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26 U.S.C.A. S 4958
UNITED STATES CODE ANNOTATED
TITLE 26. INTERNAL REVENUE CODE
SUBTITLE D--MISCELLANEOUS EXCISE TAXES
CHAPTER 42--PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT ORGANIZATIONS
SUBCHAPTER D--FAILURE BY CERTAIN CHARITABLE ORGANIZATIONS TO MEET CERTAIN QUALIFICATION REQUIREMENTS
Copr. C West 1999. No Claim to Orig. U.S. Govt. Works Current through P.L. 105-394, approved 11-13-1998
S> 4958. Taxes on excess benefit transactions
(a) Initial taxes.--
(1) On the disqualified person.--There is hereby imposed on each excess benefit transaction a tax equal to 25 percent of the excess benefit. The tax imposed by this paragraph shall be paid by any disqualified person referred to in subsection (f)(1) with respect to such transaction.
(2) On the management.--In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any organization manager in the excess benefit transaction, knowing that it is such a transaction, a tax equal to 10 percent of the excess benefit, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any organization manager who participated in the excess benefit transaction.
(b) Additional tax on the disqualified person.--In any case in which an initial tax is imposed by subsection (a)(1) on an excess benefit transaction and the excess benefit involved in such transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 200 percent of the excess benefit involved. The tax imposed by this subsection shall be paid by any disqualified person referred to in subsection (f)(1) with respect to such transaction.
(c) Excess benefit transaction; excess benefit.--For purposes of this section--
(1) Excess benefit transaction.--
(A) In general.--The term "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 if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to so treat such benefit.
(B) Excess benefit.--The term "excess benefit" means the excess referred to in subparagraph (A).
(2) Authority to include certain other private inurement.--To the extent provided in regulations prescribed by the Secretary, the term "excess benefit transaction" includes any transaction in which the amount of any economic benefit provided to or for the use of a disqualified person is determined in whole or in part by the revenues of 1 or more activities of the organization but only if such transaction results in inurement not permitted under paragraph (3) or (4) of section 501(c), as the case may be. In the case of any such transaction, the excess benefit shall be the amount of the inurement not so permitted.
(d) Special rules.--For purposes of this section--
(1) Joint and several liability.--If more than 1 person is liable for any tax imposed by subsection (a) or subsection (b), all such persons shall be jointly and severally liable for such tax.
(2) Limit for management.--With respect to any 1 excess benefit transaction, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $10,000.
(e) Applicable tax-exempt organization.--For purposes of this subchapter, the term "applicable tax-exempt organization" means--
(1) any organization which (without regard to any excess benefit) would be described in paragraph (3) or (4) of section 501(c) and exempt from tax under section 501(a), and
(2) any organization which was described in paragraph (1) at any time during the 5-year period ending on the date of the transaction.
Such term shall not include a private foundation (as defined in section 509(a)).
(f) Other definitions.--For purposes of this section--
(1) Disqualified person.--The term "disqualified person" means, with respect to any transaction--
(A) 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.
(B) a member of the family of an individual described in subparagraph (A), and
(C) a 35-percent controlled entity.
(2) Organization manager.--The term "organization manager" means, with respect to any applicable tax-exempt organization, any officer, director, or trustee of such organization (or any individual having powers or responsibilities similar to those of officers, directors, or trustees of the organization).
(3) 35-Percent controlled entity.--
(A) In general.--The term "35-percent controlled entity" means--
(i) a corporation in which persons described in subparagraph (A) or (B) of paragraph (1) own more than 35 percent of the total combined voting power,
(ii) a partnership in which such persons own more than 35 percent of the profits interest, and
(iii) a trust or estate in which such persons own more than 35 percent of the beneficial interest.
(B) Constructive ownership rules.--Rules similar to the rules of paragraphs (3) and (4) of section 4946(a) shall apply for purposes of this paragraph.
(4) Family members.--The members of an individual's family shall be determined under section 4946(d); except that such members also shall include the brothers and sisters (whether by the whole or half blood) of the individual and their spouses.
