I

103D CONGRESS

1ST SESSION H. R. 3697

To amend the Internal Revenue Code of 1986 to impose excise taxes on

acts of self-dealing and private inurement by certain tax-exempt organizations.

IN THE HOUSE OF REPRESENTATIVES

NOVEMBER 22, 1993

Mr. STARK introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to impose

excise taxes on acts of self-dealing and private inurement

by certain tax-exempt organizations.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. EXCISE TAXES ON ACTS OF SELF-DEALING AND

4 PRIVATE INUREMENT BY CERTAIN TAX-EX5 EMPT ORGANIZATIONS.

6 (a) IN GENERAL.—Chapter 42 of the Internal Reve7 nue Code of 1986 (relating to private foundations and cer8 tain other tax-exempt organizations) is amended by redes9 ignating subchapter D as subchapter E and by inserting

10 after subchapter C the following new subchapter:
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1 ‘‘SUBCHAPTER D—ACTS OF SELF-DEALING AND PRI2 VATE INUREMENT BY CERTAIN EXEMPT ORGANIZA3 TIONS

‘‘Sec. 4958. Taxes on certain acts of self-dealing.

‘‘Sec. 4959. Taxes on private inurement.

‘‘Sec. 4960. Other definitions.

4 ‘‘SEC. 4958. TAXES ON CERTAIN ACTS OF SELF-DEALING.

5 ‘‘(a) INITIAL TAXES.—

6 ‘‘(1) ON SELF-DEALER.—There is hereby im7 posed a tax on each act of self-dealing between a

8 disqualified person and an applicable tax-exempt or9 ganization. The amount of such tax shall be 5 per10 cent of the amount involved with respect to the act

11 of self-dealing for each year (or part thereof) in the

12 taxable period. The tax imposed by this paragraph

13 shall be paid by any disqualified person (other than

14 an organization manager acting only as such) who

15 participates in the act of self-dealing.

16 ‘‘(2) ON ORGANIZATION MANAGER.—In any

17 case in which a tax is imposed by paragraph (1),

18 there is hereby imposed on the participation of any

19 organization manager in any act of self-dealing be20 tween a disqualified person and an applicable tax-ex21 empt organization, knowing that it is such an act,

22 a tax equal to 2.5 percent of the amount involved

23 with respect to such act of self-dealing for each year

24 (or part thereof) in the taxable period, unless such
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1 participation is not willful and is due to reasonable

2 cause. The tax imposed by this paragraph shall be

3 paid by any organization manager who participated

4 in the act of self-dealing.

5 ‘‘(b) ADDITIONAL TAXES.—

6 ‘‘(1) ON SELF-DEALER.—In any case in which

7 an initial tax is imposed by subsection (a)(1) on any

8 act of self-dealing between a disqualified person and

9 an applicable tax-exempt organization and such act

10 is not corrected within the taxable period, there is

11 hereby imposed a tax equal to 200 percent of the

12 amount involved. The tax imposed by this paragraph

13 shall be paid by any disqualified person (other than

14 an organization manager acting only as such) who

15 participated in the act of self-dealing.

16 ‘‘(2) ON ORGANIZATION MANAGER.—In any

17 case in which an additional tax is imposed by para18 graph (1), if an organization manager refused to

19 agree to part or all of the correction, there is hereby

20 imposed a tax equal to 50 percent of the amount in21 volved. The tax imposed by this paragraph shall be

22 paid by any organization manager who refused to

23 agree to part or all of the correction.

24 ‘‘(c) SPECIAL RULES.—
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1 ‘‘(1) JOINT AND SEVERAL LIABILITY.—If more

2 than one person is liable under any paragraph of

3 subsection (a) or (b) with respect to any one act of

4 self-dealing, all such persons shall be jointly and sev5 erally liable under such paragraph with respect to

6 such act.

7 ‘‘(2) $10,0000 LIMIT FOR MANAGEMENT.—With

8 respect to any one act of self-dealing, the maximum

9 amount of the tax imposed by subsection (a)(2) shall

10 not exceed $10,000, and the maximum amount of

11 the tax imposed by subsection (b)(2) shall not ex12 ceed $10,000.

