Are there grounds for imposing intermediate sanctions?

Please cite the text.. Law of Nonprofit – The Life Cycle of a Charitable Organization
Read Chapter 9 (pages 407-454) and answer the problem question…..PROBLEM …..
You are an IRS examiner. You are auditing Land Conservation, Inc. (LCI), a §501(c)
(3) nonprofit that preserves land from development by buying and reselling it with
easements that prohibit future development of the land except for a single-family
house. Two years ago, Larry Luck, the executive director and chairman of the board,
and his wife Letitia purchased 500 acres in their hometown for $500,000. They
financed the purchase entirely with a no-interest loan from LCI. Last month, LCI
bought the land from them for $1 million, placed the easement prohibiting further
development on the land, and then said it was worth only $500,000 in the open
market because of the restriction…….
NOTES AND QUESTION
Letitia Luck is both Larry’s wife and LCI’s lawyer. At the time that the board
approved the loan, she did not mention that the local banks were requiring 20% down
and 5% interest on all loans. At the time of the sale, she prepared an appraisal of the
land, which she presented to the board. She did not compare the price of the land to
that of any other property; she simply said that the value of the land “must have been
reduced substantially due to the restrictions.” The board of directors approved both
transactions unanimously.
Are there grounds for imposing intermediate sanctions? If so, what transaction or
transactions concern you? Who should be sanctioned? What should the penalty be?
Do you think that the tax exemption should be revoked? Why or why not? Assume
that you are also working with state charity officials. What state law principles, which
were covered in Chapters 2 and 3, may have been broken?
ANSWER
Excess Benefit Transaction: An excess benefit transaction occurs when an insider of a tax-exempt organization (such as Larry Luck or Letitia Luck) receives a financial benefit that exceeds the value of what the organization received in return.
Lack of Fair Market Value: If the land purchased from Larry and Letitia Luck is indeed worth less than what LCI paid due to the restrictions, the IRS may consider whether the purchase was in the best interest of the organization or if it primarily benefited the Lucks personally.
Conflict of Interest: The fact that Letitia Luck is both Larry’s wife and LCI’s lawyer and that she did not disclose information regarding local banks’ loan terms raises concerns about potential conflicts of interest.
Appraisal Process: The appraisal process should be thorough and impartial. Letitia Luck’s presentation of an appraisal without comparing the land’s value to other properties could raise questions about the validity of the valuation.
Unanimous Board Approval: The unanimous approval of both transactions by the board may indicate a lack of due diligence in evaluating the transactions.
Based on these factors, there may be grounds for imposing intermediate sanctions. This would typically involve assessing penalties against individuals involved in the excess benefit transactions. The penalties may include excise taxes on the excess benefit received.
Revoking the tax exemption of LCI would be a more severe measure and would depend on the severity and frequency of such transactions, as well as whether they are deemed as consistently undermining the organization’s charitable purpose.
Regarding state law principles, this would depend on the specific state laws and regulations governing nonprofit organizations. Key areas to examine might include fiduciary duties, conflicts of interest, and the duty of care. Violations of state law could lead to penalties or sanctions at the state level.
To provide a more precise analysis, it’s essential to consult the specific text, case law, and applicable regulations. Legal counsel with expertise in nonprofit law may be necessary to navigate the complexities of this case effectively.