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

Page 3044 TITLE 26—INTERNAL REVENUE CODE § 4958 Editorial Notes AMENDMENTS 1996—Subsec. (e). Pub. L. 104–168 substituted ‘‘sec- tions 4945 and 4958’’ for ‘‘section 4945’’ in heading and inserted ‘‘or an excess benefit for purposes of section 4958’’ before period at end of text. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1996 AMENDMENT Pub. L. 104–168, title XIII, § 1311(d)(1), (2), July 30, 1996, 110 Stat. 1478, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [enacting section 4958 of this title and amending this section and sections 4963, 6213, 7422, and 7454 of this title] (other than subsection (b)) [amending section 501 of this title] shall apply to excess benefit transactions occurring on or after September 14, 1995. ‘‘(2) BINDING CONTRACTS.—The amendments referred to in paragraph (1) shall not apply to any benefit aris- ing from a transaction pursuant to any written con- tract which was binding on September 13, 1995, and at all times thereafter before such transaction occurred.’’ EFFECTIVE DATE Pub. L. 100–203, title X, § 10712(d), Dec. 22, 1987, 101 Stat. 1330–468, provided that: ‘‘The amendments made by this section [enacting this section and amending sections 4962, 4963, 6213, 6501, 6503, 6684, 7422, and 7454 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Dec. 22, 1987].’’ Subchapter D—Failure by Certain Charitable Organizations To Meet Certain Qualification Requirements Sec. 4958. Taxes on excess benefit transactions. 4959. Taxes on failures by hospital organizations. 4960. Tax on excess tax-exempt organization execu- tive compensation. Editorial Notes PRIOR PROVISIONS A prior subchapter D, consisting of sections 4961 to 4963 of this title, was redesignated subchapter E. AMENDMENTS 2017—Pub. L. 115–97, title I, § 13602(b), Dec. 22, 2017, 131 Stat. 2159, added item 4960. 2010—Pub. L. 111–148, title IX, § 9007(b)(2), Mar. 23, 2010, 124 Stat. 857, added item 4959. § 4958. Taxes on excess benefit transactions (a) Initial taxes (1) On the disqualified person There is hereby imposed on each excess ben- efit 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 re- spect 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 per- cent of the excess benefit, unless such partici- pation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any organization manager who par- ticipated 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 trans- action 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 eco- nomic benefit is provided by an applicable tax-exempt organization directly or indi- rectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consider- ation (including the performance of services) received for providing such benefit. For pur- poses 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 ex- cess referred to in subparagraph (A). (2) Special rules for donor advised funds In the case of any donor advised fund (as de- fined in section 4966(d)(2))— (A) the term ‘‘excess benefit transaction’’ includes any grant, loan, compensation, or other similar payment from such fund to a person described in subsection (f)(7) with re- spect to such fund, and (B) the term ‘‘excess benefit’’ includes, with respect to any transaction described in subparagraph (A), the amount of any such grant, loan, compensation, or other similar payment. (3) Special rules for supporting organizations (A) In general In the case of any organization described in section 509(a)(3)— (i) the term ‘‘excess benefit transaction’’ includes— (I) any grant, loan, compensation, or other similar payment provided by such organization to a person described in subparagraph (B), and (II) any loan provided by such organi- zation to a disqualified person (other than an organization described in sub- paragraph (C)(ii)), and (ii) the term ‘‘excess benefit’’ includes, with respect to any transaction described in clause (i), the amount of any such grant, loan, compensation, or other simi- lar payment. (B) Person described A person is described in this subparagraph if such person is— Page 3045 TITLE 26—INTERNAL REVENUE CODE § 4958 (i) a substantial contributor to such or- ganization, (ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or (iii) a 35-percent controlled entity (as de- fined in section 4958(f)(3) by substituting ‘‘persons described in clause (i) or (ii) of section 4958(c)(3)(B)’’ for ‘‘persons de- scribed in subparagraph (A) or (B) of para- graph (1)’’ in subparagraph (A)(i) thereof). (C) Substantial contributor For purposes of this paragraph— (i) In general The term ‘‘substantial contributor’’ means any person who contributed