Tax Court Upholds $1.3M Penalty for Charity Exec’s Fund Diversion

Tax Court upheld $1.3 million penalty against charity president for misusing funds.

On September 24, 2026, the U.S. Tax Court ruled in Jagannath v. Commissioner that the president of a Section 501(c)(3) charity engaged in an excess benefit transaction by transferring $590,000 from the nonprofit to his own LLC without giving adequate value in return. The transaction was formally documented through an interest-free promissory note, with repayment scheduled by the end of 2021. The organization reported this as a loan to an officer on its Forms 990 for 2016 and 2017.

The president contested the IRS’s claim, arguing no improper transfer occurred and that a separate $600,000 payment was repayment. However, the court dismissed his testimony as self-serving, relying instead on bank records and official tax filings that contradicted his account. This led to the court upholding the IRS’s imposition of a $1.3 million excise tax associated with the excess benefit transaction.

This ruling illustrates the IRS’s increased vigilance over nonprofit executives and transactions that could jeopardize an organization’s tax-exempt status. As noted by Shumaker, Loop & Kendrick LLP, the court treated the president’s defense as "self-serving" and relied on documented financial evidence.

For legal and compliance professionals advising nonprofits, this case underscores the critical need for transparent, arms-length dealings and strict adherence to IRS rules governing excess benefit transactions. Failure to comply can lead to significant personal penalties impacting officers and directors.