Excise Taxes on Excess Benefit Transactions

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 53, 301, and 602 [TD 8920] RIN
1545-AY64

TITLE: Excise Taxes on Excess Benefit Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations relating to
the excise taxes on excess benefit transactions under section 4958
of the Internal Revenue Code, as well as certain amendments and
additions to existing Income Tax Regulations affected by section
4958. Section 4958 was enacted in section 1311 of the Taxpayer Bill
of Rights 2. Section 4958 imposes excise taxes on transactions that
provide excess economic benefits to disqualified persons of public
charities and social welfare organizations (referred to as
applicable tax-exempt organizations). Disqualified persons who
benefit from an excess benefit transaction with an applicable tax-
exempt organization are liable for a tax of 25 percent of the excess
benefit. Such persons are also liable for a tax of 200 percent of
the excess benefit if the excess benefit is not corrected by a
certain date. Additionally, organization managers who participate in
an excess benefit transaction knowingly, willfully, and without
reasonable cause, are liable for a tax of 10 percent of the excess
benefit. The tax for which participating organization managers are
liable cannot exceed $10,000 for any one excess benefit transaction.

DATES: Effective Date: These regulations are effective January 10,
2001. Applicability Date: These regulations apply as of January 10,
2001, and will cease to apply January 9, 2004.

FOR FURTHER INFORMATION CONTACT: Phyllis D. Haney, (202) 622-4290
(not a toll-free number).

SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collections
of information contained in these temporary regulations have been
reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1623, in conjunction with the notice of proposed
rulemaking published August 4, 1998, 63 FR 41486, REG-246256-96,
Failure by Certain Charitable Organizations to Meet Certain
Qualification Requirements; Taxes on Excess Benefit Transactions.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
valid control number assigned by the Office of Management and
Budget.

Books and records relating to the collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background Section

4958 was added to the Code by the Taxpayer Bill of Rights 2, Public
Law 104-168 (110 Stat. 1452), enacted July 30, 1996. The section
4958 excise taxes generally apply to excess benefit transactions
occurring on or after September 14, 1995. The IRS notified the
general public of the new section 4958 excise taxes in Notice 96-46
(1996-2 C.B. 112), which also solicited comments on the new law.

On August 4, 1998, a notice of proposed rulemaking (REG-246256-96)
clarifying certain definitions and rules contained in section 4958
was published in the Federal Register (63 FR 41486). The IRS
received numerous written comments responding to this notice,
including a comment from the public on the collections of
information estimates contained therein.

That commentator expressed concern that the purchase of independent
compensation surveys is required to certify the reasonableness of
certain outside and personnel contracts; and that the proposed
regulations place a burden on governing bodies of applicable tax-
exempt organizations, increasing the personal risk of members of
those governing bodies. The collections of information in the
proposed regulations are voluntary on the part of the governing
bodies of applicable tax-exempt organizations. Although the
collections of information allow the organization to rely on a
presumption that a transaction is reasonable or at fair market
value, the failure to obtain the collections of information in no
way implies that a transaction is unreasonable.

Further, as discussed under Explanation of Provisions of this
preamble (under the heading Rebuttable presumption that a
transaction is not an excess benefittransaction), the IRS and the
Treasury Department believe that any applicable tax-exempt
organization may compile its own comparability data rather than
obtain an independent survey to satisfy the requirement to obtain
appropriate data as to comparability. Therefore, although the
comment on Paperwork Reduction Act requirements was considered in
the new estimates of the annual burden per recordkeeper and per
respondent, these temporary regulations continue to conclude that
the estimated annual burden per recordkeeper varies from 3 hours to
308 hours, depending on individual circumstances, with an estimated
weighted average of 6 hours, 3 minutes.

A public hearing was held on March 16 and 17, 1999. After
consideration of all the comments, the proposed regulations under
section 4958 were revised as follows. The major areas of the
comments and revisions are discussed below.

Explanation of Provisions

Additional Taxes on Disqualified Person

A disqualified person benefitting from an excess benefit transaction
must correct the excess benefit within the taxable period to avoid
liability for the 200-percent tax under section 4958(b). The taxable
period is defined by section 4958 as the period beginning on the
date the transaction occurred and ending on the earlier of the date
of mailing a notice of deficiency, or the date on which the 25-
percent tax is assessed. A commentator questioned whether the
disqualified person would receive any notice that the IRS was
examining a possible excess benefit transaction before either of the
events ending the taxable period occur. In fact, a disqualified
person would benotified if an examination of that person were opened
pursuant to an examination of an applicable tax-exempt organization.
The IRS has an obligation under Internal Revenue Code (Code) section
7602(c) to notify taxpayers at the beginning of the examination and
collection process that the IRS might contact third parties (such as
the organization) about the taxpayer's tax liabilities.
Additionally, the IRS follows the procedure of issuing a "first
letter of proposed deficiency" allowing the taxpayer an opportunity
for administrative review in the IRS Office of Appeals. This first
letter is issued 30 days before the notice of deficiency is issued.
Consequently, a disqualified person would be aware of any
examination of a potential excess benefit transaction before the end
of the taxable period.

Although it is also IRS practice to issue a single notice of
deficiency for both the 25-percent and 200-percent section 4958
taxes for which the disqualified person is liable, the abatement
rules under section 4961 provide that the 200-percent tax under
section 4958(b) is not to be assessed (and if assessed, is to be
abated) if the excess benefit is corrected within 90 days after the
mailing of the notice of deficiency for that tax.

Correction

Section 4958(f)(6) defines correction as "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." The proposed regulations
provide a short, general description of correction, referring to the
statutory language.

The proposed regulations define correction as repaying an amount of
money equal to the excess benefit, plus "any additional amount
needed to compensate the organization for the loss of the use of the
money or other property" from the date of the excess benefit
transaction to the date the excess benefit is corrected. The
proposed regulations further allow correction "in certain
circumstances" by permitting the disqualified person to return
property to the organization and "taking any additional steps
necessary to make the organization whole." Where there is an ongoing
contract for services, the proposed regulations provide that the
parties need not terminate the contract in order to correct, but the
contract "may need to be modified" to avoid future excess benefit
transactions.

The IRS received numerous comments and requests for additional
guidance relating to correction as defined in the proposed
regulations. A number of commentators requested that final
regulations state explicitly that correction requires a disqualified
person to pay interest on the excess benefit amount, and to specify
the rate of interest.

The temporary regulations state that the disqualified person must
pay the applicable tax-exempt organization a correction amount in
order to correct an excess benefit transaction and prevent
imposition of the 200-percent tax. The correction amount equals the
sum of the excess benefit and interest on the excess benefit. The
amount of the interest charge is determined by multiplying the
excess benefit by an interest rate, compounded annually, for the
period from the date the excess benefit transaction occurred to the
date of correction. The interest rate used for this purposemust be a
rate that equals or exceeds the applicable Federal rate (AFR),
compounded annually, for the month in which the transaction
occurred. The period from the date the excess benefit transaction
occurred to the date of correction is used to determine whether the
appropriate AFR is the Federal short-term rate, the Federal mid-term
rate, or the Federal long-term rate.

Commentators requested that an applicable tax-exempt organization
have discretion to determine the appropriate form of correction; for
example, payment of money, return of property, or some combination.
Alternatively, one commentator requested an explicit rule that
monetary payment is always sufficient and that a buy-back or return
of property is not required. Another requested clarification that
rescission could constitute an appropriate form of correction.

The temporary regulations provide, in general, that a disqualified
person corrects an excess benefit only by making a payment in cash
or cash equivalents to the applicable tax-exempt organization equal
to the correction amount. The disqualified person may, however, with
the agreement of the applicable tax-exempt organization, make a
payment by returning specific property previously transferred in the
excess benefit transaction. In the latter case, the amount of the
payment equals the lesser of the fair market value of the property
determined on the date the property is returned to the organization,
or the fair market value of the property on the date the excess
benefit transaction occurred.

Under the temporary regulations, if the payment made by returning
the property is less than the correction amount, the disqualified
person must make an additionalcash payment to the organization of
the difference. Conversely, if the payment made by returning the
property exceeds the correction amount, the organization may make a
cash payment to the disqualified person of the difference. The
disqualified person who engaged in the excess benefit transaction
with the applicable tax-exempt organization may not participate in
the applicable tax-exempt organization's decision whether to accept
as a correction payment the return of specific property previously
transferred in the excess benefit transaction. An organization may
always refuse the return of that property as payment, and require
instead that the disqualified person make a payment in cash (or cash
equivalents) of the full correction amount.

The temporary regulations provide a special rule relating to the
correction of an excess benefit transaction resulting from the
vesting of benefits provided under a nonqualified deferred
compensation plan. To the extent that such benefits have not been
distributed to the disqualified person, the disqualified person may
correct the portion of the excess benefit attributable to such
undistributed deferred compensation by relinquishing any right to
receive such benefits (including any earnings thereon). The
temporary regulations provide five new examples that illustrate
acceptable forms of correction. The temporary regulations also
clarify that, if the disqualified person makes a payment of less
than the full correction amount, the 200-percent tax is imposed only
on the unpaid portion of the correction amount.

Another commentator suggested that where an organization failed to
establish its intent to treat an economic benefit as consideration
for the performance of services, amending an information return,
rather than requiring the disqualified person to repaythe benefit,
should be sufficient to correct the excess benefit transaction,
assuming that the total amount of compensation was reasonable. In
this regard, the proposed regulations specifically allow the
reporting of an economic benefit by an organization on an original
or amended Federal tax information return to establish that a
benefit was intended as compensation. The proposed regulations and
these temporary regulations permit an organization to establish its
intent by amending an information return at any time prior to when
the IRS commences an examination. Additionally, the temporary
regulations explicitly allow the disqualified person to amend the
person's Federal tax return to report a benefit as income at any
time prior to when the IRS commences an examination of the
disqualified person or the applicable tax-exempt organization for
the taxable year in which the transaction occurs.

In addition, under the proposed regulations and these temporary
regulations, if an organization can show reasonable cause (using
existing standards under section 6724) for failing to report an
economic benefit as compensation as required under the Code or
regulations, then the organization will be treated as clearly
indicating its intent to provide an economic benefit as compensation
for services. The section 6724 standards include acting in a
responsible manner before and after the failure to report occurred,
along with either significant mitigating factors or events beyond
the organization's control.

Where the applicable tax-exempt organization provides taxable
benefits to a disqualified person, section 4958(c)(1) requires a
clear indication that the organization intended to provide the
benefits as consideration for the performance of services. Where
there is no such clear indication, the value of those benefits
generally is an excess benefit, regardless of any claim of
reasonableness of the total compensation package. In this case, the
regular correction rules apply.

The temporary regulations provide that failure of the organization
or the disqualified person to report nontaxable economic benefits
(or otherwise document a clear intent) does not result automatically
in an excess benefit transaction. This rule is consistent with the
legislative history. (H. REP. NO. 506, 104th Congress, 2d SESS.
(1996), 53, 57, note 8). These nontaxable benefits must still be
taken into account (unless specifically excluded elsewhere in the
regulations) when determining whether the total amount of
compensation paid to a disqualified person is reasonable. Therefore,
only to the extent that total compensation exceeds what is
reasonable could a section 4958 excise tax be imposed and correction
be required with respect to nontaxable economic benefits.

The temporary regulations provide additional guidance regarding
correction where an applicable tax-exempt organization has ceased to
exist or is no longer tax-exempt under section 501(a) as an
organization described in section 501(c)(3) or (4). The temporary
regulations make clear that a disqualified person must correct the
excess benefit transaction in either event. In the case of section
501(c)(3) organizations, the disqualified person must pay the
correction amount to another organization described in section
501(c)(3) in accordance with the dissolution clause of the
applicable tax-exempt organization involved in the excess benefit
transaction, provided the other organization is not related to the
disqualified person. In the case of section 501(c)(4) organizations,
the disqualified person must pay the correction amount to the
successor section 501(c)(4) organization or, if there is no tax-
exempt successor, to any section 501(c)(3) or section 501(c)(4)
organization not related to the disqualified person.

Several commentators requested clarification that a disqualified
person is allowed to deduct the payment of a correction amount as a
business expense. The issue is beyond the scope of these
regulations. The provisions of Subtitle A of the Code govern the
deductibility of any part of a correction payment.

Tax Paid by Organization Managers: Reliance on Advice of Counsel The
proposed regulations provide a safe harbor under which a manager's
participation in a transaction will ordinarily not be subject to tax
under section 4958(a)(2), even though the transaction is
subsequently held to be an excess benefit transaction, if the
manager fully discloses the factual situation to legal counsel, then
relies on the advice of such counsel expressed in a reasoned written
legal opinion that a transaction is not an excess benefit
transaction. This safe harbor parallels the rules for foundation
manager taxes contained in the regulations under section 4941 (taxes
on self-dealing) and section 4945 (taxes on taxable expenditures).

A number of commentators suggested that the final regulations expand
the advice-of-counsel safe harbor to allow reliance on the advice of
other professionals. Specifically mentioned were section 7525
practitioners (Federally authorized tax practitioners), professional
tax advisors, and compensation consultants and appraisers with
respect to valuation issues. Commentators likewise suggested that
parallel revisions should be made to the section 4941 and 4945
regulations.

The temporary regulations expand the safe harbor contained in the
proposed regulations. The temporary regulations provide that an
organization manager's participation in an excess benefit
transaction will ordinarily not be considered knowing to the extent
that, after full disclosure of the factual situation to an
appropriate professional, the organization manager relies on a
reasoned written opinion of that professional with respect to
elements of the transaction within the professional's expertise. For
this purpose, appropriate professionals are legal counsel (including
in-house counsel), certified public accountants or accounting firms
with expertise regarding the relevant tax law matters, and
independent valuation experts who meet specified requirements. The
requirements for appropriate valuation experts are modeled after the
section 170 regulations that define qualified appraisers for
charitable deduction purposes. Under the section 4958 temporary
regulations, the valuation experts must hold themselves out to the
public as appraisers or compensation consultants; perform the
relevant valuations on a regular basis; be qualified to make
valuations of the type of property or services being valued; and
include in the written opinion a certification that they meet the
preceding requirements. This section 4958 regulations project did
not undertake any revisions to the advice-of-counsel safe harbor or
the definition of knowing in the section 4941 and 4945 regulations.

The temporary regulations contain an additional safe harbor,
providing that an organization manager's participation in a
transaction will ordinarily not be considered knowing if the manager
relies on the fact that the requirements giving rise to the
rebuttable presumption of reasonableness are satisfied with respect
to the transaction (for the requirements, see discussion under the
heading Rebuttable presumption that a transaction is not an excess
benefit transaction of this preamble).

Date of Occurrence

Section 4958 does not specify when an excess benefit transaction
occurs. The proposed regulations provide that an excess benefit
transaction occurs on the date on which the disqualified person
receives the economic benefit from the applicable tax-exempt
organization for Federal income tax purposes. The proposed
regulations also provide that a transaction consisting of the
payment of deferred compensation occurs on the date the deferred
compensation is earned and vested. Several comments were received
requesting additional guidance about the timing of an excess benefit
transaction. Specifically, one commentator requested clarification
in the case of multiple payments.

The temporary regulations continue to provide as a general rule that
an excess benefit transaction occurs on the date the disqualified
person receives the economic benefit for Federal income tax
purposes. The temporary regulations contain additional rules for a
series of compensation payments or other payments arising pursuant
to a single contractual arrangement provided to a disqualified
person over the course of the disqualified person's taxable year (or
part of a taxable year). In such a case, any excess benefit
transaction with respect to these aggregate payments is deemed to
occur on the last day of the taxable year (or, if the payments
continue for part of the year, the date of the last payment in the
series).

The temporary regulations also contain special rules for deferred,
contingent, and certain noncash compensation. The temporary
regulations state that in the case of benefits provided pursuant to
a qualified pension, profit-sharing, or stock bonus plan, the
transaction occurs on the date the benefit is vested. In the case of
a transfer of property that is subject to a substantial risk of
forfeiture, or in the case of rights to future compensation or
property (including benefits under a nonqualified deferred
compensation plan), the transaction occurs on the date the property,
or the rights to future compensation or property, is not subject to
a substantial risk of forfeiture. However, where the disqualified
person elects to include an amount in gross income in the taxable
year of transfer pursuant to section 83(b), the general rule
applies, such that the transaction occurs on the date the
disqualified person receives the economic benefit from the
applicable tax-exempt organization for Federal income tax purposes.
Any excess benefit transaction with respect to benefits under a
deferred compensation plan which vest during any taxable year of the
disqualified person is deemed to occur on the last day of the
disqualified person's taxable year.

The temporary regulations continue to reference the relevant Code
sections for statute of limitations rules as they apply to section
4958 excise taxes.Generally, the statute of limitations for section
4958 taxes begins with the filing of the applicable tax-exempt
organization's return for the year in which the excess benefit
transaction occurred. If the organization discloses an item on its
return or on an attached schedule or statement in a manner
sufficient to apprise the IRS of the existence and nature of an
excess benefit transaction, the three-year limitation on assessment
and collection applies. If the transaction is not so disclosed, a
six-year limitation on assessment and collection applies, unless an
exception listed in section 6501(c) applies.

Definition of Applicable Tax-Exempt Organization

Section 4958(e) defines an applicable tax-exempt organization as
"any organization which (without regard to any excess benefit) would
be described in paragraph (3) or (4) of section 501(c) and exempt
from tax under section 501(a) . . ." (except private foundations).
An applicable tax-exempt organization also includes any organization
that was described in section 501(c)(3) or (4) and exempt from tax
under section 501(a) at any time during a five-year period ending on
the date of an excess benefit transaction (the lookback period).

The temporary regulations revise the section defining applicable
tax-exempt organizations to clarify that an organization is not
described in section 501(c)(3) or (4) for purposes of section 4958
during any period covered by a final determination or adjudication
that the organization is not exempt from tax under section 501(a) as
an organization described in section 501(c)(3) or (4), so long as
that determination or adjudication is not based upon participation
in inurement or one or more excess benefit transactions.

A number of commentators requested that the final regulations
clarify the status of section 115 governmental entities that
voluntarily applied for a determination of their section 501(c)(3)
status. Others requested that those governmental entities that
applied for section 501(c)(3) exemption before the enactment of
section 4958 be exempt from section 4958. In response to these
comments, the temporary regulations provide that any governmental
entity that is exempt from (or not subject to) taxation without
regard to section 501(a) is not an applicable tax-exempt
organization for purposes of section 4958.

Definition of Disqualified Person

Section 4958(f)(1) defines a disqualified person with respect to any
transaction as "any person who was, at any time during the 5-year
period ending on the date of such transaction, in a position to
exercise substantial influence over the affairs of the organization
. . ." (and several other categories of related persons). The
proposed regulations list the statutory categories of related
persons (i.e., certain family members and 35-percent controlled
entities) that are treated as disqualified persons for section 4958
purposes. The proposed regulations also list several categories of
persons who are treated as disqualified persons by virtue of the
functions they perform for, or the interests they hold in, the
organization. The proposed regulations further provide that other
persons may be treated as disqualified persons depending on all
relevant facts and circumstances and list some of the factors to be
considered.

Some commentators questioned certain categories of persons who are
deemed to have substantial influence under the proposed regulations
(e.g., presidents, chief executive officers, treasurers), arguing
that these per se categories conflict with a statement in the
legislative history that "[a] person having the title of 'officer,
director, or trustee' does not automatically have the status of a
disqualified person." These commentators requested that final
regulations adopt an alternative approach of listing these
categories as facts and circumstances tending to show that a person
has substantial influence over the affairs of an organization. In
response to these comments, the temporary regulations clarify that
the per se categories of persons who are in a position to exercise
substantial influence for section 4958 purposes are defined by
reference to the actual powers and responsibilities held by the
person and not merely by the person's title or formal position.
Thus, for example, it is possible that a person with the mere title
of "president" could be treated as not having substantial influence
if it is demonstrated that the person, in fact, does not have
ultimate responsibility for implementing the decisions of the
governing body or for supervising the management, administration, or
operation of the organization.

