Question 10: Intermediate sanctions! Excess benefits! Disqualified Persons! What does it all mean?

Intermediate Sanctions

[Excerpted from H.R. 2337 - disclaimer: consult your attorney for your specific issues.
See the related article by James E. Guinn and David Middlebrook, Intermediate Sanctions]

SUBTITLE B--EXCISE TAXES ON AMOUNTS OF PRIVATE EXCESS BENEFITS

SEC. 1311. EXCISE TAXES FOR FAILURE BY CERTAIN CHARITABLE
ORGANIZATIONS TO MEET CERTAIN QUALIFICATION
REQUIREMENTS.
(a) IN GENERAL- Chapter 42 (relating to private foundations and
certain other tax-exempt organizations) is amended by redesignating
subchapter D as subchapter E and by inserting after subchapter C
the following new subchapter:
SUBCHAPTER D--FAILURE BY CERTAIN CHARITABLE
ORGANIZATIONS TO MEET CERTAIN QUALIFICATION REQUIREMENTS
Sec. 4958. Taxes on excess benefit transactions.
SEC. 4958. TAXES ON EXCESS BENEFIT TRANSACTIONS.
(a) INITIAL TAXES-
(1) ON THE DISQUALIFIED PERSON- There is hereby imposed on
each excess benefit transaction a tax equal to 25 percent of
the excess benefit. The tax imposed by this paragraph shall be
paid by any disqualified person referred to in subsection
(f)(1) with respect to such transaction.
(2) ON THE MANAGEMENT- In any case in which a tax is imposed
by paragraph (1), there is hereby imposed on the participation
of any organization manager in the excess benefit transaction,
knowing that it is such a transaction, a tax equal to 10
percent of the excess benefit, unless such participation is not
willful and is due to reasonable cause. The tax imposed by this
paragraph shall be paid by any organization manager who
participated in the excess benefit transaction.
(b) ADDITIONAL TAX ON THE DISQUALIFIED PERSON- In any case in
which an initial tax is imposed by subsection (a)(1) on an excess
benefit transaction and the excess benefit involved in such
transaction is not corrected within the taxable period, there is
hereby imposed a tax equal to 200 percent of the excess benefit
involved. The tax imposed by this subsection shall be paid by any
disqualified person referred to in subsection (f)(1) with respect
to such transaction.
(c) EXCESS BENEFIT TRANSACTION; EXCESS BENEFIT- For purposes of
this section--
(1) EXCESS BENEFIT TRANSACTION-
(A) IN GENERAL- The term `excess benefit transaction'
means any 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
if the value of the economic benefit provided exceeds the
value of the consideration (including the performance of
services) received for providing such benefit. For purposes
of the preceding sentence, an economic benefit shall not be
treated as consideration for the performance of services
unless such organization clearly indicated its intent to so
treat such benefit.
(B) EXCESS BENEFIT- The term `excess benefit' means the
excess referred to in subparagraph (A).
(2) AUTHORITY TO INCLUDE CERTAIN OTHER PRIVATE INUREMENT- To
the extent provided in regulations prescribed by the Secretary,
the term `excess benefit transaction' includes any transaction
in which the amount of any economic benefit provided to or for
the use of a disqualified person is determined in whole or in
part by the revenues of 1 or more activities of the
organization but only if such transaction results in inurement
not permitted under paragraph (3) or (4) of section 501(c), as
the case may be. In the case of any such transaction, the
excess benefit shall be the amount of the inurement not so
permitted.
(d) SPECIAL RULES- For purposes of this section--
(1) JOINT AND SEVERAL LIABILITY- If more than 1 person is
liable for any tax imposed by subsection (a) or subsection (b),
all such persons shall be jointly and severally liable for such
tax.
(2) LIMIT FOR MANAGEMENT- With respect to any 1 excess
benefit transaction, the maximum amount of the tax imposed by
subsection (a)(2) shall not exceed $10,000.
