Jagannath v. Commissioner, T.C. Memo. 2026-92 (Sept. 24, 2026)

In Jagannath v. Commissioner, T.C. Memo. 2026-92 (Filed September 24, 2026), the United States Tax Court addressed the application of section 4958 intermediate sanctions excise taxes to an uncorrected transaction between a Section 501(c)(3) public charity and its founder/president. The decision serves as a stark reminder for tax practitioners regarding the strict statutory mechanics of IRC § 4958, the evidentiary burden on taxpayers under Subtitle D, and the mandatory reporting rules on Form 4720.

The petitioner, Sitaraman Jagannath, holds bachelor’s and master’s degrees in chemical engineering and worked as a chemical engineer and real estate manager. On September 9, 2015, Mr. Jagannath formed Senecura, a Tennessee non-profit corporation designed to assist indigent individuals with basic living necessities. On September 29, 2015, the Internal Revenue Service (IRS) issued Letter 5436 approving Senecura’s exemption from corporate income tax under IRC § 501(c)(3) and granting public charity status under IRC § 170(b)(1)(A)(vi), retroactive to September 9, 2015.

During the 2016 tax year at issue, Mr. Jagannath served as Senecura’s president, his father served as director, and his daughter served as treasurer. The organization’s principal office was listed at Mr. Jagannath’s personal residence. Separately, Mr. Jagannath was the sole member of Pingala Group, LLC (Pingala), a Tennessee single-member limited liability company (SMLLC) formed in 2005 for real estate investment. For federal income tax purposes, Pingala was treated as a disregarded entity under Treas. Reg. § 301.7701-3, with all items of income, gain, loss, and deduction reported directly on Mr. Jagannath’s individual Form 1040.

The transactions giving rise to the controversy commenced on April 4, 2016, when Senecura’s SunTrust Bank business advantage money market account reflected an “Over the Counter Withdrawal” of $590,000. Eleven days later, on April 15, 2016, Mr. Jagannath executed a document titled “Promissory Note” in the amount of $590,000. The note provided for zero interest and specified a principal maturity date of December 31, 2021. Mr. Jagannath executed the note in a dual capacity—signing as president on behalf of the lender (Senecura) and as sole member on behalf of the borrower (Pingala). Pingala’s bank accounts showed no record of receiving or depositing the $590,000 withdrawal in April 2016, nor had Pingala made any principal or interest payments under the note as of the start of trial.

On December 30, 2016, Senecura’s primary business checking account received an incoming wire transfer of $600,000 described as “Incoming Fedwire CR TRN #016861.”

Senecura’s tax returns (Form 990, Return of Organization Exempt From Income Tax) reflected inconsistent and deficient reporting across multiple tax years:

On its 2015 Form 990, Senecura reported $608,700 in contributions, with Schedule B listing $600,000 contributed by Mr. Jagannath’s half-brother and $8,700 by Mr. Jagannath.
On its 2016 Form 990 (prepared by MyTaxFiler), Senecura reported $600,000 in contributions but failed to attach Schedule B. On Part X (Balance Sheet), Line 5, Senecura reported $590,000 as “Loans and other receivables from current and former officers, directors, trustees, key employees, and highest compensated employees.” Despite instructions mandating Schedule L (Transactions With Interested Persons), Part II, Senecura failed to attach Schedule L.
On its 2017 Form 990, Senecura again reported $590,000 on Balance Sheet Line 5 as officer loans and again omitted Schedule L, Part II.
On its 2018 Form 990 (prepared by Fulton CPAs), Senecura combined previous asset balances into $1,090,000 on Line 7 (“Notes and loans receivables, net”) and reported an additional $536,920 loan to Pingala on Schedule L, Part IV, stating the purpose was to assist an unrelated non-profit (Social Justice Collaborative) in purchasing a building in Berkeley, California.

