26 U.S.C. § 4965 — Excise tax on certain tax-exempt entities entering into prohibited tax shelter transactions

(a)(1)(A) If a transaction is a prohibited tax-shelter transaction when an entity described in subsection (c)(1), (2), or (3) becomes a party to it, the entity must pay the subsection (b)(1) tax for that taxable year and each later taxable year. (B) If such an entity is a party to a subsequently listed transaction at any time during a taxable year, it must pay the subsection (b)(1) tax for that year. (2) If an entity manager approves the entity’s participation in a prohibited tax-shelter transaction, or otherwise causes that participation, during the taxable year and knows or has reason to know that the transaction is prohibited, the manager must pay the subsection (b)(2) tax for that year. (b)(1)(A) For an entity, the tax for a transaction is the highest rate under section 11 multiplied by the greater of (i) the entity’s net income for the year, after taking into account other subtitle taxes on the transaction, that is attributable to the transaction—or, for a subsequently listed transaction, attributable to it and properly allocable to the period beginning on the later of the date the Secretary identifies it as a listed transaction in guidance or the first day of the taxable year—or (ii) 75 percent of the proceeds the entity received for the year that are attributable to the transaction, with the same later-period allocation rule for a subsequently listed transaction. (B) If the entity knew or had reason to know when it became a party that the transaction was prohibited, the tax is the greater of (i) 100 percent of the entity’s attributable net income for the year, after other subtitle taxes on the prohibited transaction, or (ii) 75 percent of its attributable proceeds. This subparagraph does not apply to a prohibited tax-shelter transaction the entity joined on or before the date this section was enacted. (2) An entity manager owes $20,000 for each approval or other act causing participation described in subsection (a)(2). (c) “Tax-exempt entity” means an entity that is (1) described in section 501(c) or 501(d), (2) described in section 170(c), other than the United States, (3) an Indian tribal government as defined in section 7701(a)(40), (4) described in paragraph (1), (2), or (3) of section 4979(e), (5) a program described in section 529, (6) an eligible deferred compensation plan described in section 457(b) maintained by an employer described in section 457(e)(1)(A), (7) an arrangement described in section 4973(a), or (8) a program described in section 529A. (d) “Entity manager” means, for an entity described in subsection (c)(1), (2), or (3), (1) a person with authority or responsibility similar to that of an officer, director, or trustee, and (2) for any act, the person with authority or responsibility for that act. For an entity described in subsection (c)(4), (5), (6), or (7), it means the person who approves or otherwise causes the entity to become a party to the prohibited tax-shelter transaction. (e)(1) “Prohibited tax-shelter transaction” means (i) any listed transaction or (ii) any prohibited reportable transaction. “Listed transaction” has the meaning given in section 6707A(c)(2). “Prohibited reportable transaction” means a confidential transaction or a transaction with contractual protection, as defined by regulations prescribed by the Secretary, that is a reportable transaction as defined in section 6707A(c)(1). (2) “Subsequently listed transaction” means a transaction to which a tax-exempt entity is a party and that the Secretary determines is a listed transaction after the entity became a party. It does not include a transaction that was a prohibited reportable transaction when the entity became a party. (f) The Secretary may issue regulations giving guidance on deciding how to allocate an entity’s net income or proceeds attributable to a transaction among different periods, including periods before and after the transaction is listed or before and after the date 90 days after this section’s enactment. (g) This tax is in addition to every other tax, addition to tax, or penalty imposed under this title.