7.27.30  Taxes on Excess Benefit Transactions

7.27.30.1  (11-17-2009)
Overview

  1. Examination guidelines are provided involving the excise taxes on excess benefit transactions under IRC § 4958. The objectives are to provide assistance in determining:

    1. When excess benefit transactions occur;

    2. The period of limitations for IRC § 4958 excise taxes;

    3. Whether excess benefit transactions have been corrected; and

    4. When IRC § 4958 excise taxes should be abated.

  2. IRC § 4958 establishes excise taxes as an intermediate sanction where applicable tax-exempt organizations engage in excess benefit transactions with disqualified persons. These excise taxes are imposed on disqualified persons who benefit from excess benefit transactions and on organization managers who participate in these transactions knowing that they are excess benefit transactions.

  3. Since enactment of the Pension Protection Act of 2006, P.L. 109–280 (120 Stat. 780), on August 17, 2006, section 4958 disqualified persons and excess benefit transactions are specifically defined statutorily with respect to certain transactions involving supporting organizations, donor advised funds, and sponsoring organizations of donor advised funds.

7.27.30.1.1  (11-17-2009)
History

  1. IRC § 4958 was added to the Internal Revenue Code by section 1311 of the Taxpayer Bill of Rights 2, P. L. 104-168 (110 Stat. 1452), enacted July 30, 1996. IRC § 4958 generally applies to excess benefit transactions occurring on or after September 14, 1995. P.L. 104-168, section 1311(d)(1); Regs. § 53.4958-1(f)(1).

  2. The Report from the Committee on Ways and Means on the Taxpayer Bill of Rights 2, H.R. 2337, was submitted March 28, 1996. H. Rep. No. 506, 104th Cong., 2d Sess. (1996) 53.

  3. Proposed regulations were published in the Federal Register, August 4, 1998, 63 F.R. 41486.

  4. The proposed regulations were replaced by temporary regulations that were published in the Federal Register January 10, 2001, 66 F.R. 2173.

  5. The temporary regulations were replaced by final regulations that were published in the Federal Register January 23, 2002, 67 F.R. 3076.

  6. The final regulations were effective January 23, 2002, and apply as of that date.

  7. The regulations were partially amended by final regulations that were published in the Federal Register March 28, 2008, 73 F.R. 16519.

  8. IRC § 4958 was amended with regard to transactions involving donor advised funds and supporting organizations by sections 1232 and 1242 of the Pension Protection Act of 2006, P.L. 109–280 (120 Stat. 780), enacted August 17, 2006.

  9. IRC § 4958 was amended by section 3 of the Tax Technical Corrections Act of 2007, P.L. 110-172 (121 Stat. 2473), enacted December 29, 2007.

7.27.30.1.2  (11-17-2009)
Effective Date

  1. IRC § 4958 generally applies to excess benefit transactions occurring on or after September 14, 1995. P.L. 104-168, section 1311(d)(1); Regs. § 53.4958-1(f)(1).

  2. IRC § 4958 does not apply to an excess benefit transaction occurring pursuant to a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurs. P.L. 104-168, section 1311(d)(2); Regs. § 53.4958-1(f)(2).

    1. Termination or Cancellation. A written binding contract that is terminable or subject to cancellation by the applicable tax-exempt organization without the disqualified person’s consent and without substantial penalty to the organization is no longer treated as a binding contract as of the earliest date that any such termination or cancellation, if made, would be effective. Regs. § 53.4958-1(f)(2).

    2. Material Change. If a binding written contract is materially changed, it is treated as a new contract entered into as of the effective date of the material change. Regs. § 53.4958-1(f)(2).

    • A material change includes an extension or renewal of the contract, or a more than incidental change to any payment under the contract.

    • A material change does not include an extension or renewal that results from the person contracting with the applicable tax-exempt organization unilaterally exercising an option expressly granted by the contract.

  3. The revisions to IRC § 4958 with regard to transactions involving supporting organizations made by the Pension Protection Act of 2006 generally apply to transactions occurring after July 25, 2006. P.L. 109–280, section 1242(c)(2). The revisions to IRC § 4958 with regard to transactions involving donor advised funds made by the Pension Protection Act of 2006 generally apply to transactions occurring after August 17, 2006. P.L. 109–280, section 1232(c).

    1. Supporting Organization Binding Written Contract. Any payment made pursuant to a written contract that was binding on August 17, 2006 will not be treated as an excess benefit transaction under IRC § 4958(c)(3), provided that (1) such contract was binding at all times after August 17, 2006 and before payment is made, (2) the contract is not modified during such period, and (3) the payment under the contract is made on or before August 17, 2007. Termination of the contract does not constitute a modification for this purpose. Notice 2006-109, I.R.B. 2006-51, December 18, 2006.

    2. Supporting Organization, Other Arrangements. With respect to any arrangement not governed by a binding written contract involving an employment relationship in existence, or other legal obligation in effect, on August 17, 2006, the IRS will not consider any payment pursuant to such arrangement as an excess benefit transaction under IRC § 4958(c)(3), provided that (1) the terms of such arrangement are not modified after August 17, 2006, (2) any services are performed and any goods are delivered as required by the arrangement no later than December 31, 2006, and (3) the payment is made no later than August 17, 2007. Termination of the arrangement does not constitute a modification for this purpose.

7.27.30.1.3  (11-17-2009)
Revocation

  1. IRC § 4958 does not affect the substantive standards for exemption under IRC § 501(c)(3) or IRC § 501(c)(4). These include the requirements that the organization be organized and operated exclusively for exempt purposes, and that no part of its net earnings inure to the benefit of any private shareholder or individual. Regs. § 53.4958-8(a).

  2. The legislative history of IRC § 4958 states:

    • The intermediate sanctions for "excess benefit transactions " may be imposed by the IRS in lieu of (or in addition to) revocation of an organization’s tax-exempt status. H. Rep. No. 506, 104th Cong., 2d Sess. (1966) 53, 59.

    • In general, the intermediate sanctions are the sole sanction imposed in those cases in which the excess benefit does not rise to a level where it calls into question whether, on the whole, the organization functions as a charitable or other tax-exempt organization. In practice, revocation of tax-exempt status, with or without the imposition of excise taxes, would occur only when the organization no longer operates as a charitable organization. Ibid, note 15.

  3. In determining whether to continue to recognize the tax-exempt status of an applicable tax-exempt organization that engages in one or more excess benefit transactions that violate the prohibition on inurement under section 501(c)(3), consider all relevant facts and circumstances, including, but not limited to, the following

    1. The size and scope of the organization’s regular and ongoing activities that further exempt purposes before and after the excess benefit transaction(s) occurred;

    2. The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization’s regular and ongoing activities that further exempt purposes;

    3. Whether the organization has been involved in multiple excess benefit transactions with one or more persons;

    4. Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and

    5. Whether the excess benefit transaction has been corrected, or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction.

    All factors should be considered in combination with each other. Depending on the particular situation, greater or lesser weight may be assigned to some factors than to others. The safeguard and correction factors will weigh more heavily in favor of continuing to recognize exemption where the organization discovers the excess benefit transaction(s) and takes action before the IRS discovers the excess benefit transaction(s). Further, with respect to the correction factor, correction after the excess benefit transaction(s) are discovered by the IRS, by itself, is never a sufficient basis for continuing to recognize exemption. Regs. § 1.501(c)(3)-1(f)(2)(ii).

  4. When an agent proposes both intermediate sanctions under IRC § 4958 and revocation of the applicable tax-exempt organization's exemption based on the same transaction(s), the agent is required to consult with Rulings and Agreements, Washington, D.C., regarding the IRC § 4958 issues and whether technical advice is appropriate.

7.27.30.1.4  (11-17-2009)
Date of Occurrence

  1. Generally, an excess benefit transaction occurs when the disqualified person receives the economic benefit from the applicable tax-exempt organization for federal income tax purposes. Regs. § 53.4958-1(e)(1).

  2. When a single contractual arrangement provides for a series of compensation payments or other payments to (or for the use of) a disqualified person over the course of the disqualified person’s taxable year, any excess benefit transaction regarding these payments is deemed to occur on the last day of the disqualified person’s taxable year. Regs. § 53.4958-1(e)(1). However, if a series of payments continue for only part of the taxable year, the excess benefit transaction is deemed to occur on the date of the last payment date in the series. Ibid.

  3. In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property (including benefits under a nonqualified deferred compensation plan), the excess benefit transaction occurs when the property, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. Regs. § 53.4958-1(e)(2).

    1. Where the disqualified person elects to include an amount in gross income in the taxable year of transfer under IRC § 83(b), the excess benefit transaction occurs when the disqualified person receives the economic benefit for Federal income tax purposes.

    2. Any excess benefit transaction regarding benefits under a deferred compensation plan which vest during any taxable year of the disqualified person is deemed to occur on the last day of the disqualified person’s taxable year.

    3. In the case of benefits provided pursuant to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested.

7.27.30.1.5  (11-17-2009)
25-Percent Tax on Disqualified Persons

  1. An excise tax equal to 25 percent of the excess benefit from each excess benefit transaction between an applicable tax-exempt organization and a disqualified person is imposed on the excess benefit transaction. IRC § 4958(a)(1); Regs. § 53.4958-1(a). See IRM 7.27.30.9.3 , regarding abatement of the 25-percent tax. In the case of certain transactions involving donor advised funds or supporting organizations, the tax is imposed on the entire amount of the payment.

    Note:

    The above tax is sometimes referred to as the "Initial Tax" or the "First Tier Tax."

  2. The 25-percent tax is payable by the disqualified person who received the excess benefit from the excess benefit transaction. IRC § 4958(a)(1); Regs. § 53.4958-1(c)(1).

  3. If more than one disqualified person is liable for the 25-percent tax, all of the disqualified persons are jointly and severally liable for the tax. IRC § 4958(d)(1); Regs. § 53.4958-1(c)(1).

    Note:

    Joint and several liability means that all or a portion of the 25-percent tax may be assessed against and collected from one or more of the disqualified persons who received an excess benefit from the excess benefit transaction. However, the total tax collected must not exceed 100 percent of the 25-percent tax.

7.27.30.1.6  (11-17-2009)
200-Percent Tax on Disqualified Persons

  1. If the 25-percent tax is imposed on an excess benefit transaction between an applicable tax-exempt organization and a disqualified person, and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200 percent of the excess benefit is imposed on the excess benefit transaction. IRC § 4958(b); Regs. § 53.4958-1(c)(2)(i). See IRM 7.27.30.9.2 , regarding abatement of the 200-percent tax.

    1. The 200-percent tax is sometimes referred to as the "Additional Tax" or the "Second Tier Tax."

    2. If a disqualified person makes a payment of less than the full correction amount the 200-percent tax is imposed only on the unpaid portion of the correction amount.

  2. The 200-percent tax is payable by the disqualified person who received an excess benefit from the excess benefit transaction on which the 25-percent tax was imposed. IRC § 4958(b); Regs. § 53.4958-1(c)(2)(i).

  3. If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the 200-percent tax. IRC § 4958(d)(1); Regs. § 53.4958-1(c)(2)(i).