A number of commentators objected to a provision in the proposed
regulations under which a person who has or shares authority to sign
drafts or to authorize electronic transfer of the organization's
funds is treated as a treasurer or chief financial officer who is in
a position to exercise substantial influence over the affairs of the
organization. Other commentators requested that the final
regulations recognize that a person who may authorize transfer of
only minimal amounts of the organization's funds should not be
treated as a disqualified person solely by reason of that authority.

The temporary regulations clarify that a person who has the powers
and responsibilities of a treasurer or chief financial officer is in
a position to exercise substantial influence, provided that the
person has ultimate responsibility for managing the finances of the
organization. As requested by commentators, the temporary
regulations delete the provision from the proposed regulations that
refers to having, or sharing, authority to sign drafts or to
authorize electronic transfer of funds.

The IRS and the Treasury Department considered, but declined to
adopt at present, a special rule with respect to so-called "donor
advised funds" maintained by an applicable tax-exempt organization.
Unlike other segments of an applicable tax-exempt organization, such
as an operating department (or division) of the organization, a
donor advised fund consists of a segregated fund maintained for the
specific purpose of allowing certain persons to provide ongoing
advice regarding the organization's use of amounts contributed by a
particular donor (or donors). Although these persons cannot properly
have legal control over the segregated fund, they nonetheless are in
a position to exercise substantial influence over the amount,
timing, or recipients of distributions from the fund. Accordingly,
the IRS and the Treasury Department request comments regarding
potential issues raised by applying the fair market value standard
of section 4958 to distributions from a donor advised fund to (or
for the use of) the donor or advisor.

The proposed regulations deem certain persons not to have
substantial influence, including any applicable tax-exempt
organization described in section 501(c)(3) (i.e., public charities
subject to section 4958). Various commentators requested that
section 501(c)(4) applicable tax-exempt organizations, section 115
governmental entities, corporations or associations organized as
non-profits under the laws of any State, or entities 100-percent
controlled by and for the benefit of section 501(c)(3) applicable
tax-exempt organizations, be deemed not to exercise substantial
influence over the affairs of applicable tax-exempt organizations.

The temporary regulations provide that any organization described in
section 501(c)(3) and exempt from tax under section 501(a)
(including a private foundation), is not a disqualified person. The
temporary regulations do not specifically exclude from disqualified
person status section 115 and section 501(c)(4) organizations
generally, as requested in comments. However, the temporary
regulations state that an organization described in section 501(c)
(4) is deemed not to have substantial influence with respect to
another applicable tax-exempt organization described in section
501(c)(4). Additionally, the temporary regulations provide that the
transfer of economic benefits to a government entity for exclusively
public purposes is disregarded for purposes of section 4958.

A number of comments were received on the section of the proposed
regulations providing that facts and circumstances govern in all
cases where disqualified person status is not explicitly described.
Commentators variously requested revision or deletion of the
statement that a person with managerial control over a discrete
segment of an organization could be in a position to exercise
substantial influence over the affairs of the entire organization.
Instead of considering this factor in an overall evaluation of the
facts and circumstances, the temporary regulations provide that the
fact that a "person manages a discrete segment or activity of the
organization that represents a substantial portion of the
activities, assets, income, or expenses of the organization" is a
separate factor tending to show substantial influence. The IRS and
the Treasury Department believe that, in some circumstances, a
person managing a discrete segment or activity of an organization
is, in fact, in a position to exercise substantial influence over
the organization as a whole.

With respect to the factor that a person is a substantial
contributor within the meaning of section 507(d)(2), requests were
made to define a substantial contributor as a person contributing
more than two percent of the organization's total support; to use a
higher threshold, such as the greater of $50,000 or 10 percent of
total contributions received; to limit the treatment of substantial
contributor status as a factor to a reasonable time (e.g., four
years); and to tie substantial contributor status to persons
required to be disclosed as such on Form 990 or Schedule A of that
form. Additionally, a request was made to specify how the five-year
lookback period applies to substantial contributors.

The temporary regulations continue to include as a factor tending to
show substantial influence the fact that a person is a substantial
contributor, generally as defined in section 507(d)(2)(A). However,
the temporary regulations clarify that, to determine whether a
person is a substantial contributor for section 4958 purposes, only
contributions received by the organization during its current
taxable year and the four preceding taxable years are taken into
account.

With respect to the factor that a person's compensation is based on
revenues derived from activities of the organization that the person
controls, a number of commentators requested that a determination of
disqualified person status not be based solely on this factor.
Several commentators specifically requested clarification of this
factor with respect to physicians in particular, and others
requested that the factor be deleted altogether. Other commentators
requested that the factor be narrowed to situations where the
person's compensation is based on revenues from activities that
provide over half of the organization's annual revenue, or that the
factor be modified to apply only if a person's compensation is based
to a significant extent on revenues derived from activities of the
organization that the person controls. In response to these
comments, the temporary regulations modify the factor to require
that the person's compensation is primarily based on revenues
derived from activities of the organization that the person
controls.

A number of commentators argued that it is inappropriate to include
all persons with managerial authority, or persons serving as key
advisors to a person with managerial authority, as potential
disqualified persons. Additional comments on this issue requested
that the final regulations clarify the meaning of managerial
authority or delete that factor from the regulations. Others
suggested that the term key advisor be limited to those with real,
substantial authority, or deleted altogether and replaced by a
standard that a person can have managerial authority by virtue of
his or her actual impact on the organization's affairs without
regard to title or position. In response to these comments, the
temporary regulations delete as a factor tending to show substantial
influence the fact that a person serves as a key advisor to a
manager.

Moreover, with respect to managerial authority, the temporary
regulations list revised factors tending to show substantial
influence, including whether: 1) the person has or shares authority
to control or determine a substantial portion of the organization's
capital expenditures, operating budget, or compensation for
employees; and 2) the person manages a discrete segment or activity
of the organization that represents a substantial portion of the
activities, assets, income, or expenses of the organization, as
compared to the organization as a whole.

With respect to factors tending to show that a person does not have
substantial influence, one commentator requested that the fact that
the person has had no prior involvement or relationship with the
organization be added as a factor. Another commentator requested
that the independent contractor factor be modified so that all
"outside, independent professionals performing services on a
strictly fee-for-service arrangement" are presumed not to be
disqualified persons. Other commentators requested that additional
factors tending to show no substantial influence be added for
employees. In this regard, suggested factors included that the
person reports to a disqualified person, does not participate in
major policy or financial decisions affecting the organization as a
whole, or holds a position three or more levels below the governing
body. In response to these comments, the temporary regulations
provide as a factor tending to show no substantial influence the
fact that a person is an independent contractor (such as an
attorney, accountant, or investment manager or advisor) whose sole
relationship to the organization is providing professional advice,
but who does not have decision-making authority, with respect to
transactions from which the independent contractor will not
economically benefit either directly or indirectly (aside from
customary fees received for the professional advice rendered). In
addition, the temporary regulations add as factors tending to show
no substantial influence the fact that the direct supervisor of the
individual is not a disqualified person, and that the person does
not participate in any management decisions affecting the
organization as a whole or a substantial, discrete segment or
activity of the organization. The temporary regulations also address
the issue of persons with no prior involvement with the organization
by providing a special exception for initial contracts (see the
discussion under the heading Initial Contract Exception in this
preamble).

Definition of Excess Benefit Transaction

Section 4958(c)(1) defines the phrase excess benefit transaction as
"any transaction in which an economic benefit is provided by an
applicable tax-exempt organization directly or indirectly to or for
the use of any disqualified person if the value of the economic
benefit provided exceeds the value of the consideration (including
the performance of services) received for providing such benefit."
The excess benefit is the amount by which the value of the economic
benefits provided to (or for the use of) the disqualified person
exceeds the value of the consideration received. The proposed
regulations further define certain terms in the statutory definition
of excess benefit transaction and delineate specific items that
either are disregarded or must be taken into account in determining
the value of a compensation package. The proposed regulations also
prescribe standards for determining fair market value for section
4958 purposes. In response to comments received on these topics, the
temporary regulations make numerous changes to the provisions of the
proposed regulations that define the phrase excess benefit
transaction (as summarized under the next six topic headings).

The IRS and the Treasury Department considered whether embezzled
amounts should be viewed as provided by the organization for section
4958 purposes. In this regard, the IRS and the Treasury Department
believe that any economic benefit received by a disqualified person
(who by definition has substantial influence) from the assets of the
organization is provided by the organization even if the transfer of
the benefit was not authorized under the regular procedures of the
organization.

Economic Benefit Provided Directly or Indirectly

Section 4958(c)(1)(A) provides that an excess benefit transaction
may arise when economic benefits are provided by an applicable tax-
exempt organization directly or indirectly to or for the use of any
disqualified person. In this regard, the proposed regulations
provide that "[a] benefit may be provided indirectly through the use
of one or more entities controlled by or affiliated with the
applicable tax-exempt organization. For example, if an applicable
tax-exempt organization causes its taxable subsidiary to pay
excessive compensation to, or engage in a transaction at other than
fair market value with, a disqualified person of the parent
organization, the payment of the compensation or the transfer of
property is an excess benefit transaction." This example is based on
similar language contained in the legislative history to section
4958 (See H. REP. NO. 506, 104th Congress, 2d SESS. (1996), 53, 56,
note 3).

A number of commentators requested further clarification of the
definition of indirect excess benefit transactions. Some
commentators requested that the final regulations clarify that any
compensation disqualified persons receive from unrelated third
parties through the acquiescence of the employing applicable tax-
exempt organization not be considered in determining reasonable
compensation. Another commentator suggested that, as a general rule,
an excess benefit may be found to be provided indirectly through an
entity controlled by an applicable tax-exempt organization only when
the funds or other benefits at issue can clearly be traced to the
parent organization. Additionally, a request was received to specify
that payment by a subsidiary of excessive compensation does not, by
itself, justify the conclusion that the parent organization caused
the subsidiary to engage in an excess benefit transaction. Other
requests were made to clarify that services received by the
applicable tax-exempt organization may include services provided by
the disqualified person to one or more other entities controlled by
or affiliated with the organization.

Commentators also suggested several clarifications to the phrase
"controlled by or affiliated with" for purposes of determining
whether an indirect excess benefit transaction has occurred.One
commentator suggested that control or affiliation must exist at the
time the benefit is authorized or approved, rather than when the
benefit is received by the disqualified person. Others suggested
that the definition of "controlled by or affiliated with" follow
more closely the definition of control under the section 4941 self-
dealing regulations or under section 512(b)(13) (including
constructive ownership rules contained in section 318). Another
commentator suggested defining the term affiliated to mean that
organizations share a majority of governing body members or
principal officers. Other commentators requested that the final
regulations state that approval of a benefit by a board independent
of the applicable tax-exempt organization would prevent finding that
the organization indirectly provided an excess benefit to a
disqualified person.Commentators also requested that the final
regulations include examples demonstrating that the mere existence
of a relationship between two entities, including a control
relationship, is insufficient to justify a conclusion that a benefit
has been indirectly provided to a disqualified person unless a
purposeful avoidance of section 4958 by conducting a transaction
indirectly is shown.

In response to these comments, the temporary regulations clarify
that an applicable tax-exempt organization may provide an economic
benefit indirectly to a disqualified person either through a
controlled entity or through an intermediary. In this regard, the
temporary regulations parallel the section 4941 self-dealing
regulations, except that the temporary regulations generally adopt
the section 512(b)(13) standard for control. (The section 512(b)(13)
standard for control considers only the tax-exempt organization's
interest in the controlled entity, or the tax-exempt organization's
control of a nonstock corporation's directors or trustees. In
contrast, the section 4941 regulations' definition of control also
considers interests held individually by the directors or trustees
of the foundation). The temporary regulations provide that all
consideration and benefits exchanged between a disqualified person
and an applicable tax-exempt organization, and all entities the
organization controls, are taken into account to determine whether
there has been an excess benefit transaction.

The temporary regulations provide that an applicable tax-exempt
organization provides an economic benefit indirectly through an
intermediary when: 1) an applicable tax-exempt organization provides
an economic benefit to a third party (the intermediary); 2) the
intermediary provides economic benefits to a disqualified person of
the applicable tax-exempt organization; and 3) either (a) there is
evidence of an oral or written agreement or understanding that the
intermediary will transfer property to a disqualified person; or (b)
the intermediary lacks a significant business purpose or exempt
purpose of its own for engaging in such a transfer. The temporary
regulations also include four new examples illustrating different
fact patterns under which economic benefits are provided indirectly
to a disqualified person through a controlled entity or through an
intermediary.

Initial Contract Exception

The proposed regulations do not provide any special rules for
transactions conducted pursuant to the first contract that a
previously unrelated person enters into with the applicable tax-
exempt organization. Several comments received during the regular
comment period requested that a person having no prior relationship
with an organization not be considered a disqualified person with
respect to the first contractual arrangement with the organization.

After the close of the written comment period for the proposed
regulations (November 2, 1998), but before the public hearing (March
16 and 17, 1999), the United States Court of Appeals for the Seventh
Circuit issued its decision in United Cancer Council, Inc. v.
Commissioner of Internal Revenue, 165 F.3d 1173 (7th Cir. 1999),
rev'ing and remanding 109 T.C. 326 (1997). In this case, the Seventh
Circuit reversed the Tax Court's finding that a contract between a
charity and a previously unrelated fundraising company resulted in
private inurement in violation of the charity's tax-exempt status.
The Seventh Circuit remanded the case back to the Tax Court to
address the question whether the fundraising contract resulted in
private benefit in violation of section 501(c)(3).

In United Cancer Council, the Seventh Circuit concluded that
prohibited inurement under section 501(c)(3) cannot result from a
contractual relationship negotiated at arm's length with a party
having no prior relationship with the organization, regardless of
the relative bargaining strength of the parties or resultant control
over the tax-exempt organization created by the terms of the
contract. The transactions at issue in United Cancer Council were
conducted prior to the effective date of section 4958. Consequently,
United Cancer Council involved interpretations of the general
requirements for tax-exempt status under section 501(c)(3), and not
questions of disqualified person status or the existence of an
excess benefit transaction under section 4958. Nevertheless, at the
public hearing and in supplemental comments received after the
hearing, commentators referenced the Seventh Circuit decision and
requested that the proposed regulations be modified so that section
4958 excise taxes will not be imposed on the first transaction or
contract between an applicable tax-exempt organization and a
previously unrelated person.

The temporary regulations address the issue raised by United Cancer
Council by providing that section 4958 does not apply to any fixed
payment made to a person pursuant to an initial contract, regardless
of whether the payment would otherwise constitute an excess benefit
transaction. For this purpose, an initial contract is defined as a
binding written contract between an applicable tax-exempt
organization and a person who was not a disqualified person
immediately prior to entering into the contract. A fixed payment
means an amount of cash or other property specified in the contract,
or determined by a fixed formula specified in the contract, which is
paid or transferred in exchange for the provision of specified
services or property. A fixed formula may incorporate an amount that
depends upon future specified events or contingencies (e.g.,
revenues generated by activities of the organization), provided that
no person exercises discretion when calculating the amount of a
payment or deciding whether to make a payment. As suggested by some
commentators, however, the initial contract rule does not apply if
the contract is materially modified or if a person fails to
substantially perform his or her obligations under the contract.

Thus, under the temporary regulations, to the extent that an
applicable tax-exempt organization and a person who is not yet a
disqualified person conduct negotiations and specify the amounts to
be paid to the person (or specify an objective formula for paying
that person), then these fixed payments are not subject to scrutiny
under section 4958, even if paid after the person becomes a
disqualified person. An initial contract may provide for both fixed
and non-fixed (i.e., discretionary) payments. In this case, the
fixed payments are not subject to section 4958, while the non-fixed
payments will be subject to scrutiny under section 4958 (taking into
account all consideration exchanged between the parties). In effect,
the initial contract rule contained in the temporary regulations
protects from section 4958 liability those payments made pursuant to
fixed, objective terms specified in a contract entered into before
the person was in a position to exercise substantial influence, yet
allows for scrutiny under section 4958 to the extent the contract
allows for subsequent discretion to be exercised (which may be
subject to influence by the disqualified person) when calculating
the amount of a payment or deciding whether to make a payment. The
temporary regulations include eleven examples to illustrate the
application of the initial contract rule.

Certain Economic Benefits Disregarded for Purposes of Section 4958
For ease of administration, the proposed regulations list several
economic benefits that are disregarded for purposes of section 4958.
These disregarded items include reimbursements for reasonable
expenses of attending meetings of the governing body (but not luxury
or spousal travel); certain economic benefits provided to a
disqualified person solely as a member of, or volunteer for, the
organization; and economic benefits provided to a disqualified
person solely as a member of a charitable class. A number of
comments recommended modifying these provisions.

With respect to reimbursements for expenses of attending meetings of
the governing body (but not luxury travel or spousal travel),
suggestions were made to clarify or delete these terms; to provide
as an alternative that all travel expenses that are not lavish or
extravagant within the meaning of section 162 may be disregarded; to
disregard spousal travel expenses in circumstances where the spousal
attendance furthers the exempt purposes of the organization or meets
the section 274 bona fide business purpose test; and to address the
issue of travel expenses by generally disregarding working condition
fringe benefits and de minimis fringe benefits described in sections
132(d) and (e). Other commentators requested that any benefits
received by a disqualified person should be disregarded if
incidental to the organization's achievement of its exempt purposes,
such as when disqualified persons attend fundraising dinners or
conferences on behalf of the organization.

In response to these comments, the temporary regulations delete the
separate provision that provides that reasonable expenses of
attending meetings of the governing body may be disregarded. In
place of this provision, the temporary regulations substitute a more
general rule providing that all fringe benefits excluded from income
under section 132 (except for certain liability insurance premiums,
payments or reimbursements, discussed below) are disregarded for
section 4958 purposes. This change addresses comments received on
the limitation in the proposed regulations with respect to luxury
and spousal travel. By referring to fringe benefits excluded from
income under section 132, the temporary regulations adopt existing
standards under section 162 and section 274 (which are incorporated
into section 132) to determine whether payments or reimbursements of
travel expenses of an employee - or any other expenses - should be
disregarded for section 4958 purposes or, instead, treated as part
of the disqualified person's compensation.

With respect to economic benefits provided to a disqualified person
solely as a member of, or volunteer for, the organization, the
proposed regulations disregard such benefits for section 4958
purposes only if the organization provides the same benefits to
members of the general public in exchange for a membership fee of
$75 or less per year. Commentators suggested that this provision be
expanded in the final regulations to apply to any benefit (without a
dollar limitation) provided to a disqualified person solely by
virtue of that person being a donor, volunteer, or member, provided
that any member of the general public making a comparable
contribution receives a similar benefit. Another commentator
requested a similar modification, with the additional requirement
that a significant number of non-disqualified persons (e.g., 10 or
more) actually make a comparable payment to the organization and are
given the option of receiving substantially the same benefit.

The temporary regulations continue to disregard for section 4958
purposes economic benefits provided to a volunteer (who is also a
disqualified person) if that benefit is provided by the organization
to the general public in exchange for a membership fee or
contribution of $75 or less per year. In contrast, economic benefits
provided to a disqualified person as a member of, or a donor to, an
applicable tax-exempt organization are no longer limited by a
specific dollar cap. The temporary regulations disregard economic
benefits provided to a member of an organization solely on account
of the payment of a membership fee, or to a donor solely on account
of a contribution deductible under section 170 if: 1) any non-
disqualified person paying a membership fee or making a contribution
above a specified amount to the organization is given the option of
receiving substantially the same economic benefit; and 2) the
disqualified person and a significant number of non-disqualified
persons in fact make a payment or contribution of at least the
specified amount.

The temporary regulations clarify that section 162 standards apply
in determining reasonableness of compensation for section 4958
purposes, taking into account all benefits provided to a person
(other than benefits that are specifically disregarded for section
4958 purposes) and the rate at which any deferred compensation
accrues. The temporary regulations also provide that the fact that a
bonus or revenue-sharing arrangement is subject to a cap is a
relevant factor in determining the reasonableness of compensation.

