§4965 — Title 26 Internal Revenue Code | U.S. Code

Summary

Tax-exempt organizations must pay a big tax if they take part in banned tax-shelter deals. If the deal is already a banned tax shelter when the organization joins, it must pay the tax for the year it joined and for later years. If a deal becomes officially “listed” while the organization is involved, the organization must pay the tax for the year it is listed. The tax equals the highest tax rate in section 11 multiplied by the larger of two amounts: the net income tied to the deal or 75% of the money the organization received from the deal. If the organization knew or should have known the deal was banned when it joined, the tax is the larger of 100% of the net income tied to the deal or 75% of the money received. A person who approves or causes an organization to join a banned deal, and who knew or should have known it was banned, must pay $20,000 for each approval. A “tax-exempt entity” covers eight kinds of groups and plans (briefly: 501(c)/(d) groups, 170(c) recipients other than the U.S., Indian tribal governments, certain entities under 4979(e), Section 529 and 529A programs, certain 457(b) plans, and arrangements under 4973(a)). An “entity manager” means officers or others who have authority or who approve the deal. Banned deals mean listed transactions or certain confidential/contract-protected reportable transactions. The Treasury can make rules about how to split income or proceeds over time. This tax is extra on top of any other taxes or penalties.

Title 26, §4965

Internal Revenue Code — Source: USLM XML via OLRC

(a)(1)(A)If a transaction is a prohibited tax shelter transaction at the time any tax-exempt entity described in paragraph (1), (2), or (3) of subsection (c) becomes a party to the transaction, such entity shall pay a tax for the taxable year in which the entity becomes such a party and any subsequent taxable year in the amount determined under subsection (b)(1).

(B)If any tax-exempt entity described in paragraph (1), (2), or (3) of subsection (c) is a party to a subsequently listed transaction at any time during a taxable year, such entity shall pay a tax for such taxable year in the amount determined under subsection (b)(1).

(2)If any entity manager of a tax-exempt entity approves such entity as (or otherwise causes such entity to be) a party to a prohibited tax shelter transaction at any time during the taxable year and knows or has reason to know that the transaction is a prohibited tax shelter transaction, such manager shall pay a tax for such taxable year in the amount determined under subsection (b)(2).

(b)(1)In the case of a tax-exempt entity—

(A)Except as provided in subparagraph (B), the amount of the tax imposed under subsection (a)(1) with respect to any transaction for a taxable year shall be an amount equal to the product of the highest rate of tax under section 11, and the greater of—

(i)the entity’s net income (after taking into account any tax imposed by this subtitle (other than by this section) with respect to such transaction) for such taxable year which—

(I)in the case of a prohibited tax shelter transaction (other than a subsequently listed transaction), is attributable to such transaction, or

(II)in the case of a subsequently listed transaction, is attributable to such transaction and which is properly allocable to the period beginning on the later of the date such transaction is identified by guidance as a listed transaction by the Secretary or the first day of the taxable year, or

(ii)75 percent of the proceeds received by the entity for the taxable year which—

(I)in the case of a prohibited tax shelter transaction (other than a subsequently listed transaction), are attributable to such transaction, or

(II)in the case of a subsequently listed transaction, are attributable to such transaction and which are properly allocable to the period beginning on the later of the date such transaction is identified by guidance as a listed transaction by the Secretary or the first day of the taxable year.

(B)In the case of a tax-exempt entity which knew, or had reason to know, a transaction was a prohibited tax shelter transaction at the time the entity became a party to the transaction, the amount of the tax imposed under subsection (a)(1)(A) with respect to any transaction for a taxable year shall be the greater of—

(i)100 percent of the entity’s net income (after taking into account any tax imposed by this subtitle (other than by this section) with respect to the prohibited tax shelter transaction) for such taxable year which is attributable to the prohibited tax shelter transaction, or

(ii)75 percent of the proceeds received by the entity for the taxable year which are attributable to the prohibited tax shelter transaction.