    Note:

    Joint and several liability means that all or a portion of the 200-percent tax may be assessed against and collected from one or more of the disqualified persons who received an excess benefit from an excess benefit transaction. However, the total tax collected must not exceed 100 percent of the 200-percent tax.

  4. To avoid imposition of the 200-percent tax, a disqualified person must correct the excess benefit transaction during the taxable period.

7.27.30.1.6.1  (11-17-2009)
Taxable Period

  1. The taxable period begins when the excess benefit transaction occurs. IRC § 4958(f)(5); Regs. § 53.4958-1(c)(2)(ii).

  2. The taxable period ends on the earlier of the following:

    1. Mailing a notice of deficiency to the disqualified person regarding the 25-percent tax, or

    2. Assessment of the 25-percent tax on the disqualified person. IRC § 4958(f)(5); Regs. § 53.4958-1(c)(2)(ii).

7.27.30.1.7  (11-17-2009)
10-Percent Tax on Organization Managers

  1. An excise tax equal to 10 percent of the excess benefit is imposed on the participation of an organization manager in an excess benefit transaction between an applicable tax-exempt organization and a disqualified person. IRC § 4958(a)(2); Regs. § 53.4958-1(d). This tax is imposed if:

    1. The 25-percent tax is imposed on the disqualified person;

    2. The organization manager See IRM 7.27.30.1.7.1 knowingly See IRM 7.27.30.1.7.2participated See IRM 7.27.30.1.7.3 in the excess benefit transaction See IRM 7.27.30.1.7.3; and

    3. The organization manager's participation was willful See IRM 7.27.30.1.7.4and not due to reasonable cause See IRM 7.27.30.1.7.5.

  2. The 10-percent tax is payable by any organization manager who knowingly participated in the excess benefit transaction. IRC § 4958(a); Regs. § 53.4958-1(d)(1). Thus, if more than one organization manager is liable for the 10-percent tax, all of these organization managers are jointly and severally liable for the tax. IRC § 4958(d)(1); Regs. § 53.4958-1(d)(8).

    Note:

    Joint and several liability means that all or a portion of the 10-percent tax may be assessed against and collected from one or more of the organization managers who are liable for the 10-percent tax. However, the total tax collected cannot exceed 100 percent of the 10-percent tax.

  3. The maximum aggregate amount of 10-percent tax that may be imposed on all organization managers who knowingly participated in an excess benefit transaction is $20,000 for each excess benefit transaction. IRC § 4958(d)(2).

  4. If a disqualified person who receives an excess benefit from an excess benefit transaction is also an organization manager who knowingly participated in the excess benefit transaction, and such participation was willful and not due to reasonable cause, this person would be liable for both the 25-percent tax and the 10-percent tax. Regs. § 53.4958-1(a).

  5. The IRS bears the burden of proof in cases involving the issue of whether an organization manager has knowingly participated in an excess benefit transaction. See IRC § 7454(b); Regs. §§ 301.7454-2 and 53.4958-1(d)(9).

  6. If the 25-percent tax that is imposed on the disqualified person is abated, the 10-percent tax would be abated automatically. SeeIRC § 4962(a).

7.27.30.1.7.1  (11-17-2009)
Organization Manager

  1. An organization manager is any officer, director, or trustee of an applicable tax-exempt organization, or any individual having powers or responsibilities similar to officers, directors, or trustees of the organization, regardless of title. IRC § 4958(f)(2); Regs. § 53.4958-1(d)(2)(i).

  2. A person is an officer of an organization if that person:

    1. Is specifically so designated under the certificate of incorporation, by-laws or other organizational documents, or

    2. Regularly exercises authority to make administrative or policy decisions on behalf of the organization. Regs. § 53.4958-1(d)(2)(i).

      Note:

      An individual who is not an officer, director, or trustee of an applicable tax-exempt organization, but who serves on the committee of the governing body of an applicable tax-exempt organization that is attempting to invoke the rebuttable presumption of reasonableness (See IRM 7.27.30.8.) based on the committee’s actions, is considered to be an organization manager. Regs. § 53.4958-1(d)(2)(ii).

  3. The following persons are not officers:

    1. An independent contractor who acts solely in a capacity as an attorney, accountant, or investment manager or advisor.

    2. A person who has authority merely to recommend particular administrative or policy decisions, but not to implement them without approval of a superior.

7.27.30.1.7.2  (11-17-2009)
Organization Manager - Knowingly

  1. An organization manager participates in an excess benefit transaction knowingly if the organization manager:

    1. Has actual knowledge of sufficient facts so that, based solely upon such facts, the transaction would be an excess benefit transaction;

    2. Is aware that the transaction may constitute an excess benefit transaction; and

    3. Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the person is, in fact, aware that it is such a transaction. Regs. § 53.4958-1(d)(4)(i).

  2. Knowing does not mean having reason to know. Regs. § 53.4958-1(d)(4)(ii).

    Note:

    Evidence showing that an organization manager had reason to know of a particular fact or particular rule is relevant in determining whether the organization manager had actual knowledge of such a fact or rule. Regs. § 53.4958-1(d)(4)(ii).

  3. Reliance on Professional Advice. Even though a transaction is subsequently determined to be an excess benefit transaction, an organization manager’s participation in the transaction will usually not be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relies on the professional’s reasoned written opinion regarding the elements of the transaction within the professional’s expertise. Regs. § 53.4958-1(d)(4)(iii). An organization manager may rely on the written opinion of:

    1. Legal counsel, including in-house counsel;

    2. Certified public accountants or accounting firms with expertise regarding the relevant tax law matters; and

    3. Certain independent valuation experts. See Regs. § 53.4958-1(d)(4)(iii).

    Note:

    A written opinion is reasoned even though it reaches a conclusion that is later determined to be incorrect, so long as the opinion addresses itself to the facts and the applicable standards. However, a written opinion is not reasoned if it does nothing more than recite the facts and express a conclusion.

    The absence of a written opinion of an appropriate professional with respect to a transaction shall not, by itself, give rise to any inference that an organization manager participated in the transaction knowingly.

  4. Rebuttable Presumption. Even though a transaction is subsequently determined to be an excess benefit transaction, an organization manager’s participation in the transaction will not be considered knowing if the appropriate authorized body of the applicable tax-exempt organization has met the requirements of the rebuttable presumption as to the transaction. Regs. § 53.4958-1(d)(4)(iv). See IRM 7.27.30.8

7.27.30.1.7.3  (11-17-2009)
Organization Manager - Participation

  1. Participation includes an affirmative action. Participation also includes silence or inaction where the organization manager is under a duty to speak or act. Regs. § 53.4958-1(d)(3).

    Note:

    An organization manager is not considered to have participated in an excess benefit transaction where the organization manager has opposed the transaction in a manner consistent with fulfilling the organization manager’s responsibilities to the organization.

7.27.30.1.7.4  (11-17-2009)
Organization Manager - Willfully

  1. Participation by an organization manager is willful if it is voluntary, conscious, and intentional. Regs. § 53.4958-1(d)(5).

    1. Participation may be willful even without a motive to avoid the restrictions of the law or the incurrence of any tax.

    2. If an organization manager does not know that a transaction is an excess benefit transaction his participation is not willful.

7.27.30.1.7.5  (11-17-2009)
Organization Manager - Reasonable Cause

  1. Participation by an organization manager is due to reasonable cause if the organization manager exercises responsibility on behalf of the applicable tax-exempt organization with ordinary business care and prudence. Regs. § 53.4958-1(d)(6).

7.27.30.2  (11-17-2009)
Applicable Tax-Exempt Organization

  1. An applicable tax-exempt organization is an IRC §§ 501(c)(3) or (c)(4) organization that is tax-exempt under IRC § 501(a). IRC § 4958(e)(1); Regs. § 53.4958-2(a)(1).

  2. An applicable tax-exempt organization includes an organization that was tax-exempt under IRC §§ 501(c)(3) or (c)(4) at any time during the five-year period ending when the excess benefit transaction occurred (the "Lookback Period" ). IRC § 4958(e)(2); Regs. § 53.4958-2(a)(1).

    Exception:

    If an excess benefit transaction occurred before September 14, 2000, the Lookback Period begins on September 14, 1995, and ends on the date of the excess benefit transaction. Regs. § 53.4958-2(b)(1).

  3. An applicable tax-exempt organization does not include:

    1. A private foundation as defined in IRC § 509(a). IRC § 4958(e); Regs. § 53.4958-2(a)(2)(i).

    2. A governmental unit or an affiliate of a governmental unit if it meets either of the following requirements: (i) It is exempt from, or not subject to, taxation without regard to IRC § 501(a); or (ii) It is relieved from filing an annual return under Regs. § 1.6033-2(g)(6). See Rev. Proc. 95-48, 1995-2 C.B. 418; Regs. § 53.4958-2(a)(2)(ii).

    3. A foreign organization that is recognized as exempt under IRC §§ 501(c)(3) or (c)(4) either by the IRS or by treaty, which receives substantially all of its support (other than gross investment income) from sources outside the United States. Regs. § 53.4958-2(b)(2).

  4. An organization is not treated as an applicable tax-exempt organization for any period covered by a final determination that the organization was not tax-exempt under IRC § 501(a). Regs. § 53.4958-2(a)(5).

    1. But if revocation of an organization’s exemption was based on inurement or impermissible private benefit, the organization would be treated as an applicable tax-exempt organization during the revocation period.

    2. In addition, if the organization was an applicable tax-exempt organization during the Lookback Period, it would be treated as an applicable tax-exempt organization during a concurrent revocation period.

7.27.30.3  (11-17-2009)
Disqualified Person - Statutory Definition

  1. Any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during the Lookback Period. IRC § 4958(f)(1)(A); Regs. § 53.4958-3(a)(1).

    Exception:

    If the Lookback Period would have begun on or before September 14, 1995, it is considered to have begun on September 14, 1995, and ended when the excess benefit transaction occurred. Regs. § 53.4958-3(a)(2).

  2. Family Members of a Disqualified Person. A disqualified person’s family is limited to the person’s spouse, siblings, spouses of siblings, ancestors, children, grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren. IRC §§ 4958(f)(1)(B), (f)(4); Regs. § 53.4958-3(b)(1).

    Note:

    A legally adopted child of an individual is treated as a child of such individual.

  3. 35-percent Controlled Entity of a Disqualified Person. IRC §§ 4958(f)(1)(C), (f)(3); Regs. § 53.4958-3(b)(2). A 35-percent controlled entity of a disqualified person is:

    1. A corporation in which disqualified persons own more than 35 percent of the combined voting power;

    2. A partnership in which disqualified persons own more than 35 percent of the profits interest; and

    3. A trust or estate in which disqualified persons own more than 35 percent of the beneficial interest.

      Note:

      An LLC in which disqualified persons own more than a 35-percent interest is treated in the same manner as it is under IRC § 7701. See Regs. § 301.7701-1, etc.

  4. Any person described in 1, 2, or 3 above with respect to an organization described in IRC § 509(a)(3), which is organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of the applicable tax-exempt organization. IRC § 4958(f)(1)(D).