Insurance or Indemnification of Excise Taxes

The legislative history to section 4958 indicates that
reimbursements of excise tax liability, or payment of premiums for
liability insurance for excess benefit taxes, by an applicable tax-
exempt organization constitute an excess benefit unless they are
included in the disqualified person's compensation during the year
paid and the total compensation package for that person is
reasonable. See H. REP. NO. 506, 104th Congress, 2d SESS. (1996),
53, 58. Following this legislative history, the proposed regulations
specifically provide that payment of a premium for insurance for
section 4958 taxes or indemnification of a disqualified person for
these taxes is not an excess benefit transaction if the premium or
the indemnification is treated as compensation to the disqualified
person when paid, and the total compensation paid to the person is
reasonable. However, some commentators read the special rule in
conjunction with another section of the proposed regulations - which
listed "[t]he amount of premiums paid for liability or any other
insurance coverage, as well as any payment or reimbursement by the
organization of charges, expenses, fees, or taxes not covered
ultimately by the insurance coverage" as an item included in
compensation for purposes of section 4958 - as potentially mandating
that such insurance premium or indemnification payments be treated
as taxable income to the disqualified person in order to avoid being
characterized as an excess benefit transaction.

Several commentators requested that premiums for liability insurance
be disregarded entirely for section 4958 purposes, along with non-
compensatory indemnification of members of the governing body and
officers against liability in civil proceedings (as described in the
private foundation self-dealing regulations under section 4941), or
that de minimis costs (e.g., $200) associated with such insurance
coverage be disregarded.

Other commentators suggested that a portion of the premium payment
be allocated to section 4958 tax coverage, and that only that
portion be included in compensation of the disqualified person.
Others requested that the portion of a premium allocable to
liability insurance coverage for an organization manager who is also
a disqualified person to cover the person's potential liability for
the manager-level tax under section 4958(a)(2) be considered a
working condition fringe under section 132(d). Others requested that
benefits under indemnification plans be taken into account for
section 4958 purposes only if and when paid.

To clarify the treatment of insurance premiums and reimbursements of
excise tax liability, the temporary regulations include a special
rule, which includes in a disqualified person's compensation for
section 4958 purposes the payment of liability insurance premiums
for, or the payment or reimbursement by the organization of: 1) any
penalty, tax, or expense of correction owed under section 4958; 2)
any expense not reasonably incurred by the person in connection with
a civil judicial or civil administrative proceeding arising out of
the person's performance of services on behalf of the applicable
tax-exempt organization; and 3) any expense resulting from an act or
failure to act with respect to which the person has acted willfully
and without reasonable cause. This rule parallels the section 4941
regulations governing the treatment of directors and officers
liability insurance and indemnification. As under the section 4941
regulations, however, the temporary regulations provide that
insurance premiums and reimbursements may be disregarded if they
qualify as de minimis fringe benefits excludable from income under
section 132(a)(4).

In addition, the temporary regulations clarify that the inclusion of
an item in compensation for section 4958 purposes does not govern
its income tax treatment. Thus, the mere fact that a premium or
reimbursement payment, or any other benefit, provided to a
disqualified person must be taken into account in determining the
reasonableness of that person's total compensation package for
section 4958 purposes is not determinative of whether or not that
benefit is included in the disqualified person's gross income for
income tax purposes.

Timing Rules for Determining Reasonableness

Section 4958(c)(1) defines an excess benefit transaction as a
transaction in which the value of an economic benefit provided to a
disqualified person exceeds the value of the consideration received
(including the performance of services), but the statutory
provisions do not directly address the issue of when to value the
benefits and consideration exchanged. In this regard, the proposed
regulations provide that whether compensation is reasonable is
generally determined when the parties enter into the contract for
services. The proposed regulations further provide, however, that
"where reasonableness of compensation cannot be determined based on
circumstances existing at the date when the contract for services
was made, then that determination is made based on all facts and
circumstances, up to and including circumstances as of the date of
payment." Many commentators objected to the uncertainty created by
this additional sentence.

To clarify the issue of the timing of the reasonableness
determination, the temporary regulations provide that reasonableness
is determined with respect to any fixed payment (as defined for
purposes of the initial contract rule discussed above) at the time
the parties enter into the contract. However, the temporary
regulations provide that the reasonableness of any amounts not fixed
in the contract itself or paid pursuant to an objective formula is
determined based on all facts and circumstances, up to and including
circumstances as of the date of the payment at issue, because
determining the amount of such a payment (or whether a payment is
made) requires the exercise of discretion after the contract is
entered into.

Establishing Intent to Treat Economic Benefit as Consideration for
the Performance of Services

The second sentence of section 4958(c)(1)(A) defining excess benefit
transaction states that an economic benefit will not be treated as
consideration for the performance of services unless the applicable
tax-exempt organization clearly indicated its intent to so treat the
benefit. The proposed regulations generally require the organization
to provide clear and convincing evidence of its intent to treat the
benefit as compensation for services when the benefit is paid. Under
the proposed regulations, this requirement is satisfied if the
organization reports the economic benefit on a federal tax
information return filed before the commencement of an IRS
examination in which the reporting of the benefit is questioned, or
if the recipient disqualified person reports the benefit as income
on the person's Form 1040 for the year in which the benefit is
received. In addition, an organization is deemed to satisfy the
clear and convincing evidence requirement if the organization's
failure to report a payment is due to reasonable cause as defined in
the section 6724 regulations. The proposed regulations also provide
that an organization may use other methods to provide clear and
convincing evidence of its intent. The preamble of the proposed
regulations explicitly solicited comments on appropriate ways of
applying this rule that would not create an unnecessary burden on
affected organizations.

A number of comments were received with regard to establishing an
organization's intent to treat a benefit as compensation for
services. Several commentators suggested that the clear and
convincing standard is higher than appropriate. Others requested
that organizations not be required to demonstrate intent with
respect to specific benefits, such as: reimbursement arrangements
that are clearly part of the employment arrangement; de minimis
amounts (for example, taxable benefits of up to $500 per year
provided to a disqualified person); and certain nontaxable benefits.
Other commentators requested that final regulations clarify the
appropriate method for substantiating an organization's intent in
the case of certain nontaxable benefits and transfers of property
subject to section 83. Others requested guidance on how to report
compensation paid to a disqualified person on Form 990 if that
person is not an officer or director or one of the five highest paid
employees. Some commentators suggested that the final regulations
allow other methods to establish an intention to treat benefits as
compensation, such as a written contract of employment. Commentators
also suggested that an organization's reasonable belief that a
benefit is nontaxable should constitute reasonable cause for failure
to report, or that the reasonable cause standard be expanded to
ordinary business care and prudence.

In response to these comments, the temporary regulations modify the
requirement that an organization provide clear and convincing
evidence of its intent to treat benefits provided to a disqualified
person as compensation for services. Consistent with the legislative
history, the temporary regulations provide instead that an
organization must provide "written substantiation that is
contemporaneous with the transfer of benefits at issue." H. REP. NO.
506, 104th Congress, 2d SESS. (1996), 53, 57, note 8.

The temporary regulations also provide a safe harbor for nontaxable
benefits. Under this safe harbor, an applicable tax-exempt
organization is not required to indicate its intent to provide an
economic benefit as compensation for services if the economic
benefit is excluded from the disqualified person's gross income for
income tax purposes under chapter 1 of the Internal Revenue Code.
Examples of such benefits include: employer-provided health
benefits, contributions to a qualified pension, profit-sharing, or
stock bonus plan under Internal Revenue Code section 401(a), and
benefits described in sections 127 (educational assistance programs)
and 137 (adoption assistance programs). The safe harbor is
consistent with the legislative history, which indicates that
Congress intended to except nontaxable benefits from this
contemporaneous substantiation requirement. H. REP. NO. 506, 104th
Congress, 2d SESS. (1996), 53, 57, note 8. However, the benefits
must still be taken into account (unless specifically disregarded
under the regulations) in determining the reasonableness of the
disqualified person's compensation for purposes of section 4958.

Consistent with the legislative history, the temporary regulations
also clarify that, if a benefit is not reported on a return filed
with the IRS, other written contemporaneous evidence (such as an
approved written employment contract executed on or before the date
of the transfer) may be used to demonstrate that the appropriate
decision-making body or an authorized officer approved a transfer as
compensation for services in accordance with established procedures.

Transaction in Which the Amount of the Economic Benefit Is
Determined in Whole or in Part by the Revenues of One or More
Activities of the Organization Section 4958(c)(2) describes a second
type of excess benefit transaction: "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 . . .", if the
transaction results in inurement under section 501(c)(3) or (4).
However, a revenue-sharing transaction is treated as an excess
benefit transaction under this special statutory rule only "[t]o the
extent provided in regulations prescribed by the Secretary . . .. "

The proposed regulations provide that whether a revenue-sharing
transaction results in inurement, and therefore constitutes an
excess benefit transaction, depends upon all relevant facts and
circumstances. The proposed regulations provide that, in general, a
revenue-sharing transaction may constitute an excess benefit
transaction regardless of whether the economic benefit provided to
the disqualified person exceeds the fair market value of services
(or other consideration) rendered, if a disqualified person is
permitted to receive additional compensation without providing
proportional benefits that contribute to the organization's
accomplishment of its exempt purpose. The proposed regulations
consider an improper revenue-sharing transaction, in its entirety,
to be an excess benefit subject to section 4958. Special rules
governing revenue-sharing transactions, however, will be effective
only for transactions occurring on or after the date of publication
of final regulations containing such rules. Until special rules for
revenue-sharing transactions are adopted in final regulations, these
transactions are potentially subject to section 4958 liability under
the general rules governing excess benefit transactions, but only to
the extent that the value of the economic benefits provided to the
disqualified person is shown to exceed the value of the services (or
other consideration) received in return.

Numerous comments were received with respect to revenue-sharing
transactions. Some commentators did not believe a different standard
from that applied to all other transactions (fair market value)
should apply, and that the value of consideration provided by a
disqualified person in a revenue-sharing transaction should be taken
into account in determining the excess benefit in these
transactions. Others objected to the revenue-sharing transaction
standard of the proposed regulations, and requested that it be
replaced by a standard based on approaches the IRS has taken in
prior unpublished rulings. Some commentators requested guidance as
to the meaning of proportional benefits or other concepts
incorporated in the proposed regulations standard. Others requested
that existing contractual arrangements not be subject to this
section of the final regulations, or that the effect of the final
rules for existing arrangements be phased in. In addition, several
commentators requested that the final regulations clarify whether
the rebuttable presumption of reasonableness is available for
revenue-sharing transactions. In sum, commentators offered multiple,
often conflicting, suggestions and recommendations to address the
many issues raised with respect to revenue-sharing transactions.

The temporary regulations reserve the separate section governing
revenue-sharing transactions. Accordingly, the IRS and the Treasury
Department will continue to consider the many comments received on
this issue. Any revised regulations that may, in the future, be
issued governing revenue-sharing transactions in particular will be
issued in proposed form. This will provide an additional opportunity
for public comment, and any special rules governing revenue-sharing
transactions will become effective only after being published in
final form. In the meantime, revenue sharing transactions will be
evaluated under the general rules (contained in §53.4958-4T of
the temporary regulations) defining excess benefit transactions,
which apply to all transactions with disqualified persons regardless
of whether the person's compensation is computed by reference to
revenues of the organization.

Rebuttable Presumption that a Transaction is not an Excess Benefit
Transaction Although the statute is silent on this point, the
legislative history accompanying section 4958 indicated Congress's
intent that the parties to a transaction are entitled to rely on a
rebuttable presumption of reasonableness with respect to any
transaction with a disqualified person that is approved by a board
of directors or trustees (or committee thereof) that: 1) is composed
entirely of individuals unrelated to and not subject to the control
of the disqualified person(s) involved in the transaction; 2)
obtained and relied upon appropriate data as to comparability; and
3) adequately documented the basis for its determination. If these
three requirements are satisfied, the IRS can impose section 4958
taxes only if it develops sufficient contrary evidence to rebut the
probative value of the evidence put forth by the parties to the
transaction. H. REP. NO. 506, 104th Congress, 2d SESS. (1996), 53,
56-7.

The proposed regulations incorporate this rebuttable presumption and
provide guidance regarding the three requirements for invoking the
rebuttable presumption. The proposed regulations provide that the
presumption established by satisfying the three requirements may be
rebutted by additional information showing that the compensation was
not reasonable or that the transfer was not at fair market value.
Additionally, the proposed regulations provide that, if the
reasonableness of compensation cannot be determined based on
circumstances existing at the date when a contract for services was
made, then the presumption cannot arise until reasonableness of
compensation can be determined and the three requirements
subsequently are satisfied.

Comments were received on various aspects of the rebuttable
presumption of reasonableness. With regard to the requirement that
the compensation arrangement or property transfer must be approved
by a governing body (or committee) composed entirely of individuals
who do not have a conflict of interest with respect to the
transaction, one commentator suggested that the final regulations
adopt standards consistent with the model conflicts of interest
policy published by the IRS. The IRS and the Treasury Department
believe that the standards contained in the proposed regulations for
determining the absence of a conflict of interest are consistent
with the legislative history of section 4958, which requires that
the governing body (or committee) be composed entirely of
individuals who are free of any conflict of interest, and not merely
that its members disclose the existence of any conflict of interest.
Accordingly, the temporary regulations retain these standards.

With regard to the requirement that the governing body (or a
committee thereof) obtain appropriate data as to comparability,
numerous commentators requested that the final regulations expand
the acceptable types of comparability data and authorize additional
methods for determining fair market value or reasonable
compensation. For example, some commentators requested clarification
that an organization need not obtain an independent, customized
survey, but may rely on an independent salary survey prepared for
general publication if that survey contains information specific
enough to provide meaningful data for comparison purposes. Other
commentators requested that the governing body (or committee) be
permitted to rely on compensation surveys compiled by staff members
(other than disqualified persons) under the supervision of an
independent director or committee member, rather than incurring the
additional cost of obtaining compensation surveys compiled by
independent firms. Some commentators requested that the final
regulations provide that comparability data.-44- is viable for some
period of time (e.g., three years).

The temporary regulations continue to require only that the
authorized body have sufficient information to determine whether,
consistent with the valuation standards in other sections of the
regulations, the compensation arrangement is reasonable, or the
property transfer is at fair market value. The temporary regulations
clarify that a compensation arrangement in its entirety must be
evaluated and also provide examples of relevant comparability data.
In the case of a compensation arrangement, the temporary regulations
provide that relevant information may include a current compensation
survey compiled by an independent firm. As in the proposed
regulations, this list of relevant comparability data is not
exclusive, and the authorized body may rely on other appropriate
data. For clarity, the temporary regulations list separately
examples of the types of relevant information for compensation
arrangements and property transfers. The temporary regulations add
competitive bids received from unrelated third parties as another
example of relevant information in the case of a property transfer.
In response to comments, the temporary regulations revise examples
from the proposed regulations and add several examples illustrating
appropriate comparability data.

Comments were also received regarding the special rule for
compensation paid by small organizations. The proposed regulations
allow small organizations (those with annual gross receipts of less
than $1 million) to satisfy the requirement of appropriate data as
to comparability by obtaining data on compensation paid by five
comparable organizations in the same or similar communities for
similar services. Some commentators indicated that the $1 million
threshold is too low, because organizations having gross receipts
above that amount may lack the resources to hire an independent
compensation firm. These commentators requested that the ceiling for
small organizations be increased from $1 million to $5 million in
gross receipts. Others suggested allowing small organizations to
obtain data from fewer than five comparable organizations.

The IRS and the Treasury Department believe the general rule
regarding appropriate comparability data is flexible enough to
permit any organization (not just small organizations) to compile
its own comparability data. Therefore, the IRS and the Treasury
Department did not believe it was necessary to extend the special
safe-harbor rule to organizations with annual gross receipts over $1
million. As requested by commentators, however, the temporary
regulations reduce the number of comparables small organizations
must obtain for that safe harbor from five to three.

Certain commentators requested that the final regulations provide a
mechanism for an applicable tax-exempt organization to satisfy the
requirements of the rebuttable presumption of reasonableness with
respect to large groups of employees, such as mid-level managers,
rather than requiring the governing body to approve the compensation
paid to each individual. The IRS and the Treasury Department believe
that changes to the definition of disqualified person in the
temporary regulations, including eliminating as a factor tending to
show substantial influence the fact that a person has any managerial
authority, or serves as a key advisor to a manager, reduce the
potential burden on the governing body. Moreover, the temporary
regulations continue to allow the governing body to delegate
responsibility for approving compensation arrangements and property
transfers, to the extent permitted under State law. Consistent with
the legislative history, the temporary regulations continue to
require that the rebuttable presumption requirements be satisfied on
an individual basis. With respect to the requirement that the
governing body (or committee) adequately document the basis for its
determination, comments were received requesting that the final
regulations allow additional time for records to be prepared. In
response to these comments, the temporary regulations provide that
the records must be prepared by the later of the next meeting of the
authorized body or 60 days after final approval of the particular
arrangement or transfer. Although one commentator objected to the
requirement in the proposed regulations that the governing body (or
committee) review and approve the records within a reasonable period
of time thereafter, the temporary regulations retain this
requirement in order to ensure that the records are accurate and
complete.

Several commentators requested that the final regulations permit
organizations to establish a rebuttable presumption of
reasonableness with respect to deferred or contingent compensation
arrangements when the contract for services is entered into if the
terms of the arrangement are sufficiently certain (even if the exact
dollar amounts are not known) and the governing body (or committee)
obtains appropriate data as to comparability. Other commentators
simply requested that the final regulations indicate when the board
should take the necessary steps to put the presumption in place in
the event that reasonableness cannot be determined as of the date
the contract is entered into. Consistent with the general rule
contained in the temporary regulations regarding the timing of the
reasonableness determination, the temporary regulations provide
that, with respect to fixed payments (including payments made
pursuant to a fixed formula, although the exact dollar amount is not
known at the time the contract is entered into), the rebuttable
presumption can arise at the time the parties enter into the
contract giving rise to the payments. Under a special rule in the
temporary regulations, payments pursuant to a qualified pension,
profit-sharing, or stock bonus plan under section 401(a) are treated
as fixed payments for purposes of section 4958, even if the employer
exercises discretion with respect to the plan or program. Therefore,
a rebuttable presumption can arise with respect to such payments at
the time the parties enter into the contract for services.

In contrast, the temporary regulations provide that the rebuttable
presumption generally can arise with respect to a payment that is
not a fixed payment (as defined for purposes of the initial contract
exception) only after discretion is exercised, the exact amount of
the payment is determined (or a fixed formula for calculating the
payment is specified), and the three requirements for the
presumption subsequently are satisfied. The temporary regulations
contain a limited exception to this general rule for certain non-
fixed payments which are subject to a cap. Under this exception, an
applicable tax-exempt organization may establish the rebuttable
presumption, even with respect to non-fixed payments, at the time
the contract is entered into if: 1) prior to approving the contract,
the governing body (or committee) obtains appropriate comparability
data indicating that a fixed payment of up to a certain amount to a
particular disqualified person would represent reasonable
compensation; 2) the maximum amount payable under the contract
(including both fixed and non-fixed payment amounts) does not exceed
the reasonable compensation figure; and 3) the other requirements
for establishing the rebuttable presumption are satisfied. However,
the general rules for the timing of the reasonableness determination
apply, such that the IRS may rebut the presumption of reasonableness
with respect to a non-fixed payment subject to a cap based on all
facts and circumstances, up to and including circumstances as of the
date of payment.

Some commentators suggested that the final regulations provide
specific standards the IRS must meet in order to rebut any
presumption established by satisfying the three requirements
described above. For example, one commentator suggested that the IRS
should be allowed to overcome the presumption only if it is able to
produce clear and convincing evidence that the transaction was, in
fact, an excess benefit transaction. Another commentator suggested
that the IRS should be required to establish that one of the
requirements for invoking the presumption has not been met in order
to rebut the presumption. Consistent with the legislative history,
the temporary regulations provide that, if the rebuttable
presumption of reasonableness is established, the IRS may rebut the
presumption only if it develops sufficient contrary evidence to
rebut the probative value of the comparability data relied upon by
the authorized body.

Finally, some commentators requested clarification whether entities
controlled by or affiliated with an applicable tax-exempt
organization that provide economic benefits to a disqualified person
can establish the presumption, even if those entities are not
themselves applicable tax-exempt organizations. Consistent with the
rules relating to indirect excess benefit transactions, the
temporary regulations clarify that an authorized body of an entity
controlled by an applicable tax-exempt organization (as defined for
purposes of describing indirect transfers of economic benefits) may
establish the rebuttable presumption.