The IRS Tax Exempt and Government Entities (TE/GE) Division examined Senecura’s 2016 Form 990. Following administrative correspondence, the IRS issued a Notice of Deficiency (NOD) on May 24, 2022, determining an excise tax deficiency under IRC § 4958 of $1,347,500, along with additions to tax under IRC § 6651(a)(1) ($33,187.50) and IRC § 6651(a)(2) ($36,875). Prior to trial, the IRS conceded $20,000 of organization manager tax under IRC § 4958(a)(2), reducing the active § 4958 deficiency sought to $1,327,500.

Taxpayer’s Request for Relief and Contentions

Mr. Jagannath timely filed a Petition in the United States Tax Court seeking complete redetermination and relief from the asserted excise tax deficiencies and additions to tax.

In his administrative protest and initial pleadings, Mr. Jagannath contended that the loan between Senecura and Pingala was a bona fide, arm’s-length transaction and that he satisfied the objective economic factors demonstrating debt. However, at trial, Mr. Jagannath abandoned the bona fide loan theory and shifted his strategy.

Before the court, Mr. Jagannath requested relief based on two primary alternative arguments:

Absence of Economic Benefit / Repayment: Mr. Jagannath argued that he never received an economic benefit of $590,000 in 2016 from Senecura. He contended that the $590,000 over-the-counter withdrawal on April 4, 2016, was fully repaid on December 30, 2016, via the $600,000 incoming wire transfer into Senecura’s checking account.
Promissory Note as Anticipated Plan: Mr. Jagannath testified that the April 15, 2016 Promissory Note did not represent an actual movement or transfer of cash in 2016, but was merely part of an anticipated transaction to help the Social Justice Collaborative (SJC)—a non-profit entity where his daughter worked—acquire a building in Berkeley, California. He argued that the 2016 withdrawal and promissory note were linked to Pingala’s eventual 2018 contribution of $561,919.89 toward the Berkeley property purchase.
Relief from Additions to Tax: Mr. Jagannath disputed the IRC § 6651(a)(1) failure-to-file and IRC § 6651(a)(2) failure-to-pay additions to tax solely on the threshold premise that he was not liable for any underlying IRC § 4958 excess benefit transaction tax.

Statutory Framework and Court’s Legal Analysis

Judge Weiler’s analysis began by clarifying the statutory framework governing IRC § 4958, statutory burden of proof rules, and the mechanics of intermediate sanctions.

Statutory Burden of Proof under Subtitle D

The court firmly rejected any notion that the IRS bore the burden of proof. While IRC § 7491(a)(1) can shift the burden of proof to the Commissioner under specified circumstances, Judge Weiler pointed out that the statute is strictly limited to Subtitles A and B (income, estate, and gift taxes).

Citing Paschall v. Commissioner, 137 T.C. 8, 17 (2011), and Farr v. Commissioner, T.C. Memo. 2018-2, aff’d, 738 F. App’x 969 (10th Cir. 2018), the court stated:

“Section 7491 has no application to a case such as this, which involves excise tax determined under subtitle D... Mr. Jagannath thus bears the burden of proving that respondent’s excise tax determinations are incorrect.”

Under Tax Court Rule 142(a) and Welch v. Helvering, 290 U.S. 111, 115 (1933), the Commissioner’s deficiency determinations carry a presumption of correctness.

Statutory Purpose of Intermediate Sanctions

The court contextualized IRC § 4958 by reviewing its legislative origin. Congress enacted IRC § 4958 via the Taxpayer Bill of Rights 2 (P.L. 104-168) to provide intermediate sanctions. As Judge Weiler highlighted:

“Congress enacted section 4958 not to collect revenue but to ‘deter insiders of an organization from using their positions of influence to receive unreasonable compensation.’”

Quoting Caracci v. Commissioner, 118 T.C. 379, 414 (2002), rev’d per curiam, 456 F.3d 444 (5th Cir. 2006), and treatise authority (Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates & Gifts ¶ 100.5), the court noted that prior to IRC § 4958, the IRS’s sole remedy for inurement or private benefit was revoking the charity’s tax-exempt status—a penalty that fell heavily on the charitable beneficiaries rather than the wrongdoing insiders. Section 4958 imposes targeted excise taxes directly on the benefited insider (“disqualified person”) to “deter malfeasance and incentivize insiders to restore the charity to the status quo ante.”