  5. In a transaction involving a donor advised fund (as defined in IRC § 4966(d)(2)), the donor, donor advisor, members of the donor’s or donor advisor’s families, and entities 35-percent controlled by such persons are disqualified persons with respect to that donor advised fund. IRC §§ 4958(f)(1)(E), (f)(7).

  6. In a transaction involving a sponsoring organization of donor advised funds (as defined in IRC § 4966(d)(1)), investment advisors (as defined in § 4958(f)(8)(B)), members of investment advisors’ families, and entities 35-percent controlled by such persons are disqualified persons with respect to such sponsoring organization. IRC § 4958(f)(1)(F).

    Note:

    Employees of the sponsoring organization are not investment advisors. IRC § 4958(f)(8)(B).

7.27.30.4  (11-17-2009)
Disqualified Person - Substantial Influence

  1. Persons Having Substantial Influence. A person who holds any of the following powers, responsibilities, or interests is in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization. Regs. § 53.4958-3(c).

    1. A voting member of the governing body.

    2. A person who, regardless of title, has ultimate responsibility for implementing the decisions of the governing body or for supervising the management, administration, or operation of the organization (for example, president, chief executive officer, or chief operating officer).

    3. A person who, regardless of title, has ultimate responsibility for managing the finances of the applicable tax-exempt organization (for example, treasurer or chief financial officer).

      Note:

      If this ultimate responsibility resides with two or more individuals who may exercise such responsibility in concert or individually, then each individual is in a position to exercise substantial influence.

      Example:

      Physicians are disqualified persons with respect to a hospital only if they are in a position to exercise substantial influence over the affairs of the hospital. H.Rep. No. 506, 104th Cong., 2d Sess. (1996) 53, 58, fn. 12.

    4. A person with a material financial interest in a provider-sponsored organization.

  2. Persons Not Having Substantial Influence. The following persons are treated as not in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization. Regs. § 53.4958-3(d).

    1. Tax-exempt organizations described in IRC § 501(c)(3).

    2. Only as to other IRC § 501(c)(4) organizations, organizations described in IRC § 501(c)(4).

    3. Any part-time or full-time employee of the applicable tax exempt organization who meets all of the following requirements:

    • Receives economic benefits from the organization, directly or indirectly, of less than the amount for a highly-compensated employee in IRC § 414(q)(1)(B)(i).

      Note:

      Under IR 2008-118, this amount (updated periodically) is $110,000 for 2009.

    • Is not a family member of a disqualified person, as described in IRM 7.27.30.3(2).

    • Is not a 35-percent controlled entity of a disqualified person, as described in IRM 7.27.30.3(3).

    • Is not a person having substantial influence, as described in IRM 7.27.30.4.

    • Is not a substantial contributor to the applicable tax-exempt organization under IRC § 507(d)(2)(A), taking into account only contributions received by the organization during its current taxable year and the four preceding taxable years.

7.27.30.5  (11-17-2009)
Disqualified Person - Facts and Circumstances

  1. Facts and Circumstances test. Whether a person who is not described above is a disqualified person depends upon all the relevant facts and circumstances. Regs. § 53.4958-3(e)(1).

  2. Facts and circumstances tending to show substantial influence include, but are not limited to, the following (Regs. § 53.4958-3(e)(2)):

    1. The person founded the applicable tax-exempt organization.

    2. The person is a substantial contributor to the applicable tax-exempt organization under IRC § 507(d)(2)(A), taking into account only contributions received by the organization during its current taxable year and the four preceding taxable years.

    3. The person’s compensation is primarily based on revenues derived from activities of the applicable tax-exempt organization,or of a department or function of the organization, that the person controls.

    4. The person has or shares authority to control or determine a substantial portion of the applicable tax-exempt organization’s capital expenditures, operating budget, or compensation for employees.

    5. The person manages a discrete segment or activity of the applicable tax-exempt organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole.

    6. The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person.

    7. The person is a non-stock organization controlled directly or indirectly by one or more disqualified persons.

  3. Facts and circumstances tending to show no substantial influence include, but are not limited to, the following (Regs. § 53.4958-3(e)(3)):

    1. The person has taken a bona fide vow of poverty as an employee, agent, or on behalf, of a religious organization

    2. The person is a contractor whose sole relationship to the applicable tax-exempt organization is providing professional advice (without having decision-making authority) regarding transactions from which the independent contractor will not economically benefit either directly or indirectly (other than from customary fees for professional advice).

    3. The direct supervisor of the person is not a disqualified person

    4. The person does not participate in any management decisions affecting the applicable tax-exempt organization as a whole or a discrete segment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole.

    5. Any preferential treatment a person receives based on the size of the person’s donation is also offered to all other donors making a comparable contribution as part of a solicitation intended to attract a substantial number of contributions.

  4. Affiliated Organizations. In the case of multiple affiliated applicable tax-exempt organizations, whether a person has substantial influence is made separately for each organization. A person may be a disqualified person regarding transactions with more than one organization. Regs. § 53.4958-3(f).

7.27.30.6  (11-17-2009)
Excess Benefit Transaction - Overview

  1. An excess benefit transaction is a 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, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received from the disqualified person for providing such benefit. IRC § 4958(c)(1)(A); Regs. § 53.4958-4(a)(1).

  2. To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. Regs. § 53.4958-4(a)(1).

    Note:

    In determining the reasonableness of compensation paid (or vested, or no longer subject to a substantial risk of forfeiture) in one year, services performed in prior years may be taken into account. Regs. § 53.4958-4(a)(1).

  3. Indirect Benefit. A transaction that would be an excess benefit transaction if the applicable tax-exempt organization engaged in it directly with a disqualified person is an excess benefit transaction when it is accomplished indirectly. Regs. § 53.4958-4(a)(2)(i).

    1. Controlled Entity. An applicable tax-exempt organization may provide an excess benefit indirectly through the use of one or more entities it controls. Regs. § 53.4958-4(a)(2)(ii).

    2. Intermediary. An applicable tax-exempt organization may provide an excess benefit indirectly through an intermediary. Regs. § 53.4958-4(a)(2)(iii).

  4. Special Rule for Donor Advised Funds. In the case of any donor advised fund, an excess benefit transaction includes any grant, loan, compensation or other similar payment from such fund to the donor, donor advisor, members of the donor’s or donor advisor’s families, and entities 35-percent controlled by such persons. See IRM 7.27.30.3(5). The amount of the excess benefit is the entire amount of the grant, loan, compensation or other similar payment. IRC § 4958(c)(2).

  5. Special Rule for Supporting Organizations. In the case of any supporting organization, an excess benefit transaction includes:

    1. Any grant, loan, compensation, or other similar payment from such supporting organization to a substantial contributor, members of the substantial contributor’s family (as described in § 4958(f)(4)), or entities 35-percent controlled by such persons (as defined in § 4958(f)(3), as modified by § 4958(c)(3)(B)). IRC § 4958(c)(3)(A)(i)(I).

      • For this purpose, a substantial contributor is any person who contributed or bequeathed an aggregate of more than $5,000 to the organization, if such amount is more than 2 percent of the total contributions and bequests received by the organization before the close of the taxable year of the organization in which the contribution or bequest is received. In the case of a trust, the creator of the trust is also a substantial contributor. Rules similar to those of IRC §§ 507(d)(2)(B) and (C) apply. IRC § 4958(c)(3)(C).

      • For this purpose, a substantial contributor does not include organizations described in §§ 509(a)(1), (2), or (4), or to the supporting organization’s supported organizations that are described in IRC §§ 501(c)(4), 501(c)(5), or 501(c)(6) and that are treated as IRC § 509(a)(2) organizations by virtue of the last sentence of IRC § 509(a). Ibid.

    2. In addition, loans by any supporting organization to a disqualified person of such supporting organization are treated as excess benefit transactions. IRC § 4958(c)(3)(A)(i)(II).

      • For this purpose, a disqualified person includes any person who was, at any time during the 5-year period ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the organization, members of those persons’ families (as described in § 4958(f)(4)), and entities 35-percent controlled by such persons (as described in § 4958(f)(3)).

      • For this purpose, a disqualified person does not include organizations described in §§ 509(a)(1), (2), or (4) or to the supporting organization’s supported organizations that are described in IRC §§ 501(c)(4), 501(c)(5), or 501(c)(6) and that are treated as IRC § 509(a)(2) organizations by virtue of the last sentence of IRC § 509(a). IRC § 4958(c)(3)(C)(ii).

    3. The amount of the excess benefit in (A) or (B) above is the entire amount of the grant, loan, compensation or other similar payment. IRC § 4958(c)(3)(A)(ii).

7.27.30.6.1  (11-17-2009)
Excess Benefit Transaction - Exceptions

  1. The general rules of IRC § 4958 does not apply to:

    1. Fixed payments under an "initial contract" ;

    2. Certain "disregarded benefits" ; and

    3. Certain payments under ERISA.

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.6.1.1  (11-17-2009)
Initial Contract Rule

  1. IRC § 4958 does not apply to a "fixed payment" made to a person pursuant to an "initial contract." Regs. § 53.4958-4(a)(3)(i).

  2. A "fixed payment" is an amount of cash or other property specified in the contract, or determined by a "fixed formula" that is specified in the contract, which is to be paid or transferred in exchange for the provision of specified services or property. Regs. § 53.4958-4(a)(3)(ii)(A).

    1. A "fixed formula" may incorporate an amount that depends upon future "specified events or contingencies," as long as no one has discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus).

    2. A "specified event or contingency" may include the amount of revenues generated by (or other objective measure of) one or more activities of the applicable tax-exempt organization.

    3. A fixed payment does not include any amount paid to a person under a reimbursement or similar arrangement where any person has discretion regarding the amounts incurred or reimbursed.

  3. An "initial contract" is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately prior to entering into the contract. Regs. § 53.4958-4(a)(3)(iii).

  4. The initial contract exception does not apply to any fixed payment made during any taxable year if the disqualified person does not substantially perform the person’s obligations during that year under the initial contract. Regs. § 53.4958-4(a)(3)(iv).

  5. New Contracts. A binding written contract providing that it may be terminated or cancelled by the applicable tax-exempt organization (except for substantial non-performance) without the other party’s consent and without substantial penalty to the organization is treated as a new contract as of the earliest date that any termination or cancellation would be effective. Regs. § 53.4958-4(a)(3)(v).

    1. If the parties make a "material change" to the contract, it is treated as a new contract as of the date the material change is effective.

    2. A "material change" includes an extension or renewal of the contract (except for an extension or renewal resulting from the exercise of an option), or a more than incidental change to the amount payable under the contract.

    3. Any new contract is tested under IRM 7.27.30.6.1.1. to determine whether it is an "initial contract. "

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.6.1.2  (11-17-2009)
Disregarded Benefits

  1. The following economic benefits are generally disregarded for IRC § 4958. Regs. § 53.4958-4(a)(4).

    1. Nontaxable Fringe Benefits - An economic benefit that is excluded from gross income under IRC § 132, except certain liability insurance premium, payment, or reimbursements that must be taken into account under Regs. § 53.4958-4(b)(1)(ii)(B)(2) See IRM 7.27.30.6.3 Regs. § 53.4958-4(a)(4)(i).