Special Rules

The proposed regulations provided several special rules, one of
which stated that the procedures of section 7611 will be used in
initiating and conducting any inquiry or examination into whether an
excess benefit transaction has occurred between a church and a
disqualified person. Several comments were received on this rule,
including one stating that there is no statutory authority to extend
section 7611 protection to churches for section 4958 tax inquiries.
Other comments requested that final regulations specify when
information from an informant alone is sufficient to form the basis
for a reasonable belief on the part of the IRS for purposes of
applying this rule, and clarify how section 4958 interacts with the
section 7611 exception for records related to the income tax of an
individual employed by the church. The temporary regulations do not
modify the special rules for churches.

Additional Issues

Section 4958 does not contain provisions governing the relationship
of the taxes imposed under that section to revocation of the
organization's tax-exempt status under sections 501(c)(3) and (4).
With respect to this issue, the legislative history to section 4958
indicates as follows: "In general, the intermediate sanctions are
the sole sanction imposed in those cases in which the excess benefit
does not rise to a level where it calls into question whether, on
the whole, the organization functions as a charitable or other tax-
exempt organization. In practice, revocation of tax-exempt status,
with or without the imposition of excise taxes, would occur only
when the organization no longer operates as a charitable
organization." H. REP. NO. 506, 104th Congress, 2d SESS. (1996), 53,
59, note 15. However, the same legislative history also indicates
that "[t]he intermediate sanctions for 'excess benefit transactions'
may be imposed by the IRS in lieu of (or in addition to) revocation
of the organization's tax-exempt status." Id. at 59 (emphasis added)

In the Comments and Requests for a Public Hearing section of the
preamble of the proposed regulations, the IRS and the Treasury
Department specifically requested comments concerning the
relationship between revocation of tax-exempt status and imposition
of section 4958 taxes. Additionally, the preamble of the proposed
regulations lists four factors that the IRS will consider in
determining whether to revoke an applicable tax-exempt
organization's status: 1) whether the organization has been involved
in repeated excess benefit transactions; 2) the size and scope of
the excess benefit transaction; 3) whether, after concluding that it
has been party to an excess benefit transaction, the organization
has implemented safeguards to prevent future recurrences; and 4)
whether there was compliance with other applicable laws. The
preamble also states that the IRS intends to publish the factors
that it will consider in exercising its administrative discretion in
guidance issued in conjunction with the issuance of final
regulations under section 4958.

A number of commentators requested that the final regulations
expressly provide that section 4958 taxes are the principal sanction
with respect to excess benefit transactions, in lieu of revocation
of the organization's tax-exempt status. Other commentators
suggested that the final regulations incorporate factors to be
considered by the IRS in deciding whether to impose section 4958
excise taxes or revoke tax-exempt status, or both.

The temporary regulations do not foreclose revocation of tax-exempt
status in appropriate cases. The IRS and the Treasury Department
believe that to do so would effectively change the substantive
standard for tax-exempt status under sections 501(c)(3) and (4).
Accordingly, the IRS intends to exercise its administrative
discretion in enforcing the requirements of sections 4958, 501(c)(3)
and 501(c)(4) in accordance with the direction given in the
legislative history. The IRS will publish guidance concerning the
factors that it will consider in exercising its discretion as it
gains more experience administering the section 4958 regime.

The temporary regulations reiterate that section 4958 does not
affect the substantive standards for tax exemption under section
501(c)(3) or (4), including the requirements that the organization
be organized and operated exclusively for exempt purposes, and that
no part of its earnings inure to the benefit of any private
shareholder or individual. Thus, regardless of whether a particular
transaction is subject to excise taxes under section 4958, existing
principles and rules may be implicated, such as the limitation on
private benefit. For example, transactions that are not subject to
section 4958 because of the initial contract exception may, under
certain circumstances, jeopardize an organizations's tax-exempt
status.

Some comments regarding revenue-sharing transactions included
requests to address gainsharing arrangements in the final
regulations; or to provide that certain transactions are not
revenue-sharing arrangements because they do not involve a payment
that is contingent on the revenues of (but rather the cost savings
to) the organization. As noted earlier, these temporary regulations
reserve the separate section governing revenue-sharing transactions.
However, because the Office of Inspector General, Department of
Health and Human Services, believes the methodology involved in
calculating payments under gainsharing arrangements may violate
sections 1128A(b)(1) and (2) of the Social Security Act in
situations where patient care may be affected by the cost savings,
the IRS will not issue private letter rulings under section 4958 on
these arrangements. The Office of Inspector General issued a Special
Advisory Bulletin on July 8, 1999, addressing the application of
sections 1128A(b)(1) and (2) of the Social Security Act to
gainsharing arrangements, entitled "Gainsharing Arrangements and
CMPs [Civil Money Penalties] for Hospital Payments to Physicians to
Reduce or Limit Services to Beneficiaries".

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. Because no
preceding notice of proposed rulemaking is required for this
temporary regulation, the provisions of the Regulatory Flexibility
Act do not apply. Pursuant to section 7805(f) of the Internal
Revenue Code, this temporary regulation will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on business.

Drafting Information

The principal author of these regulations is Phyllis D. Haney,
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and The
Treasury Department participated in their development.

List of Subjects

26 CFR Part 53 Excise taxes, Foundations, Investments, Lobbying,
Reporting and recordkeeping requirements, Trusts and trustees.

26 CFR Part 301 Employment taxes, Estate taxes, Excise taxes, Gift
taxes, Income taxes, Penalties, Reporting and recordkeeping
requirements.

26 CFR Part 602 Reporting and recordkeeping requirements Amendments
to the Regulations

Accordingly, 26 CFR parts 53, 301, and 602 are amended as follows:
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

Paragraph 1. The authority citation for part 53 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Par. 2. Sections 53.4958-0T through 53.4958-8T are added to read as
follows: §53.4958-0T Table of contents (temporary).

This section lists the major captions contained in
§§53.4958-1T through

53.4958-8T. §53.4958-1T Taxes on excess benefit transactions
(temporary).

(a) In general.

(b) Excess benefit defined.

(c) Taxes paid by disqualified person.

(1) Initial tax.

(2) Additional tax on disqualified person.

(i) In general.

(ii) Taxable period.

(iii) Abatement if correction during the correction period.

(d) Tax paid by organization managers.

(1) In general.

(2) Organization manager defined.

(i) In general.

(ii) Special rule for certain committee members.

(3) Participation.

(4) Knowing.

(i) In general.

(ii) Amplification of general rule.

(iii) Reliance on professional advice.

(iv) Reliance on rebuttable presumption of reasonableness.

(5) Willful.

(6) Due to reasonable cause.

(7) Limits on liability for management.

(8) Joint and several liability.

(9) Burden of proof.

(e) Date of occurrence.

(1) In general.

(2) Special rules.

(3) Statute of limitations rules.

(f) Effective date for imposition of taxes.

(1) In general.

(2) Existing binding contracts. §53.4958-2T Definition of
applicable tax-exempt organization (temporary).

(a) Organizations described in section 501(c)(3) or (4) and exempt
from tax under section 501(a).

(1) In general.

(2) Organizations described in section 501(c)(3).

(3) Organizations described in section 501(c)(4) .

(4) Effect of non-recognition or revocation of exempt status.

(b) Special rules.

(1) Transition rule for lookback period.

(2) Certain foreign organizations. §53.4958-3T Definition of
disqualified person (temporary).

(a) In general.

(1) Scope of definition.

(2) Transition rule for lookback period.

(b) Statutory categories of disqualified persons.

(1) Family members.

(2) Thirty-five percent controlled entities.

(i) In general.

(ii) Combined voting power.

(iii) Constructive ownership rules.

(a) Stockholdings.

(b) Profits or beneficial interest.

(c) Persons having substantial influence.

(1) Voting members of the governing body.

(2) Presidents, chief executive officers, or chief operating
officers.

(3) Treasurers and chief financial officers.

(4) Persons with a material financial interest in a provider-
sponsored organization.

(d) Persons deemed not to have substantial influence.

(1) Tax-exempt organizations described in section 501(c)(3).

(2) Certain section 501(c)(4) organizations.

(3) Employees receiving economic benefits of less than a specified
amount in a taxable year.

(e) Facts and circumstances govern in all other cases.

(1) In general.

(2) Facts and circumstances tending to show substantial influence.

(3) Facts and circumstances tending to show no substantial
influence.

(f) Affiliated organizations.

(g) Examples. §53.4958-4T Excess benefit transaction
(temporary).

(a) Definition of excess benefit transaction.

(1) In general. (2) Economic benefit provided indirectly.

(i) In general.

(ii) Through a controlled entity.

(a) In general.

(b) Definition of control.

(1) In general.

(2) Constructive ownership.

(iii) Through an intermediary.

(iv) Examples.

(3) Exception for fixed payments made pursuant to an initial
contract.

(i) In general.

(ii) Fixed payment.

(a) In general.

(b) Special rules.

(iii) Initial contract.

(iv) Substantial performance required.

(v) Treatment as a new contract.

(vi) Evaluation of non-fixed payments.

(vii) Examples.

(4) Certain economic benefits disregarded for purposes of section
4958.

(i) Nontaxable fringe benefits.

(ii) Certain economic benefits provided to a volunteer for the
organization.

(iii) Certain economic benefits provided to a member of, or donor
to, the organization.

(iv) Economic benefits provided to a charitable beneficiary.

(v) Certain economic benefits provided to a governmental unit.

(b) Valuation standards.

(1) In general.

(i) Fair market value of property.

(ii) Reasonable compensation.

(a) In general.

(b) Items included in determining the value of compensation for
purposes of determining reasonableness under section 4958.

(c) Inclusion in compensation for reasonableness determination does
not govern income tax treatment.

(2) Timing of reasonableness determination.

(i) In general.

(ii) Treatment as a new contract.

(iii) Examples.

(c) Establishing intent to treat economic benefit as consideration
for the performance of services.

(1) In general.

(2) Nontaxable benefits.

(3) Contemporaneous substantiation.

(i) Reporting of benefit. (ii) Other evidence of contemporaneous
substantiation.

(iii) Failure to report due to reasonable cause.

(4) Examples. §53.4958-5T Transaction in which the amount of
the economic benefit is determined in whole or in part by the
revenues of one or more activities of the organization (temporary).
[Reserved] §53.4958-6T Rebuttable presumption that a
transaction is not an excess benefit transaction (temporary).

(a) In general.

(b) Rebutting the presumption.

(c) Requirements for invoking rebuttable presumption.

(1) Approval by an authorized body.

(i) In general.

(ii) Individuals not included on authorized body.

(iii) Absence of conflict of interest.

(2) Appropriate data as to comparability.

(i) In general.

(ii) Special rule for compensation paid by small organizations.

(iii) Application of special rule for small organizations.

(iv) Examples.

(3) Documentation.

(d) No presumption with respect to non-fixed payments until amounts
are determined.

(1) In general.

(2) Special rule for certain non-fixed payments subject to a cap.

(e) No inference from absence of presumption.

(f) Period of reliance on rebuttable presumption. §53.4958-7T
Correction (temporary).

(a) In general.

(b) Form of correction.

(1) Cash or cash equivalents.

(2) Anti-abuse rule.

(3) Special rule relating to nonqualified deferred compensation.

(4) Return of specific property.

(i) In general.

(ii) Payment not equal to correction amount.

(iii) Disqualified person may not participate in decision.

(c) Correction amount.

(d) Correction where contract has been partially performed.

(e) Correction in the case of an applicable tax-exempt organization
that has ceased to exist, or is no longer tax-exempt.

(1) In general.

(2) Section 501(c)(3) organizations.

(3) Section 501(c)(4) organizations.

(f) Examples. §53.4958-8T Special rules (temporary).

(a) Substantive requirements for exemption still apply.

(b) Interaction between section 4958 and section 7611 rules for
church tax inquiries and examinations.

(c) Three year duration of these temporary regulations.
§53.4958-1T Taxes on excess benefit transactions (temporary).

(a) In general. Section 4958 imposes excise taxes on each excess
benefit transaction (as defined in section 4958(c) and
§53.4958-4T) between an applicable tax-exempt organization (as
defined in section 4958(e) and §53.4958-2T) and a disqualified
person (as defined in section 4958(f)(1) and §53.4958-3T). A
disqualified person who receives an excess benefit from an excess
benefit transaction is liable for payment of a section 4958(a)(1)
excise tax equal to 25 percent of the excess benefit. If an initial
tax is imposed by section 4958(a)(1) on an excess benefit
transaction and the transaction is not corrected (as defined in
section 4958(f)(6) and §53.4958-7T) within the taxable period
(as defined in section 4958(f)(5) and paragraph (c)(2)(ii) of this
section), then any disqualified person who received an excess
benefit from the excess benefit transaction on which the initial tax
was imposed is liable for an additional tax of 200 percent of the
excess benefit. An organization manager (as defined in section
4958(f)(2) and paragraph (d) of this section) who participates in an
excess benefit transaction, knowing that it was such a transaction,
is liable for payment of a section 4958(a)(2) excise tax equal to 10
percent of the excess benefit, unless the participation was not
willful and was due to reasonable cause. If an organization manager
also receives an excess benefit from an excess benefit transaction,
the manager may be liable for both taxes imposed by section 4958(a).

(b) Excess benefit defined. An excess benefit is the amount by which
the value of the economic benefit provided by an applicable tax-
exempt organization directly or indirectly to or for the use of any
disqualified person exceeds the value of the consideration
(including the performance of services) received for providing such
benefit.

(c) Taxes paid by disqualified person--(1) Initial tax. Section
4958(a)(1) imposes a tax equal to 25 percent of the excess benefit
on each excess benefit transaction. The section 4958(a)(1) tax shall
be paid by any disqualified person who received an excess benefit
from that excess benefit transaction. With respect to any excess
benefit transaction, if more than one disqualified person is liable
for the tax imposed by section 4958(a)(1), all such persons are
jointly and severally liable for that tax.

(2) Additional tax on disqualified person--

(i) In general. Section 4958(b) imposes a tax equal to 200 percent
of the excess benefit in any case in which section 4958(a)(1)
imposes a 25-percent tax on an excess benefit transaction and the
transaction is not corrected (as defined in section 4958(f)(6) and
§53.4958-7T) within the taxable period (as defined in section
4958(f)(5) and paragraph (c)(2)(ii) of this section). If a
disqualified person makes a payment of less than the full correction
amount under the rules of §53.4958-7T, the 200-percent tax is
imposed only on the unpaid portion of the correction amount (as
described in §53.4958-7T(c)). The tax imposed by section
4958(b) is payable by any disqualified person who received an excess
benefit from the excess benefit transaction on which the initial tax
was imposed by section 4958(a)(1). With respect to any excess
benefit transaction, if more than one disqualified person is liable
for the tax imposed by section 4958(b), all such persons are jointly
and severally liable for that tax.

(ii) Taxable period. 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 earlier of--

(A) The date of mailing a notice of deficiency under section 6212
with respect to the section 4958(a)(1) tax; or

(B) The date on which the tax imposed by section 4958(a)(1) is
assessed.

(iii) Abatement if correction during the correction period. For
rules relating to abatement of taxes on excess benefit transactions
that are corrected within the correction period, as defined in
section 4963(e), see sections 4961(a), 4962(a), and the regulations
thereunder. The abatement rules of section 4961 specifically provide
for a 90-day correction period after the date of mailing a notice of
deficiency under section 6212 with respect to the section 4958(b)
200-percent tax. If the excess benefit is corrected during that
correction period, the 200-percent tax imposed shall not be
assessed, and if assessed the assessment shall be abated, and if
collected shall be credited or refunded as an overpayment. For
special rules relating to abatement of the 25-percent tax, see
section 4962.

(d) Tax paid by organization managers--

(1) In general. In any case in which section 4958(a)(1) imposes a
tax, section 4958(a)(2) imposes a tax equal to 10 percent of the
excess benefit on the participation of any organization manager who
knowingly participated in the excess benefit transaction, unless
such participation was not willful and was due to reasonable cause.
Any organization manager who so participated in the excess benefit
transaction must pay the tax.

(2) Organization manager defined--

(i) In general. An organization manager is, 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, regardless of title. A person is an
officer of an organization if that person--

(A) Is specifically so designated under the certificate of
incorporation, by-laws, or other constitutive documents of the
organization; or

(B) Regularly exercises general authority to make administrative or
policy decisions on behalf of the organization. An independent
contractor who acts solely in a capacity as an attorney, accountant,
or investment manager or advisor, is not an officer. For purposes of
this paragraph (d)(2)(i)(B), any person who has authority merely to
recommend particular administrative or policy decisions, but not to
implement them without approval of a superior, is not an officer.

(ii) Special rule for certain committee members. An individual who
is not an officer, director, or trustee, yet serves on a committee
of the governing body of an applicable tax-exempt organization (or
as a designee of the governing body described in §53.4958-6T(c)
(1)) that is attempting to invoke the rebuttable presumption of
reasonableness described in §53.4958-6T based on the
committee's (or designee's) actions, is an organization manager for
purposes of the tax imposed by section 4958(a)(2).

(3) Participation. For purposes of section 4958(a)(2) and paragraph
(d) of this section, participation includes silence or inaction on
the part of an organization manager where the manager is under a
duty to speak or act, as well as any affirmative action by such
manager. An organization manager is not considered to have
participated in an excess benefit transaction, however, where the
manager has opposed the transaction in a manner consistent with the
fulfillment of the manager's responsibilities to the applicable tax-
exempt organization.

(4) Knowing--

(i) In general. For purposes of section 4958(a)(2) and paragraph

(d) of this section, a manager participates in a transaction
knowingly only if the person--

(A) Has actual knowledge of sufficient facts so that, based solely
upon those facts, such transaction would be an excess benefit
transaction;

(B) Is aware that such a transaction under these circumstances may
violate the provisions of federal tax law governing excess benefit
transactions; and

(C) Negligently fails to make reasonable attempts to ascertain
whether the transaction is an excess benefit transaction, or the
manager is in fact aware that it is such a transaction.

(ii) Amplification of general rule. Knowing does not mean having
reason to know. However, evidence tending to show that a manager has
reason to know of a particular fact or particular rule is relevant
in determining whether the manager had actual knowledge of such a
fact or rule. Thus, for example, evidence tending to show that a
manager has reason to know of sufficient facts so that, based solely
upon such facts, a transaction would be an excess benefit
transaction is relevant in determining whether the manager has
actual knowledge of such facts.

(iii) Reliance on professional advice. An organization manager's
participation in a transaction is ordinarily not considered knowing
within the meaning of section 4958(a)(2), even though the
transaction is subsequently held to be an excess benefit transaction
to the extent that, after full disclosure of the factual situation
to an appropriate professional, the organization manager relies on a
reasoned written opinion of that professional with respect to
elements of the transaction within the professional's expertise. For
purposes of section 4958(a)(2) and this paragraph (d), a written
opinion is reasoned even though it reaches a conclusion that is
subsequently determined to be incorrect so long as the opinion
addresses itself to the facts and the applicable standards. However,
a written opinion is not reasoned if it does nothing more than
recite the facts and express a conclusion. The absence of a written
opinion of an appropriate professional with respect to a transaction
shall not, by itself, however, give rise to any inference that an
organization manager participated in the transaction knowingly. For
purposes of this paragraph, appropriate professionals on whose
written opinion an organization manager may rely, are limited to--

(A) Legal counsel, including in-house counsel;

(B) Certified public accountants or accounting firms with expertise
regarding the relevant tax law matters; and

(C) Independent valuation experts who--

(1) Hold themselves out to the public as appraisers or compensation
consultants;

(2) Perform the relevant valuations on a regular basis;

(3) Are qualified to make valuations of the type of property or
services involved; and

(4) Include in the written opinion a certification that the
requirements of paragraphs (d)(4)(iii)(C)(1) through (3) of this
section are met.

(iv) Reliance on rebuttable presumption of reasonableness. An
organization manager's participation in a transaction is ordinarily
not considered knowing within the meaning of section 4958(a)(2),
even though the transaction is subsequently held to be an excess
benefit transaction, if the organization manager relies on the fact
that the requirements of §53.4958-6T(a) are satisfied with
respect to the transaction.

