Intermediate Sanctions, written by Celia Roady, Esq. of Morgan, Lewis & Bockius, discusses in detail the applicable sanctions that, under §4958, may be imposed on excess benefit transactions.

Enacted in 1996 by the Taxpayer Bill of Rights 2, §4958 imposes an excise tax not only on a “disqualified person” — a person with influence over the exempt organization involved in the questionable transaction — who receives an excess economic benefit as the result of a transaction with a charity (other than a private foundation) or a social welfare organization, but also on the organization manager who knowingly approves the transaction.

Amendments made by the Pension Protection Act of 2006 extended the tax to transactions between donor advised funds and their donors, and between supporting organizations and their substantial contributors, even when there is no excess benefit. As the title indicates, §4958 provides an “intermediate” regime of punishment that stops short of revoking the organization's tax-exempt status.

After noting that the §4941 self-dealing tax was the template for §4958, Intermediate Sanctions identifies the exempt organizations to which §4958 applies, then defines “disqualified person” and “organization manager.”

This Portfolio provides a thorough consideration of how an “excess benefit transaction” may be effected via transactions involving compensation, revenue sharing and property transfers.

Intermediate Sanctions discusses the “rebuttable presumption of reasonableness” safe harbor, describes how the excise taxes are imposed, addresses the concept of “correction,” and explains the abatement of §4958 sanctions.

Intermediate Sanctions allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

Detailed Analysis

I. Introduction

Introductory Material

A. Problems with Pre-Act Penalties for Inurement

1. Section 501(c)(3) Organizations

2. Section 501(c)(4) Organizations

3. Definition of Insider for Purposes of Inurement

B. Section 4941: A Template for § 4958

C. Previous Proposals for Intermediate Sanctions Legislation

II. Overview of § 4958

III. Definition of Applicable Tax-Exempt Organization

Introductory Material

A. Section 501(c)(3) Organizations

1. Application of § 508 Rules

2. Private Foundation Exclusion; Terminating Private Foundations

3. Foreign Charities

4. Governmental Entities and Instrumentalities

5. Collectively Bargained Apprenticeship Funds

B. Section 501(c)(4) Organizations

C. Impact of Nonrecognition of Exemption or Revocation of Exemption

IV. Definition of a Disqualified Person

Introductory Material

A. Disqualified Persons by Reason of Position

B. Disqualified Persons by Reason of Facts and Circumstances

C. Other Categories of Disqualified Persons

D. Persons Not Disqualified by Reason of Position

E. Persons Not Disqualified by Reason of Facts and Circumstances

F. Treatment of Donor-Advisors as Disqualified Persons

V. Definition of Organization Manager

VI. Excess Benefit Transactions

Introductory Material

A. Reasonableness Standard in General

1. Compensation

2. Sources of Compensation

3. Indirect Economic Benefits

a. Controlled Entity

b. Intermediary Entity

c. Examples

4. Embezzlement of Funds by Disqualified Person: "Provided by" Requirement

5. Initial Contract Exception

6. Timing of Reasonableness Determination

7. Intent to Treat Economic Benefit as Consideration for Services

8. Treatment of Insurance or Indemnification for Excise Taxes

B. Revenue-Sharing Transactions; Incentive Compensation

1. Pre-§ 4958 IRS Position Regarding Incentive Compensation Plans

a. The Incentive Plan Should Build Upon a System of Reasonable Compensation

b. The Plan Should Reflect the Realistic Needs of the Organization for Services

c. The Plan Should Be Formulated and Adopted Through a Process Independent of the Employees

d. The Structure of the Plan Should Minimize the Potential for Employee Control

e. The Incentive Formula Should Promote Exempt Objectives

f. The Plan Should Not Encourage Conduct Contrary to Exempt Purposes

g. The Plan Should Ensure that Aggregate Compensation Payments Are Reasonable

2. IRS Information Letter Dated January 9, 2002

C. Loans As Excess Benefit Transactions

D. Transfer or Use of Property

E. Early Cases and Technical Advice under § 4958

1. Sta-Home Health Agencies v. Comr.

2. Peters v. Comr.

3. Technical Advice Memorandum 200243057

4. Technical Advice Memorandum 200244028

F. Special Rules for Donor Advised Funds and Supporting Organizations

VII. Rebuttable Presumption of Reasonableness

Introductory Material

A. Independent Approval

B. Comparable Data

C. Adequate Documentation

D. Effect of Establishing Rebuttable Presumption

VIII. Imposition of Excise Tax

Introductory Material

A. Initial Tax on Disqualified Person

B. Second-Tier Tax on Disqualified Person

C. Definition of Correction

D. Excise Tax on Organization Manager

1. Definition of Participation

2. Definition of Knowing

a. Reliance on Professional Advice

b. Qualification for Rebuttable Presumption of Reasonableness

3. Definition of Willful

4. Reasonable Cause

IX. Abatement of § 4958 Excise Taxes

X. Reporting Excess Benefit Transactions

XI. Church Tax Inquiries and Examinations

XII. IRS Discretion to Impose Revocation and/or Excise Taxes

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 Easier Compliance is Goal of New Intermediate Sanction Regulations

Worksheet 2 Rebuttable Presumption Procedure is Key to Easy Intermediate Sanctions Compliance

Worksheet 3 IRS Information Letter 2002-0021 by Marvin Friedlander, Manager, Exempt Organizations Technical Group I, Internal Revenue Service, dated January 9, 2002

Worksheet 4 Intermediate Sanctions (IRS 4958) Update, from FY 2003 CPE Text for Tax Exempt Organizations

Worksheet 5 Kamehameha Schools Bishop Estate Closing Agreement

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