    2. Expense Reimbursements paid under an "accountable plan" under Regs. § 1.62-2(c)(2). Regs. § 53.4958-4(a)(4)(ii).

    3. Economic benefits provided to volunteers for the organization, if the benefit is provided to the general public in exchange for a membership fee or contribution of $75 or less per year. Regs. § 53.4958-4(a)(4)(iii).

    4. Economic benefits provided to members of an organization solely due to the payment of a membership fee, or to a donor solely as a result of a charitable contribution if:

      • (i) Any nondisqualified person paying a membership fee or making a charitable contribution above a specified amount is given the option of receiving substantially the same benefit; and

      • (ii) The disqualified person and a significant number of non-disqualified persons make a payment or charitable contribution of at least the specified amount. Regs. § 53.4958-4(a)(4)(iv).

    5. Economic benefits provided to a person solely because the person is a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose. Regs. § 53.4958-4(a)(4)(v).

    6. Any transfer of an economic benefit to or for the use of a governmental unit, as defined in IRC § 170(c)(1), if the transfer is for exclusively public purposes. Regs. § 53.4958-4(a)(4)(vi).

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.6.1.3  (11-17-2009)
Payments Under ERISA

  1. IRC § 4958 does not apply to payments made pursuant to, and in accordance with, a final individual prohibited transaction exemption issued by the Department of Labor under section 408(a) of ERISA as to a transaction involving a plan that is an applicable tax-exempt organization. Regs. § 53.4958-4(a)(5).

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.6.2  (11-17-2009)
Fair Market Value

  1. In determining the value of economic benefits for purposes of section 4958, the value of property, including the right to use property, is its fair market value. Regs. § 53.4958-4(b)(1)(i).

  2. Definition. Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. Regs. § 53.4958-4(b)(1)(i).

7.27.30.6.3  (11-17-2009)
Reasonable Compensation

  1. Reasonable compensation is the value of services that would ordinarily be paid for like services by like enterprises (whether taxable or tax-exempt) under like circumstances. Regs. § 53.4958-4(b)(1)(ii)(A).

  2. IRC § 162 standards apply in determining the reasonableness of compensation, taking into account the aggregate benefits provided and the rate at which any deferred compensation accrues. Regs. § 53.4958-4(b)(1)(ii)(A).

  3. The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining the reasonableness of compensation. Regs. § 53.4958-4(b)(1)(ii)(A).

  4. The fact that a state or local legislative or agency body or court has authorized or approved a particular compensation package paid to a disqualified person is not determinative of the reasonableness of compensation for purposes of section 4958. Regs. § 53.4958-4(b)(1)(ii)(A).

  5. For determining the reasonableness of compensation, all economic benefits provided by an applicable tax-exempt organization in exchange for the performance of services are included, except for economic benefits that are disregarded under See IRM 7.27.30.6.1.2Regs. § 53.4958-4(b)(1)(ii)(B).

    Examples of economic benefits included are:

    1. All forms of cash and non-cash compensation, including:

      • salary, fees, bonuses;

      • severance payments; and

      • deferred and non-cash compensation. Regs. § 53.4958-4(b)(1)(ii)(B)(1).

    2. The payment of liability insurance premiums for the payment or reimbursement by the applicable tax-exempt organization of the following, unless excludable from gross income as a de minimis fringe benefit under IRC § 132(a)(4). Regs. § 53.4958-4(b)(1)(ii)(B)(2).

      • Any penalty, tax, or expense of correction owed under IRC § 4958,

      • Any expense not reasonably incurred in a civil proceeding arising out of the performance of services for the applicable tax-exempt organization, or

      • Any expense resulting from an act or failure to where the person has acted willfully and without reasonable cause.

    3. All other compensatory benefits, whether or not included ingross income for income tax purposes. Regs. § 53.4958-4(b)(1)(ii)(B)(3).

    4. Taxable and nontaxable fringe benefits, except fringe benefits that are excludable from gross income under IRC § 132. Regs. § 53.4958-4(b)(1)(ii)(B)(3).

    5. Certain expense allowances or reimbursements paid under "nonaccountable plan" under Regs. § 1.62-2(c)(3). Regs. § 53.4958-4(b)(1)(ii)(B)(3).

    6. The economic benefit of a below-market loan within the meaning of IRC § 7872(e)(1). Regs. § 53.4958-4(b)(1)(ii)(B)(3).

      Note:

      The economic benefit of a below-market loan is the amount deemed transferred to the disqualified person under IRC § 7872(a) or (b), regardless of whether IRC § 7872 otherwise applies to the loan.

  6. All compensatory benefits (regardless of the federal income tax treatment) provided by an applicable tax-exempt organization in exchange for the performance of services are taken into account in determining the reasonableness of a person’s compensation, except for economic benefits that are disregarded under IRM 7.27.30.6.1.2. Regs. § 53.4958-4(b)(1)(ii)(B).

  7. Whether an item is included in the disqualified person’s gross income for income tax purposes is made on the basis of the provisions of Chapter 1 of the Internal Revenue Code. The determination is made without regard to whether the item is taken into account for purposes of the reasonableness of compensation under IRC § 4958. Regs. § 53.4958-4(b)(1)(ii)(C).

  8. Fixed Payment. In determining reasonableness of a fixed payment under a contract, the facts and circumstances considered are those existing when the parties entered into the contract under which the payment was made. Regs. § 53.4958-4(b)(2)(i). Likewise, if property subject to a substantial risk of forfeiture is a fixed payment, reasonableness is determined at the time the parties entered into the contract providing for the transfer of the property.

    Note:

    In the event of substantial non-performance, reasonableness is determined based on all facts and circumstances, up to and including circumstances as of the date of payment.

    Note:

    If property subject to a substantial risk of forfeiture satisfies the definition of fixed payment, reasonableness is determined at the time the parties entered into the contract providing for the transfer of the property.

    Caution:

    In determining reasonableness, facts and circumstances existing at the date that the payment is questioned are not considered.

  9. Non-Fixed Payment. In determining reasonableness of a payment that is not a fixed payment under a contract, all the facts and circumstances, up to the date of payment, are considered. Regs. § 53.4958-4(b)(2)(i).

    Note:

    If property subject to a substantial risk of forfeiture is not a fixed payment, reasonableness is determined based on all the facts and circumstances up to and including circumstances as of the date of payment.

    Caution:

    In determining reasonableness, facts and circumstances existing at the date that the payment is questioned are not considered.

  10. Intent. An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. Regs. § 53.4958-4(c)(1). See IRM 7.27.30.6.3.1

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.6.3.1  (11-17-2009)
Intent that Benefit be Treated as Compensation

  1. An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. Regs. § 53.4958-4(c)(1).

  2. Such intent to provide an economic benefit as compensation for services is not required if the economic benefit is excluded from the disqualified person's gross income for income tax purposes on the basis of the provisions of chapter 1 of Subtitle A of the Internal Revenue Code (i.e., for nontaxable benefits). Regs. § 53.4958-4(c)(2).

  3. An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefits under consideration. Regs. § 53.4958-4(c)(1).

  4. Contemporaneous Substantiation. An applicable tax-exempt organization provides contemporaneous written substantiation of its intent to provide an economic benefit as compensation if:

    1. The applicable tax-exempt organization reports the benefit as compensation on an original Federal tax information return (for example, Form W-2, Form 1099, or Form 990), or

    2. The applicable tax-exempt organization reports the benefit as compensation on an amended Federal tax information return filed before the start of an IRS audit of either the organization or the disqualified person for the taxable year in which the transaction occurred, or

    3. The recipient disqualified person reports the benefit as income on an original Federal tax return (for example, Form 1040), or

    4. The recipient disqualified person reports the benefit as income on an amended Federal tax return filed before the earlier of (1) the start of an IRS audit of either the applicable tax-exempt organization or the disqualified person for the taxable year in which the transaction occurred, or (2) the first documentation in writing by the IRS of a potential excess benefit transaction. Regs. § 53.4958-4(c)(3)(i)(A).

  5. Other Evidence. Other written contemporaneous evidence may be used to demonstrate that the appropriate decision-making body, or an officer authorized to approve compensation, approved a transfer as compensation for services, including:

    1. An approved written employment contract executed on or before the date of the transfer. Regs. § 53.4958-4(c)(3)(ii)(A).

    2. Documentation indicating that an authorized body approved the transfer as compensation for services on or before the date of transfer. Regs. § 53.4958-4(c)(3)(ii)(B).

    3. Written evidence in existence on or before the due date of the applicable Federal return (including extensions but not amendments) of a reasonable belief by the applicable tax-exempt organization that a benefit was nontaxable under the Internal Revenue Code. Regs. § 53.4958-4(c)(3)(ii)(C).

  6. No Contemporaneous Written Substantiation. If an applicable tax-exempt organization fails to provide contemporaneous written substantiation of its intent to provide an economic benefit as compensation, for determining reasonableness of the transaction, any services provided by the disqualified person will not be treated as provided in consideration for the economic benefit. Regs. § 53.4958-4(c)(1). Therefore, the economic benefit would be treated as an excess benefit under IRC § 4958, unless the organization provided the economic benefit in exchange for consideration other than the performance of services.

  7. Reasonable Cause. If an applicable tax-exempt organization’s failure to report an economic benefit as required under the Internal Revenue Code is due to reasonable cause, the organization will be treated as having clearly indicated its intent to provide an economic benefit as compensation for services. Regs. §§ 53.4958-4(c)(3)(i)(B) and 301.6724-1. To show reasonable cause, the applicable tax-exempt organization must establish that either:

    1. There were significant mitigating factors regarding its failure to report (Regs. § 301.6724-1(b)), or

    2. The failure arose from events beyond the organization’s control (Regs. § 301.6724-1(c)). In addition, the organization must establish that it acted in a responsible manner both before and after the failure occurred. Regs. § 301.6724-1(d).

  8. Theft or Fraud. An economic benefit that a disqualified person obtains by theft or fraud is never consideration for the performance of services. Regs. § 53.4958-4(c)(1).

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.7  (11-17-2009)
Economic Benefits Determined by Revenues

  1. Revenue-sharing transactions are potentially subject to IRC § 4958 liability under the general rules governing excess benefit transactions, but only to the extent that the value of the economic benefits provided to the disqualified person is shown to exceed the value of the services or other consideration received in return. Regs. § 53.4958-4(a)(1).

  2. The final regulations reserved a separate section governing revenue-sharing transactions. Regs. § 53.4958-5.

  3. Until final regulations are published regarding revenue-sharing transactions, these transactions should be evaluated under the general rules defining excess benefit transactions (see Regs. § 53.4958-4), which apply to all transactions with disqualified persons regardless of whether the person’s compensation is computed by reference to revenues of the organization.

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.8  (11-17-2009)
Rebuttable Presumption - Overview

  1. Payments under a compensation arrangement are presumed to be reasonable, and a transfer of property, or the right to use property, is presumed to be at fair market value, if all of the following conditions are satisfied. Regs. § 53.4958-6(a).