(5) Willful. For purposes of section 4958(a)(2) and this paragraph
(d), participation by an organization manager is willful if it is
voluntary, conscious, and intentional. No motive to avoid the
restrictions of the law or the incurrence of any tax is necessary to
make the participation willful. However, participation by an
organization manager is not willful if the manager does not know
that the transaction in which the manager is participating is an
excess benefit transaction.

(6) Due to reasonable cause. An organization manager's participation
is due to reasonable cause if the manager has exercised
responsibility on behalf of the organization with ordinary business
care and prudence.

(7) Limits on liability for management. The maximum aggregate amount
of tax collectible under section 4958(a)(2) and this paragraph (d)
from organization managers with respect to any one excess benefit
transaction is $10,000.

(8) Joint and several liability. In any case where more than one
person is liable for a tax imposed by section 4958(a)(2), all such
persons shall be jointly and severally liable for the taxes imposed
under section 4958(a)(2) with respect to that excess benefit
transaction.

(9) Burden of proof. For provisions relating to the burden of proof
in cases involving the issue of whether an organization manager has
knowingly participated in an excess benefit transaction, see section
7454(b) and §301.7454-2. In these cases, the Commissioner bears
the burden of proof.

(e) Date of occurrence--

(1) In general. Except as otherwise provided, an excess benefit
transaction occurs on the date on which the disqualified person
receives the economic benefit for Federal income tax purposes. When
a single contractual arrangement provides for a series of
compensation or other payments to (or for the use of) a disqualified
person over the course of the disqualified person's taxable year (or
part of a taxable year), any excess benefit transaction with respect
to these aggregate payments is deemed to occur on the last day of
the taxable year (or if the payments continue for part of the year,
the date of the last payment in the series).

(2) Special rules. In the case of benefits provided pursuant to a
qualified pension, profit-sharing, or stock bonus plan, the
transaction occurs on the date the benefit is vested. In the case of
a transfer of property that is subject to a substantial risk of
forfeiture or in the case of rights to future compensation or
property (including benefits under a nonqualified deferred
compensation plan), the transaction occurs on the date the property,
or the rights to future compensation or property, is not subject to
a substantial risk of forfeiture. However, where the disqualified
person elects to include an amount in gross income in the taxable
year of transfer pursuant to section 83(b), the general rule of
paragraph (e)(1) of this section applies to the property with
respect to which the section 83(b) election is made. Any excess
benefit transaction with respect to benefits under a deferred
compensation plan which vest during any taxable year of the
disqualified person is deemed to occur on the last day of such
taxable year. For the rules governing the timing of the
reasonableness determination for deferred, contingent, and certain
other noncash compensation, see §53.4958-4T(b)(2).

(3) Statute of limitations rules. See sections 6501(e)(3) and
6501(l) and the regulations thereunder for statute of limitations
rules as they apply to section 4958 excise taxes.

(f) Effective date for imposition of taxes--

(1) In general. The section 4958 taxes imposed on excess benefit
transactions or on participation in excess benefit transactions
apply to transactions occurring on or after September 14, 1995.

(2) Existing binding contracts. The section 4958 taxes do not apply
to any transaction occurring pursuant to a written contract that was
binding on September 13, 1995, and at all times thereafter before
the transaction occurs. A written binding contract that is
terminable or subject to cancellation by the applicable tax-exempt
organization without the disqualified person's consent (including as
the result of a breach of contract by the disqualified person) and
without substantial penalty to the organization, is no longer
treated as a binding contract as of the earliest date that any such
termination or cancellation, if made, would be effective.If a
binding written contract is materially changed, it is treated as a
new contract entered into as of the date the material change is
effective. A material change includes an extension or renewal of the
contract (other than an extension or renewal that results from the
person contracting with the applicable tax-exempt organization
unilaterally exercising an option expressly granted by the
contract), or a more than incidental change to any payment under the
contract. §53.4958-2T Definition of applicable tax-exempt
organization (temporary).

(a) Organizations described in section 501(c)(3) or (4) and exempt
from tax under section 501(a)--

(1) In general. An applicable tax-exempt organization is any
organization that, without regard to any excess benefit, would be
described in section 501(c)(3) or (4) and exempt from tax under
section 501(a). An applicable tax-exempt organization also includes
any organization that was described in section 501(c)(3) or

(4) and was exempt from tax under section 501(a) at any time during
a five-year period ending on the date of an excess benefit
transaction (the lookback period). A private foundation as defined
in section 509(a) is not an applicable tax-exempt organization for
section 4958 purposes. A governmental entity that is exempt from (or
not subject to) taxation without regard to section 501(a) is not an
applicable tax-exempt organization for section 4958 purposes.

(2) Organizations described in section 501(c)(3). An organization is
described in section 501(c)(3) for purposes of section 4958 only if
the organization provides the notice described in section 508,
unless the organization otherwise is described in section 501(c)(3)
and specifically is excluded from the requirements of section 508 by
that section.

(3) Organizations described in section 501(c)(4) . An organization
is described in section 501(c)(4) for purposes of section 4958 if
the organization--

(i) Has applied for and received recognition from the Internal
Revenue Service as an organization described in section 501(c)(4);
or

(ii) Has filed an application for recognition under section 501(c)
(4) with the Internal Revenue Service, has filed an annual
information return as a section 501(c)(4) organization under the
Internal Revenue Code or regulations promulgated thereunder, or has
otherwise held itself out as being described in section 501(c)(4)
and exempt from tax under section 501(a).

(4) Effect of non-recognition or revocation of exempt status. An
organization is not described in paragraph (a)(2) or (3) of this
section during any period covered by a final determination or
adjudication that the organization is not exempt from tax under
section 501(a) as an organization described in section 501(c)(3) or
(4), so long as that determination or adjudication is not based upon
participation in inurement or one or more excess benefit
transactions. However, the organization may be an applicable tax-
exempt organization for that period as a result of the five-year
lookback rule described in paragraph (a)(1) of this section.

(b) Special rules--(1) Transition rule for lookback period. In the
case of any excess benefit transaction occurring before September
14, 2000, the lookback period described in paragraph (a)(1) of this
section begins on September 14, 1995, and ends on the date of the
transaction.

(2) Certain foreign organizations. A foreign organization,
recognized by the Internal Revenue Service or by treaty, that
receives substantially all of its support (other than gross
investment income) from sources outside of the United States is not
an organization described in section 501(c)(3) or (4) for purposes
of section 4958. §53.4958-3T Definition of disqualified person
(temporary).

(a) In general--(1) Scope of definition. Section 4958(f)(1) defines
disqualified person, with respect to any transaction, as any person
who was in a position to exercise substantial influence over the
affairs of an applicable tax-exempt organization at any time during
the five-year period ending on the date of the transaction (the
lookback period). Paragraph (b)of this section describes persons who
are defined to be disqualified persons under the statute, including
certain family members of an individual in a position to exercise
substantial influence, and certain 35-percent controlled entities.
Paragraph (c)of this section describes persons in a position to
exercise substantial influence over the affairs of an applicable
tax-exempt organization by virtue of their powers and
responsibilities or certain interests they hold. Paragraph (d) of
this section describes persons deemed not to be in a position to
exercise substantial influence. Whether any person who is not
described in paragraph (b), (c) or (d) of this section is a
disqualified person with respect to a transaction for purposes of
section 4958 is based on all relevant facts and circumstances, as
described in paragraph (e)of this section. Paragraph (f) of this
section describes special rules for affiliated organizations.
Examples in paragraph (g) of this section illustrate these
categories of persons.

(2) Transition rule for lookback period. In the case of any excess
benefit transaction occurring before September 14, 2000, the
lookback period described in paragraph (a)(1) of this section begins
on September 14, 1995, and ends on the date of the transaction.

(b) Statutory categories of disqualified persons--(1) Family
members. A person is a disqualified person with respect to any
transaction with an applicable tax-exempt organization if the person
is a member of the family of a person who is a disqualified person
described in paragraph (a)of this section (other than as a result of
this paragraph) with respect to any transaction with the same
organization. For purposes of the following sentence, a legally
adopted child of an individual is treated as a child of such
individual by blood. A person's family is limited to--

(i) Spouse;

(ii) Brothers or sisters (by whole or half blood);

(iii) Spouses of brothers or sisters (by whole or half blood);

(iv) Ancestors;

(v) Children;

(vi) Grandchildren;

(vii) Great grandchildren; and

(viii) Spouses of children, grandchildren, and great grandchildren.

(2) Thirty-five percent controlled entities--

(i) In general. A person is a disqualified person with respect to
any transaction with an applicable tax-exempt organization if the
person is a 35-percent controlled entity. A 35-percent controlled
entity is--

(A) A corporation in which persons described in this section (except
in paragraphs (b)(2) and (d) of this section) own more than 35
percent of the combined voting power;

(B) A partnership in which persons described in this section (except
in paragraphs (b)(2) and (d) of this section) own more than 35
percent of the profits interest; or

(C) A trust or estate in which persons described in this section
(except in paragraphs (b)(2) and (d) of this section) own more than
35 percent of the beneficial interest.

(ii) Combined voting power. For purposes of this paragraph (b)(2),
combined voting power includes voting power represented by holdings
of voting stock, direct or indirect, but does not include voting
rights held only as a director, trustee, or other fiduciary.

(iii) Constructive ownership rules--(A) Stockholdings. For purposes
of section 4958(f)(3) and this paragraph (b)(2), indirect
stockholdings are taken into account as under section 267(c), except
that in applying section 267(c)(4), the family of an individual
shall include the members of the family specified in section 4958(f)
(4) and paragraph (b)(1) of this section.

(B) Profits or beneficial interest. For purposes of section 4958(f)
(3) and this paragraph (b)(2), the ownership of profits or
beneficial interests shall be determined in accordance with the
rules for constructive ownership of stock provided in section 267(c)
(other than section 267(c)(3)), except that in applying section
267(c)(4), the family of an individual shall include the members of
the family specified in section 4958(f)(4) and paragraph (b)(1) of
this section.

(c) Persons having substantial influence. A person who holds any of
the following powers, responsibilities, or interests is in a
position to exercise substantial influence over the affairs of an
applicable tax-exempt organization:

(1) Voting members of the governing body. This category includes any
individual serving on the governing body of the organization who is
entitled to vote on any matter over which the governing body has
authority.

(2) Presidents, chief executive officers, or chief operating
officers. This category includes any person who, regardless of
title, has ultimate responsibility for implementing the decisions of
the governing body or for supervising the management,
administration, or operation of the organization. A person who
serves as president, chief executive officer, or chief operating
officer has this ultimate responsibility unless the person
demonstrates otherwise. If this ultimate responsibility resides with
two or more individuals (e.g., co-presidents), who may exercise such
responsibility in concert or individually, then each individual is
in a position to exercise substantial influence over the affairs of
the organization.

(3) Treasurers and chief financial officers. This category includes
any person who, regardless of title, has ultimate responsibility for
managing the finances of the organization. A person who serves as
treasurer or chief financial officer has this ultimate
responsibility unless the person demonstrates otherwise. If this
ultimate responsibility resides with two or more individuals who may
exercise the responsibility in concert or individually, then each
individual is in a position to exercise substantial influence over
the affairs of the organization.

(4) Persons with a material financial interest in a provider-
sponsored organization. For purposes of section 4958, if a hospital
that participates in a provider- sponsored organization (as defined
in section 1855(e) of the Social Security Act, 42 U.S.C. 1395w-25)
is an applicable tax-exempt organization, then any person with a
material financial interest (within the meaning of section 501(o))
in the provider-sponsored organization has substantial influence
with respect to the hospital.

(d) Persons deemed not to have substantial influence. A person is
deemed not to be in a position to exercise substantial influence
over the affairs of an applicable tax-exempt organization if that
person is described in one of the following categories:

(1) Tax-exempt organizations described in section 501(c)(3). This
category includes any organization described in section 501(c)(3)
and exempt from tax under section 501(a).

(2) Certain section 501(c)(4) organizations. Only with respect to an
applicable tax-exempt organization described in section 501(c)(4)
and §53.4958-2T(a)(3), this category includes any other
organization so described.

(3) Employees receiving economic benefits of less than a specified
amount in a taxable year. This category includes, for the taxable
year in which benefits are provided, any full- or part-time employee
of the applicable tax-exempt organization who--

(i) Receives economic benefits, directly or indirectly from the
organization, of less than the amount referenced for a highly
compensated employee in section 414(q)(1)(B)(i);

(ii) Is not described in §53.4958-3T(b) or (c) with respect to
the organization; and

(iii) Is not a substantial contributor to the organization within
the meaning of section 507(d)(2)(A), taking into account only
contributions received by the organization during its current
taxable year and the four preceding taxable years.

(e) Facts and circumstances govern in all other cases--

(1) In general. Whether a person who is not described in paragraph
(b), (c) or (d) of this section is a disqualified person depends
upon all relevant facts and circumstances.

(2) Facts and circumstances tending to show substantial influence.
Facts and circumstances tending to show that a person has
substantial influence over the affairs of an organization include,
but are not limited to, the following--

(i) The person founded the organization;

(ii) The person is a substantial contributor to the organization
(within the meaning of section 507(d)(2)(A)), taking into account
only contributions received by the organization during its current
taxable year and the four preceding taxable years;

(iii) The person's compensation is primarily based on revenues
derived from activities of the organization that the person
controls;

(iv) The person has or shares authority to control or determine a
substantial portion of the organization's capital expenditures,
operating budget, or compensation for employees;

(v) The person manages a discrete segment or activity of the
organization that represents a substantial portion of the
activities, assets, income, or expenses of the organization, as
compared to the organization as a whole;

(vi) The person owns a controlling interest (measured by either vote
or value) in a corporation, partnership, or trust that is a
disqualified person; or

(vii) The person is a non-stock organization controlled, directly or
indirectly, by one or more disqualified persons.

(3) Facts and circumstances tending to show no substantial
influence. Facts and circumstances tending to show that a person
does not have substantial influence over the affairs of an
organization include, but are not limited to, the following--

(i) The person has taken a bona fide vow of poverty as an employee,
agent, or on behalf, of a religious organization;

(ii) The person is an independent contractor (such as an attorney,
accountant, or investment manager or advisor) whose sole
relationship to the organization is providing professional advice
(without having decision-making authority) with respect to
transactions from which the independent contractor will not
economically benefit either directly or indirectly (aside from
customary fees received for the professional advice rendered);

(iii) The direct supervisor of the individual is not a disqualified
person;

(iv) The person does not participate in any management decisions
affecting the organization as a whole or a discrete segment or
activity of the organization that represents a substantial portion
of the activities, assets, income, or expenses of the organization,
as compared to the organization as a whole; or

(v) Any preferential treatment a person receives based on the size
of that person's donation is also offered to all other donors making
a comparable contribution as part of a solicitation intended to
attract a substantial number of contributions.

(f) Affiliated organizations. In the case of multiple organizations
affiliated by common control or governing documents, the
determination of whether a person does or does not have substantial
influence shall be made separately for each applicable tax-exempt
organization. A person may be a disqualified person with respect to
transactions with more than one applicable tax-exempt organization.

(g) Examples. The following examples illustrate the principles of
this section. Finding a person to be a disqualified person in the
following examples does not indicate that an excess benefit
transaction has occurred. If a person is a disqualified person, the
rules of section 4958(c) and §53.4958-4T apply to determine
whether an excess benefit transaction has occurred. The examples are
as follows:

Example 1. N, an artist by profession, works part-time at R, a local
museum. In the first taxable year in which R employs N, R pays N a
salary and provides no additional benefits to N except for free
admission to the museum, a benefit R provides to all of its
employees and volunteers. The total economic benefits N receives
from R during the taxable year are less than the amount referenced
for a highly compensated employee in section 414(q)(1)(B)(i). The
part-time job constitutes N's only relationship with R. N is not
related to any other disqualified person with respect to R. N is
deemed not to be in a position to exercise substantial influence
over the affairs of R. Therefore, N is not a disqualified person
with respect to R in that year.

Example 2. The facts are the same as in Example 1, except that in
addition to the salary that R pays N for N's services during the
taxable year, R also purchases one of N's paintings for $x. The
total of N's salary plus $x exceeds the amount referenced for highly
compensated employees in section 414(q)(1)(B)(i). Consequently,
whether N is in a position to exercise substantial influence over
the affairs of R for that taxable year depends upon all of the
relevant facts and circumstances.

Example 3: Q is a member of K, a section 501(c)(3) organization with
a broad-based public membership. Members of K are entitled to vote
only with respect to the annual election of directors and the
approval of major organizational transactions such as a merger or
dissolution. Q is not related to any other disqualified person of K.
Q has no other relationship to K besides being a member of K and
occasionally making modest donations to K. Whether Q is a
disqualified person is determined by all relevant facts and
circumstances. Q's voting rights, which are the same as granted to
all members of K, do not place Q in a position to exercise
substantial influence over K. Under these facts and circumstances, Q
is not a disqualified person with respect K.

Example 4. E is the headmaster of Z, a school that is an applicable
tax-exempt organization for purposes of section 4958. E reports to
Z's board of trustees and has ultimate responsibility for
supervising Z's day-to-day operations. For example, E can hire
faculty members and staff, make changes to the school's curriculum
and discipline students without specific board approval. Because E
has ultimate responsibility for supervising the operation of Z, E is
in a position to exercise substantial influence over the affairs of
Z. Therefore, E is a disqualified person with respect to Z.

Example 5. Y is an applicable tax-exempt organization for purposes
of section 4958 that decides to use bingo games as a method of
generating revenue. Y enters into a contract with B, a company that
operates bingo games. Under the contract, B manages the promotion
and operation of the bingo activity, provides all necessary staff,
equipment, and services, and pays Y q percent of the revenue from
this activity. B retains the balance of the proceeds. Y provides no
goods or services in connection with the bingo operation other than
the use of its hall for the bingo games. The annual gross revenue
earned from the bingo games represents more than half of Y's total
annual revenue. B's compensation is primarily based on revenues from
an activity B controls. B also manages a discrete activity of Y that
represents a substantial portion of Y's income compared to the
organization as a whole. Under these facts and circumstances, B is
in a position to exercise substantial influence over the affairs of
Y. Therefore, B is a disqualified person with respect to Y.

Example 6. The facts are the same as in Example 5, with the
additional fact that P owns a majority of the stock of B and is
actively involved in managing B. Because P owns a controlling
interest (measured by either vote or value) in and actively manages
B, P is also in a position to exercise substantial influence over
the affairs of Y. Therefore, under these facts and circumstances, P
is a disqualified person with respect to Y.

Example 7. A, an applicable tax-exempt organization for purposes of
section 4958, owns and operates one acute care hospital. B, a for-
profit corporation, owns and operates a number of hospitals. A and B
form C, a limited liability company. In exchange for proportional
ownership interests, A contributes its hospital, and B contributes
other assets, to C. All of A's assets then consist of its membership
interest in C. A continues to be operated for exempt purposes based
almost exclusively on the activities it conducts through C. C enters
into a management agreement with a management company, M, to provide
day to day management services to C. M is generally subject to
supervision by C's board, but M is given broad discretion to manage
C's day to day operation. Under these facts and circumstances, M is
in a position to exercise substantial influence over the affairs of
A because it has day to day control over the hospital operated by C,
A's ownership interest in C is its primary asset, and C's activities
form the basis for A's continued exemption as an organization
described in section 501(c)(3). Therefore, M is a disqualified
person with respect to A.

Example 8. T is a large university and an applicable tax-exempt
organization for purposes of section 4958. L is the dean of the
College of Law of T, a substantial source of revenue for T,
including contributions from alumni and foundations. L is not
related to any other disqualified person of T. L does not serve on
T's governing body or have ultimate responsibility for managing the
university as whole. However, as dean of the College of Law, L plays
a key role in faculty hiring and determines a substantial portion of
the capital expenditures and operating budget of the College of Law.
L's compensation is greater than the amount referenced for a highly
compensated employee in section 414(q)(1)(B)(i) in the year benefits
are provided. L's management of a discrete segment of T that
represents a substantial portion of the income of T (as compared to
T as a whole) places L in a position to exercise substantial
influence over the affairs of T. Under these facts and circumstances
L is a disqualified person with respect to T.

