Final intermediate sanctions regulations issued.

• Author: Packard, Pamela
• Position: Exempt organizations.

On Jan. 21, 2002, the IRS issued final regulations on intermediate sanctions under Sec. 4958.

Background

Congress added Sec. 4958 to the Code in 1996 in an effort to find a middle ground short of exemption revocation for "applicable tax-exempt organizations" (Sec. 501(c)(3) organizations (other than private foundations) and Sec. 501(c)(4) organizations), when insiders (disqualified persons) receive excess economic benefits at the organization's expense. An excess-benefit transaction occurs when the economic benefit provided by such an organization to (or for the use of) a disqualified person exceeds the value that the organization received from the consideration (Sec. 4958(c)(1)(A)).

The statute added a three-tier system of excise taxes:

* A first-tier tax of 25% of the excess-benefit amount imposed on the disqualified person receiving the excess benefit;

* A second-tier tax of 200% of the excess-benefit amount imposed on the disqualified person if the organization does not correct the transaction in a timely manner; and

* An additional tax of 10% of the excess benefit imposed on any organization manager who knowingly participated in the excess-benefit transaction.

Excess-benefit transactions can include compensation arrangements, asset sales, loan arrangements and a variety of their dealings between organizations and insiders.

The Service published proposed regulations in August 1998. After a lengthy comment process, it released temporary regulations in January 2001 (see Tax Clinic, "IRS Issues Intermediate Sanctions Regulations," TTA, March 2002, p. 161.) The temporary regulations went into significant detail in defining applicable tax-exempt organizations, disqualified persons, organization managers and excess-benefit transactions, with extensive guidance on compensation arrangements. The temporary regulations established a rebuttable presumption of reasonableness for both compensatory and noncompensatory arrangements, through a process of governing-body approval, use of comparable data and documentation. If the organization met these requirements for reasonableness, the IRS could rebut the presumption only if it developed sufficient contrary evidence to rebut the probative value of the comparability data on which the organization's governing body relied.

Final Regulations

After reviewing comments on the temporary regulations, the Service made only a few changes to the year-old temporary regulations:

* Organization managers would not be...