    1. Approval in Advance by an Authorized Body. The compensation arrangement or the terms of the property transfer are approved in advance by an authorized body of the applicable tax-exempt organization or an entity it controls, See IRM 7.27.30.8.1, composed entirely of individuals who do not have a conflict of interest as to the compensation arrangement or property transfer. See IRM 7.27.30.8.2

    2. Comparability. Prior to making its determination, the authorized body obtained and relied upon appropriate data as to comparability. See IRM 7.27.30.8.3

    3. Documentation. The authorized body adequately documented the basis for its determination concurrently with making that determination. See IRM 7.27.30.8.4

  2. If the above three requirements are satisfied, then the Internal Revenue Service may rebut the presumption that arises only if it develops sufficient contrary evidence to rebut the probative value of the comparability data relied upon by the authorized body.

    1. With respect to any fixed payment, rebuttal evidence is limited to evidence relating to facts and circumstances existing on the date the parties enter into the contract pursuant to which the payment is made (except in the event of substantial nonperformance).

    2. With respect to all other payments (including non-fixed payments subject to a cap, as described in paragraph (d)(2) of this section), rebuttal evidence may include facts and circumstances up to and including the date of payment. See § 53.4958-4(b)(2)(i).

  3. Absence of Presumption. The fact that a transaction between an applicable tax-exempt organization and a disqualified person is not subject to the rebuttable presumption of reasonableness does not create any inference that the transaction is an excess benefit transaction. Regs. § 53.4958-6(e).

    Note:

    The absence of the rebuttal presumption does not exempt or relieve any person from compliance with any Federal or state law imposing any obligation, duty, responsibility, or other standard of conduct as to the operation or administration of any applicable tax-exempt organization.

  4. Reliance Period. The rebuttable presumption applies to all payments made or transactions completed under a contract if the three requirements in See IRM 7.27.30.8.1 were met when the contract was entered into, except in the case of non-fixed payments See IRM 7.27.30.8. Regs. § 53.4958-6(f).

  5. No Ruling Policy. The Service will not issue private letter rulings that any or all of the requirements for establishing the rebuttable presumption under Regs. § 53.4958-6 have been satisfied. See Rev. Proc. 2009-4, 2009-1 I.R.B. 118,, Section 6.10, which is updated annually.

  6. Checklists. To help agents evaluate whether a rebuttable presumption has been established, two checklists, one for compensation and one for property, are attached as Exhibit 7.27.30-1 and Exhibit 7.27.30-2.

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.8.1  (11-17-2009)
Authorized Body

  1. An authorized body means:

    1. The applicable tax-exempt organization’s governing body,

    2. A committee of the governing body, or

    3. Other parties authorized by the governing body to act on its behalf by following procedures specified by the governing body in approving compensation arrangements or property transfers, if permitted by state law. Regs. § 53.4958-6(c)(1)(i).

  2. When an authorized body is reviewing a specific compensation arrangement or property transfer involving an individual, that individual is not considered to be included on the authorized body if:

    1. That individual meets with other members only to answer questions,

    2. Otherwise recuses himself or herself from the meeting, and

    3. Is not present during debate and voting on the compensation arrangement or property transfer. Regs. § 53.4958-6(c)(1)(ii).

      Note:

      Under this rule, when an authorized body is reviewing a specific compensation arrangement or property transfer involving a member of the authorized body, the member is not considered as having a conflict of interest.

7.27.30.8.2  (11-17-2009)
Conflict of Interest

  1. A member of the authorized body does not have a conflict of interest as to a compensation arrangement or property transfer only if the member:

    1. Is not the disqualified person participating in or economically benefiting from the compensation arrangement or property transfer, and is not a member of the family of the disqualified person under Regs. § 53.4958-3(b)(1);

    2. Is not in an employment relationship subject to the direction or control of any disqualified person participating in or economically benefiting from the compensation arrangement or property transfer;

    3. Does not receive compensation or other payments subject to approval by any disqualified person participating in or economically benefiting from the compensation arrangement or property transfer;

    4. Has no material financial interest affected by the compensation arrangement or property transfer; and

    5. Does not approve a transaction providing economic benefits to any disqualified person participating in the compensation arrangement or property transfer, who in turn has approved or will approve a transaction providing economic benefits to the member. Regs. § 53.4958-6(c)(1)(iii).

7.27.30.8.3  (11-17-2009)
Comparability

  1. An authorized body has appropriate data as to comparability if, given the knowledge and expertise of its members, it has information sufficient to determine whether the compensation is reasonable or the property transfer is at fair market value. Regs. § 53.4958-6(c)(2)(i).

  2. In the case of compensation, examples of relevant information are:

    1. Compensation levels paid by similarly situated organizations, both taxable and tax-exempt, for functionally comparable positions;

    2. The availability of similar services in the geographic area;

    3. Current compensation surveys compiled by independent firms; and

    4. Actual written offers from similar institutions competing for the services of the disqualified person.

  3. Special rule for compensation paid by small organizations. For organizations with annual gross receipts of less than $1 million reviewing compensation arrangements, the authorized body is considered to have appropriate data as to comparability if it has data on compensation paid for similar services by three comparable organizations in the same or similar communities for similar services. Regs. § 53.4958-6(c)(2)(ii).

    1. An applicable tax-exempt organization may calculate its annual gross receipts based on an average of its gross receipts during the three prior taxable years. Regs. § 53.4958-6(c)(2)(iii).

    2. If any applicable tax-exempt organization is controlled by or controls another entity, the annual gross receipts of such organizations must be aggregated. Regs. § 53.4958-6(c)(2)(iii).

  4. Current independent appraisals of the value of the property that the organization intends to purchase or receive from, or sell or provide to, the disqualified person.

    1. Current independent appraisals of the value of the property that the organization intends to purchase or receive from, or sell or provide to, the disqualified person.

    2. Offers received as part of an open and competitive bidding process.

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.8.4  (11-17-2009)
Documentation

  1. For a decision by an authorized body to be documented adequately, the written or electronic records of the authorized body must note:

    1. The terms of the transaction that was approved and the date it was approved,

    2. The members of the authorized body who were present during debate on the transaction that was approved and those who voted on it,

    3. The comparability data obtained and relied upon by the authorized body and how the data was obtained, and

    4. Any actions taken regarding the transaction by anyone who is a member of the authorized body but who had a conflict of interest as to the transaction. Regs. § 53.4958-6(c)(3)(i).

  2. Variances. If the authorized body determines that the reasonable compensation for a specific arrangement, or that the fair market value in a specific property transfer, varies from the range of comparable data obtained, the authorized body must record the basis for its determination. Regs. § 53.4958-6(c)(3)(ii).

  3. Concurrently. For a decision by an authorized body to be documented concurrently, records must be prepared by the later of:

    1. The next meeting, or

    2. 60 days after final action by the authorized body

      Note:

      Within a reasonable time afterwards, records must be reviewed and approved by the authorized body as reasonable, accurate, and complete.

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.8.5  (03-15-2005)
Non-Fixed Payment

  1. Non-Fixed Payment. In the case of a non-fixed payment, no rebuttable presumption arises until the exact amount of the payment is determined, or a fixed formula for calculating the payment is specified, and the three requirements in See IRM 7.27.30.8.1 are subsequently satisfied. Regs. § 53.4958-6(d)(1).

  2. Non-Fixed Payments Subject to a Cap. If the authorized body approves an employment contract with a disqualified person that includes a non-fixed payment (such as a discretionary bonus) up to a specified cap, the authorized body may establish a rebuttable presumption as to the non-fixed payment when the employment contract is entered into if:

    1. Before approving the contract, the authorized body obtains appropriate comparability data indicating that a fixed payment of up to a certain amount to the particular disqualified person would represent reasonable compensation,

    2. The maximum amount payable under the contract, taking into account both fixed and non-fixed payments, does not exceed the above amount, and

    3. The requirements for the rebuttable presumption in See IRM 7.27.30.8.1 are satisfied. Regs. § 53.4958-6(d)(2).

    Note:

    This section does not apply to the special definition of excess benefit transaction for certain transactions involving donor advised funds and supporting organizations.

7.27.30.9  (11-17-2009)
Correction

  1. An excess benefit transaction is corrected by undoing the excess benefit to the extent possible and taking any additional measures necessary to place the applicable tax-exempt organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards. IRC § 4958(f)(6); Regs. § 53.4958-7(a).

    Note:

    In the case of any correction of an excess benefit transaction described in IRC § 4958(c)(2), no amount repaid may be held in any donor advised fund.

  2. Cash. In general, a disqualified person corrects an excess benefit only by making a payment in cash or cash equivalents to the applicable tax-exempt organization equal to the correction amount. Regs. § 53.4958-7(b)(1).

    1. Promissory Note. A cash equivalent does not include a promissory note

    2. Anti-Abuse. A disqualified person will not satisfy the correction requirements if the disqualified person engaged in one or more transactions with the applicable tax-exempt organization to circumvent the correction requirements, so that the disqualified person effectively transferred property other than cash or cash equivalents. Regs. § 53.4958-7(b)(2).

    3. Nonqualified Deferred Compensation. If an excess benefit transaction results from the vesting of benefits under a nonqualified deferred compensation plan, the disqualified person may correct the undistributed benefits by relinquishing any right to receive such benefits and any earnings on those benefits. Regs. § 53.4958-7(b)(3).

  3. Property. With the agreement of the applicable tax-exempt organization, a disqualified person may make a payment by returning the specific property previously transferred in the excess benefit transaction. The return of the property is considered a payment equal to the lesser of the fair market value of the property when the property is returned to the applicable tax-exempt organization or the fair market value of the property on the date the excess benefit transaction occurred. Regs. § 53.4958-7(b)(4).

    1. Insufficient Payment. If the payment resulting from the return of the property is less than the correction amount, the disqualified person must make an additional cash payment to the applicable tax-exempt organization equal to the difference. Regs. § 53.4958-7(b)(4)(ii).

    2. Excess Payment. If the payment resulting from the return of the property exceeds the correction amount, the applicable tax-exempt organization may make a cash payment to the disqualified person equal to the difference. Regs. § 53.4958-7(b)(4)(ii).

    3. Nonparticipation. Any disqualified person who received an excess benefit from the excess benefit transaction may not participate in the applicable tax-exempt organization’s decision whether to accept the return of the specific property. Regs. § 53.4958-7(b)(4)(iii).

  4. Correction Amount. The correction amount equals the sum of the excess benefit and interest on the excess benefit. Regs. § 53.4958-7(c).

  5. Interest. The amount of interest is determined by multiplying the excess benefit by the appropriate interest rate. Regs. § 53.4958-7(c).

    1. Interest should be compounded annually.

    2. Interest should be computed from the date the excess benefit transaction occurred to the date of correction.

    3. The interest rate should be a rate at least equal to the applicable Federal rate (AFR), compounded annually, for the month when the excess benefit transaction occurred.

    4. The period from the date the excess benefit transaction occurred to the date of correction is used to determine whether the appropriate AFR is the Federal short-term rate, the Federal mid-term rate, or the Federal long-term rate. See IRC § 1274(d)(1)(A).