13 ‘‘(d) SELF-DEALING.—For purposes of this section—

14 ‘‘(1) IN GENERAL.—Except as provided by

15 paragraph (2), the term ‘self-dealing’ means any di16 rect or indirect—

17 ‘‘(A) transfer, lease, or license of property

18 between an applicable tax-exempt organization

19 and a disqualified person, and

20 ‘‘(B) lending of money or other extension

21 of credit between an applicable tax-exempt or22 ganization and a disqualified person.

23 ‘‘(2) EXCEPTIONS.—The term ‘self-dealing’

24 shall not include—
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1 ‘‘(A) the lending of money by a disqualified

2 person to an applicable tax-exempt organization

3 if the loan is without interest or other charge

4 (determined without regard to section 7872)

5 and if the proceeds of the loan are used exclu6 sively for exempt purposes,

7 ‘‘(B) the furnishing of goods or facilities

8 by a disqualified person to an applicable tax-ex9 empt organization if the furnishing is without

10 charge and if the goods or facilities so fur11 nished are used exclusively for exempt purposes,

12 and

13 ‘‘(C) any transfer, lease, or license of prop14 erty if—

15 ‘‘(i) such transfer, lease, or license (as

16 the case may be) is by a disqualified per17 son in the ordinary course of such disquali18 fied person’s trade or business and such

19 transaction is on a basis comparable to the

20 basis on which similar transactions are

21 made in the ordinary course of such trade

22 or business with other parties, or

23 ‘‘(ii) such transfer, lease, or license

24 (as the case may be) is by an applicable

25 tax-exempt organization in the ordinary
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1 course of its activities and such transaction

2 is made on a basis comparable to the basis

3 on which similar transactions are made in

4 the ordinary course of such activities with

5 other parties.

6 ‘‘(3) EXEMPT PURPOSE.—For purposes of

7 paragraph (2), the term ‘exempt purpose’ means—

8 ‘‘(A) in the case of an organization de9 scribed in section 501(c)(3), any purpose speci10 fied in section 501(c)(3), and

11 ‘‘(B) in the case of an organization de12 scribed in section 501(c)(4), any purposes spec13 ified in section 501(c)(4).

14 ‘‘(e) OTHER DEFINITIONS.—For purposes of this

15 section—

16 ‘‘(1) TAXABLE PERIOD.—The term ‘taxable pe17 riod’ means, with respect to any act of self-dealing,

18 the period beginning with the date on which the act

19 of self-dealing occurs and ending on the earliest of—

20 ‘‘(A) the date of mailing a notice of defi21 ciency under section 6212 with respect to the

22 tax imposed by subsection (a)(1),

23 ‘‘(B) the date on which the tax imposed by

24 subsection (a)(1) is assessed, or
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1 ‘‘(C) the date on which correction of the

2 act of self-dealing is completed.

3 ‘‘(2) AMOUNT INVOLVED.—The term ‘amount

4 involved’ means, with respect to any act of self-deal5 ing, the greater of the amount of money and fair

6 market value of other property given, or the amount

7 of money and fair market value of other property re8 ceived. In the case of a lease or license, the amount

9 involved is the fair market value of the leased or li10 censed property. For purposes of this paragraph—

11 ‘‘(A) in the case of the taxes imposed by

12 subsection (a), fair market value shall be deter13 mined as of the date on which the act of self14 dealing occurs, and

15 ‘‘(B) in the case of the taxes imposed by

16 subsection (b), fair market value shall be the

17 highest fair market value during the taxable

18 period.

19 ‘‘(3) CORRECTION.—The terms ‘correction’ and

20 ‘correct’ mean, with respect to any act of self-deal21 ing transaction, undoing the transaction to the ex22 tent possible, but in any case place the applicable

23 tax-exempt organization in a financial position not

24 worse than that in which it would be if the disquali-
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1 fied person were dealing under the highest fiduciary

2 standards.

3 ‘‘SEC. 4959. TAXES ON PRIVATE INUREMENT.