or be- queathed an aggregate amount of more than $5,000 to the organization, if such amount is more than 2 percent of the total contributions and bequests received by the organization before the close of the tax- able year of the organization in which the contribution or bequest is received by the organization from such person. In the case of a trust, such term also means the cre- ator of the trust. Rules similar to the rules of subparagraphs (B) and (C) of section 507(d)(2) shall apply for purposes of this subparagraph. (ii) Exception Such term shall not include— (I) any organization described in para- graph (1), (2), or (4) of section 509(a), and (II) any organization which is treated as described in such paragraph (2) by rea- son of the last sentence of section 509(a) and which is a supported organization (as defined in section 509(f)(3)) of the or- ganization to which subparagraph (A) ap- plies. (4) Authority to include certain other private inurement To the extent provided in regulations pre- scribed 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 per- son is determined in whole or in part by the revenues of 1 or more activities of the organi- zation 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 lia- ble for such tax. (2) Limit for management With respect to any 1 excess benefit trans- action, the maximum amount of the tax im- posed by subsection (a)(2) shall not exceed $20,000. (e) Applicable tax-exempt organization For purposes of this subchapter, the term ‘‘ap- plicable tax-exempt organization’’ means— (1) any organization which (without regard to any excess benefit) would be described in paragraph (3), (4), or (29) 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 pe- riod ending on the date of the transaction. Such term shall not include a private founda- tion (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 dur- ing 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 indi- vidual described in subparagraph (A), (C) a 35-percent controlled entity, (D) any person who is described in subpara- graph (A), (B), or (C) with respect to an orga- nization described in section 509(a)(3) and or- ganized and operated exclusively for the ben- efit of, to perform the functions of, or to carry out the purposes of the applicable tax- exempt organization, (E) which involves a donor advised fund (as defined in section 4966(d)(2)), any person who is described in paragraph (7) with respect to such donor advised fund (as so defined), and (F) which involves a sponsoring organiza- tion (as defined in section 4966(d)(1)), any person who is described in paragraph (8) with respect to such sponsoring organization (as so defined). (2) Organization manager The term ‘‘organization manager’’ means, with respect to any applicable tax-exempt or- ganization, 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 organiza- tion). (3) 35-percent controlled entity (A) In general The term ‘‘35-percent controlled entity’’ means— (i) a corporation in which persons de- scribed in subparagraph (A) or (B) of para- graph (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 in- terest, and (iii) a trust or estate in which such per- sons own more than 35 percent of the bene- ficial interest. (B) Constructive ownership rules Rules similar to the rules of paragraphs (3) and (4) of section 4946(a) shall apply for pur- poses of this paragraph. Page 3046 TITLE 26—INTERNAL REVENUE CODE § 4958 (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 re- spect 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 defi- ciency 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 pos- sible, and taking any additional measures nec- essary 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, except that in the case of any correction of an excess benefit transaction described in subsection (c)(2), no amount repaid in a manner pre- scribed by the Secretary may be held in any donor advised fund. (7) Donors and donor advisors For purposes of paragraph (1)(E), a person is described in this paragraph if such person— (A) is described in section 4966(d)(2)(A)(iii), (B) is a member of the family of an indi- vidual described in subparagraph (A), or (C) is a 35-percent controlled entity (as de- fined in paragraph (3) by substituting ‘‘per- sons described in subparagraph (A) or (B) of paragraph (7)’’ for ‘‘persons described in sub- paragraph (A) or (B) of paragraph (1)’’ in sub- paragraph (A)(i) thereof). (8) Investment advisors For purposes of paragraph (1)(F)— (A) In general A person is described in this paragraph if such person— (i) is an investment advisor, (ii) is a member of the family