(5) Taxable period.--The term "taxable period" means, with respect to any excess benefit transaction, the period beginning with the date on which the transaction occurs and ending on the earliest of--
(A) the date of mailing a notice of deficiency under section 6212 with respect to the tax imposed by subsection (a)(1), or
(B) the date on which the tax imposed by subsection (a)(1) is assessed.
(6) Correction.--The terms "correction" and "correct" mean, with respect to any excess benefit transaction, undoing the excess benefit to the extent possible, and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards.
CREDIT(S)
1998 Electronic Update
(Added Pub.L. 104-168, Title XIII, S 1311(a), July 30, 1996, 110 Stat. 1475.)
General Materials (GM) - References, Annotations, or Tables>
HISTORICAL AND STATUTORY NOTES
Revision Notes and Legislative Reports
1996 Acts. House Report No. 104-506, see 1996 U.S. Code Cong. and Adm. News, p. 1143.
Effective Dates
1996 Acts. Section shall apply to excess benefit transactions occurring on or after Sept. 14, 1995 and shall not apply to any benefit arising from a transaction pursuant to any written contract which was binding on Sept. 13, 1995, and at all times thereafter before such transaction occurred, see section 1311(d)(1), (2), of Pub.L. 104-168, set out as a note under section 4955 of this title.
CROSS REFERENCES
Reporting by organizations of certain excise taxes and other information, see > 26 USCA S 6033.
LIBRARY REFERENCES
Law Review and Journal Commentaries
Comments concerning new > section 4958 of the Internal Revenue Code of 1986. ABA Section of Taxation, Committee on Exempt Organizations, 50 Tax Lawyer 817 (1997). IRS closely examines insider 'excess benefit' deals. Meri-Beth Robertson, 146 N.J.L.J. S-12 (1996).
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IX.(B): PUBLIC CHARITY DEFINED
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26 U.S.C.A. S 509
UNITED STATES CODE ANNOTATED
TITLE 26. INTERNAL REVENUE CODE
SUBTITLE A--INCOME TAXES
CHAPTER 1--NORMAL TAXES AND SURTAXES
SUBCHAPTER F--EXEMPT ORGANIZATIONS
PART II--PRIVATE FOUNDATIONS Copr. C West 1999. No Claim to Orig. U.S. Govt. Works
Current through P.L. 105-394, approved 11-13-1998
S> 509. Private foundation defined
(a) General rule.--For purposes of this title, the term "private foundation" means a domestic or foreign organization described in section 501(c)(3) other than--
(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii));
(2) an organization which--
(A) normally receives more than one-third of its support in each taxable year from any combination of--
(i) gifts, grants, contributions, or membership fees, and
(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year,
from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and
(B) normally receives not more than one-third of its support in each taxable year from the sum of--
(i) gross investment income (as defined in subsection (e)) and
(ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511;
(3) an organization which--
(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2),
(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and
(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and
(4) an organization which is organized and operated exclusively for testing for public safety.
For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).
(b) Continuation of private foundation status.--For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969, or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969, or after such subsequent date, unless its status as such
is terminated under section 507.
(c) Status of organization after termination of private foundation status.-- For purposes of this part, an organization the status of which as a private foundation is terminated under section 507 shall (except as provided in section 507(b)(2)) be treated as an organization created on the day after the date of such termination.
(d) Definition of support.--For purposes of this part and chapter 42, the term "support" includes (but is not limited to)--
(1) gifts, grants, contributions, or membership fees,
(2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513),
(3) net income from unrelated business activities, whether or not such activities are carried on regularly as a trade or business,
(4) gross investment income (as defined in subsection (e)),
(5) tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and
(6) the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit referred to in section 170(c)(1) to an organization without charge.
Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any Federal, State, or local tax or any similar benefit.
(e) Definition of gross investment income.--For purposes of subsection (d), the term "gross investment income" means the gross amount of income from interest, dividends, payments with respect to securities loans (as defined in section 512(a)(5)), rents, and royalties, but not including any such income to the extent included in computing the tax imposed by section 511.