4 ‘‘(a) INITIAL TAXES.—

5 ‘‘(1) ON THE ORGANIZATION.—There is hereby

6 imposed on any taxable inurement a tax equal to 10

7 percent of the amount thereof. The tax imposed by

8 this paragraph shall be paid by the organization

9 with respect to which such inurement occurred.

10 ‘‘(2) ON THE MANAGEMENT.—There is hereby

11 imposed on the participation of any organization

12 manager of an organization in any taxable

13 inurement which occurs with respect to such organi14 zation, knowing that it is taxable inurement, a tax

equal to 21 15 ⁄2 percent of the amount thereof, unless

16 such participation is not willful and is due to reason17 able cause. The tax imposed by this paragraph shall

18 be paid by the organization manager who partici19 pated in the taxable inurement.

20 ‘‘(3) ON THE BENEFICIARY.—There is hereby

21 imposed on any taxable inurement a tax equal to 5

22 percent of the amount thereof. The tax imposed by

23 this paragraph shall be paid by the beneficiary of

24 such inurement.

25 ‘‘(b) ADDITIONAL TAXES.—
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1 ‘‘(1) ON THE ORGANIZATION.—In any case in

2 which an initial tax is imposed by subsection (a)(1)

3 on any taxable inurement and such inurement is not

4 corrected within the taxable period, there is hereby

5 imposed a tax equal to 100 percent of the amount

6 of the taxable inurement. The tax imposed by this

7 paragraph shall be paid by the organization with re8 spect to which such inurement occurred.

9 ‘‘(2) ON THE MANAGEMENT.—In any case in

10 which an additional tax is imposed by paragraph (1),

11 if an organization manager refused to agree to part

12 or all of the correction, there is hereby imposed a

13 tax equal to 50 percent of the amount of the taxable

14 inurement. The tax imposed by this paragraph shall

15 be paid by any organization manager who refused to

16 agree to part or all of the correction.

17 ‘‘(3) ON THE BENEFICIARY.—In any case in

18 which an additional tax is imposed by paragraph (1),

19 there is hereby imposed a tax equal to 200 percent

20 of the amount of the taxable inurement. The tax im21 posed by this paragraph shall be paid by the bene22 ficiary of such inurement.

23 ‘‘(c) TAXABLE INUREMENT.—For purposes of this

24 section, the term ‘taxable inurement’ means any direct or

25 indirect inurement of any part of the net earnings of an
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1 applicable tax-exempt organization to the benefit of any

2 disqualified person. Such term shall not include any act

3 of self-dealing on which tax is imposed under section 4958.

4 ‘‘(d) SPECIAL RULES.—For purposes of this sec5 tion—

6 ‘‘(1) JOINT AND SEVERAL LIABILITY.—If more

7 than one person is liable under any paragraph of

8 subsection (a) or (b) with respect to any one taxable

9 inurement, all such persons shall be jointly and sev10 erally liable under such paragraph with respect to

11 such inurement.

12 ‘‘(2) LIMIT FOR MANAGEMENT.—With respect

13 to any 1 taxable inurement, the maximum amount

14 of the tax imposed by subsection (a)(2) shall not ex15 ceed $10,000, and the maximum amount of the tax

16 imposed by subsection (b)(2) shall not exceed

17 $10,000.

18 ‘‘(e) OTHER DEFINITIONS.—For purposes of this

19 section—

20 ‘‘(1) TAXABLE PERIOD.—The term ‘taxable pe21 riod’ means, with respect to any taxable inurement,

22 the period beginning with the date on which the

23 inurement occurs and ending on the earliest of—
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1 ‘‘(A) the date of mailing a notice of defi2 ciency under section 6212 with respect to the

3 tax imposed by subsection (a)(1), or

4 ‘‘(B) the date on which the tax imposed by

5 subsection (a)(1) is assessed.

6 ‘‘(2) CORRECTION.—The terms ‘correction’ and

7 ‘correct’ mean, with respect to any taxable

8 inurement, undoing the inurement to the extent pos9 sible, establishing safeguards to prevent future tax10 able inurement, and where fully undoing the

11 inurement is not possible, such additional corrective

12 action as is prescribed by the Secretary by regula13 tions.

