had failed to value the companies’ intangible assets properly, including counting the value of certificates from the state that allowed the family to operate home–health-care services. “These certificates effectively closed the home–health-care market to competition during a period of high growth for the industry,” the court said.
The court ordered the family members, as officers of the for-profit companies, to pay the fines and return $5.2-million in assets to the nonprofit entities.
In addition to imposing penalties and fines, the IRS had sought to have the groups’ tax-exempt status retroactively revoked.
However, the court disagreed. “Given that we have already sustained the imposition of intermediate sanctions, we do not believe it appropriate” to also revoke tax-exempt status, it said (Michael T. Caracci and Cindy W. Caracci v. Commissioner of Internal Revenue, 118 T.C. 25).
Under the 1996 federal intermediate-sanctions statute, influential “insiders” who get inappropriately high compensation can be forced to pay fines, called excise taxes, as can trustees who approve the arrangements.
The penalties can equal 25 percent of the portion of the compensation or other benefits considered excessive. Insiders who fail to pay the penalties and return the portion of the compensation considered excessive can face fines of up to 200 percent of the money they received improperly.