(2)In the case of each entity manager, the amount of the tax imposed under subsection (a)(2) shall be $20,000 for each approval (or other act causing participation) described in subsection (a)(2).

(c)For purposes of this section, the term “tax-exempt entity” means an entity which is—

(1)described in section 501(c) or 501(d),

(2)described in section 170(c) (other than the United States),

(3)an Indian tribal government (within the meaning of section 7701(a)(40)),

(4)described in paragraph (1), (2), or (3) of section 4979(e),

(5)a program described in section 529,

(6)an eligible deferred compensation plan described in section 457(b) which is maintained by an employer described in section 457(e)(1)(A),

(7)an arrangement described in section 4973(a), or

(8)a program described in section 529A.

(d)For purposes of this section, the term “entity manager” means—

(1)in the case of an entity described in paragraph (1), (2), or (3) of subsection (c)—

(A)the person with authority or responsibility similar to that exercised by an officer, director, or trustee of an organization, and

(B)with respect to any act, the person having authority or responsibility with respect to such act, and

(2)in the case of an entity described in paragraph (4), (5), (6), or (7) of subsection (c), the person who approves or otherwise causes the entity to be a party to the prohibited tax shelter transaction.

(e)For purposes of this section—

(1)(A)The term “prohibited tax shelter transaction” means—

(i)any listed transaction, and

(ii)any prohibited reportable transaction.

(B)The term “listed transaction” has the meaning given such term by section 6707A(c)(2).

(C)The term “prohibited reportable transaction” means any confidential transaction or any transaction with contractual protection (as defined under regulations prescribed by the Secretary) which is a reportable transaction (as defined in section 6707A(c)(1)).

(2)The term “subsequently listed transaction” means any transaction to which a tax-exempt entity is a party and which is determined by the Secretary to be a listed transaction at any time after the entity has become a party to the transaction. Such term shall not include a transaction which is a prohibited reportable transaction at the time the entity became a party to the transaction.

(f)The Secretary is authorized to promulgate regulations which provide guidance regarding the determination of the allocation of net income or proceeds of a tax-exempt entity attributable to a transaction to various periods, including before and after the listing of the transaction or the date which is 90 days after the date of the enactment of this section.

(g)The tax imposed by this section is in addition to any other tax, addition to tax, or penalty imposed under this title.

Notes & Related Subsidiaries

Editorial Notes

References in Text

The date of the enactment of this section, referred to in subsecs. (b)(1)(B) and (f), is the date of enactment of Pub. L. 109–222, which was approved May 17, 2006.

Amendments

2014—Subsec. (c)(8). Pub. L. 113–295 added par. (8). 2007—Subsec. (c)(6). Pub. L. 110–172 substituted “section 457(e)(1)(A)” for “section 4457(e)(1)(A)”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2014 AmendmentAmendment by Pub. L. 113–295 applicable to taxable years beginning after Dec. 31, 2014, see section 102(f)(1) of Pub. L. 113–295, set out as a note under section 552a of Title 5, Government Organization and Employees.

Effective Date

Pub. L. 109–222, title V, § 516(d), May 17, 2006, 120 Stat. 372, provided that: “(1) In general.—Except as provided in paragraph (2), the

Amendments

made by this section [enacting this section and amending section 6011, 6033, and 6652 of this title] shall apply to taxable years ending after the date of the enactment of this Act [May 17, 2006], with respect to transactions before, on, or after such date, except that no tax under section 4965(a) of the Internal Revenue Code of 1986 (as added by this section) shall apply with respect to income or proceeds that are properly allocable to any period ending on or before the date which is 90 days after such date of enactment. “(2) Disclosure.—The

Amendments

made by subsections (b) and (c) [amending section 6011, 6033, and 6652 of this title] shall apply to disclosures the due date for which are after the date of the enactment of this Act.”

§4965 Excise tax on certain tax-exempt entities entering into prohibited tax shelter transactions

Summary

Title 26, §4965

Notes & Related Subsidiaries

Editorial Notes

References in Text

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Amendments

Amendments

Citations & Metadata