Definition and Tiered Computation of Excess Benefit Transactions

Under IRC § 4958(c)(1)(A), an “excess benefit transaction” is defined as:

“[A]ny transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.”

The legal framework requires a two-step calculation:

Determine the aggregate economic benefit provided by the tax-exempt organization to the disqualified person.
Subtract any consideration received by the organization in exchange for providing the benefit (citing Fumo v. Commissioner, T.C. Memo. 2025-97).

The parties stipulated to two foundational statutory elements under IRC § 4958(e)(1) and § 4958(f)(1):

Senecura was an “applicable tax-exempt organization” during 2016.
Mr. Jagannath was a “disqualified person” because he was in a position to exercise substantial influence over Senecura’s affairs.

The statutory excise tax structure operates on two tiers:

First-Tier Tax (IRC § 4958(a)(1)): Imposes an initial excise tax equal to 25 percent of the excess benefit amount, payable by the disqualified person.
Second-Tier Tax (IRC § 4958(b)): Imposes an additional excise tax equal to 200 percent of the excess benefit amount if the transaction is not “corrected” within the “taxable period.”

Under IRC § 4958(f)(5), the “taxable period” begins on the date the transaction occurs and ends on the earlier of the date the Notice of Deficiency is mailed or the date the tax is assessed.

Application of the Law to the Facts

Applying the statutory elements to the record, the Tax Court examined whether an economic benefit was provided, whether consideration or repayment existed, and whether the testimony provided by the taxpayer was credible.

Evaluation of Taxpayer Credibility and Uncorroborated Testimony

The Tax Court found Mr. Jagannath’s trial testimony entirely unpersuasive and legally insufficient to overturn the IRS’s determinations. Addressing Mr. Jagannath’s assertions that he could not recall where the $590,000 cash went and that the $600,000 wire represented a loan repayment, Judge Weiler observed:

“His testimony at times was questionable, vague, conclusory, and unsupported by the evidence in the record. Under these circumstances we are not required to, and do not, rely on Mr. Jagannath’s testimony to establish error in respondent’s determinations.”

In support of its rejection of self-serving, uncorroborated testimony, the court cited an extensive line of federal precedent: Lerch v. Commissioner, 877 F.2d 624, 631–32 (7th Cir. 1989); Lovell & Hart, Inc. v. Commissioner, 456 F.2d 145, 148 (6th Cir. 1972); Mills v. Commissioner, 399 F.2d 744, 749 (4th Cir. 1968); Factor v. Commissioner, 281 F.2d 100, 111 (9th Cir. 1960); and Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

The court expressed deep skepticism regarding Mr. Jagannath’s claimed lack of knowledge regarding Senecura’s financial disbursements:

“We find it to be rather doubtful how Mr. Jagannath, as Senecura’s president during the first and second years of operation, cannot recall the source of and withdrawal of nearly all of Senecura’s reported contributions.”

Rejection of Repayment and Real Estate Off-Set Theories

The court systematically dismantled Mr. Jagannath’s two factual defenses:

The $600,000 “Repayment” Wire: The court noted that Senecura’s 2016 Form 990 reported the $600,000 wire as “[a]ll other contributions, gifts, grants, and similar amounts”—not as a loan repayment. No Schedule B was attached, and Mr. Jagannath admitted at trial that he was unsure who made the contribution. Furthermore, the $590,000 withdrawal was taken over-the-counter from Senecura’s money market account, whereas the $600,000 wire was deposited into Senecura’s primary checking account. The court emphasized: “It is also unclear why a repayment would be $600,000 when there was only a $590,000 withdrawal.”
The Promissory Note and Berkeley Property: The court rejected the argument that the $590,000 Promissory Note executed on April 15, 2016, was merely an advance planning document for the 2018 Berkeley property acquisition. The note was executed just 11 days after an “Over the Counter Withdrawal” of $590,000 from Senecura’s account. Because Pingala was a disregarded entity wholly owned by Mr. Jagannath, executing a note to Pingala constituted an direct economic benefit provided to Mr. Jagannath. The 2018 transaction occurred more than two years later and involved distinct withdrawal amounts ($536,919.89), making the transactions independent.