(e) APPLICABLE TAX-EXEMPT ORGANIZATION- For purposes of this
subchapter, the term `applicable tax-exempt organization' means--
(1) any organization which (without regard to any excess
benefit) would be described in paragraph (3) or (4) of section
501(c) and exempt from tax under section 501(a), and
(2) any organization which was described in paragraph (1) at
any time during the 5-year period ending on the date of the
transaction.
Such term shall not include a private foundation (as defined in
section 509(a)).
(f) OTHER DEFINITIONS- For purposes of this section--
(1) DISQUALIFIED PERSON- The term `disqualified person'
means, with respect to any transaction--
(A) 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,
(B) a member of the family of an individual described in
subparagraph (A), and
(C) a 35-percent controlled entity.
(2) ORGANIZATION MANAGER- The term `organization manager'
means, with respect to any applicable tax-exempt organization,
any officer, director, or trustee of such organization (or any
individual having powers or responsibilities similar to those
of officers, directors, or trustees of the organization).
(3) 35-PERCENT CONTROLLED ENTITY-
(A) IN GENERAL- The term `35-percent controlled entity'
means--
(i) a corporation in which persons described in
subparagraph (A) or (B) of paragraph (1) own more than
35 percent of the total combined voting power,
(ii) a partnership in which such persons own more
than 35 percent of the profits interest, and
(iii) a trust or estate in which such persons own
more than 35 percent of the beneficial interest.
(B) CONSTRUCTIVE OWNERSHIP RULES- Rules similar to the
rules of paragraphs (3) and (4) of section 4946(a) shall
apply for purposes of this paragraph.
(4) FAMILY MEMBERS- The members of an individual's family
shall be determined under section 4946(d); except that such
members also shall include the brothers and sisters (whether by
the whole or half blood) of the individual and their spouses.
(5) TAXABLE PERIOD- The term `taxable period' means, with
respect to any excess benefit transaction, the period beginning
with the date on which the transaction occurs and ending on the
earliest of--
(A) the date of mailing a notice of deficiency under
section 6212 with respect to the tax imposed by subsection
(a)(1), or
(B) the date on which the tax imposed by subsection
(a)(1) is assessed.
(6) CORRECTION- The terms `correction' and `correct' mean,
with respect to any excess benefit transaction, undoing the
excess benefit to the extent possible, and taking any
additional measures necessary to place the 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.'.
(b) APPLICATION OF PRIVATE INUREMENT RULE TO TAX-EXEMPT
ORGANIZATIONS DESCRIBED IN SECTION 501(c)(4)-
(1) IN GENERAL- Paragraph (4) of section 501(c) is amended by
inserting `(A)' after `(4)' and by adding at the end the
following:
(B) Subparagraph (A) shall not apply to an entity unless no
part of the net earnings of such entity inures to the benefit
of any private shareholder or individual.'.
(2) SPECIAL RULE FOR CERTAIN COOPERATIVES- In the case of an
organization operating on a cooperative basis which, before the
date of the enactment of this Act, was determined by the
Secretary of the Treasury or his delegate, to be described in
section 501(c)(4) of the Internal Revenue Code of 1986 and
exempt from tax under section 501(a) of such Code,
the allocation or return of net margins or capital to the members
of such organization in accordance with its incorporating statute
and bylaws shall not be treated for purposes of such Code as the
inurement of the net earnings of such organization to the benefit
of any private shareholder or individual. The preceding sentence
shall apply only if such statute and bylaws are substantially as
such statute and bylaws were in existence on the date of the
enactment of this Act.
(c) TECHNICAL AND CONFORMING AMENDMENTS-
(1) Subsection (e) of section 4955 is amended--
(A) by striking `SECTION 4945' in the heading and
inserting `SECTIONS 4945 AND 4958', and
(B) by inserting before the period `or an excess benefit
for purposes of section 4958'.
