§4965 Excise Tax on Certain Tax-exempt Entities Entering Into Prohibited Tax Shelter Transactions

Summary

Tax-exempt entities must pay a special tax if they take part in certain banned tax-shelter deals. If the deal is already banned when the entity joins, the entity pays for that year and for later years it stays a party. If a deal is later listed as banned, the entity pays for any year it was a party. Someone who runs or approves the entity and knew or should have known the deal was banned must pay a separate tax for the year they approved it. The tax for the entity is the highest rate of tax under section 11 multiplied by the larger of two amounts: the entity’s net income from the banned deal for the year (after other taxes), or 75% of the deal proceeds the entity got that year. If the entity knew or should have known the deal was banned when it joined, the tax is the larger of 100% of net income from the deal or 75% of the proceeds. The knowing-participation increase does not apply to deals entered on or before the law’s enactment. An approving manager pays $20,000 for each approval. The Treasury Secretary can make rules about how to split income or proceeds over time, including rules tied to listing dates or the date 90 days after enactment. These taxes are in addition to any other taxes or penalties. Definitions (one line each): Tax-exempt entity — groups listed under several tax code sections, including 501(c)/(d) groups, qualified charities, Indian tribes, certain retirement and education programs (like 529 and 529A), and similar arrangements. Entity manager — a person who acts like an officer, director, or trustee, or who approves the entity’s participation. Prohibited tax shelter transaction — a listed transaction or a certain kind of reportable confidential or contract-protected transaction. Subsequently listed transaction — a deal an entity joined before it was later labeled a listed transaction.