Estates, Gifts, And Trusts (EGT)

Intermediate Sanctions (Portfolio 476)

  • Intermediate Sanctions discusses in detail the applicable sanctions that, under §4958, may be imposed on excess benefit transactions.


The Bloomberg Tax Portfolio, Intermediate Sanctions, No. 476, discusses in detail the applicable sanctions that, under §4958, may be imposed on so-called “excess benefit transactions” involving §501(c)(3) public charities, §501(c)(4) organizations, and their insiders. Enacted in 1996 by the Taxpayer Bill of Rights 2, §4958 was added to the Internal Revenue Code to provide the IRS with a tool to penalize insiders of §501(c)(3) public charities and §501(c)(4) organizations who receive excess compensation or engage in unfair business transactions with the organizations, as well as managers who knowingly approve such arrangements. Section 4958 imposes an excise tax on a “disqualified person” — a person with substantial control over the organization — who receives excessive economic benefit from the organization, as well as on the organization manager(s) who approves the benefit knowing it to be excessive. The IRS may choose to invoke these penalties on the disqualified person as an alternative to revoking the organization’s tax exemption, hence the term “intermediate sanctions” to describe this new penalty regime. Amendments made by the Pension Protection Act of 2006 extended the intermediate sanctions penalty system to certain transactions involving donor advised funds and supporting organizations and their substantial contributors, even when there is no “excess” benefit.

The Portfolio begins by reviewing the background leading to the adoption of §4958. It then identifies the exempt organizations to which §4958 applies and the key definitions of “disqualified person” and “organization manager.” The Portfolio provides a thorough consideration of how an “excess benefit transaction” may be effected via transactions involving compensation, revenue sharing, and property transfers. The Portfolio discusses the “initial contract” exception and the procedures for qualifying for a “rebuttable presumption of reasonableness” and describes how the excise taxes are imposed as well as the “correction” and abatement of §4958 sanctions. The Portfolio reviews the application of §4958 to donor advised funds and supporting organizations added in 2006 by the Pension Protection Act. Finally, the Portfolio addresses the interplay of §4958 with good governance practices and the reporting requirements of the revised Form 990.

Other Portfolios that discuss intermediate sanctions include 482 T.M., Tax Issues of Educational Organizations; 484 T.M, Tax Issues of Religious Organizations; and 869 T.M., Tax-Exempt Organizations: Organizational and Operational Requirements.

This Portfolio may be cited as Roady, 476 T.M., Intermediate Sanctions.

Table of Contents

I. Introduction
II. Overview of § 4958
III. Definition of Applicable Tax-Exempt Organization
IV. Definition of a Disqualified Person
V. Definition of Organization Manager
VI. Excess Benefit Transactions
VII. Rebuttable Presumption of Reasonableness
VIII. Imposition of Excise Tax
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

Celia Roady
Morgan Lewis
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