IRS issues intermediate-sanctions regulations.

• Author: Sair, Edward A.
• Position: Excise taxes against disqualified persons participating in excess-benefit transactions with tax-exempt organizations

Temporary and proposed regulations under Sec. 4958 (the intermediate-sanctions provisions) permit the IRS to assess excise taxes against disqualified persons who participate in excess-benefit transactions with applicable tax-exempt organizations. The new regulations modify and clarify aspects of the proposed regulations issued in August 1998, and reflect comments the IRS received in writing and at a two-day public hearing held in March 1999.

In lieu of revocation of tax-exempt status, Sec. 4958 imposes sanctions consisting of a two-tier excise tax on disqualified persons who have unduly benefited from dealing with certain exempt organizations. These rules were created as a mechanism to "police" transactions between certain public charities and individuals who have substantial influence over their affairs.

On Jan. 10, 2001, the Service issued temporary regulations interpreting these provisions, which have the same effect as final regulations until Jan. 9, 2004.

Applicability

The regulations apply only to certain Sec. 501(c)(3) or 501(c)(4) organizations. They do not cover:

* A private foundation.

* A governmental entity exempt from (or not subject to) taxation without regard to Sec. 501(a) (Temp. Regs. Sec. 53.4958-2T). This exclusion covers state colleges and universities, state and municipal or county-owned hospitals and other similar organizations.

* Certain foreign organizations.

Disqualified Persons

Sec. 4958 applies only to certain disqualified persons of the organization. In any transaction, a disqualified person is any person in a position to exercise "substantial influence" over the organization's affairs at any time during a five-year period ending on a transaction's date. Thus, a person no longer with an organization at the time an excess-benefit transaction occurs may nevertheless still be considered a disqualified person.

Persons who hold certain powers, responsibilities or interests are among those in a position to exercise substantial influence over the organization's affairs. This would include, for example, voting members of the governing body and persons holding the power of:

* President, chief executive officer or chief operating officer; or

* Treasurer or chief financial officer.

The regulations also cover spouses, certain family members of disqualified persons and entities controlled 35% or more by disqualified persons. Actual powers and responsibilities, rather than title, are considered in making the determination of substantial influence.

Who Is Not a Disqualified Person?

The regulations also clarify which persons are not in positions to exercise substantial influence over an organization's affairs:

* An employee who (1) receives benefits that total less than a specified "highly compensated" amount ($85,000 in 2001) and who does not hold executive or voting powers; (2) is not a family member of a disqualified person; and (3) is not a substantial contributor (see below);

* Sec. 501(c)(3) organizations; and

* Sec. 501(c)(4) organizations, for transactions with other Sec. 501(c)(4) organizations.

Other Persons Subject to a Facts-and-Circumstances Test

Other persons not described can also be disqualified persons, depending on the relevant facts and circumstances that tend to show substantial influence. A person may be a disqualified person with respect to an organization if facts and circumstances show the person:

* Is the organization's founder.

* Is a substantial contributor to...