CREDIT(S)
1988 Main Volume
(Added Pub.L. 91-172, Title I, S 101(a), Dec. 30, 1969, 83 Stat. 496, and amended Pub.L. 94-81, S 3(a), Aug. 9, 1975, 89 Stat. 418; Pub.L. 95-345, S 2(a) (1), Aug. 15, 1978, 92 Stat. 481.)
General Materials (GM) - References, Annotations, or Tables>
CROSS REFERENCES
"Applicable tax-exempt organization" as not including private foundation as defined under this section for purposes of taxes on excess benefit transactions, see > 26 USCA S 4958.
Charitable contribution deductions generally, see > 26 USCA S 170.
Charitable trust unexpired non-exempt interests treated as exempt, see > 26 USCA S 4947.
Declaratory judgments relating to private foundation classifications, see > 26 USCA S 7428.
Employment not including services performed by student employed by or attending courses at organization under this section--
Federal Insurance Contributions Act, see > 26 USCA S 3121.
Social Security Act, see > 42 USCA S 410.
Grants to organizations under this section by private foundation not taxable, see > 26 USCA S 4945. Inspection of records--
Returns, see > 26 USCA S 6104.
Written determination of organization as private foundation, see > 26 USCA S 6110.
Investment income excise tax not imposed on publicly supported exempt operating private foundation, see > 26 USCA S 4940. Notice of exempt status application not required for organizations defined under this section, see > 26 USCA S 508. Personal holding company definition, organization described in this section as individual for purposes of, see > 26 USCA S 542. Political organization contributions to organizations under this section not deductible, see > 26 USCA S 527. Returns required to be filed--
Generally, see > 26 USCA S 6033.
Returns regarding liquidation, dissolution, termination, or contraction, see > 26 USCA S 6043. Transfer to, or operation as, public charity, see > 26 USCA S 507. Undistributed income of private operating foundation not taxable, see > 26 USCA S 4942. Unrelated business taxable income not including real property acquisition or improvement indebtedness of qualified organization under this section, see > 26 USCA S 514.
Works of art transferred to private foundations under this section deductible, see > 26 USCA S 2055.
LIBRARY REFERENCES
Administrative Law
Declaration of status, see West's Federal Practice Manual S 619. Private foundation, definition, see West's Federal Practice Manual S 632 et seq.
American Digest System
Private foundations, see Internal Revenue K4063.
Encyclopedias
Private foundations, see C.J.S. Internal Revenue S 425.
34 Am Jur 2d, Federal Taxation (1995) PP 19208, 20952.
34 Am Jur 2d, Federal Taxation (1996) PP 19208, 20952.
Law Review and Journal Commentaries
Alternatives to private foundations. David Wheeler Newman and Jose Silva, 16 L.A.Law. 21 (June 1993). Churches and their enviable tax status. Wendy Gerzog Shaller, > 51 U.Pitt.L.Rev. 345 (1990). Privileges & exemptions enjoyed by nonprofit organizations. Bazil Facchina, Evan A. Showell and Jan E. Stone, > 28 U.S.F.L.Rev. 85 (1993). Regulation of not-for-profit corporations. John T. Baker, 18 Ind.L.Rev. 777 (1985). Significant tax issues in hospital related joint ventures. Theodore T. Myre, Jr., > 75 Ky.L.J. 559 (1986-87). Tax-exempt entities: Achieving and maintaining special status under the Internal Revenue Service. I. Richard Gershon, > 16 Cumb.L.Rev. 301 (1985- 1986). Tax-exempt organizations: Primer for the uninitiated. Aline H. Lotter, 37 N.H.B.J. 56 (Dec.1996). Tax-exempt public charities: Increasing accountability and compliance. Robert C. DeGaudenzi, > 36 Cath.Law. 203 (1996). The official Catholic directory: Civil and canon law requirements. J. Michael Fitzgerald, > 30 Cath.Law. 107 (1986). Use of the nonprofit supporting foundation to assist governmental districts after Amendment 1. Peter C. Guthery, Kerrie A. Boese and Lisa J. Lambert, 22 Colo.Law. 685 (1993).