  6. Contract Not Completed. If the excess benefit transaction arises under a contract that has been partially performed, in order to correct, it is not required that the contractual relationship be terminated in order to correct. Regs. § 53.4958-7(d).

    Caution:

    However, to avoid future excess benefit transactions, the parties may need to modify the terms of any ongoing contract.

  7. Non-Existing or Non-Exempt Organization.

    1. IRC § 501(c)(3). If the applicable tax-exempt organization that engaged in the excess benefit transaction no longer exists, or is no longer described in IRC § 501(c)(3) and exempt from tax under IRC § 501(a), the disqualified person should pay the correction amount to another IRC § 501(c)(3) organization that is exempt from tax under IRC § 501(a) pursuant to the dissolution clause in the applicable tax-exempt organization’s organizational documents. Regs. § 53.4958-7(e)(2).

      • The recipient organization must be described in section 170(b)(1)(A) (other than in section 170(b)(1)(A)(vii and (viii)) for at least 60 months prior to the correction date

      • The disqualified person must not also be a disqualified person as to the recipient organization.

      • The recipient organization must not allow the disqualified person to make or recommend any grants or distributions

      Caution:

      If the organization or organizations named in the dissolution clause does not satisfy these three requirements, the agent should contact Rulings and Agreements, Washington, D.C., for guidance.

    2. IRC § 501(c)(4). If the applicable tax-exempt organization that engaged in the excess benefit transaction no longer exists, or is no longer described in IRC § 501(c)(4) and exempt from tax under IRC § 501(a), the disqualified person should pay the correction amount to a successor IRC § 501(c)(4) organization. Regs

    Note:

    If there is no successor tax-exempt organization, the disqualified person should pay the correction amount to any IRC §§ 501(c)(3) or 501(c)(4) organization that meets the three requirements in IRM 7.27.30.9(7)a.

7.27.30.9.1  (11-17-2009)
Abatement - Overview

  1. Under certain circumstances, the 25-percent tax may be abated and the 200-percent tax must be abated. Regs. § 53.4958-1(c)(2)(iii); IRC §§ 4961; 4962.

  2. By providing for abatement, the Internal Revenue Code encourages the correction of excess benefits by disqualified persons.

7.27.30.9.2  (03-15-2005)
Abatement - 200-Percent Tax

  1. If the disqualified person corrects the excess benefit transaction during the correction period, the 200-percent tax must be abated.

  2. If any excess benefit transaction with a disqualified person is corrected within the correction period, then any 200-percent tax imposed regarding this excess benefit transaction (including interest, additions to the tax, and additional amounts) must not be assessed; but if assessed, the assessment must be abated; and, if collected, the amount collected must be credited or refunded as an overpayment. Regs. §§ 53.4958-1(c)(2)(iii), 53.4963-1; IRC §§ 4961(a), 4963.

7.27.30.9.3  (03-15-2005)
Abatement - 25-Percent Tax

  1. If it is established to the satisfaction of the IRS that an excess benefit transaction with an applicable tax-exempt organization was due to reasonable cause and not due to willful neglect, and the excess benefit transaction was corrected within the correction period, then any 25-percent tax imposed regarding the excess benefit transaction, including interest, may not be assessed; but, if assessed, the assessment may be abated; and, if collected, the amount collected may be credited or refunded as an overpayment. IRC §§ 4962, 4963; Regs. § 53.4963-1.

  2. Therefore, for IRC § 4962 to apply, three requirements must be met:

    1. Correction of the excess benefit within the correction period. See IRM 7.27.30.9

    2. The excess benefit transaction was due to "reasonable cause. " See IRM 7.27.30.9.3.1and

    3. The excess benefit transaction was not due to "willful neglect." See IRM 7.27.30.9.3.2

    Note:

    In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court stated that "reasonable cause" and "willful neglect" are two separate standards. 469 U.S. at 245.

7.27.30.9.3.1  (03-15-2005)
Abatement - 25-Percent Tax - "Reasonable Cause"

  1. "Reasonable cause" means exercising" ordinary business care and prudence." Regs. §§ 53.4958-1(d)(6); 53.4941(a)-1(b)(5); and 301.6651-1(c); United States v. Boyle, 469 U.S. 241 (1985).

  2. Determining "reasonable cause" requires a consideration of all the facts and circumstances. Regs. § 301.6651-1(c).

7.27.30.9.3.2  (03-15-2005)
Abatement - 25-Percent Tax - "Not Willful Neglect "

  1. Not willful neglect" means that the receipt of the excess benefit was not due to the disqualified person’s conscious, intentional, or voluntary failure to comply with IRC § 4958, and that the noncompliance was not due to conscious indifference. Regs. §§ 53.4958-1(d)(5) and 53.4941(a)-1(b)(4).

    1. An act is "willful" if it is "voluntary, conscious, and intentional." Regs. §§ 53.4958-1(d)(5) and 53.4941(a)-1(b)(4).

    2. "Negligence" includes any failure to make a reasonable attempt to comply with the law. IRC § 6662(c).

    3. "Willful neglect" implies failure to exercise the care a reasonable person would observe under the circumstances to see that the standards were observed, despite knowledge of the standards or rules in question.

  2. In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court stated that the term "willful neglect" means "a conscious, intentional failure or reckless indifference." 469 U.S. at 245.

    Note:

    Establishing that the disqualified person did not know that the receipt of the excess benefit violated IRC § 4958 does not establish "not willful neglect."

7.27.30.9.3.3  (03-15-2005)
Abatement - 25-Percent Tax - Examples

  1. The following examples illustrate abatement of the 25-percent tax.

    Example:

    1

    Facts:

    "DP," a disqualified person with respect to "EO," an organization described in IRC § 501(c)(3), consulted an attorney experienced in exempt organization matters who advised DP, based on correct facts provided by DP, that DP could purchase certain real estate from EO at a price set by a member of EO’s Board of Directors who is a licensed real estate agent. DP purchased the property at this price. Subsequently, the DP consulted another attorney who advised DP that DP should have obtained a formal appraisal from an independent appraiser. DP did so, and the appraiser determined that the fair market value of the property on the date of purchase was greater than the price the DP had paid. Before EO received notice from the IRS that it would conduct an examination, DP promptly paid EO this additional amount plus interest. DP’s purchase of the property from EO at less than fair market value was an excess benefit transaction between DP and EO.

    Conclusion:

    DP entered into the excess benefit transaction due to reasonable cause and not willful neglect.

    Example:

    2

    Facts:

    "DP," a disqualified person with respect to "EO," an organization described in IRC § 501(c)(4), consulted a CPA experienced in exempt organization matters who advised DP that based on certain published compensation surveys, $100,000 per year would be reasonable compensation for EO to pay DP for services DP will provide to EO. EO pays DP this compensation. Later, DP consulted an attorney who advised DP that the particular compensation survey on which DP relied was not comparable because DP worked only 75 percent of a full-time schedule and EO was substantially smaller than the organizations in the survey. Before EO received notice from the IRS that it would conduct an examination, DP promptly repaid EO the excess compensation received, plus interest, and EO reduced DP’s future compensation to the proper level. DP’s receipt of excess compensation from EO was an excess benefit transaction between DP and EO.

    Conclusion:

    DP entered into the excess benefit transaction due to reasonable cause and not willful neglect.

    Example:

    3

    Facts:

    In 2000, "EO," an IRC § 501(c)(3) organization, paid "DP," the president of EO and a disqualified person with respect to EO, $2,500 per month for expenses. DP did not provide EO with any accounting of the use of these funds and, in fact, DP used most of these funds for personal expenses. Neither DP nor EO consulted a tax adviser regarding the tax consequences of this practice. In 2003, during an IRS examination of EO’s Forms 990, the agent asked EO about these payments. EO consulted a tax adviser and promptly requested that DP repay these expenses plus interest, which DP promptly did. DP’s receipt of the expense payments was an excess benefit transaction between DP and EO.

    Conclusion:

    DP entered into the excess benefit transaction not due to reasonable cause and due to willful neglect.

7.27.30.9.3.4  (03-15-2005)
Abatement - Technical Advice

  1. When a disqualified person requests abatement under IRC § 4962 of the 25-percent tax, the Area Manager is required to request technical advice from Rulings and Agreements, Washington, D.C., when the total 25-percent taxes involving all related parties and transactions within the period of limitations exceed $200,000. See IRM 7.1.4.2.2.2, Exempt Organizations Technical Advice Procedures — IRC 4962 Abatements.

    Note:

    Amounts for which several disqualified persons are jointly and severally liable are counted only once.

    1. For procedures regarding technical advice, see Rev. Proc. 2009-5, 2009-1 I.R.B. 161, which is updated annually.

    2. The authority to abate the 25-percent tax has been delegated to the Director, Exempt Organizations. IRM 1.2.2.7.11, Delegation Order No. 237 (Rev. 2) (11/14/97) (Updated 10/02/00).

    3. In appropriate circumstances, the Area Manager should consider using the pre-submission conference procedures described in Section 9 of Rev. Proc. 2009-5, 2009-1 I.R.B. 161, which is updated annually.

    4. Before preparing a request for technical advice relating to abatement, the Group Manager should contact Rulings and Agreements, Washington, D.C.

    5. After first contacting Rulings and Agreements, a request for technical advice must be routed through the Exempt Organizations Mandatory Review Staff in Dallas, Texas.

    Note:

    Send technical advice requests to: SE:T:EO:E:PR:MR (Dallas).

  2. When a disqualified person requests abatement under IRC § 4962 of the 25-percent tax, the Area Manager is not required to request technical advice when the total 25-percent taxes involving all related parties and transactions within the period of limitations are $200,000 or less.

    1. The authority to abate the 25-percent tax has been delegated to TE/GE Directors, Area Managers, Managers of TE/GE Technical Staffs, Manager of Examination Programs and Review, and Manager of Determination Quality Assurance. IRM 1.2.2.7.11, Delegation Order No. 237 (Rev. 2) (11/14/97) (Updated 10/2/00).

7.27.30.9.4  (03-15-2005)
Abatement - Correction Period

  1. Begins. The correction period begins when the excess benefit transaction between an applicable tax-exempt organization and a disqualified person occurs. IRC § 4963(e)(1).

  2. Ends. The correction period ends 90 days after the date of mailing of a notice of deficiency which includes the 200-percent tax, plus:

    1. The period when a Tax Court petition is pending, and

    2. Any other period which the IRS determines is reasonable and necessary to bring about correction of the excess benefit. IRC § 4963(e)(1)(B); Regs. § 53.4963-1(e)(3).

7.27.30.10  (11-17-2009)
Churches

  1. In initiating and conducting any inquiry or examination into whether an excess benefit transaction has occurred between a church and a disqualified person, the procedures in IRC § 7611 should be used. Regs. § 53.4958-8(b).

  2. The reasonable belief in IRC § 7611(a)(2) required to initiate a church tax inquiry is satisfied if there is a reasonable belief that an IRC § 4958 excise tax is due from a disqualified person as to an excess benefit transaction involving a church. Regs. § 53.4958-8(b).

