PRIA, Government Policy, Made Personal

Summary

The law taxes situations when a tax-exempt group gives someone a benefit worth more than what that person gave back. If that happens, the person who got the extra benefit (a “disqualified person”) must pay a tax equal to 25% of the extra amount. Any officer, director, or trustee (an “organization manager”) who knowingly took part in the deal must pay 10% of the extra amount, unless their role was not willful and they had a reasonable cause. If more than one person is responsible, they can all be held liable. The manager’s tax for one transaction can never be more than $20,000. If the extra benefit is not fixed during the “taxable period” (from the transaction date until the IRS mails a notice of deficiency or formally assesses the tax), the disqualified person must pay an additional tax equal to 200% of the extra amount. An “excess benefit transaction” means the group gave an economic benefit to a disqualified person that was worth more than the payment or work the group got back. Special rules say that payments from donor-advised funds and supporting organizations (like grants, loans, or pay) can count as excess benefits. A “disqualified person” is someone who had big influence over the group in the last 5 years, their family, or an entity they control more than 35%. A “substantial contributor” for supporting organizations is someone who gave more than $5,000 and more than 2% of that year’s total gifts. “Correction” means undoing the excess and putting the group in the financial position it would have been in under high fiduciary standards; money paid back to fix donor-advised fund problems cannot stay in a donor-advised fund.

Title 26, §4958

Internal Revenue Code, Source: USLM XML via OLRC

(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

(2)Special rules for donor advised funds

In the case of any donor advised fund (as defined in section 4966(d)(2))—

(A)the term “excess benefit transaction” includes any grant, loan, compensation, or other similar payment from such fund to a person described in subsection (f)(7) with respect to such fund, and

(B)the term “excess benefit” includes, with respect to any transaction described in subparagraph (A), the amount of any such grant, loan, compensation, or other similar payment.

(3)Special rules for supporting organizations

(A)In general

In the case of any organization described in section 509(a)(3)—

(i)the term “excess benefit transaction” includes—

(I)any grant, loan, compensation, or other similar payment provided by such organization to a person described in subparagraph (B), and

(II)any loan provided by such organization to a disqualified person (other than an organization described in subparagraph (C)(ii)), and

(ii)the term “excess benefit” includes, with respect to any transaction described in clause (i), the amount of any such grant, loan, compensation, or other similar payment.

(B)Person described

A person is described in this subparagraph if such person is—

(i)a substantial contributor to such organization,

(ii)a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or

(iii)a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting “persons described in clause (i) or (ii) of section 4958(c)(3)(B)” for “persons described in subparagraph (A) or (B) of paragraph (1)” in subparagraph (A)(i) thereof).

(C)Substantial contributor

For purposes of this paragraph

(i) In general

(ii)Exception

Such term shall not include—

(I)any organization described in paragraph (1), (2), or (4) of section 509(a), and

(II)any organization which is treated as described in such paragraph (2) by reason of the last sentence of section 509(a) and which is a supported organization (as defined in section 509(f)(3)) of the organization to which subparagraph (A) applies.

(4)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

(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 $20,000.

(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), (4), or (29) 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

(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)

(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, except that in the case of any correction of an excess benefit transaction described in subsection (c)(2), no amount repaid in a manner prescribed by the Secretary may be held in any donor advised fund.

(7)Donors and donor advisors

For purposes of paragraph (1)(E), a person is described in this paragraph if such person—

(A)is described in section 4966(d)(2)(A)(iii),

(B)is a member of the family of an individual described in subparagraph (A), or

(C)is a 35-percent controlled entity (as defined in paragraph (3) by substituting “persons described in subparagraph (A) or (B) of paragraph (7)” for “persons described in subparagraph (A) or (B) of paragraph (1)” in subparagraph (A)(i) thereof).

(8)Investment advisors

For purposes of paragraph (1)(F)—

(A)In general

A person is described in this paragraph if such person—

(i)is an investment advisor,

(ii)is a member of the family of an individual described in clause (i), or

(iii)is a 35-percent controlled entity (as defined in paragraph (3) by substituting “persons described in clause (i) or (ii) of paragraph (8)(A)” for “persons described in subparagraph (A) or (B) of paragraph (1)” in subparagraph (A)(i) thereof).

(B)Investment advisor defined

For purposes of subparagraph (A), the term “investment advisor” means, with respect to any sponsoring organization (as defined in section 4966(d)(1)), any person (other than an employee of such organization) compensated by such organization for managing the investment of, or providing investment advice with respect to, assets maintained in donor advised funds (as defined in section 4966(d)(2)) owned by such organization.