Reliance on Contemporaneous Tax Records over Subsequent Claims

When confronted with conflicting evidence, the court established a clear evidentiary preference:

“We continue not to accept his self-serving testimony... and prefer to accept contemporaneous documentary records (e.g., Forms 990) as credible evidence.”

Because Senecura’s 2016 and 2017 Forms 990—signed under penalties of perjury—explicitly reported $590,000 as a loan to an officer on Balance Sheet Line 5, and because Mr. Jagannath provided no amended returns or independent documentation to disprove those entries, the contemporaneous returns established the existence of the $590,000 transfer.

Because Senecura received zero consideration in exchange for providing the $590,000 economic benefit to its president, the court held that the entire $590,000 constituted an excess benefit transaction under IRC § 4958(c)(1)(A).

Sustaining Additions to Tax under IRC § 6651(a)(1) and (2)

The court analyzed the applicability of failure-to-file and failure-to-pay additions to tax in the context of excise tax returns:

IRC § 6651(a)(1) Failure to File: Under IRC § 6011(a) and Treas. Reg. § 53.6011-1(b), every person liable for tax imposed by IRC § 4958(a) is legally required to file an annual return on Form 4720 (Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code). Citing Ononuju v. Commissioner, T.C. Memo. 2021-94, and Janpol v. Commissioner, 102 T.C. 499 (1994), Judge Weiler held that failure to file Form 4720 exposes the disqualified person to § 6651(a)(1) additions to tax. The IRS satisfied its burden of production under IRC § 7491(c) and Wheeler v. Commissioner, 127 T.C. 200 (2006), by proving Form 4720 was not filed.
IRC § 6651(a)(2) Failure to Pay: Under IRC § 6651(g)(2) and § 6020(b), a Substitute for Return (SFR) prepared by the IRS satisfies the return filing requirement for failure-to-pay penalties. The IRS produced Form 13496 (IRC Section 6020(b) Certification) signed by the revenue agent alongside the SFR audit package, satisfying its burden of production under Frost v. Commissioner, 154 T.C. 23 (2020).

Because Mr. Jagannath failed to offer any reasonable cause defense under Treas. Reg. § 301.6651-1(c)(1)—which requires showing ordinary business care and prudence despite factors outside the taxpayer’s control—the court sustained both additions to tax in full.

Holdings and Final Conclusions

The Tax Court concluded its legal analysis with the following definitive holdings:

Excess Benefit Determination: Mr. Jagannath engaged in an excess benefit transaction under IRC § 4958 of $590,000 during tax year 2016 in his capacity as a disqualified person with Senecura.
First-Tier Excise Tax Liability: Under IRC § 4958(a)(1), Mr. Jagannath is liable for a 25 percent first-tier excise tax equal to $147,500 ($590,000 x 25%).
Second-Tier Excise Tax Liability: Because Mr. Jagannath failed to correct the excess benefit transaction within the statutory taxable period under IRC § 4958(f)(5), he is liable under IRC § 4958(b) for a 200 percent second-tier excise tax equal to $1,180,000 ($590,000 x 200%).
Total Section 4958 Excise Tax: The combined intermediate sanctions excise tax deficiency sustained against Mr. Jagannath individually totals $1,327,500.
Additions to Tax: Mr. Jagannath is liable for additions to tax under IRC § 6651(a)(1) for failure to file Form 4720 and under IRC § 6651(a)(2) for failure to pay excise tax.

The court directed that decision be entered under Tax Court Rule 155 to allow the parties to calculate the exact final additions to tax in accordance with its findings.

Prepared with assistance from Gemini Notebook.