  3. IRM 4.76.7, Church Tax Inquiries and Examinations - IRC § 7611 provides current procedures for conducting church tax inquiries and examinations under IRC § 7611.

7.27.30.11  (11-17-2009)
Period of Limitations

  1. The statute of limitations rules that apply to IRC § 4958 excise taxes are found in IRC §§ 6501(e)(3) and 6501(l).

  2. Begins. The period of limitations for assessing IRC § 4958 excise taxes against disqualified persons and organization managers begins when the applicable tax-exempt organization files the information return (Form 990 or Form 990-EZ) for the period when the excess benefit transaction occurred, or when the information return is due, whichever is later. IRC §§ 6501(b)(1), 6501(b)(4), and 6501(l)(1); Regs. §§ 301.6501(n)-1(a)(1) and 301.6501(n)-1(c).

    1. For a discussion of when a tax-exempt organization should file an information return (Form 990 or Form 990-EZ), see IRM 7.27.30.12.

    2. The filing of Form 4720 by a disqualified person or by an organization manager, reporting an excess benefit transaction with an applicable tax-exempt organization, does not begin the period of limitations for assessing initial excise taxes against the disqualified person or the organization manager. Regs. § 301.6501(n)-1(b).

  3. Ends. The period of limitations for assessing IRC § 4958 excise taxes against disqualified persons and organization managers ends either three years or six years after it begins.

    1. Three Years. If an applicable tax-exempt organization that engaged in an excess benefit transaction with a disqualified person filed an information return (Form 990 or Form 990-EZ) for the period the excess benefit transaction occurred, and reported the excess benefit transaction on this return or in an attached schedule or statement, the period of limitations for assessing IRC § 4958 excise taxes against a disqualified person or an organization manager would be three years. IRC § 6501(a); Regs. § 301.6501(a)-1(a).

    2. Six Years. If an applicable tax-exempt organization that engaged in an excess benefit transaction with a disqualified person filed an information return (Form 990 or Form 990-EZ) for the period when the excess benefit transaction occurred, but did not report the excess benefit transaction on this return or in an attached schedule or statement, the period of limitations for assessing IRC § 4958 excise taxes against a disqualified person or an organization manager would be six years. IRC § 6501(e)(3); Regs. § 301.6501(e)-1(c)(3)(ii).

  4. No Limitations Period. If an applicable tax-exempt organization that engaged in an excess benefit transaction with a disqualified person was required to file, but did not file, an information return (Form 990 or Form 990-EZ) for the period when the excess benefit transaction occurred, there is no period of limitations for assessing the related excise taxes against a disqualified person or an organization manager. IRC § 6501(c)(3); Regs. § 301.6501(n)-1(b).

  5. Reporting. An excess benefit transaction is considered reported on an information return (Form 990 or Form 990-EZ) or in a schedule or statement attached to the information return if it is disclosed in a manner sufficient to apprise the IRS of the existence and nature of the excess benefit transaction with a disqualified person and, if applicable, the participation by an organization manager. Regs. § 301.6501(e)-1(c)(3)(ii); Rev. Rul. 69-247, 1969-1 C.B. 303.

    Note:

    The IRS has the burden of proving that the disclosure of information on an information return (or in a schedule or statement attached to the information return) was insufficient to apprise the IRS of the existence and nature of an excess benefit transaction with a disqualified person and the participation by an organization manager.

  6. Since the period of limitations for assessing IRC § 4958 excise taxes against a disqualified person or an organization manager is based on the information return (Form 990 or Form 990-EZ) of the applicable tax-exempt organization, it is different from the period of limitations for assessing income taxes against a disqualified person or an organization manager. IRC § 6501(a).

    Example:

    1

    Facts:

    "E" is an IRC § 501(c)(3) organization, and "D" is a disqualified person as to E. E adopted the calendar year as its tax year, and D is a calendar year taxpayer. In 1998, E engaged in an excess benefit transaction with D in the amount of $320,000. On May 15, 1999, E filed Form 990 for 1998 reporting the excess benefit transaction of $320,000. D did not file Form 4720 for 1998 or pay the 25-percent excise tax.

    Conclusion:

    1. The excess benefit transaction occurred during E’s 1998 tax year.

    2. The period of limitations for assessing against D the 25-percent tax and the 200-percent tax on the excess benefit D received from E in 1998 expires on May 15, 2002, three years after E filed Form 990.

    Example:

    2

    Facts:

    The facts are the same as in Example 1 except that E did not report the excess benefit transaction with D on Form 990 or in a schedule or statement attached to the return, although E did timely file its Form 990 for that year.

    Conclusion:

    The period of limitations for assessing against D the 25-percent tax and the 200-percent tax on the excess benefit D received from E in 1998 expires six years after E filed Form 990, or on May 15, 2005.

    Example:

    3

    Facts:

    The facts are the same as in Example 1 except that E did not file Form 990 (or Form 990-EZ) for 1998, and D did not file Form 4720 for 1998 or pay the 25-percent excise tax.

    Conclusion:

    The 25-percent tax and the 200-percent tax on the excess benefit D received from E in 1998 may be assessed against D at any time.

    Example:

    4

    Facts:

    "E" is an IRC § 501(c)(3) organization, and "D" is a disqualified person as to E. E adopted a fiscal year ended September 30 as its tax year, and D is a calendar year taxpayer. E employed D from October 1, 1997, through September 30, 1998, during which E paid D compensation on the first day of every month. During this period, E paid D excess compensation of $240,000. On February 15, 1999, E filed Form 990 for the fiscal year ended September 30, 1998, reporting the $240,000 excess benefit E paid D from October 1, 1997, through September 30, 1998. D did not file Form 4720 or pay the 25-percent excise tax. D reported $60,000 of this "excess" compensation on Form 1040 for 1997 and $180,000 on Form 1040 for 1998.

    Conclusion:

    1. The $60,000 excess compensation E paid D from October 1, 1997, through December 31, 1997, is deemed to have occurred on December 31, 1997, the last day of D’s tax year. Regs. § 53.4958-1(e)(1).

    2. The $180,000 excess compensation E paid D from January 1, 1998, through September 30, 1998, is deemed to have occurred on September 1, 1998, the last payment date for D’s compensation. Regs. § 53.4958-1(e)(1).

    3. Since E reported the $240,000 excess benefit transaction with D on Form 990 filed on February 15, 1999, the period of limitations for assessing against D the 25-percent tax and the 200-percent tax on the $240,000 excess benefits D received from October 1, 1997, through September 30, 1998, begins on February 15, 1999, and ends three years later, on February 15, 2002.

    Example:

    5

    Facts:

    The facts are the same as in Example 4. In addition, D’s employment continued through December 31, 1998, at the same rate of compensation. On February 15, 2000, E filed Form 990 for the fiscal year ended September 30, 1999, reporting the $60,000 excess benefit E paid D from October 1, 1998, through December 31, 1998. D did not file Form 4720 or pay the 25-percent excise tax. D reported $240,000 of "excess" compensation on Form 1040 for 1998.

    Conclusion:

    1. The $60,000 excess compensation E paid D from October 1, 1998, through December 31, 1998, is deemed to have occurred on December 31, 1998, the last day of D’s tax year. Regs. § 53.4958-1(e)(1).

    2. Since E reported the $60,000 excess benefit transaction with D on Form 990 filed on February 15, 2000, the period of limitations for assessing against D the 25-percent tax and the 200-percent tax on the $60,000 excess benefits D received from October 1, 1998, through December 31, 1998, begins on February 15, 2000, and ends three years later, on February 15, 2003.

    Example:

    6

    Facts:

    The facts are the same as in Example 4, except that E did not file Form 990 (or Form 990-EZ) for the fiscal year ended September 30, 1998, and D did not file Form 4720 for 1998 or pay the 25-percent excise tax.

    Conclusion:

    The 25-percent tax and the 200-percent tax on the excess benefit D received from E in 1998 may be assessed against D at any time.

7.27.30.11.1  (03-15-2005)
Period of Limitations - Form 872

  1. The IRS and disqualified persons and organization managers may agree to extend the period of limitations for assessing IRC § 4958 excise taxes. IRC § 6501(c)(4); Regs. § 301.6501(c)-1(d). See IRM 25.6.23, Examination, TE/GE and Service Center Examination Statute Control .

  2. IRC § 4958 excise taxes are payable by the disqualified person or the organization manager. See IRM 7.27.30.1.5 (2) and IRM 7.27.30.1.6 (2).

  3. To extend the period of limitations for assessment, use the taxable period of the disqualified person or organization manager, not the taxable period of the applicable tax-exempt organization. Use Form 872 (Consent to Extend the Time to Assess Tax) for this purpose.

  4. Completing Form 872:

    1. If the disqualified person or organization manager is an individual, enter the social security number of the disqualified person or organization manager.

    2. If the disqualified person is not an individual, but a legal entity (e.g., a corporation, a partnership or trust), enter the employer identification number of the entity.

    3. Do not enter the employer identification number of the applicable tax-exempt organization.

    4. If the disqualified person operates a sole proprietorship that received the excess benefit, enter the social security number of the disqualified person, not the employer identification number of the sole proprietorship.

    5. Name. Enter the name of the disqualified person (either an individual or legal entity) or the organization manager.

      Note:

      If the spouse of the disqualified person or the organization manager is also a disqualified person or an organization manager, prepare a separate Form 872 for the spouse. Do not prepare a joint Form 872, even if they filed a joint income tax return.

    6. Address. If the disqualified person or organization manager is an individual, enter the address of that person's personal residence.

      Note:

      Do not enter the business address of the individual disqualified person, the individual organization manager, or the applicable tax-exempt organization.

      Caution:

      If the disqualified person is a legal entity, enter the business address of the entity.

    7. Kind of Tax. Enter "Excise" .

    8. Period(s) Ended. Enter the tax year(s) of the disqualified person or organization manager.

      Caution:

      Do not enter the tax year(s) of the applicable tax-exempt organization.

    9. Expiration Date. Enter the new expiration date.

    10. Your Signature Here.

      If the name appearing on the line "Name(s)" is that of ... Then ...
      An individual That individual should sign and date Form 872.
      A legal entity Leave this line blank.

    11. Spouse's Signature. This line should be left blank, even though the individual whose name appears on the line "Name(s)" may have filed a joint income tax return with a spouse.

      Caution:

      If the spouse of the individual whose name appears on the line "Name(s) " is also a disqualified person or an organization manager, do not prepare a joint Form 872, even if they filed a joint income tax return. Instead, prepare a separate Form 872 for the spouse.

    12. Corporate Name. If the name appearing on the line "Name(s) " is a legal entity, enter the name of the entity.

    13. Corporate Officer(s) Sign Here. If the name appearing on the line "Name(s)" is a legal entity, an authorized officer, partner or trustee should sign here. See Rev. Rule. 83-41, 1983-1 C.B. 349.