Notes & Related Subsidiaries

Editorial Notes

Codification section 1212(a)(3), 1232(a), (b), and 1242(a), (b) of Pub. L. 109–280, which directed the amendment of section 4958 without specifying the act to be amended, were executed to this section, which is section 4958 of the Internal Revenue Code of 1986, to reflect the probable intent of Congress. See 2006 Amendment notes below.

Amendments

2018—Subsec. (f)(1)(D). Pub. L. 115–141 substituted comma for period at end. 2010—Subsec. (e)(1). Pub. L. 111–148 substituted “paragraph (3), (4), or (29)” for “paragraph (3) or (4)”. 2007—Subsec. (c)(3)(A)(i)(II). Pub. L. 110–172, § 3(i)(1), substituted “subparagraph (C)(ii)” for “paragraph (1), (2), or (4) of section 509(a)”. Subsec. (c)(3)(C)(ii). Pub. L. 110–172, § 3(i)(2), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “Such term shall not include any organization described in paragraph (1), (2), or (4) of section 509(a).” 2006—Subsec. (c)(2). Pub. L. 109–280, § 1232(b)(1), added par. (2). Former par. (2) redesignated (3). See Codification note above. Subsec. (c)(3). Pub. L. 109–280, § 1242(b), added par. (3). Former par. (3) redesignated (4). See Codification note above. Pub. L. 109–280, § 1232(b)(1), redesignated par. (2) as (3). See Codification note above. Subsec. (c)(4). Pub. L. 109–280, § 1242(b), redesignated par. (3) as (4). See Codification note above. Subsec. (d)(2). Pub. L. 109–280, § 1212(a)(3), substituted “$20,000” for “$10,000”. See Codification note above. Subsec. (f)(1)(D). Pub. L. 109–280, § 1242(a), added subpar. (D). Former subpar. (D) redesignated (E). See Codification note above. Pub. L. 109–280, § 1232(a)(1), added subpar. (D). See Codification note above. Subsec. (f)(1)(E). Pub. L. 109–280, § 1242(a), redesignated subpar. (D) as (E). Former subpar. (E) redesignated (F). See Codification note above. Pub. L. 109–280, § 1232(a)(1), added subpar. (E). See Codification note above. Subsec. (f)(1)(F). Pub. L. 109–280, § 1242(a), redesignated subpar. (E) as (F). See Codification note above. Subsec. (f)(6). Pub. L. 109–280, § 1232(b)(2), inserted “, except that in the case of any correction of an excess benefit transaction described in subsection (c)(2), no amount repaid in a manner prescribed by the Secretary may be held in any donor advised fund” after “standards”. See Codification note above. Subsec. (f)(7), (8). Pub. L. 109–280, § 1232(a)(2), added pars. (7) and (8). See Codification note above.

Statutory Notes and Related Subsidiaries

Effective Date

of 2007 AmendmentAmendment by Pub. L. 110–172 effective as if included in the provisions of the Pension Protection Act of 2006, Pub. L. 109–280, to which such amendment relates, see section 3(j) of Pub. L. 110–172, set out as a note under section 170 of this title.

Effective Date

of 2006 AmendmentAmendment by section 1212(a)(3) of Pub. L. 109–280 applicable to taxable years beginning after Aug. 17, 2006, see section 1212(f) of Pub. L. 109–280, set out as a note under section 4941 of this title. Pub. L. 109–280, title XII, § 1232(c), Aug. 17, 2006, 120 Stat. 1099, provided that: “The

Amendments

made by this section [amending this section] shall apply to transactions occurring after the date of the enactment of this Act [Aug. 17, 2006].” Pub. L. 109–280, title XII, § 1242(c), Aug. 17, 2006, 120 Stat. 1105, provided that: “(1) Subsection (a).—The

Amendments

made by subsection (a) [amending this section] shall apply to transactions occurring after the date of the enactment of this Act [Aug. 17, 2006]. “(2) Subsection (b).—The

Amendments

made by subsection (a) [probably should be “subsection (b)”, amending this section] shall apply to transactions occurring after July 25, 2006.”

Effective Date

Section applicable to excess benefit transactions occurring on or after Sept. 14, 1995, and not applicable to any benefit arising from a transaction pursuant to any written contract which was binding on Sept. 13, 1995, and at all times thereafter before such transaction occurred, see section 1311(d)(1), (2) of Pub. L. 104–168, set out as an

Effective Date

of 1996 Amendment note under section 4955 of this title.

§4958 Taxes on Excess Benefit Transactions

Summary

Title 26, §4958

Notes & Related Subsidiaries

Editorial Notes

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Statutory Notes and Related Subsidiaries

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Amendments

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