26 U.S.C. § 4958 — Taxes on excess benefit transactions

(a) Initial taxes. (1) A disqualified person in an excess-benefit transaction owes 25% of the excess benefit. (2) An organization manager who knowingly participates owes 10%, unless participation was not willful and was due to reasonable cause. The participating person pays the applicable tax. (b) If the initial tax applies and the excess benefit is not corrected during the taxable period, the disqualified person owes an additional 200% of the excess benefit. (c)(1)(A) An “excess benefit transaction” is one in which an applicable tax-exempt organization directly or indirectly provides an economic benefit to or for a disqualified person, and the benefit’s value exceeds the value of what the organization receives in return, including services. A benefit counts as payment for services only if the organization clearly showed that intent. (B) “Excess benefit” is that excess. (2) For a donor-advised fund^* defined in section 4966(d)(2), an excess-benefit transaction also includes a grant, loan, compensation, or similar payment to a person described in (f)(7), and the excess benefit includes that payment. (3)(A) For a section 509(a)(3) supporting organization, an excess-benefit transaction includes (i)(I) a grant, loan, compensation, or similar payment to a person in (B), and (II) a loan to a disqualified person other than an organization in (C)(ii); the excess benefit includes the amount of each such payment. (B) A person is covered if (i) a substantial contributor; (ii) a family member under (f)(4) of that contributor; or (iii) a 35%-controlled entity under (f)(3), using the substitution stated in the statute. (C)(i) A substantial contributor is someone who contributed or bequeathed more than $5,000 and more than 2% of the organization’s pre-year-end contributions and bequests for the year received; for a trust, it also includes the creator. Similar rules to section 507(d)(2)(B) and (C) apply. (ii) It excludes section 509(a)(1), (2), and (4) organizations and an organization treated as section 509(a)(2) under that section’s last sentence if it is supported by the organization in (A). (4) Regulations may include a transaction as an excess-benefit transaction when the benefit is based in whole or part on one or more activity revenues and creates impermissible inurement under section 501(c)(3) or (4). The excess benefit is the impermissible inurement. (d)(1) Multiple liable persons are each liable for the full tax under (a) or (b). (2) Management tax under (a)(2) cannot exceed $20,000 for one transaction. (e) An “applicable tax-exempt organization” is (1) an organization that, without considering excess benefit, would be described in section 501(c)(3), (4), or (29) and exempt under section 501(a), or (2) one so described at any time in the 5 years ending on the transaction date. It excludes private foundations defined in section 509(a). (f)(1) A “disqualified person” is, for a transaction: (A) someone able to exercise substantial influence over the organization at any time in the prior 5 years; (B) that person’s family member; (C) a 35%-controlled entity; (D) a person covered by (A), (B), or (C) for a section 509(a)(3) organization organized and operated exclusively for the applicable organization; (E) for a donor-advised-fund transaction, a person in (7); or (F) for a sponsoring-organization transaction, a person in (8). (2) An “organization manager” is an officer, director, trustee, or similar-power individual of the applicable organization. (3)(A) A “35%-controlled entity” is a corporation^*, partnership^*, trust, or estate in which persons in (1)(A) or (B) own more than 35% of voting power, profits interest, or beneficial interest, respectively. (B) Similar constructive-ownership rules from section 4946(a)(3) and (4) apply. (4) Family members are determined under section 4946(d), also including the individual’s brothers and sisters, whether whole or half blood, and their spouses. (5) “Taxable period” begins on the transaction date and ends on the earlier of mailing a section 6212 deficiency^* notice for the (a)(1) tax or assessment of that tax. (6) “Correction” means undoing the excess benefit as far as possible and taking measures needed to leave the organization no worse financially than if the disqualified person had used the highest fiduciary^* standards. For a (c)(2) transaction, no repayment made as the Secretary^* prescribes may be held in a donor-advised fund. (7) For (1)(E), a person is covered if (A) described in section 4966(d)(2)(A)(iii), (B) a family member of that individual, or (C) a 35%-controlled entity using the stated substitution. (8)(A) For (1)(F), a person is covered if (i) an investment advisor, (ii) that individual’s family member, or (iii) a 35%-controlled entity using the stated substitution. (B) An “investment advisor” is, for a sponsoring organization, a nonemployee whom it pays to manage investments of, or advise about, assets held in its donor-advised funds.