of an indi- vidual described in clause (i), or (iii) is a 35-percent controlled entity (as defined in paragraph (3) by substituting ‘‘persons described in clause (i) or (ii) of paragraph (8)(A)’’ for ‘‘persons described in subparagraph (A) or (B) of paragraph (1)’’ in subparagraph (A)(i) thereof). (B) Investment advisor defined For purposes of subparagraph (A), the term ‘‘investment advisor’’ means, with respect to any sponsoring organization (as defined in section 4966(d)(1)), any person (other than an employee of such organization) compensated by such organization for managing the in- vestment of, or providing investment advice with respect to, assets maintained in donor advised funds (as defined in section 4966(d)(2)) owned by such organization. (Added Pub. L. 104–168, title XIII, § 1311(a), July 30, 1996, 110 Stat. 1475; amended Pub. L. 109–280, title XII, §§ 1212(a)(3), 1232(a), (b), 1242(a), (b), Aug. 17, 2006, 120 Stat. 1074, 1098, 1099, 1104; Pub. L. 110–172, § 3(i), Dec. 29, 2007, 121 Stat. 2475; Pub. L. 111–148, title I, § 1322(h)(3), Mar. 23, 2010, 124 Stat. 192; Pub. L. 115–141, div. U, title IV, § 401(a)(224), Mar. 23, 2018, 132 Stat. 1194.) Editorial Notes CODIFICATION Sections 1212(a)(3), 1232(a), (b), and 1242(a), (b) of Pub. L. 109–280, which directed the amendment of section 4958 without specifying the act to be amended, were ex- ecuted to this section, which is section 4958 of the In- ternal Revenue Code of 1986, to reflect the probable in- tent of Congress. See 2006 Amendment notes below. AMENDMENTS 2018—Subsec. (f)(1)(D). Pub. L. 115–141 substituted comma for period at end. 2010—Subsec. (e)(1). Pub. L. 111–148 substituted ‘‘para- graph (3), (4), or (29)’’ for ‘‘paragraph (3) or (4)’’. 2007—Subsec. (c)(3)(A)(i)(II). Pub. L. 110–172, § 3(i)(1), substituted ‘‘subparagraph (C)(ii)’’ for ‘‘paragraph (1), (2), or (4) of section 509(a)’’. Subsec. (c)(3)(C)(ii). Pub. L. 110–172, § 3(i)(2), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: ‘‘Such term shall not include any organization described in para- graph (1), (2), or (4) of section 509(a).’’ 2006—Subsec. (c)(2). Pub. L. 109–280, § 1232(b)(1), added par. (2). Former par. (2) redesignated (3). See Codifica- tion note above. Subsec. (c)(3). Pub. L. 109–280, § 1242(b), added par. (3). Former par. (3) redesignated (4). See Codification note above. Pub. L. 109–280, § 1232(b)(1), redesignated par. (2) as (3). See Codification note above. Subsec. (c)(4). Pub. L. 109–280, § 1242(b), redesignated par. (3) as (4). See Codification note above. Subsec. (d)(2). Pub. L. 109–280, § 1212(a)(3), substituted ‘‘$20,000’’ for ‘‘$10,000’’. See Codification note above. Subsec. (f)(1)(D). Pub. L. 109–280, § 1242(a), added sub- par. (D). Former subpar. (D) redesignated (E). See Codi- fication note above. Pub. L. 109–280, § 1232(a)(1), added subpar. (D). See Codification note above. Subsec. (f)(1)(E). Pub. L. 109–280, § 1242(a), redesig- nated subpar. (D) as (E). Former subpar. (E) redesig- nated (F). See Codification note above. Pub. L. 109–280, § 1232(a)(1), added subpar. (E). See Codification note above. Subsec. (f)(1)(F). Pub. L. 109–280, § 1242(a), redesig- nated subpar. (E) as (F). See Codification note above. Subsec. (f)(6). Pub. L. 109–280, § 1232(b)(2), inserted ‘‘, except that in the case of any correction of an excess benefit transaction described in subsection (c)(2), no amount repaid in a manner prescribed by the Secretary may be held in any donor advised fund’’ after ‘‘stand- ards’’. See Codification note above. Subsec. (f)(7), (8). Pub. L. 109–280, § 1232(a)(2), added pars. (7) and (8). See Codification note above. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2007 AMENDMENT Amendment by Pub. L. 110–172 effective as if included in the provisions of the Pension Protection Act of 2006, Pub. L. 109–280, to which such amendment relates, see section 3(j) of Pub. L. 110–172, set out as a note under section 170 of this title. EFFECTIVE DATE OF 2006 AMENDMENT Amendment by section 1212(a)(3) of Pub. L. 109–280 ap- plicable to taxable years beginning after Aug. 17, 2006, Page 3047 TITLE 26—INTERNAL REVENUE CODE § 4960 see section 1212(f) of Pub. L. 109–280, set out as a note under section 4941 of this title. Pub. L. 109–280, title XII, § 1232(c), Aug. 17, 2006, 120 Stat. 1099, provided that: ‘‘The amendments made by this section [amending this section] shall apply to transactions occurring after the date of the enactment of this Act [Aug. 17, 2006].’’ Pub. L. 109–280, title XII, § 1242(c), Aug. 17, 2006, 120 Stat. 1105, provided that: ‘‘(1) SUBSECTION (a).