Example 9. S chairs a small academic department in the College of
Arts and Sciences of the same university T described in Example 8. S
is not related to any other disqualified person of T. S does not
serve on T's governing body or as an officer of T. As department
chair, S supervises faculty in the department, approves the course
curriculum, and oversees the operating budget for the department.
S's compensation is greater than the amount referenced for a highly
compensated employee in section 414(q)(1)(B)(i) in the year benefits
are provided. Even though S manages the department, that department
does not represent a substantial portion of T's activities, assets,
income, expenses, or operating budget. Therefore, S does not
participate in any management decisions affecting either T as a
whole, or a discrete segment or activity of T that represents a
substantial portion of its activities, assets, income, or expenses.
Under these facts and circumstances, S does not have substantial
influence over the affairs of T, and therefore S is not a
disqualified person with respect to T.

Example 10. U is a large acute-care hospital that is an applicable
tax-exempt organization for purposes of section 4958. U employs X as
a radiologist. X gives instructions to staff with respect to the
radiology work X conducts, but X does not supervise other U
employees or manage any substantial part of U's operations. X's
compensation is primarily in the form of a fixed salary. In
addition, X is eligible to receive an incentive award based on
revenues of the radiology department. X's compensation is greater
than the amount referenced for a highly compensated employee in
section 414(q)(1)(B)(i) in the year benefits are provided. X is not
related to any other disqualified person of U. X does not serve on
U's governing body or as an officer of U. Although U participates in
a provider-sponsored organization (as defined in section 1855(e) of
the Social Security Act), X does not have a material financial
interest in that organization. X does not receive compensation
primarily based on revenues derived from activities of U that X
controls. X does not participate in any management decisions
affecting either U as a whole or a discrete segment of U that
represents a substantial portion of its activities, assets, income,
or expenses. Under these facts and circumstances, X does not have
substantial influence over the affairs of U, and therefore X is not
a disqualified person with respect to U.

Example 11. W is a cardiologist and head of the cardiology
department of the same hospital U described in Example 10. The
cardiology department is a major source of patients admitted to U
and consequently represents a substantial portion of U's income, as
compared to U as a whole. W does not serve on U's governing board or
as an officer of U. W does not have a material financial interest in
the provider-sponsored organization (as defined in section 1855(e)
of the Social Security Act) in which U participates. W receives a
salary and retirement and welfare benefits fixed by a three-year
renewable employment contract with U. W's compensation is greater
than the amount referenced for a highly compensated employee in
section 414(q)(1)(B)(i) in the year benefits are provided. As
department head, W manages the cardiology department and has
authority to allocate the budget for that department, which includes
authority to distribute incentive bonuses among cardiologists
according to criteria that W has authority to set. W's management of
a discrete segment of U that represents a substantial portion of its
income and activities (as compared to U as a whole) places W in a
position to exercise substantial influence over the affairs of U.
Under these facts and circumstances, W is a disqualified person with
respect to U.

Example 12. M is a museum that is an applicable tax-exempt
organization for purposes of section 4958. D provides accounting
services and tax advice to M as an independent contractor in return
for a fee. D has no other relationship with M and is not related to
any disqualified person of M. D does not provide professional advice
with respect to any transaction from which D might economically
benefit either directly or indirectly (aside from fees received for
the professional advice rendered). Because D's sole relationship to
M is providing professional advice (without having decision-making
authority) with respect to transactions from which D will not
economically benefit either directly or indirectly (aside from
customary fees received for the professional advice rendered), under
these facts and circumstances, D is not a disqualified person with
respect to M.

Example 13. F is a repertory theater company that is an applicable
tax-exempt organization for purposes of section 4958. F holds a
fund-raising campaign to pay for the construction of a new theater.
J is a regular subscriber to F's productions who has made modest
gifts to F in the past. J has no relationship to F other than as a
subscriber and contributor. F solicits contributions as part of a
broad public campaign intended to attract a large number of donors,
including a substantial number of donors making large gifts. In its
solicitations for contributions, F promises to invite all
contributors giving $z or more to a special opening production and
party held at the new theater. These contributors are also given a
special number to call in F's office to reserve tickets for
performances, make ticket exchanges, and make other special
arrangements for their convenience. J makes a contribution of $z to
F, which makes J a substantial contributor within the meaning of
section 507(d)(2)(A), taking into account only contributions
received by F during its current and the four preceding taxable
years. J receives the benefits described in F's solicitation.
Because F offers the same benefit to all donors of $z or more, the
preferential treatment that J receives does not indicate that J is
in a position to exercise substantial influence over the affairs of
the organization. Therefore, under these facts and circumstances, J
is not a disqualified person with respect to F. §53.4958-4T
Excess benefit transaction (temporary).

(a) Definition of excess benefit transaction--

(1) In general. An excess benefit transaction means any transaction
in which an economic benefit is provided by an applicable tax-exempt
organization directly or indirectly to or for the use of any
disqualified person, and the value of the economic benefit provided
exceeds the value of the consideration (including the performance of
services) received for providing the benefit. Subject to the
limitations of paragraph (c) of this section (relating to the
treatment of economic benefits as compensation for the performance
of services), to determine whether an excess benefit transaction has
occurred, all consideration and benefits (except disregarded
benefits described in paragraph (a)(4) of this section) exchanged
between a disqualified person and the applicable tax-exempt
organization and all entities the organization controls (within the
meaning of paragraph (a)(2)(ii)(B) of this section) are taken into
account. For example, in determining the reasonableness of
compensation that is paid (or vests, or is no longer subject to a
substantial risk of forfeiture) in one year, services performed in
prior years may be taken into account. For rules regarding valuation
standards, see paragraph (b) of this section. For the requirement
that an applicable tax-exempt organization clearly indicate its
intent to treat a benefit as compensation for services when paid,
see paragraph (c) of this section.

(2) Economic benefit provided indirectly--

(i) In general. A transaction that would be an excess benefit
transaction if the applicable tax-exempt organization engaged in it
directly with a disqualified person is likewise an excess benefit
transaction when it is accomplished indirectly. An applicable tax-
exempt organization may provide an excess benefit indirectly to a
disqualified person through a controlled entity or through an
intermediary, as described in paragraphs (a)(2)(ii) and (iii) of
this section, respectively.

(ii) Through a controlled entity--(A) In general. An applicable tax-
exempt organization may provide an excess benefit indirectly through
the use of one or more entities it controls. For purposes of section
4958, economic benefits provided by a controlled entity will be
treated as provided by the applicable tax-exempt organization.

(b) Definition of control-- (1) In general. For purposes of this
paragraph, control by an applicable tax-exempt organization means--

(i) In the case of a stock corporation, ownership (by vote or value)
of more than 50 percent of the stock in such corporation;

(ii) In the case of a partnership, ownership of more than 50 percent
of the profits interests or capital interests in the partnership;

(iii) In the case of a nonstock organization (i.e., an entity in
which no person holds a proprietary interest), that at least 50
percent of the directors or trustees of the organization are either
representatives (including trustees, directors, agents, or
employees) of, or directly or indirectly controlled by, an
applicable tax-exempt organization; or

(iv) In the case of any other entity, ownership of more than 50
percent of the beneficial interest in the entity.

(2) Constructive ownership. Section 318 (relating to constructive
ownership of stock) shall apply for purposes of determining
ownership of stock in a corporation. Similar principles shall apply
for purposes of determining ownership of interests in any other
entity.

(iii) Through an intermediary. An applicable tax-exempt organization
may provide an excess benefit indirectly through an intermediary. An
intermediary is any person (including an individual or a taxable or
tax-exempt entity) who participates in a transaction with one or
more disqualified persons of an applicable tax-exempt organization.
For purposes of section 4958, economic benefits provided by an
intermediary will be treated as provided by the applicable tax-
exempt organization when--

(A) An applicable tax-exempt organization provides an economic
benefit to an intermediary; and

(B) In connection with the receipt of the benefit by the
intermediary--

(1) There is evidence of an oral or written agreement or
understanding that the intermediary will provide economic benefits
to or for the use of a disqualified person; or

(2) The intermediary provides economic benefits to or for the use of
a disqualified person without a significant business purpose or
exempt purpose of its own.

(iv) Examples. The following examples illustrate when economic
benefits are provided indirectly under the rules of paragraph (a)(2)
of this section: Example 1. K is an applicable tax-exempt
organization for purposes of section 4958. L is an entity controlled
by K within the meaning of paragraph (a)(2)(ii)(B) of this section.
J is employed by K, and is a disqualified person with respect to K.
K pays J an annual salary of $12m, and reports that amount as
compensation during calendar year 2001. Although J only performed
services for K for nine months of 2001, J performed equivalent
services for L during the remaining three months of 2001. Taking
into account all of the economic benefits K provided to J, and all
of the services J performed for K and L, $12m does not exceed the
fair market value of the services J performed for K and L during
2001. Therefore, under these facts, K does not provide an excess
benefit to J directly or indirectly.

Example 2. F is an applicable tax-exempt organization for purposes
of section 4958. D is an entity controlled by F within the meaning
of paragraph (a)(2)(ii)(B) of this section. T is the chief executive
officer (CEO) of F. As CEO, T is responsible for overseeing the
activities of F. T's duties as CEO make him a disqualified person
with respect to F. T's compensation package with F represents the
maximum reasonable compensation for T's services as CEO. Thus, any
additional economic benefits that F provides to T without T
providing additional consideration constitute an excess benefit. D
contracts with T to provide enumerated "consulting services" to D.
However, the contract does not require T to perform any additional
services for D that T is not already obligated to perform as F's
chief executive officer. Therefore, any payment to T pursuant to the
consulting contract with D represents an indirect excess benefit
that F provides through a controlled entity, even if F, D, or T
treats the additional payment to T as compensation.

Example 3. P is an applicable tax-exempt organization for purposes
of section 4958. S is a taxable entity controlled by P within the
meaning of paragraph (a)(2)(ii)(B) of this section. V is the chief
executive officer of S, for which S pays V $w in salary and
benefits. V also serves as a voting member of P's governing body.
Consequently, V is a disqualified person with respect to P. P
provides V with $x representing compensation for the services V
provides P as a member of its governing body. Although $x represents
reasonable compensation for the services V provides directly to P as
a member of its governing body, the total compensation of $w + $x
exceeds reasonable compensation for the services V provides to P and
S collectively. Therefore, the portion of total compensation that
exceeds reasonable compensation is an excess benefit provided to V.

Example 4. G is an applicable tax-exempt organization for section
4958 purposes. F is a disqualified person who was last employed by G
in a position of substantial influence three years ago. H is an
entity engaged in scientific research and is unrelated to either F
or G. G makes a grant to H to fund a research position. H
subsequently advertises for qualified candidates for the research
position. F is among several highly qualified candidates who apply
for the research position. H hires F. There was no evidence of an
oral or written agreement or understanding with G that H will use
G's grant to provide economic benefits to or for the use of F.
Although G provided economic benefits to H, and in connection with
the receipt of such benefits, H will provide economic benefits to or
for the use of F, H acted with a significant business purpose or
exempt purpose of its own. Under these facts, G did not provide an
economic benefit to F indirectly through the use of an intermediary.

(3) Exception for fixed payments made pursuant to an initial
contract--

(i) In general. Except as provided in paragraph (iv), section 4958
does not apply to any fixed payment made to a person pursuant to an
initial contract.

(ii) Fixed payment--(A) In general. For purposes of paragraph (a)(3)
(i) of this section, fixed payment means an amount of cash or other
property specified in the contract, or determined by a fixed formula
specified in the contract, which is to be paid or transferred in
exchange for the provision of specified services or property. A
fixed formula may incorporate an amount that depends upon future
specified events or contingencies, provided that no person exercises
discretion when calculating the amount of a payment or deciding
whether to make a payment (such as a bonus). A specified event or
contingency may include the amount of revenues generated by (or
other objective measure of) one or more activities of the applicable
tax-exempt organization. A fixed payment does not include any amount
paid to a person under a reimbursement (or similar) arrangement
where discretion is exercised by any person with respect to the
amount of expenses incurred or reimbursed.

(b) Special rules. Amounts payable pursuant to a qualified pension,
profit-sharing, or stock bonus plan under Internal Revenue Code
section 401(a), or pursuant to an employee benefit program that is
subject to and satisfies coverage and nondiscrimination rules under
the Code (e.g., sections 127 and 137), other than nondiscrimination
rules under section 9802, are treated as fixed payments for purposes
of this section, regardless of the applicable tax-exempt
organization's discretion with respect to the plan or program. The
fact that a person contracting with an applicable tax-exempt
organization is expressly granted the choice whether to accept or
reject any economic benefit is disregarded in determining whether
the benefit constitutes a fixed payment for purposes of this
paragraph.

(iii) Initial contract. For purposes of paragraph (a)(3)(i) of this
section, initial contract means a binding written contract between
an applicable tax-exempt organization and a person who was not a
disqualified person within the meaning of section 4958(f)(1) and
§53.4958-3T immediately prior to entering into the contract.

(iv) Substantial performance required. Paragraph (a)(3)(i) of this
section does not apply to any fixed payment made pursuant to the
initial contract during any taxable year of the person contracting
with the applicable tax-exempt organization if the person fails to
perform substantially the person's obligations under the initial
contract during that year.

(v) Treatment as a new contract. A written binding contract that
provides that the contract is terminable or subject to cancellation
by the applicable tax-exempt organization (other than as a result of
a lack of substantial performance by the disqualified person, as
described in paragraph (a)(3)(iv) of this section) without the other
party's consent and without substantial penalty to the organization
is treated as a new contract as of the earliest date that any such
termination or cancellation, if made, would be effective.
Additionally, if the parties make a material change to a contract,
it is treated as a new contract as of the date the material change
is effective. A material change includes an extension or renewal of
the contract (other than an extension or renewal that results from
the person contracting with the applicable tax-exempt organization
unilaterally exercising an option expressly granted by the
contract), or a more than incidental change to any amount payable
under the contract. The new contract is tested under paragraph (a)
(3)(iii) of this section to determine whether it is an initial
contract for purposes of this section.

(vi) Evaluation of non-fixed payments. Any payment that is not a
fixed payment (within the meaning of paragraph (a)(3)(ii) of this
section) is evaluated to determine whether it constitutes an excess
benefit transaction under section 4958. In making this
determination, all payments and consideration exchanged between the
parties are taken into account, including any fixed payments made
pursuant to an initial contract with respect to which section 4958
does not apply.

(vii) Examples. The following examples illustrate the rules
governing fixed payments made pursuant to an initial contract.
Unless otherwise stated, assume that the person contracting with the
applicable tax-exempt organization has performed substantially the
person's obligations under the contract with respect to the payment.
The examples are as follows: Example 1. T is an applicable tax-
exempt organization for purposes of section 4958. On January 1,
2000, T hires S as its chief financial officer by entering into a
five-year written employment contract with S. S was not a
disqualified person within the meaning of section 4958(f)(1) and
§53.4958-3T immediately prior to entering into the January 1,
2000, contract (initial contract). S's duties and responsibilities
under the contract make S a disqualified person with respect to T
(see §53.4958-3T(a)). Under the initial contract, T agrees to
pay S an annual salary of $200,000, payable in monthly installments.
The contract provides that, beginning in 2001, S's annual salary
will be adjusted by the increase in the Consumer Price Index (CPI)
for the prior year. Section 4958 does not apply because S's
compensation under the contract is a fixed payment pursuant to an
initial contract within the meaning of paragraph (a)(3) of this
section. Thus, for section 4958 purposes, it is unnecessary to
evaluate whether any portion of the compensation paid to S pursuant
to the initial contract is an excess benefit transaction.

Example 2. The facts are the same as in Example 1, except that the
initial contract provides that, in addition to a base salary of
$200,000, T may pay S an annual performance-based bonus. The
contract provides that T's governing body will determine the amount
of the annual bonus as of the end of each year during the term of
the contract, based on the board's evaluation of S's performance,
but the bonus cannot exceed $100,000 per year. Unlike the base
salary portion of S's compensation, the bonus portion of S's
compensation is not a fixed payment pursuant to an initial contract,
because the governing body has discretion over the amount, if any,
of the bonus payment. Section 4958 does not apply to payment of the
$200,000 base salary (as adjusted for inflation), because it is a
fixed payment pursuant to an initial contract within the meaning of
paragraph (a)(3) of this section. By contrast, the annual bonuses
that may be paid to S under the initial contract are not protected
by the initial contract exception. Therefore, each bonus payment
will be evaluated under section 4958, taking into account all
payments and consideration exchanged between the parties.

Example 3. The facts are the same as in Example 1, except that in
2001, T changes its payroll system, such that T makes biweekly,
rather than monthly, salary payments to its employees. Beginning in
2001, T also grants its employees an additional two days of paid
vacation each year. Neither change is a material change to S's
initial contract within the meaning of paragraph (a)(3)(v)of this
section. Therefore, section 4958 does not apply to the base salary
payments to S due to the initial contract exception.

Example 4. The facts are the same as in Example 1, except that on
January 1, 2001, S becomes the chief executive officer of T and a
new chief financial officer is hired. At the same time, T's board of
directors approves an increase in S's annual base salary from
$200,000 to $240,000, effective on that day. These changes in S's
employment relationship constitute material changes of the initial
contract within the meaning of paragraph (a)(3)(v) of this section.
As a result, S is treated as entering into a new contract with T on
January 1, 2001, at which time S is a disqualified person within the
meaning of section 4958(f)(1) and §53.4958-3T. T's payments to
S made pursuant to the new contract will be evaluated under section
4958, taking into account all payments and consideration exchanged
between the parties.

Example 5. J is a performing arts organization and an applicable
tax-exempt organization for purposes of section 4958. J hires W to
become the chief executive officer of J. W was not a disqualified
person within the meaning of section 4958(f)(1) and §53.4958-3T
immediately prior to entering into the employment contract with J.
As a result of this employment contract, W's duties and
responsibilities make W a disqualified person with respect to J (see
§53.4958-3T(c)(2)). Under the contract, J will pay W $x (a
specified amount) plus a bonus equal to 2 percent of the total
season subscription sales that exceed $100z. The $x base salary is a
fixed payment pursuant to an initial contract within the meaning of
paragraph (a)(3) of this section. The bonus payment is also a fixed
payment pursuant to an initial contract within the meaning of
paragraph (a)(3) of this section, because no person exercises
discretion when calculating the amount of the bonus payment or
deciding whether the bonus will be paid. Therefore, section 4958
does not apply to any of J's payments to W pursuant to the
employment contract due to the initial contract exception.

Example 6. Hospital B is an applicable tax-exempt organization for
purposes of section 4958. Hospital B hires E as its chief operating
officer. E was not a disqualified person within the meaning of
section 4958(f)(1) and §53.4958-3T immediately prior to
entering into the employment contract with Hospital B. As a result
of this employment contract, E's duties and responsibilities make E
a disqualified person with respect to Hospital B (see
§53.4958-3T(c)(2)). E's initial employment contract provides
that E will have authority to enter into hospital management
arrangements on behalf of Hospital B. In E's personal capacity, E
owns more than 35 percent of the combined voting power of Company X.
Consequently, at the time E becomes a disqualified person with
respect to B, Company X also becomes a disqualified person with
respect to B (see §53.4958- 3T(b)(2)(A)). E, acting on behalf
of Hospital B as chief operating officer, enters into a contract
with Company X under which Company X will provide billing and
collection services to Hospital B. The initial contract exception of
paragraph (a)(3)(i) of this section does not apply to the billing
and collection services contract, because at the time that this
contractual arrangement was entered into, Company X was a
disqualified person with respect to Hospital B. Although E's
employment contract (which is an initial contract) authorizes E to
enter into hospital management arrangements on behalf of Hospital B,
the payments made to Company X are not made pursuant to E's
employment contract, but rather are made by Hospital B pursuant to a
separate contractual arrangement with Company X. Therefore, even if
payments made to Company X under the billing and collection services
contract are fixed payments (within the meaning of paragraph (a)(3)
(ii) of this section), section 4958 nonetheless applies to payments
made by Hospital B to Company X because the billing and collection
services contract itself does not constitute an initial contract
under paragraph (a)(3)(iii) of this section. Accordingly, all
payments made to Company X under the billing and collection services
contract will be evaluated under section 4958.

