Intermediate sanctions prop. regs.

• Author: Davis, Jeffrey
• Position: IRS nonprofit organization regulations

On July 30, 1998, the IRS released long-awaited proposed regulations providing guidance under Sec. 4958, known as the "intermediate sanctions" law. Significantly, advisers can rely on the proposed regulations until release of the final regulations. If the Service drafts the final regulations to reflect a more restrictive approach, they will be applied without retroactive effect.

Discussion

Sec. 4958 imposes a two-tiered excise tax on a "disqualified person" when a Sec. 501(c)(3) or (4) organization engages in an "excess benefit transaction." Initially, there is a 25% excise tax; if the excess benefit is not promptly paid back within a correction period, a subsequent 200% excise tax on disqualified persons who receive the excess benefit is imposed. Additionally, a 10% excise tax is imposed on organization managers who knowingly, willfully or without reasonable cause participate in the excess benefit transaction. Secs. 4961(a) and 4962(a) and the regulations thereunder permit the abatement of first- and second-tier taxes if the excess benefit is repaid within the correction period defined under Sec. 4963(e).

The legislative history to Sec. 4958 had indicated that the parties to a transaction under the intermediate sanctions law should be entitled to rely on a "rebuttable presumption" as to the reasonableness of compensation and fair market value of transactions. Prop. Regs. Sec. 53.4958-6 incorporates the "rebuttable presumption" concept and includes important additional guidance for Sec. 501(c)(3) and (4) organizations.

Disqualified Person

Sec. 4958(f) defines a disqualified person as a person who, with respect to any transaction with an applicable exempt organization, at any time during a five-year period beginning after Sept. 13, 1995 and ending on the date of such transaction, was in a position to exercise "substantial influence" over the organization's affairs. Prop. Regs. Sec. 53.4958-3 specifically identifies certain persons as having substantial influence, including:

1. Any individual who serves as a voting member on the organization's governing body.

2. Any individuals with the powers or responsibilities of the president, chief executive officer (CEO), chief operating officer, chief financial officer or treasurer.

3. Any individual (regardless of title) who has or shares ultimate responsibility for managing the organization's financial assets and has or shares authority to sign drafts, direct the signing of drafts, or authorize...