§4951 Taxes on Self-dealing

Summary

A tax must be paid when a disqualified person does self-dealing with a trust that is tax-exempt under 501(c)(21). The main tax is 10% per year (or part of a year) of the amount involved, paid by the disqualified person who took part (trustees acting only as trustees are not the main payers). A trustee who knowingly joins in the self-dealing pays 2.5% per year unless the action was not willful and was for a reasonable cause. If the self-dealing is not fixed during the “taxable period,” an extra tax of 100% of the amount involved is charged to the disqualified person. If a trustee refused to agree to the correction, that trustee pays 50%. More than one person can be held jointly and severally liable for the same act. Self-dealing includes five kinds of transactions: sales or leases, loans or credit, providing goods/services or facilities, payment of pay or expense reimbursements, and transfers or uses of trust income or assets for a disqualified person. “Amount involved” is the larger of money or fair market value given or received (for services it is only excess pay). The taxable period starts when the act happens and ends at the earliest of a mailed notice of deficiency under section 6212, assessment, or completion of correction. “Correction” means undoing the deal so the trust is no worse off than if the highest fiduciary standards had been followed. Disqualified persons include contributors, trustees, big owners (over 10%), certain officers/employees, close family, and entities controlled more than 35% by such people. Free services used only for the trust’s exempt purpose and reasonable, non-excessive pay for necessary services are not self-dealing. Payments for the specific purposes listed in subclauses (I) or (IV) of 501(c)(21)(A)(i) are also not treated as self-dealing.