Example 7. Hospital C, an applicable tax-exempt organization, enters
into a contract with Company Y, under which Company Y will provide a
wide range of hospital management services to Hospital C. Upon
entering into this contractual arrangement, Company Y becomes a
disqualified person with respect to Hospital C. The contract
provides that Hospital C will pay Company Y a management fee of x
percent of adjusted gross revenue (i.e., gross revenue increased by
the cost of charity care provided to indigents) annually for a five-
year period. The management services contract specifies the cost
accounting system and the standards for indigents to be used in
calculating the cost of charity care. The cost accounting system
objectively defines the direct and indirect costs of all health care
goods and services provided as charity care. Because Company Y was
not a disqualified person with respect to Hospital C immediately
before entering into the management services contract, that contract
is an initial contract within the meaning of paragraph (a)(3)(iii)
of this section. The annual management fee paid to Company Y is
determined by a fixed formula specified in the contract, and is
therefore a fixed payment within the meaning of paragraph (a)(3)(ii)
of this section. Accordingly, section 4958 does not apply to the
annual management fee due to the initial contract exception.

Example 8. The facts are the same as in Example 7, except that the
management services contract also provides that Hospital C will
reimburse Company Y on a monthly basis for certain expenses incurred
by Company Y that are attributable to management services provided
to Hospital C (e.g., legal fees and travel expenses). These
reimbursement payments that Hospital C makes to Company Y for the
various expenses covered by the contract are not fixed payments
within the meaning of paragraph (a)(3)(ii) of this section, because
Company Y exercises discretion with respect to the amount of
expenses incurred. Therefore, any reimbursement payments that
Hospital C pays pursuant to the contract will be evaluated under
section 4958.

Example 9. X, an applicable tax-exempt organization for purposes of
section 4958, hires C to conduct scientific research. On January 1,
2000, C enters into a three-year written employment contract with X
("initial contract"). Under the terms of the contract, C is required
to work full-time at X's laboratory for a fixed annual salary of
$90,000. Immediately prior to entering into the employment contract,
C was not a disqualified person within the meaning of section
4958(f)(1) and §53.4958-3T, nor did C become a disqualified
person pursuant to the initial contract. However, two years after
joining X, C marries D, who is the child of X's president. As D's
spouse, C is a disqualified person within the meaning of section
4958(f)(1) and §53.4958-3T with respect to X. Nonetheless,
section 4958 does not apply to X's salary payments to C due to the
initial contract exception.

Example 10. The facts are the same as in Example 9, except that the
initial contract included a below-market loan provision under which
C has the unilateral right to borrow up to a specified dollar amount
from X at a specified interest rate for a specified term. After C's
marriage to D, C borrows money from X to purchase a home under the
terms of the initial contract. Section 4958 does not apply to X's
loan to C due to the initial contract exception.

Example 11. The facts are the same as in Example 9, except that
after C's marriage to D, C works only sporadically at the
laboratory, and performs no other services for X. Notwithstanding
that C fails to perform substantially C's obligations under the
initial contract, X does not exercise its right to terminate the
initial contract for nonperformance and continues to pay full salary
to C. Pursuant to paragraph (a)(3)(iv) of this section, the initial
contract exception does not apply to any payments made pursuant to
the initial contract during any taxable year of C in which C fails
to perform substantially C's obligations under the initial contract.

(4) Certain economic benefits disregarded for purposes of section
4958. The following economic benefits are disregarded for purposes
of section 4958:

(i) Nontaxable fringe benefits. An economic benefit that is excluded
from income under section 132, except any liability insurance
premium, payment, or reimbursement that must be taken into account
under §53.4958-4T(b)(1)(ii)(B)(2);

(ii) Certain economic benefits provided to a volunteer for the
organization. An economic benefit provided to a volunteer for the
organization if the benefit is provided to the general public in
exchange for a membership fee or contribution of $75 or less per
year;

(iii) Certain economic benefits provided to a member of, or donor
to, the organization. An economic benefit provided to a member of an
organization solely on account of the payment of a membership fee,
or to a donor solely on account of a contribution deductible under
section 170, if--

(A) Any non-disqualified person paying a membership fee or making a
contribution above a specified amount to the organization is given
the option of receiving substantially the same economic benefit; and

(B) The disqualified person and a significant number of non-
disqualified persons make a payment or contribution of at least the
specified amount;

(iv) Economic benefits provided to a charitable beneficiary. An
economic benefit provided to a person solely as a member of a
charitable class that the applicable tax-exempt organization intends
to benefit as part of the accomplishment of the organization's
exempt purpose; and

(v) Certain economic benefits provided to a governmental unit. Any
transfer of an economic benefit to or for the use of a governmental
unit defined in section 170(c)(1), if the transfer is for
exclusively public purposes.

(b) Valuation standards--

(1) In general. This section provides rules for determining the
value of economic benefits for purposes of section 4958.

(i) Fair market value of property. The value of property, including
the right to use property, for purposes of section 4958 is the fair
market value (i.e., the price at which property or the right to use
property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy, sell or transfer
property or the right to use property, and both having reasonable
knowledge of relevant facts).

(ii) Reasonable compensation--(A) In general. The value of services
is the amount that would ordinarily be paid for like services by
like enterprises under like circumstances (i.e., reasonable
compensation). Section 162 standards apply in determining
reasonableness of compensation, taking into account the aggregate
benefits (other than any benefits specifically disregarded under
paragraph (a)(4) of this section) provided to a person and the rate
at which any deferred compensation accrues. The fact that a bonus or
revenue-sharing arrangement is subject to a cap is a relevant factor
in determining the reasonableness of compensation. The fact that a
State or local legislative or agency body or court has authorized or
approved a particular compensation package paid to a disqualified
person is not determinative of the reasonableness of compensation
for purposes of section 4958.

(b) Items included in determining the value of compensation for
purposes of determining reasonableness under section 4958. Except
for economic benefits that are disregarded for purposes of section
4958 under paragraph (a)(4) of this section, compensation for
purposes of determining reasonableness under section 4958 includes
all economic benefits provided by an applicable tax-exempt
organization in exchange for the performance of services. These
benefits include, but are not limited to--

(1) All forms of cash and noncash compensation, including salary,
fees, bonuses, severance payments, and deferred and noncash
compensation described in §53.4958-1T(e)(2);

(2) Unless excludable from income as a de minimis fringe benefit
pursuant to section 132(a)(4), the payment of liability insurance
premiums for, or the payment or reimbursement by the organization
of--

(i) Any penalty, tax, or expense of correction owed under section
4958;

(ii) Any expense not reasonably incurred by the person in connection
with a civil judicial or civil administrative proceeding arising out
of the person's performance of services on behalf of the applicable
tax-exempt organization; or

(iii) Any expense resulting from an act or failure to act with
respect to which the person has acted willfully and without
reasonable cause; and

(3) All other compensatory benefits, whether or not included in
gross income for income tax purposes, including payments to welfare
benefit plans, such as plans providing medical, dental, life
insurance, severance pay, and disability benefits, and both taxable
and nontaxable fringe benefits (other than fringe benefits described
in section 132), including expense allowances or reimbursements, and
foregone interest on loans.

(c) Inclusion in compensation for reasonableness determination does
not govern income tax treatment. The determination of whether any
item listed in paragraph (b)(1)(ii)(B) of this section is included
in the disqualified person's gross income for income tax purposes is
made on the basis of the provisions of chapter 1 of Subtitle A of
the Internal Revenue Code, without regard to whether the item is
taken into account for purposes of determining reasonableness of
compensation under section 4958.

(2) Timing of reasonableness determination--

(i) In general. The facts and circumstances to be taken into
consideration in determining reasonableness of a fixed payment
(within the meaning of paragraph (a)(3)(ii) of this section) are
those existing on the date the parties enter into the contract
pursuant to which the payment is made. However, in the event of
substantial non-performance, reasonableness is determined based on
all facts and circumstances, up to and including circumstances as of
the date of payment. In the case of a payment that is not a fixed
payment under a contract, reasonableness is determined based on all
facts and circumstances, up to and including circumstances as of the
date of payment. In no event shall circumstances existing at the
date when the payment is questioned be considered in making a
determination of the reasonableness of the payment.

(ii) Treatment as a new contract. For purposes of paragraph (b)(2)
(i) of this section, a written binding contract that provides that
the contract is terminable or subject to cancellation by the
applicable tax-exempt organization without the other party's consent
and without substantial penalty to the organization is treated as a
new contract as of the earliest date that any such termination or
cancellation, if made, would be effective. Additionally, if the
parties make a material change to a contract (within the meaning of
paragraph (a)(3)(v) of this section), it is treated as a new
contract as of the date the material change is effective.

(iii) Examples. The following examples illustrate the timing of the
reasonableness determination under the rules of this paragraph (b)
(2): Example 1. G is an applicable tax-exempt organization for
purposes of section 4958. H is an employee of G and a disqualified
person with respect to G. H's new multi-year employment contract
provides for payment of a salary and provision of specific benefits
pursuant to a qualified pension plan under Internal Revenue Code
section 401(a) and an accident and health plan that meets the
requirements of section 105(h)(2). The contract provides that H's
salary will be adjusted by the increase in the Consumer Price Index
(CPI) for the prior year. The contributions G makes to the qualified
pension plan are equal to the maximum amount G is permitted to
contribute under the rules applicable to qualified plans. Under
these facts, all items comprising H's total compensation are treated
as fixed payments within the meaning of paragraph (a)(3)(ii) of this
section.Therefore, the reasonableness of H's compensation is
determined based on the circumstances existing at the time G and H
enter into the employment contract.

Example 2. N is an applicable tax-exempt organization for purposes
of section 4958. On January 2, N's governing body enters into a new
one-year employment contract with K, its executive director, who is
a disqualified person with respect to N. The contract provides that
K will receive a specified amount of salary, contributions to a
qualified pension plan under Internal Revenue Code section 401(a),
and other benefits pursuant to a section 125 cafeteria plan. In
addition, the contract provides that N's governing body may, in its
discretion, declare a bonus to be paid to K at any time during the
year covered by the contract. K's salary and other specified
benefits constitute fixed payments within the meaning of paragraph
(a)(3)(ii) of this section. Therefore, the reasonableness of those
economic benefits is determined on the date when the contract was
made. However, because the bonus payment is not a fixed payment
within the meaning of paragraph (a)(3)(ii) of this section, the
determination of whether any bonus awarded to N is reasonable must
be made based on all facts and circumstances (including all payments
and consideration exchanged between the parties), up to and
including circumstances as of the date of payment of the bonus.

(c) Establishing intent to treat economic benefit as consideration
for the performance of services--

(1) In general. An economic benefit is not treated as consideration
for the performance of services unless the organization providing
the benefit clearly indicates its intent to treat the benefit as
compensation when the benefit is paid. Except as provided in
paragraph (c)(2) of this section, an applicable tax-exempt
organization (or entity controlled by an applicable tax-exempt
organization, within the meaning of paragraph (a)(2)(ii)(B) of this
section) is treated as clearly indicating its intent to provide an
economic benefit as compensation for services only if the
organization provides written substantiation that is contemporaneous
with the transfer of the economic benefit at issue. If an
organization fails to provide this contemporaneous substantiation,
any services provided by the disqualified person will not be treated
as provided in consideration for the economic benefit for purposes
of determining the reasonableness of the transaction.

(2) Nontaxable benefits. For purposes of section 4958(c)(1)(A) and
this section, an applicable tax-exempt organization is not required
to indicate its intent to provide an economic benefit as
compensation for services if the economic benefit is excluded from
the disqualified person's gross income for income tax purposes on
the basis of the provisions of chapter 1 of Subtitle A of the
Internal Revenue Code. Examples of these benefits include, but are
not limited to, employer-provided health benefits and contributions
to a qualified pension, profit-sharing, or stock bonus plan under
Internal Revenue Code section 401(a), and benefits described in
sections 127 and 137. However, except for economic benefits that are
disregarded for purposes of section 4958 under paragraph (a)(4) of
this section, all compensatory benefits (regardless of the federal
income tax treatment) provided by an organization in exchange for
the performance of services are taken into account in determining
the reasonableness of a person's compensation for purposes of
section 4958.

(3) Contemporaneous substantiation--

(i) Reporting of benefit. An applicable tax-exempt organization
provides contemporaneous written substantiation of its intent to
provide an economic benefit as compensation if--

(A) The organization reports the economic benefit as compensation on
an original Federal tax information return with respect to the
payment (e.g., Form W-2 or 1099) or with respect to the organization
(e.g., Form 990), or on an amended Federal tax information return
filed prior to the commencement of an Internal Revenue Service
examination of the applicable tax-exempt organization or the
disqualified person for the taxable year in which the transaction
occurred (as determined under §53.4958-1T(e)); or

(B) The recipient disqualified person reports the benefit as income
on the person's original Federal tax return (e.g., Form 1040), or on
the person's amended Federal tax return filed prior to the
commencement of an Internal Revenue Service examination described in
paragraph (b)(3)(i)(A) of this section.

(ii) Other evidence of contemporaneous substantiation. In addition,
other written contemporaneous evidence may be used to demonstrate
that the appropriate decision-making body or an authorized officer
approved a transfer as compensation for services in accordance with
established procedures, including an approved written employment
contract executed on or before the date of the transfer, or
documentation satisfying the requirements of §53.4958-6T(a)(3)
indicating that an authorized body approved the transfer as
compensation for services on or before the date of the transfer.

(iii) Failure to report due to reasonable cause. If an applicable
tax-exempt organization's failure to report an economic benefit as
required under the Internal Revenue Code is due to reasonable cause
(within the meaning §301.6724-1 of this chapter), then the
organization will be treated as having clearly indicated its intent
to provide an economic benefit as compensation for services. To show
that its failure to report an economic benefit that should have been
reported on an information return was due to reasonable cause, an
applicable tax-exempt organization must establish that there were
significant mitigating factors with respect to its failure to report
(as described in §301.6724-1(b) of this chapter), or the
failure arose from events beyond the organization's control (as
described in §301.6724-1(c) of this chapter), and that the
organization acted in a responsible manner both before and after the
failure occurred (as described in §301.6724-1(d) of this
chapter).

(4) Examples. The following examples illustrate the requirement that
an organization contemporaneously substantiate its intent to provide
an economic benefit as compensation for services, as defined in
paragraph (c) of this section: Example 1. G is an applicable tax-
exempt organization for purposes of section 4958. G hires an
individual contractor, P, who is also the child of a disqualified
person of G, to design a computer program for it. G executes a
contract with P for that purpose in accordance with G's established
procedures, and pays P $1,000 during the year pursuant to the
contract. Before January 31 of the next year, G reports the full
amount paid to P under the contract on a Form 1099 filed with the
Internal Revenue Service. G will be treated as providing
contemporaneous written substantiation of its intent to provide the
$1,000 paid to P as compensation for the services P performed under
the contract by virtue of either the Form 1099 filed with the
Internal Revenue Service reporting the amount, or by virtue of the
written contract executed between G and P.

Example 2. G is an applicable tax-exempt organization for purposes
of section 4958. D is the chief operating officer of G, and a
disqualified person with respect to G. D receives a bonus at the end
of the year. G's accounting department determines that the bonus is
to be reported on D's Form W-2. Due to events beyond G's control,
the bonus is not reflected on D's Form W-2. As a result, D fails to
report the bonus on his individual income tax return. G acts to
amend Forms W-2 affected as soon as G is made aware of the error
during an Internal Revenue Service examination. G's failure to
report the bonus on an information return issued to D arose from
events beyond G's control, and G acted in a responsible manner both
before and after the failure occurred. Thus, because G had
reasonable cause (within the meaning §301.6724-1 of this
chapter) for failing to report D's bonus, G will be treated as
providing contemporaneous written substantiation of its intent to
provide the bonus as compensation for services when paid.
§53.4958-5T Transaction in which the amount of the economic
benefit is determined in whole or in part by the revenues of one or
more activities of the organization (temporary). [Reserved]
§53.4958-6T Rebuttable presumption that a transaction is not an
excess benefit transaction (temporary).

(a) In general. Payments under a compensation arrangement are
presumed to be reasonable, and a transfer of property, or the right
to use property, is presumed to be at fair market value, if the
following conditions are satisfied--

(1) The compensation arrangement or the terms of the property
transfer are approved in advance by an authorized body of the
applicable tax-exempt organization (or an entity controlled by the
organization with the meaning of §53.4958- 4T(a)(2)(ii)(B))
composed entirely of individuals who do not have a conflict of
interest (within the meaning of paragraph (c)(1)(iii) of this
section) with respect to the compensation arrangement or property
transfer, as described in paragraph (c)(1) of this section;

(2) The authorized body obtained and relied upon appropriate data as
to comparability prior to making its determination, as described in
paragraph (c)(2) of this section; and

(3) The authorized body adequately documented the basis for its
determination concurrently with making that determination, as
described in paragraph (c)(3) of this section.

(b) Rebutting the presumption. If the three requirements of
paragraph (a) of this section are satisfied, then the Internal
Revenue Service may rebut the presumption that arises under
paragraph (a) of this section only if it develops sufficient
contrary evidence to rebut the probative value of the comparability
data relied upon by the authorized body. With respect to any fixed
payment (within the meaning of §53.4958-4T(a)(3)(ii)), rebuttal
evidence is limited to evidence relating to facts and circumstances
existing on the date the parties enter into the contract pursuant to
which the payment is made (except in the event of substantial
nonperformance). With respect to all other payments (including non-
fixed payments subject to a cap, as described in paragraph (d)(2) of
this section), rebuttal evidence may include facts and circumstances
up to and including the date of payment. See §53.4958-4T(b)(2)
(i).

(c) Requirements for invoking rebuttable presumption--(1) Approval
by an authorized body--

(i) In general. An authorized body means--

(A) The governing body (i.e., the board of directors, board of
trustees, or equivalent controlling body) of the organization;

(B) A committee of the governing body, which may be composed of any
individuals permitted under State law to serve on such a committee,
to the extent that the committee is permitted by State law to act on
behalf of the governing body; or

(C) To the extent permitted under State law, other parties
authorized by the governing body of the organization to act on its
behalf by following procedures specified by the governing body in
approving compensation arrangements or property transfers.

(ii) Individuals not included on authorized body. For purposes of
determining whether the requirements of paragraph (a) of this
section have been met with respect to a specific compensation
arrangement or property transfer, an individual is not included on
the authorized body when it is reviewing a transaction if that
individual meets with other members only to answer questions, and
otherwise recuses himself or herself from the meeting and is not
present during debate and voting on the compensation arrangement or
property transfer.

(iii) Absence of conflict of interest. A member of the authorized
body does not have a conflict of interest with respect to a
compensation arrangement or property transfer only if the member--

(A) Is not a disqualified person participating in or economically
benefitting from the compensation arrangement or property transfer,
and is not a member of the family of any such disqualified person,
as described in section 4958(f)(4) or §53.4958- 3T(b)(1);

(B) Is not in an employment relationship subject to the direction or
control of any disqualified person participating in or economically
benefitting from the compensation arrangement or property transfer;

(C) Does not receive compensation or other payments subject to
approval by any disqualified person participating in or economically
benefitting from the compensation arrangement or property transfer;

(D) Has no material financial interest affected by the compensation
arrangement or property transfer; and

(E) Does not approve a transaction providing economic benefits to
any disqualified person participating in the compensation
arrangement or property transfer, who in turn has approved or will
approve a transaction providing economic benefits to the member.

(2) Appropriate data as to comparability--

(i) In general. An authorized body has appropriate data as to
comparability if, given the knowledge and expertise of its members,
it has information sufficient to determine whether, under the
standards set forth in §53.4958-4T(b), the compensation
arrangement in its entirety is reasonable or the property transfer
is at fair market value. In the case of compensation, relevant
information includes, but is not limited to, compensation levels
paid by similarly situated organizations, both taxable and tax-
exempt, for functionally comparable positions; the availability of
similar services in the geographic area of the applicable tax-exempt
organization; current compensation surveys compiled by independent
firms; and actual written offers from similar institutions competing
for the services of the disqualified person. In the case of
property, relevant information includes, but is not limited to,
current independent appraisals of the value of all property to be
transferred; and offers received as part of an open and competitive
bidding process.

