Sanctions on charities for self-dealing and certain other activities.

• Author: Buehler, Janet
• Position: Brief Article

Sec. 501(c)(3) organizations are classified as either private foundations or public charities. Under current law, excise taxes may bc imposed on private foundations, their managers and certain disqualified persons for engaging in certain "self-dealing" and "taxable expenditure" transactions. Current law does not generally provide for similar excise taxes on Sec. 501(c)(3) public charities or Sec. 501(c)(4) organizations that engage in self-dealing or transactions that result in private inurement. The only sanction presently available to the IRS is revocation of the organization's exempt status, which in most circumstances is a disproportionate sanction for the prohibited transaction.

On Nov. 22, 1993l Rep. Pete Stark (D-Cal.) introduced HR 3697, the Exempt Organization Reform Act of 1993, which would impose intermediatc sanctions on Sec. 501(c)(3) public charities and Sec. 501(c)(4) organizations. These sanctions are in the form of two-tier excise taxes. One would be on "disqualified persons" for "selfdealing"; the other would be for private inurement. The bill defines a disqualified person as an organizational manager for a five-year period prior to the prohibited transaction, certain family members, officers, directors or trustees, as well as persons performing substantial medical services, such as physicians. An initial tax of 5% of the...