Tax-Exempt Organizations

Intermediate Sanctions for Certain Tax-Exempt Organizations

Penalty excise taxes may now be imposed as an intermediate sanction when a Code 501(c)(3) or 501(c)(4) organization engages in an "excess benefit transaction".

The excise taxes are imposed on "disqualified persons" who improperly benefit from the transactions and on organization managers who knowingly participate.

A "disqualified person" is defined in Code Sec. 4958(f)(1) as any individual who is in a position to exercise substantial authority over an organization's affairs.

An "excess benefit transaction" is defined in new Code Sec. 4958(c) as transactions in which a disqualified person engages in a non-fair-market-value transaction with an organization or receives unreasonable compensation.

Generally effective for excess benefit transactions occurring on or after 9/14/95.

Private Inurement Prohibition

The Code Sec. 501(c)(3) prohibition against private inurement applies explicitly to nonprofit organizations described in Code Sec. 501(c)(4): civic leagues, social welfare organizations, and certain employee charitable organizations.

An organization described in Code Sec. 501(c)(4) is eligible for tax-exempt status only if no part of the organization's net earnings inures to the benefit of any private shareholder or individual.

Generally effective for inurements occurring on or after 9/14/95.