—The amendments made by sub- section (a) [amending this section] shall apply to trans- actions occurring after the date of the enactment of this Act [Aug. 17, 2006]. ‘‘(2) SUBSECTION (b).—The amendments made by sub- section (a) [probably should be ‘‘subsection (b)’’, amending this section] shall apply to transactions oc- curring after July 25, 2006.’’ EFFECTIVE DATE Section applicable to excess benefit transactions oc- curring on or after Sept. 14, 1995, and not applicable 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 oc- curred, see section 1311(d)(1), (2) of Pub. L. 104–168, set out as an Effective Date of 1996 Amendment note under section 4955 of this title. § 4959. Taxes on failures by hospital organiza- tions If a hospital organization to which section 501(r) applies fails to meet the requirement of section 501(r)(3) for any taxable year, there is imposed on the organization a tax equal to $50,000. (Added Pub. L. 111–148, title IX, § 9007(b)(1), Mar. 23, 2010, 124 Stat. 857.) Statutory Notes and Related Subsidiaries EFFECTIVE DATE Section applicable to failures occurring after Mar. 23, 2010, see section 9007(f)(3) of Pub. L. 111–148, set out as an Effective Date of 2010 Amendment note under sec- tion 501 of this title. § 4960. Tax on excess tax-exempt organization ex- ecutive compensation (a) Tax imposed There is hereby imposed a tax equal to the product of the rate of tax under section 11 and the sum of— (1) so much of the remuneration paid (other than any excess parachute payment) by an ap- plicable tax-exempt organization for the tax- able year with respect to employment of any covered employee in excess of $1,000,000, plus (2) any excess parachute payment paid by such an organization to any covered employee. For purposes of the preceding sentence, remu- neration shall be treated as paid when there is no substantial risk of forfeiture (within the meaning of section 457(f)(3)(B)) of the rights to such remuneration. (b) Liability for tax The employer shall be liable for the tax im- posed under subsection (a). (c) Definitions and special rules For purposes of this section— (1) Applicable tax-exempt organization The term ‘‘applicable tax-exempt organiza- tion’’ means any organization which for the taxable year— (A) is exempt from taxation under section 501(a), (B) is a farmers’ cooperative organization described in section 521(b)(1), (C) has income excluded from taxation under section 115(1), or (D) is a political organization described in section 527(e)(1). (2) Covered employee For purposes of this section, the term ‘‘cov- ered employee’’ means any employee (includ- ing any former employee) of an applicable tax- exempt organization if the employee— (A) is one of the 5 highest compensated employees of the organization for the tax- able year, or (B) was a covered employee of the organi- zation (or any predecessor) for any preceding taxable year beginning after December 31, 2016. (3) Remuneration For purposes of this section: (A) In general The term ‘‘remuneration’’ means wages (as defined in section 3401(a)), except that such term shall not include any designated Roth contribution (as defined in section 402A(c)) and shall include amounts required to be in- cluded in gross income under section 457(f). (B) Exception for remuneration for medical services The term ‘‘remuneration’’ shall not in- clude the portion of any remuneration paid to a licensed medical professional (including a veterinarian) which is for the performance of medical or veterinary services by such professional. (4) Remuneration from related organizations (A) In general Remuneration of a covered employee by an applicable tax-exempt organization shall in- clude any remuneration paid with respect to employment of such employee by any re- lated person or governmental entity. (B) Related organizations A person or governmental entity shall be treated as related to an applicable tax-ex- empt organization if such person or govern- mental entity— (i) controls, or is controlled by, the orga- nization, (ii) is controlled by one or more persons which control the organization, (iii) is a supported organization (as de- fined in section 509(f)(3)) during the tax- able year with respect to the organization, (iv) is a supporting organization de- scribed in section 509(a)(3) during the tax- able year with respect to the organization, or (v) in the case of an organization which is a voluntary employees’ beneficiary asso- ciation described in section 501(c)(9), estab- lishes, maintains, or makes contributions to such voluntary employees’ beneficiary association. (C) Liability for tax In any case in which remuneration from more than one employer is taken into ac-