(2) Subsections (a), (b), and (c) of section 4963 are each
amended by inserting `4958,' after `4955,'.
(3) Subsection (e) of section 6213 is amended by inserting
`4958 (relating to private excess benefit),' before `4971'.
(4) Paragraphs (2) and (3) of section 7422(g) are each
amended by inserting `4958,' after `4955,'.
(5) Subsection (b) of section 7454 is amended by inserting
`or whether an organization manager (as defined in section
4958(f)(2)) has `knowingly' participated in an excess benefit
transaction (as defined in section 4958(c)),' after `section
4912(b),'.
(6) The table of subchapters for chapter 42 is amended by
striking the last item and inserting the following:
SUBCHAPTER D. FAILURE BY CERTAIN CHARITABLE ORGANIZATIONS TO MEET
CERTAIN QUALIFICATION REQUIREMENTS.
SUBCHAPTER E. ABATEMENT OF FIRST AND SECOND TIER TAXES IN CERTAIN
CASES.'.
(d) EFFECTIVE DATES-
(1) IN GENERAL- The amendments made by this section (other
than subsection (b)) shall apply to excess benefit transactions
occurring on or after September 14, 1995.
(2) BINDING CONTRACTS- The amendments referred to in
paragraph (1) shall not apply to any benefit arising from a
transaction pursuant to any written contract which was binding
on September 13, 1995, and at all times thereafter before such
transaction occurred.
(3) APPLICATION OF PRIVATE INUREMENT RULE TO TAX-EXEMPT
ORGANIZATIONS DESCRIBED IN SECTION 501(c)(4)-
(A) IN GENERAL- The amendment made by subsection (b)
shall apply to inurement occurring on or after September
14, 1995.
(B) BINDING CONTRACTS- The amendment made by subsection
(b) shall not apply to any inurement occurring before
January 1, 1997, pursuant to a written contract which was
binding on September 13, 1995, and at all times thereafter
before such inurement occurred.
SEC. 1312. REPORTING OF CERTAIN EXCISE TAXES AND OTHER INFORMATION.
(a) REPORTING BY ORGANIZATIONS DESCRIBED IN SECTION 501(c)(3)-
Subsection (b) of section 6033 (relating to certain organizations
described in section 501(c)(3)) is amended by striking `and' at the
end of paragraph (9), by redesignating paragraph (10) as paragraph
(14), and by inserting after paragraph (9) the following new
paragraphs:
`(10) the respective amounts (if any) of the taxes paid by
the organization during the taxable year under the following
provisions:
`(A) section 4911 (relating to tax on excess expenditures
to influence legislation),
`(B) section 4912 (relating to tax on disqualifying
lobbying expenditures of certain organizations), and
`(C) section 4955 (relating to taxes on political
expenditures of section 501(c)(3) organizations),
`(11) the respective amounts (if any) of the taxes paid by
the organization, or any disqualified person with respect to
such organization, during the taxable year under section 4958
(relating to taxes on private excess benefit from certain
charitable organizations),
`(12) such information as the Secretary may require with
respect to any excess benefit transaction (as defined in
section 4958),
`(13) such information with respect to disqualified persons
as the Secretary may prescribe, and'.
(b) ORGANIZATIONS DESCRIBED IN SECTION 501(c)(4)- Section 6033 is
amended by redesignating subsection (f) as subsection (g) and by
inserting after subsection (e) the following new subsection:
`(f) CERTAIN ORGANIZATIONS DESCRIBED IN SECTION 501(c)(4)- Every
organization described in section 501(c)(4) which is subject to the
requirements of subsection (a) shall include on the return required
under subsection (a) the information referred to in paragraphs
(11), (12) and (13) of subsection (b) with respect to such
organization.'.
(c) EFFECTIVE DATE- The amendments made by this section shall
apply to returns for taxable years beginning after the date of the
enactment of this Act.