In Jagannath v. Commissioner, T.C. Memo. 2026-92, the U.S. Tax Court held that a 501(c)(3) organization’s founder owed more than $1.4 million in excise taxes under IRC § 4958 and additions to tax from an excess benefit transaction.
Congress enacted IRC § 4958 to deter insiders of a tax-exempt organization from “using their positions of influence to receive unreasonable compensation” by imposing a 25% excise tax payable by a disqualified person on excess benefit transactions. Generally, an excess benefit transaction occurs when a tax-exempt organization gives an economic benefit, directly or indirectly, to a disqualified person and the value of the benefit is greater than the value of what the organization receives in return.
If the transaction is not corrected within the taxable period (i.e., the period beginning on the date the excess benefit transaction occurred and ending on the date the notice of deficiency was mailed), a second-tier tax equal to 200% of the excess benefit applies. Separately, an organization manager who knowingly participates in an excess benefit transaction can owe a 10% tax, capped at $20,000 per transaction.
Insider Transactions Need Real Structure and Oversight
In 2015, Sitaraman Jagannath formed Senecura, a Tennessee nonprofit corporation recognized as charity. Its purpose was to assist indigent individuals with basic living necessities. Mr. Jagannath was also the sole member of Pingala Group LLC, a real estate investment and management company and a disregarded entity.
Senecura received $600,000 from Mr. Jagannath’s half-brother and, in April 2016, Mr. Jagannath withdrew $590,000 from Senecura, which he characterized as a loan to Pingala with no interest and principal due December 31, 2021. The loan was never repaid and the proceeds were never deposited into Pingala’s account. On its 2016 and 2017 tax returns, Senecura reported the loan on its balance sheet, but not on Schedule L, Transactions With Interested Persons. Senecura’s 2018 tax return reported the loan on Senecura’s Schedule L, but not on its balance sheet.
The IRS audited Senecura’s 2016 tax return and concluded that Mr. Jagannath was subject to a 25% excise tax and that Pingala was required to return the $590,000, plus interest of $26,215 to Senecura. The IRS advised that if he did not correct the transaction, a 200% second-tier tax would apply.
Documents Contemporaneous with the Transaction Outweighed the Credibility of Trial Testimony
At trial, Mr. Jagannath argued that he never actually received or benefitted from the $590,000 withdrawal and that it was repaid in December 2016 from a wire of $600,000 that Senecura received. The IRS argued that bank records showed the $590,000 withdrawal; the promissory note Mr. Jagannath signed eleven days later stated that Pingala received $590,000 from Senecura; and Senecura’s 2016 and 2017 Forms 990 reported the loan. The court found for the IRS, stating that Mr. Jagannath’s testimony was self-serving, vague, and unsupported by the record, and relying instead on the bank records, promissory note, and Forms 990, which Mr. Jagannath never amended. The court noted – significant to this case – that Mr. Jagannath could not recall where the withdrawn funds went and testified both that there was not a loan and that he could not recall whether there was a loan, notwithstanding that he signed a promissory note contemporaneous with the transaction characterizing the payment as a loan. The court concluded that Mr. Jagannath received a $590,000 benefit and that Senecura received nothing in return.
The court sustained a 25% first-tier tax under section 4958(a)(1) and, because Mr. Jagannath did not correct the transaction within the taxable period, the court also sustained a 200% second-tier tax under section 4958(b).
Insiders Have Their Own Filing Obligation
A disqualified person liable for the section 4958(a) tax must file Form 4720 to report it. Because Mr. Jagannath neither filed Form 4720 nor paid the tax, and did not raise a reasonable cause defense, the court sustained additions to tax for failure to file under section 6651(a)(1) and failure to pay under section 6651(a)(2).
Lessons from Jagannath
Jagannath shows that nonprofit leaders can protect both their organizations and themselves by avoiding insider transactions. If, however, they engage in insider transactions, they must file the appropriate tax forms and associated disclosures, and the transactions should include independent approval and market terms, and reliable records that corroborate the tax reporting and correcting any excess benefit promptly to avoid triggering the 200% excess tax.
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If you need assistance to resolve a tax dispute with the IRS (including litigating a tax case) or need co-counsel experienced in litigating tax cases, please reach out to our team at K. Tyson Law. This alert should not be construed as legal advice, does not create an attorney-client relationship, and reflects the state of the law as of the date of this notice. Subsequent developments in the law can affect the conclusions in this alert.
Written by Emma Messore, J.D. and Kim Tyson, J.D., LL.M.