The parent may furnish all of the subsidiary's capital as equity contributions so that the subsidiary need not pay interest on the contributions. Intermediate sanctions were enacted to provide the IRS with an alternative to revocation of an organization's exempt status in the event of substantial private benefit or private inurement. If a nonprofit engages in an excess-benefit transaction, the person receiving excess benefit, as well as any organization manager who knowingly participates in the transaction, may be liable for a penalty tax, which is separate from possible revocation of the organization's exemption. Once an excess-benefit transaction is found to have occurred, an additional penalty will be imposed on the recipient of the excess benefit if the transaction is not corrected within a specified period. This additional penalty tax is equal to 200 percent of the excess benefit.
Joint ventures create inherent susceptibility to intermediate sanctions for a number of reasons.
First, compensation issues that may arise in a joint venture context are addressed in the proposed regulations, including incentive compensation and sharing of revenue. This control may cause the for-profit partner, or an individual with such control, to be deemed to be a disqualified person with respect to the organization. The potential for nonprofits expanding their income bases and scope of activities is seemingly unlimited, particularly in the age of the Internet. Using joint ventures with for-profit partners as a vehicle to attain these goals is a viable option, provided it is done consistent with current guidelines. He gratefully acknowledges the assistance of Gayle Forst in the preparation of this article.