Section 4958 of the Internal Revenue Code imposes an excise tax on excess benefit transactions between a disqualified person and an applicable tax exempt organization. The disqualified person who benefits from an excess benefit transaction is liable for the excise tax. An organizational manager may also be liable for an excise tax on the excess benefit transaction
What is an excess benefit transaction?
A transaction in which an economic benefit is provided by an applicable tax exempt organization, directly or indirectly, to or for the use of a disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration received by the organization.
What is a disqualified person?
Any person in a position to exercise substantial influence over the affairs of an applicable tax exempt organization at any time during the five-year period (look back period) ending on the date of the transaction. It also includes family members of an individual in a position to exercise substantial influence and certain 35% controlled entities.
- Based upon relevant facts and circumstances
- Includes: Voting members of the governing board; CEOs, COOs, CFOs, Treasurers, and department heads who manage a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization
Are you a Disqualified Person? Please see the Decision Tree to identify who is a “disqualified person” under Intermediate Sanctions Rules.
What is an Organization Manager?
Any officer, director, or trustee of an applicable tax-exempt organization or any other individual having similar powers or responsibilities regardless of title.
- Senior Business Administrators and Senior Managers – approving transactions
- Business Administrators and Managers
- Procurement Specialists
- Directors, Associate Directors
- Officers, Directors or Trustees
- Associate and Assistant Vice Presidents
Are you an Organization Manager? Please see the Decision Tree to identify who is a “Organization Manager” under Intermediate Sanctions Rules.
An excise tax of 25% of the excess benefit transaction is imposed on each excess benefit transaction between the organization and the Disqualified Person. The Disqualified Person is liable for the excise tax. If the 25% tax is imposed and the excess benefit is not corrected within the taxable period, an additional excess tax equal to 200% of the excess benefit is imposed.
An excise tax equal to 10% of the excess benefit (not to exceed $20,000) may be imposed on the participation of the Organization Manager in an excess benefit transaction between an applicable tax-exempt organization and a disqualified person. This tax is only imposed if:
- The 25% tax is imposed on the Disqualified Person,
- The Organization Manager knowingly participated in the transaction, and
- The manager’s participation was willful and not due to reasonable cause.