Texts and Treatises
20 Fed Proc L Ed, Internal Revenue SS 48:109, 48:125, 48:129, 48:130, 48:191.
15 Fed Tax Coord 2d P K-3545.
2A Estate Plan & Tax Coord, Income Tax PP 41,410, 41,440.
7 Fed Tax Coord 2d PP D-8000-8042.
2 Tax Action Coord, Tax Planning P 190-N.
24A Fed Tax Coord 2d PP U-3803, 4107.
1 Hoops, Family Estate Planning Guide 3d S 147.
Rasch, Handling Federal Estate and Gift Taxes 4th SS 6:99, 17:43.
NOTES OF DECISIONS
Generally 1
Educational organizations 8
Public charities 6
Religious organizations 7
Support organizations
Support organizations - Generally 2
Support organizations - Miscellaneous support organizations 5
Support organizations - Specification of beneficiary 3
Support organizations - Substitution of beneficiary 4
Administrative Decisions: IRS decisions available on WESTLAW. See WESTLAW Directory.
1. Generally
Tax-exempt organization is private foundation unless it comes within one of four specified exceptions. Change-All Souls Housing Corp. v. U. S., Ct.Cl.1982, > 671 F.2d 463, 229 Ct.Cl. 380.
2. Support organizations--Generally
Tax-exempt organization qualified as nonprivate, supporting organization under "organizational" and "operational" tests so as to be exempt from definition of "private foundation" where effectuation of its purposes resulted only in carrying out of specific aspect of stated purposes of supported nonprivate organization and there existed historic work relationship and identity of interest between plaintiff organization and supported organization. Change-All Souls Housing Corp. v. U. S., Ct.Cl.1982, > 671 F.2d 463, 229 Ct.Cl. 380.
For purposes of determining status of taxpayer as supporting organization for taxation purposes, organization which is merely "operated in connection with" a publicly supported organization must meet two tests; a responsiveness test which is met if supporting organization is a charitable trust and the named beneficiary can enforce an accounting, or if there is an overlap of officers so that publicly supported organization has some voice in the operation or supporting organization, and an integral part test which is satisfied if the attentiveness of the publicly supported organization to the operations of the supporting organization is assured by the nature or magnitude of the supporting organization's contributions. William F. Quarrie, Mable E. Quarrie and Margaret K. Quarrie v. C.I.R., C.A.7 1979, > 603 F.2d 1274.
3. ---- Specification of beneficiary
In order for taxpayer to have status of supporting organization rather than of private foundation, beneficiary organizations of a taxpayer must be specified by name, and such requirement is more narrowly drawn for taxpayers which are "operated in connection with" the beneficiary organizations. William F. Quarrie, Mable E. Quarrie and Margaret K. Quarrie v. C.I.R., C.A.7 1979, > 603 F.2d 1274.
Under Charitable Trust Act, trustee of testamentary trust, terms of which were drafted prior to change in federal law, was authorized to amend terms to avoid private foundation status through specification of an organization as income and principal beneficiary of trust in order to qualify as supporting organization. Flanagan State Bank v. Bromenn Healthcare, Ill.App. 4 Dist.1986, > 487 N.E.2d 1180, 94 Ill.Dec. 303, 140 Ill.App.3d 137, appeal denied.
4. ---- Substitution of beneficiary
Articles of supporting organization which is merely "operated in connection with" a publicly supported organization must without exception designate the specified beneficiary organizations by name; substitution of specified organization is permitted if possible substitutes are named or designated by class if such substitution is conditioned upon occurrence of event which is beyond control of the supporting organization. William F. Quarrie, Mable E. Quarrie and Margaret K. Quarrie v. C.I.R., C.A.7 1979, > 603 F.2d 1274.
Where will of decedent, who died in 1964, established charitable trust, which was to terminate either upon publication of designated book by organization specified in subsec. (a)(1) of this section, which organization was then to receive trust estate, or upon expiration of 21 years after death of survivor of three persons named in will, in which event trust estate was to be distributed equally between two other organizations named in will, Tax Court determined that taxpayer trust was not "supporting organization" within meaning of subsec. (a)(3) of this section, since its terms expressly empowered it to benefit organizations other than specified publicly supported organization described in subsecs. (a)(1) or (2) of this section. Trust Under Will of Mabury v. Commmissioner of Internal Revenue, U.S.Tax Ct.1983, > 80 T.C. 718.