(ii) Special rule for compensation paid by small organizations. For
organizations with annual gross receipts (including contributions)
of less than $1 million reviewing compensation arrangements, the
authorized body will be considered to have appropriate data as to
comparability if it has data on compensation paid by three
comparable organizations in the same or similar communities for
similar services. No inference is intended with respect to whether
circumstances falling outside this safe harbor will meet the
requirement with respect to the collection of appropriate data.

(iii) Application of special rule for small organizations. For
purposes of determining whether the special rule for small
organizations described in paragraph (c)(2)(ii) of this section
applies, an organization may calculate its annual gross receipts
based on an average of its gross receipts during the three prior
taxable years. If any applicable tax-exempt organization is
controlled by or controls another entity (as defined in
§53.4958-4T(a)(2)(ii)(B)), the annual gross receipts of such
organizations must be aggregated to determine applicability of the
special rule stated in paragraph (c)(2)(ii) of this section.

(iv) Examples. The following examples illustrate the rules for
appropriate data as to comparability for purposes of invoking the
rebuttable presumption of reasonableness described in this section.
In all examples, compensation refers to the aggregate value of all
benefits provided in exchange for services. The examples are as
follows: Example 1. Z is a university that is an applicable tax-
exempt organization for purposes of section 4958. Z is negotiating a
new contract with Q, its president, because the old contract will
expire at the end of the year. In setting Q's compensation for its
president at $600x per annum, the executive committee of the Board
of Trustees relies solely on a national survey of compensation for
university presidents that indicates university presidents receive
annual compensation in the range of $100x to $700x; this survey does
not divide its data by any criteria, such as the number of students
served by the institution, annual revenues, academic ranking, or
geographic location. Although many members of the executive
committee have significant business experience, none of the members
has any particular expertise in higher education compensation
matters. Given the failure of the survey to provide information
specific to universities comparable to Z, and because no other
information was presented, the executive committee's decision with
respect to Q's compensation was not based upon appropriate data as
to comparability.

Example 2. The facts are the same as Example 1, except that the
national compensation survey divides the data regarding compensation
for university presidents into categories based on various
university-specific factors, including the size of the institution
(in terms of the number of students it serves and the amount of its
revenues) and geographic area. The survey data shows that university
presidents at institutions comparable to and in the same geographic
area as Z receive annual compensation in the range of $200x to
$300x. The executive committee of the Board of Trustees of Z relies
on the survey data and its evaluation of Q's many years of service
as a tenured professor and high-ranking university official at Z in
setting Q's compensation at $275x annually. The data relied upon by
the executive committee constitutes appropriate data as to
comparability.

Example 3. X is a tax-exempt hospital that is an applicable tax-
exempt organization for purposes of section 4958. Before renewing
the contracts of X's chief executive officer and chief financial
officer, X's governing board commissioned a customized compensation
survey from an independent firm that specializes in consulting on
issues related to executive placement and compensation. The survey
covered executives with comparable responsibilities at a significant
number of taxable and tax-exempt hospitals. The survey data are
sorted by a number of different variables, including the size of the
hospitals and the nature of the services they provide, the level of
experience and specific responsibilities of the executives, and the
composition of the annual compensation packages. The board members
were provided with the survey results, a detailed written analysis
comparing the hospital's executives to those covered by the survey,
and an opportunity to ask questions of a member of the firm that
prepared the survey. The survey, as prepared and presented to X's
board, constitutes appropriate data as to comparability.

Example 4. The facts are the same as Example 3, except that one year
later, X is negotiating a new contract with its chief executive
officer. The governing board of X has no information indicating that
the relevant market conditions have changed or that the results of
the prior year's survey are no longer valid. Therefore, X may
continue to rely on the independent compensation survey prepared for
the prior year in setting annual compensation under the new
contract.

Example 5. W is a local repertory theater and an applicable tax-
exempt organization for purposes of section 4958. W has had annual
gross receipts ranging from $400,000 to $800,000 over its past three
taxable years. In determining the next year's compensation for W's
artistic director, the board of directors of W relies on data
compiled from a telephone survey of three other unrelated repertory
theaters of similar size in similar communities. A member of the
board drafts a brief written summary of the annual compensation
information obtained from this informal survey. The annual
compensation information obtained in the telephone survey is
appropriate data as to comparability.

(3) Documentation--

(i) For a decision to be documented adequately, the written or
electronic records of the authorized body must note--

(A) The terms of the transaction that was approved and the date it
was approved;

(B) The members of the authorized body who were present during
debate on the transaction that was approved and those who voted on
it;

(C) The comparability data obtained and relied upon by the
authorized body and how the data was obtained; and

(D) Any actions taken with respect to consideration of the
transaction by anyone who is otherwise a member of the authorized
body but who had a conflict of interest with respect to the
transaction.

(ii) If the authorized body determines that reasonable compensation
for a specific arrangement or fair market value in a specific
property transfer is higher or lower than the range of comparability
data obtained, the authorized body must record the basis for its
determination. For a decision to be documented concurrently, records
must be prepared before the later of the next meeting of the
authorized body or 60 days after the final action or actions of the
authorized body are taken. Records must be reviewed and approved by
the authorized body as reasonable, accurate and complete within a
reasonable time period thereafter.

(d) No presumption with respect to non-fixed payments until amounts
are determined--

(1) In general. Except as provided in paragraph (d)(2) of this
section, in the case of a payment that is not a fixed payment
(within the meaning of §53.4958- 4T(a)(3)(ii)), the rebuttable
presumption of this section arises only after the exact amount of
the payment is determined, or a fixed formula for calculating the
payment is specified, and the three requirements for the presumption
under paragraph (a) of this section subsequently are satisfied. See
§53.4958-4T(b)(2)(i).

(2) Special rule for certain non-fixed payments subject to a cap. If
the authorized body approves an employment contract with a
disqualified person that includes a non-fixed payment (such as a
discretionary bonus) subject to a specified cap, the authorized body
may establish a rebuttable presumption with respect to the non-fixed
payment at the time the employment contract is entered into if--

(i) Prior to approving the contract, the authorized body obtains
appropriate comparability data indicating that a fixed payment of up
to a certain amount to the particular disqualified person would
represent reasonable compensation;

(ii) The maximum amount payable under the contract (taking into
account both fixed and non-fixed payments) does not exceed the
amount referred to in paragraph (d)(2)(i) of this section; and

(iii) The other requirements for the rebuttable presumption of
reasonableness under paragraph (a) of this section are satisfied.

(e) No inference from absence of presumption. The fact that a
transaction between an applicable tax-exempt organization and a
disqualified person is not subject to the presumption described in
this section neither creates any inference that the transaction is
an excess benefit transaction, nor exempts or relieves any person
from compliance with any federal or state law imposing any
obligation, duty, responsibility, or other standard of conduct with
respect to the operation or administration of any applicable tax-
exempt organization.

(f) Period of reliance on rebuttable presumption. Except as provided
in paragraph (d) of this section with respect to non-fixed payments,
the rebuttable presumption applies to all payments made or
transactions completed in accordance with a contract, provided that
the provisions of paragraph (a) of this section were met at the time
the parties entered into the contract. §53.4958-7T Correction
(temporary).

(a) In general. An excess benefit transaction is corrected by
undoing the excess benefit to the extent possible, and taking any
additional measures necessary to place the applicable tax-exempt
organization involved in the excess benefit transaction in a
financial position not worse than that in which it would be if the
disqualified person were dealing under the highest fiduciary
standards. Paragraph (b) of this section describes the acceptable
forms of correction. Paragraph (c) of this section defines the
correction amount. Paragraph (d) of this section describes
correction where a contract has been partially performed. Paragraph
(e) of this section describes correction where the applicable tax-
exempt organization involved in the transaction has ceased to exist
or is no longer tax-exempt. Paragraph (f) of this section provides
examples illustrating correction.

(b) Form of correction--(1) Cash or cash equivalents. Except as
provided in paragraphs (b)(3) and (4) of this section, a
disqualified person corrects an excess benefit only by making a
payment in cash or cash equivalents, excluding payment by a
promissory note, to the applicable tax-exempt organization equal to
the correction amount, as defined in paragraph (c) of this section.

(2) Anti-abuse rule. A disqualified person will not satisfy the
requirements of paragraph (b)(1) of this section if the Commissioner
determines that the disqualified person engaged in one or more
transactions with the applicable tax-exempt organization to
circumvent the requirements of this correction section, and as a
result, the disqualified person effectively transferred property
other than cash or cash equivalents.

(3) Special rule relating to nonqualified deferred compensation. If
an excess benefit transaction results, in whole or in part, from the
vesting (as described in §53.4958-1T(e)(2)) of benefits
provided under a nonqualified deferred compensation plan, then, to
the extent that such benefits have not yet been distributed to the
disqualified person, the disqualified person may correct the portion
of the excess benefit resulting from such undistributed deferred
compensation by relinquishing any right to receive such benefits
(including any earnings thereon).

(4) Return of specific property--

(i) In general. A disqualified person may, with the agreement of the
applicable tax-exempt organization, make a payment by returning
specific property previously transferred in the excess benefit
transaction. In this case, the disqualified person is treated as
making a payment equal to the lesser of--

(A) The fair market value of the property determined on the date the
property is returned to the organization; or

(B) The fair market value of the property on the date the excess
benefit transaction occurred.

(ii) Payment not equal to correction amount. If the payment
described in paragraph (b)(4)(i) of this section is less than the
correction amount (as described in paragraph (c) of this section),
the disqualified person must make an additional cash payment to the
organization equal to the difference. Conversely, if the payment
described in paragraph (b)(4)(i) of this section exceeds the
correction amount (as described in paragraph (c) of this section),
the organization may make a cash payment to the disqualified person
equal to the difference.

(iii) Disqualified person may not participate in decision. Any
disqualified person who received an excess benefit from the excess
benefit transaction may not participate in the applicable tax-exempt
organization's decision whether to accept the return of specific
property under paragraph (b)(4)(i) of this section.

(c) Correction amount. The correction amount with respect to an
excess benefit transaction equals the sum of the excess benefit (as
defined in §53.4958-1T(b)) and interest on the excess benefit.
The amount of the interest charge for purposes of this section is
determined by multiplying the excess benefit by an interest rate,
compounded annually, for the period from the date the excess benefit
transaction occurred (as defined in §53.4958-1T(e)) to the date
of correction. The interest rate used for this purpose must be a
rate that equals or exceeds the applicable Federal rate (AFR),
compounded annually, for the month in which the transaction
occurred. The period from the date the excess benefit transaction
occurred to the date of correction is used to determine whether the
appropriate AFR is the Federal short-term rate, the Federal mid-term
rate, or the Federal long-term rate. See section 1274(d)(1)(A).

(d) Correction where contract has been partially performed. If the
excess benefit transaction arises under a contract that has been
partially performed, termination of the contractual relationship
between the organization and the disqualified person is not required
in order to correct. However, the parties may need to modify the
terms of any ongoing contract to avoid future excess benefit
transactions.

(e) Correction in the case of an applicable tax-exempt organization
that has ceased to exist, or is no longer tax-exempt--

(1) In general. A disqualified person must correct an excess benefit
transaction in accordance with this paragraph where the applicable
tax-exempt organization that engaged in the transaction no longer
exists or is no longer described in section 501(c)(3) or (4) and
exempt from tax under section 501(a).

(2) Section 501(c)(3) organizations. In the case of an excess
benefit transaction with a section 501(c)(3) applicable tax-exempt
organization, the disqualified person must pay the correction
amount, as defined in paragraph (c)of this section, to another
organization described in section 501(c)(3) and exempt from tax
under section 501(a) in accordance with the dissolution clause
contained in the constitutive documents of the applicable tax-exempt
organization involved in the excess benefit transaction, provided
that the other organization is not related to the disqualified
person.

(3) Section 501(c)(4) organizations. In the case of an excess
benefit transaction with a section 501(c)(4) applicable tax-exempt
organization, the disqualified person must pay the correction
amount, as defined in paragraph (c)of this section, to a successor
section 501(c)(4) organization or, if no tax-exempt successor, to
any section 501(c)(3) or other section 501(c)(4) organization not
related to the disqualified person.

(f) Examples. The following examples illustrate the principles of
this section describing the requirements of correction: Example 1. W
is an applicable tax-exempt organization for purposes of section
4958. D is a disqualified person with respect to W. W employed D in
1999 and made payments totaling $12t to D as compensation throughout
the taxable year. The fair market value of D's services in 1999 was
$7t. Thus, D received excess compensation in the amount of $5t, the
excess benefit for purposes of section 4958. In accordance with
§53.4958-1T(e)(1), the excess benefit transaction with respect
to the series of compensatory payments during 1999 is deemed to
occur on December 31, 1999, the last day of D's taxable year. In
order to correct the excess benefit transaction on June 30, 2002, D
must pay W, in cash or cash equivalents, excluding payment with a
promissory note, $5t (the excess benefit) plus interest on $5t for
the period from the date the excess benefit transaction occurred to
the date of correction (i.e., December 31, 1999, to June 30, 2002).
Because this period is not more than three years, the interest rate
D must use to determine the interest on the excess benefit must
equal or exceed the short-term AFR, compounded annually, for
December, 1999 (5.74%, compounded annually).

Example 2. X is an applicable tax-exempt organization for purposes
of section 4958. B is a disqualified person with respect to X. On
January 1, 2000, B paid X $6v for Property F. Property F had a fair
market value of $10v on January 1, 2000. Thus, the sales transaction
on that date provided an excess benefit to B in the amount of $4v.
In order to correct the excess benefit on July 5, 2005, B pays X, in
cash or cash equivalents, excluding payment with a promissory note,
$4v (the excess benefit) plus interest on $4v for the period from
the date the excess benefit transaction occurred to the date of
correction (i.e., January 1, 2000, to July 5, 2005). Because this
period is over three but not over nine years, the interest rate B
must use to determine the interest on the excess benefit must equal
or exceed the mid-term AFR, compounded annually, for January, 2000
(6.21%, compounded annually).

Example 3. The facts are the same as in Example 2, except that B
offers to return Property F. X agrees to accept the return of
Property F, a decision in which B does not participate. Property F
has declined in value since the date of the excess benefit
transaction. On July 5, 2005, the property has a fair market value
of $9v. For purposes of correction, B's return of Property F to X is
treated as a payment of $9v, the fair market value of the property
determined on the date the property is returned to the organization.
If $9v is greater than the correction amount ($4v plus interest on
$4v at a rate that equals or exceeds 6.21%, compounded annually, for
the period from January 1, 2000, to July 5, 2005), then X may make a
cash payment to B equal to the difference.

Example 4. The facts are the same as in Example 3, except that
Property F has increased in value since January 1, 2000, the date
the excess benefit transaction occurred, and on July 5, 2005, has a
fair market value of $13v. For purposes of correction, B's return of
Property F to X is treated as a payment of $10v, the fair market
value of the property on the date the excess benefit transaction
occurred. If $10v is greater than the correction amount ($4v plus
interest on $4v at a rate that equals or exceeds 6.21%, compounded
annually, for the period from January 1, 2000, to July 5, 2005),
then X may make a cash payment to B equal to the difference.

Example 5. The facts are the same as in Example 2. Assume that the
correction amount B paid X in cash on July 5, 2005, was $5.58v. On
July 4, 2005, X loaned $5.58v to B, in exchange for a promissory
note signed by B in the amount of $5.58v, payable with interest at a
future date. These facts indicate that B engaged in the loan
transaction to circumvent the requirement of this section that
(except as provided in paragraph (b)(3) or (4) of this section), the
correction amount must be paid only in cash or cash equivalents. As
a result, the Commissioner may determine that B effectively
transferred property other than cash or cash equivalents, and
therefore did not satisfy the correction requirements of this
section. §53.4958-8T Special rules (temporary).

(a) Substantive requirements for exemption still apply. Section 4958
does not affect the substantive standards for tax exemption under
section 501(c)(3) or (4), including the requirements that the
organization be organized and operated exclusively for exempt
purposes, and that no part of its net earnings inure to the benefit
of any private shareholder or individual. Thus, regardless of
whether a particular transaction is subject to excise taxes under
section 4958, existing principles and rules may be implicated, such
as the limitation on private benefit. For example, transactions that
are not subject to section 4958 because of the initial contract
exception described in §53.4958-4T(a)(3) may, under certain
circumstances, jeopardize the organization's tax-exempt status.

(b) Interaction between section 4958 and section 7611 rules for
church tax inquiries and examinations. The procedures of section
7611 will be used in initiating and conducting any inquiry or
examination into whether an excess benefit transaction.has occurred
between a church and a disqualified person. For purposes of this
rule, the reasonable belief required to initiate a church tax
inquiry is satisfied if there is a reasonable belief that a section
4958 tax is due from a disqualified person with respect to a
transaction involving a church. See §301.7611-1 Q&A 19 of this
chapter.

(c) Three year duration of these temporary regulations. Sections
53.4958-1T through 53.4958-8T will cease to apply on January 9,
2004. §53.4963-1 [Amended ] Par. 3. In §53.4963-1,
paragraphs (a), (b), and (c) are amended by adding the reference
"4958," immediately after the reference "4955," in each place it
appears. PART 301--PROCEDURE AND ADMINISTRATION Par. 4. The
authority citation for part 301 continues to read in part as
follows: Authority: 26 U.S.C. 7805 * * * §301.6213-1 [Amended ]
Par. 5. In §301.6213-1, paragraph (e) is amended by adding the
reference "4958," immediately after the reference "4955," in the
first sentence. §301.6501(e)-1 [Amended ] Par. 6. Section
301.6501(e)-1 is amended as follows:

1. Paragraph (c)(3)(ii), first and second sentences are amended by
removing the language "or trust" and adding "trust, or other
organization" in its place.

2. Paragraph (c)(3)(ii), the first sentence is amended by removing
the language "and 4953" and adding "4953, and 4958" in its place.
§301.6501(n)-1 [Amended ] Par. 7. Section 301.6501(n)-1 is
amended as follows:

1. The paragraph heading for paragraph (a) is amended by removing
the language "or trust" and adding "trust, or other organization" in
its place.

2. Paragraph (a)(1), the first sentence is amended by removing the
language "or trust" and adding "trust, or other organization" in its
place.

3. Paragraph (b), the heading and the first sentence are amended by
removing the language "or trust" and adding "trust, or other
organization" in its place. §301.7422-1 [Amended ]

Par. 8. In §301.7422-1, paragraph (a) introductory text,
paragraph (c) introductory text and paragraph (d) are amended by
adding the reference "4958," immediately after the reference
"4955,". §301.7454-2 [Amended ]

Par. 9. In §301.7454-2, paragraph (a) is amended by adding the
language "or whether an organization manager (as defined in section
4958(f)(2)) has "knowingly" participated in an excess benefit
transaction (as defined in section 4958(c))," immediately after
"4945". §301.7611-1 [Amended ]

Par. 10. In §301.7611-1, the Table of contents is amended by:

1. Adding "Application to Section 4958........19" immediately after
"Effective Date........18".

2. Adding an undesignated centerheading and Q-19 and A-19 at the end
of the section to read as follows: §301.7611-1 Questions and
answers relating to church tax inquiries and examinations.

* * * * *

Application to Section 4958

Q-19: When do the church tax inquiry and examination procedures
described in section 7611 apply to a determination of whether there
was an excess benefit transaction described in section 4958?

A-19: See §53.4958-7(b) of this chapter for rules governing the
interaction between section 4958 excise taxes on excess benefit
transactions and section 7611 church tax inquiry and examination
procedures.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 11. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.

Par. 12. In §602.101, paragraph (b) is amended by adding an
entry to the table in numerical order to read as follows:
§602.101 OMB control numbers.

* * * * *

(b) * * *

____________________________________________________________________


CFR part or section where Current OMB identified and described
control No.

* * * * *

53.4958-6T
...................................................1545-1623

* * * * *

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

Approved: 12-19, 2000

Jonathan Talisman
Acting Assistant Secretary of the Treasury

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