7.27.30.12  (11-17-2009)
Filing of Returns

  1. Organization. An applicable tax-exempt organization that engaged in an excess benefit transaction with a disqualified person should report the excess benefit transaction and the amount of the 25-percent tax imposed on the disqualified person on an information return (Form 990 or Form 990-EZ) for the period when the excess benefit transaction occurred, as required by the form and the applicable instructions. IRC §§ 6033(b)(11), 6033(b)(12), 6033(b)(13) and 6033(f); Regs. § 1.6033-2.

    1. If an organization manager knowingly participated in an excess benefit transaction between an applicable tax-exempt organization and a disqualified person, the applicable tax-exempt organization should also report the excess benefit transaction and the amount of the 10-percent tax imposed on the participation of the organization manager on an information return (Form 990 or Form 990-EZ) for the period when the excess benefit transaction occurred, as required by the form and the applicable instructions. IRC §§ 6033(b)(11), 6033(b)(12), 6033(b)(13) and 6033(f); Regs. § 1.6033-2.

  2. Disqualified Person. A disqualified person who engaged in an excess benefit transaction with an applicable tax-exempt organization and who is liable for the 25-percent tax is required to file Form 4720 reporting the excess benefit transaction and to pay the appropriate amount of excise tax. IRC § 6011(a); Regs. § 53.6011-1(b).

  3. Organization Manager. An organization manager who knowingly participated in an excess benefit transaction between an applicable tax-exempt organization and a disqualified person and who is liable for the 10-percent tax is required to file Form 4720 reporting the excess benefit transaction and to pay the appropriate amount of excise tax. IRC § 6011(a); Regs. § 53.6011-1(b).

7.27.30.12.1  (03-15-2005)
Filing of Returns - Due Date

  1. Disqualified Person. A disqualified person who is liable for the 25-percent tax on an excess benefit transaction should file Form 4720 and pay the appropriate amount of excise tax on or before the 15th day of the fifth month after the end of the disqualified person's tax year. Regs. § 53.6071-1(f).

  2. Organization Manager. An organization manager who is liable for the 10-percent tax should file Form 4720 and pay the appropriate amount of excise tax on or before the 15th day of the fifth month after the end of the organization manager's tax year. Regs. § 53.6071-1(f).

    Example:

    1

    "E" is an IRC § 501(c)(3) organization. "D" is a disqualified person as to E, and "O" is an organization manager. E adopted the calendar year as its tax year. Both D and O are calendar year taxpayers. During 1999, E engaged in an excess benefit transaction with D. O knowingly participated in this excess benefit transaction with D, and O's participation was willful and not due to reasonable cause.

    • By May 15, 2000, E should have filed Form 990 (or Form 990-EZ), reported the excess benefit transaction with D, and reported O's participation, as required by the form and the applicable instructions.

    • By May 15, 2000, D should have filed Form 4720 and paid the 25-percent excise tax.

    • By May 15, 2000, O should have filed Form 4720 and paid the 10-percent excise tax.

    Example:

    2

    "E" is an IRC § 501(c)(3) organization. "D" is a disqualified person as to E, and "O" is an organization manager. E adopted June 30 as its tax year. Both D and O are calendar year taxpayers. On May 19, 1998, E engaged in an excess benefit transaction with D. O knowingly participated in this excess benefit transaction with D, and O's participation was willful and not due to reasonable cause

    • By November 15, 1998, E should have filed Form 990 (or Form 990-EZ), reported the excess benefit transaction with D, and reported O's participation, as required by the form and the applicable instructions.

    • By May 15, 1999, D should have filed Form 4720 and paid the 25-percent excise tax.

    • By May 15, 1999, O should have filed Form 4720 and paid the 10-percent excise tax.

7.27.30.13  (11-17-2009)
Notice of Deficiency

  1. When the Area Manager sends notices of deficiency for IRC § 4958 excise taxes, the Area Manager should send each person who is liable for IRC § 4958 excise taxes a separate notice of deficiency. IRC § 6212(a); Regs. § 301.6212-1(a).

  2. If the Area Manager mails a person a notice of deficiency for IRC § 4958 excise taxes for a tax year, and this person files a petition in the U.S. Tax Court, the Area Manager may not mail another notice of deficiency for IRC § 4958 excise taxes for the same tax year. IRC § 6212(c)(1); Regs. § 301.6212-1(c).

  3. Therefore, when an Area Manager sends a notice of deficiency for IRC § 4958 excise taxes for a tax year, it should include:

    1. All excess benefit transactions occurring during the tax year, and

    2. Both the 25-percent tax and the 200-percent tax relating to each excess benefit transaction occurring during the tax year.

      Example:

      1

      Facts:

      "E" is an IRC § 501(c)(3) organization that adopted the calendar year as its tax year. "D" is a disqualified person as to E. D is a calendar year taxpayer.

      • On July 9, 1998, E sold property to D for $100,000. The fair market value of this property on that date was $250,000. Assume that this sale was an excess benefit transaction in the amount of $150,000.

      • On May 15, 1999, E filed Form 990 reporting the excess benefit transaction with D of $150,000.

      • On August 14, 2000, the IRS mailed D a 30-day letter proposing 25-percent tax of $37,500 and 200-percent tax of $300,000. However, before the IRS mailed this letter, D corrected the excess benefit transaction.

      Conclusions:

      • The taxable period began on July 9, 1998, the date the excess benefit transaction occurred.

      • Since D corrected the excess benefit transaction before the end of the taxable period, the 200-percent tax of $300,000 should not be imposed.

      • If D establishes to the satisfaction of the IRS that the excess benefit transaction was due to reasonable cause and was not due to willful neglect, a notice of deficiency should not be sent to D for the 25-percent tax of $37,500.

      Example:

      2

      Facts:

      Assume that D did not correct the excess benefit transaction during the taxable period, and on September 15, 2000, a notice of deficiency was mailed to D for the 25-percent tax of $37,500 and the 200-percent tax of $300,000.

      Conclusions:

      • The correction period began on July 9, 1998, the date the excess benefit transaction occurred.

      • Generally, the correction period would end on December 15, 2000, 90 days after the notice of deficiency was mailed, unless D filed a petition in the U.S. Tax Court, or the IRS determined that additional time was reasonable and necessary to bring about correction, or both.

      • If before the end of the correction period, D establishes to the satisfaction of the IRS that the excess benefit transaction was due to reasonable cause and not due to willful neglect, the 25-percent tax of $37,500 may be abated.

      • If before the end of the correction period, D corrected the excess benefit transaction, the 200-percent tax of $300,000 should be abated.

7.27.30.14  (11-17-2009)
Penalties

  1. A disqualified person or an organization manager would be liable for a penalty of 100 percent of the applicable IRC § 4958 excise taxes if the disqualified person or organization manager is liable for IRC § 4958 excise taxes due to an act which is not due to reasonable cause and either:

    1. The person was previously liable for IRC § 4958 excise taxes, or

    2. The act is both willful and flagrant. IRC § 6684; Regs. § 301.6684-1.

7.27.30.15  (03-15-2005)
Substitute Form 4720

  1. If a disqualified person (or an organization manager) who is required to file Form 4720 does not file Form 4720, the IRS may prepare a substitute Form 4720. IRC § 6020(b); Regs. § 301.6020-1(b).

  2. A substitute Form 4720 prepared by the IRS is a valid Form 4720 for all legal purposes. IRC § 6020(b)(2); Regs. § 301.6020-1(b)(2).

7.27.30.15.1  (11-17-2009)
Substitute Form 4720 - Penalties

  1. If a disqualified person (or an organization manager) who is required to file Form 4720 does not file Form 4720 on or before the required due date, including extensions of time, a penalty of 5 percent of the amount of the correct tax under IRC § 4958 would apply if the failure to file is not more than one month. IRC § 6651(a)(1); Regs. § 301.6651-1(a)(1).

    1. For each additional month that the disqualified person (or the organization manager) does not file Form 4720, a penalty of 5 percent per month applies, but not exceeding 25 percent in total.

    2. If the disqualified person (or the organization manager) establishes that the failure to file was due to reasonable cause and not due to willful neglect, the penalty would not apply.

  2. If a disqualified person (or an organization manager) who is required to file Form 4720 does not pay the excise taxes that should have been reported on Form 4720 on or before the required due date, including extensions of time, a penalty of 1/2 percent of the amount of the correct tax under IRC § 4958 would apply if the failure to pay is not more than one month. IRC § 6651(a)(3); Regs. § 301.6651-1(a)(3).

    1. For each additional month that the disqualified person (or the organization manager) does not pay the required excise taxes, a penalty of 1/2 percent per month applies, but not exceeding 25 percent in total.

    2. If the disqualified person (or the organization manager) establishes that the failure to pay was due to reasonable cause and not due to willful neglect, the penalty would not apply.

  3. The penalty for the failure to file and the penalty for the failure to pay cannot exceed 25 percent in the aggregate. IRC § 6651(c)(1).

  4. If the failure to file Form 4720 is fraudulent, the penalty for failure to file Form 4720 is increased from 5 percent to 15 percent, and the maximum penalty is increased from 25 percent to 75 percent. IRC § 6651(f).

  5. If a disqualified person (or an organization manager) who is required to file Form 4720 does not file Form 4720, and the IRS prepares a substitute Form 4720, the substitute Form 4720 is disregarded for purposes of the penalty for failure to file; i.e., the substitute return is not treated as the return filed by the taxpayer. The amount on the substitute Form 4720 is taken into account, however, for purposes of the penalty for failure to pay; i.e., the substitute return is treated as having been filed by the taxpayer. IRC § 6651(g); Regs. § 301.6651-1(g).

7.27.30.16  (03-15-2005)
Technical Advice

  1. An agent may consult with Rulings and Agreements, Washington D.C., at any time during an examination if there are any §4958 technical legal issues that cannot be resolved.

  2. When an agent proposes both intermediate sanctions under IRC § 4958 and revocation of the applicable tax-exempt organization's exemption based on the same transaction(s), the agent is required to consult with Rulings and Agreements, Washington, D.C., regarding the IRC § 4958 issues and whether technical advice is appropriate.

  3. If the Group Manager and Rulings and Agreements agree that a request for technical advice is appropriate, the request must be routed through the Exempt Organizations Mandatory Review Staff in Dallas, Texas.

    Note:

    Send technical advice requests to: SE:T:EO:E:PR:MR (Dallas).

  4. In certain situations involving abatement of the 25-percent tax under IRC § 4962, the Area Manager is required to request technical advice from Rulings and Agreements, Washington, D.C. See IRM 7.27.30.9.3.4

  5. When technical advice is requested, the time remaining on the period of limitations for assessing IRC § 4958 excise taxes must be at least one year. If necessary, the taxpayer should be requested to consent to extending the period of limitations for assessing IRC § 4958 excise taxes. See IRM 7.27.30.11.

    1. The agent should request executed Forms 872 (Consent to Extend the Time to Assess Tax) from all the appropriate disqualified persons and organization managers.

    2. If the agent cannot obtain executed Forms 872 from all the appropriate disqualified persons and organization managers, so that at least one year is remaining on the period of limitations for assessing all the IRC § 4958 excise taxes, the Group Manager is required to contact Rulings and Agreements, Washington, D.C.



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