5. ---- Miscellaneous support organizations
Tax-exempt organization which operated in conjunction with two other organizations, only one of which was publicly supported, was "operated in connection with one or more publicly supported organizations" within purview of this section governing qualification as nonprivate, supporting organization exempted from definition of "private foundation." Change-All Souls Housing Corp. v. U. S., Ct.Cl.1982, > 671 F.2d 463, 229 Ct.Cl. 380.
6. Public charities
Public charities are excepted from private foundation status for taxation purposes on theory that their exposure to public scrutiny and their dependence on public support will keep them from abuses to which private foundations are subject. William F. Quarrie, Mable E. Quarrie and Margaret K. Quarrie v. C.I.R., C.A.7 1979, > 603 F.2d 1274.
7. Religious organizations
Where petitioner, church's auxiliary formed to construct housing at church's conference and retreat center, sought declaratory judgment that it was not private foundation, Court determined petitioner was not private foundation under subsec. (a)(3) of this section, and Commissioner's silence on such classification in his final adverse determination letter did not deprive petitioner of its right to invoke jurisdiction of Court; but petitioner's classification under such subsection did not remove controversy as to its status under subsec. (a)(1) of this section, and that issue was properly before Court; moreover, petitioner was not organization described in subsec. (a)(1) of this section, since its was not church in its own right. Junaluska Assembly Housing Inc. v. C.I.R., U.S.Tax Ct.1986, > 86 T.C. 1114.
Where taxpayer applied for Service ruling that it was tax exempt as section 501(c) (3) organization and that it was not private foundation under subsec. (a) of this section on ground that it was church under section 170(b) (1) (A) (i) of this title and subsec. (a) (1) of this section, and Commissioner refused to rule that taxpayer was church but issued advance ruling that taxpayer would not be treated as private foundation, conditional upon meeting public support requirements, Tax Court denied Commissioner's motion to dismiss taxpayer's declaratory judgment action and determined Court had jurisdiction under section 7428 of this title to consider whether taxpayer was entitled to definite ruling that it was non-private foundation under subsec. (a) (1) of this section and section 170(b) (1) (A) (i) of this title, since jurisdiction is limited to actual controversies involving section 170(c) (2), 501(c) (3) of this title, subsec. (a) of this section, or section 4942(j) (3) of this title, and advance ruling was not favorable and constituted adverse ruling under subsec. (a) of this section. Friends of Society of Servants of God v. Commissioner of Internal Revenue, U.S.Tax Ct.1980, > 75 T.C. 209.
8. Educational organizations
Where taxpayer testamentary trust, a qualified tax-exempt organization created in 1968, provided scholarships for students attending Oregon colleges, with preference to those attending Northwest Christian College, Tax Court determined, on facts, that taxpayer was not liable for excise tax imposed on private foundations, since it was supporting organization, within meaning of subsec. (a)(3) of this section, which was "operated in connection with" colleges and universities in Oregon. Cockerline Memorial Fund v. C.I.R., U.S.Tax Ct.1986, > 86 T.C. 53.
Where taxpayer was charitable testamentary trust created to pay its income for college scholarships to selected graduates of Winterset high school; trustees, who were not initially connected with school system, were required under Iowa law to make annual public reports on investments and activities; and 53 students received direct aid during first 9 years of operation of trust, Tax Court determined in declaratory judgment action that, contrary to Commissioner's contention, taxpayer was a supporting organization within meaning of subsec. (a) (3) of this section and not a private foundation, since it was "operated in connection with" Winterset high school, in that it satisfied "responsiveness test" of reg. 1.509(a)-4(i) (2) and "integral part test" of reg. 1.509(a)-4(i) (3). Nellie Callahan Scholarship Fund v. Commissioner of Internal Revenue, U.S.Tax Ct.1980, > 73 T.C. 626, nonacq.,.
26 U.S.C.A. S 509
26 USCA S 509
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