14 ‘‘SEC. 4960. OTHER DEFINITIONS.

15 ‘‘(a) APPLICABLE TAX-EXEMPT ORGANIZATION.—

16 For purposes of this subchapter, the term ‘applicable tax17 exempt organization’ means any organization which (with18 out regard to any act of self-dealing or taxable inurement)

19 would be described in paragraph (3) or (4) of section

20 501(c) and exempt from tax under section 501(a). Such

21 term shall not include any private foundation.

22 ‘‘(b) DISQUALIFIED PERSON.—For purposes of this

23 subchapter, the term ‘disqualified person’ means, with re24 spect to any transaction—
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1 ‘‘(1) any person who was an organization man2 ager at any time during the 5-year period ending on

3 the date of such transaction,

4 ‘‘(2) any member of a family (as defined in sec5 tion 4946(d)) of any person described in paragraph

6 (1), and

7 ‘‘(3) any 35-percent controlled entity of persons

8 described in paragraph (1) or (2).

9 ‘‘(c) ORGANIZATION MANAGER.—For purposes of

10 this subchapter, the term ‘organization manager’ means,

11 with respect to any applicable tax-exempt organization,

12 any officer, director, or trustee of such organization (or

13 any individual having powers or responsibilities similar to

14 those of officers, directors, or trustees of the organiza15 tion). Such term includes any person performing substan16 tial medical services as a physician for the applicable tax17 exempt organization pursuant to an employment or other

18 contractual relationship.

19 ‘‘(d) 35-PERCENT CONTROLLED ENTITY.—For pur20 poses of this section—

21 ‘‘(1) 35-PERCENT CONTROLLED ENTITY.—The

22 term ‘35-percent controlled entity’ means—

23 ‘‘(A) a corporation in which persons de24 scribed in paragraph (1) or (2) of subsection
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1 (b) own more than 35 percent of the combined

2 voting power,

3 ‘‘(B) a partnership in which such persons

4 own more than 35 percent of the profits inter5 est, and

6 ‘‘(C) a trust or estate in which such per7 sons own more than 35 percent of the beneficial

8 interest.

9 ‘‘(2) CONSTRUCTIVE OWNERSHIP RULES.—

10 Rules similar to the rules of paragraphs (3) and (4)

11 of section 4946(a) shall apply for purposes of this

12 subsection.’’

13 (b) APPLICATION OF PRIVATE INUREMENT RULE TO

14 TAX-EXEMPT CIVIC LEAGUES.—Paragraph (4) of section

15 501(c) of such Code is amended to read as follows:

16 ‘‘(4)(A) Civic leagues or organizations not orga17 nized for profit but operated exclusively for the pro18 motion of social welfare and no part of the net earn19 ings of which inures to the benefit of any private

20 shareholder or individual.

21 ‘‘(B) Local associations of employees—

22 ‘‘(i) the membership of which is limited to

23 the employees of a designated person or persons

24 in a particular municipality, and
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1 ‘‘(ii) which is operated exclusively for char2 itable, educational, or recreational purposes.’’

3 (c) TECHNICAL AND CONFORMING AMENDMENTS.—

4 (1) Subsection (e) of section 4955 of such Code

5 is amended—

6 (A) by striking ‘‘SECTION 4945’’ in the

7 heading and inserting ‘‘SECTIONS 4945 and

8 4959’’, and

9 (B) by inserting before the period ‘‘or a

10 taxable inurement for purposes of section

11 4959’’.

12 (2) Subsections (a), (b), and (c) of section 4963

13 of such Code are each amended by inserting ‘‘4958,

14 4959,’’ after ‘‘4955,’’.

15 (3) Subsection (e) of section 6213 of such Code

16 is amended by inserting ‘‘4958 (relating to acts of

17 self-dealing), 4959 (relating to private inurement),’’

18 before ‘‘4971’’.

19 (4) The table of subchapters for chapter 42 of

20 such Code is amended by striking the last item and

21 inserting the following:

‘‘Subchapter D. Acts of self-dealing and private inurement by certain exempt organizations.

‘‘Subchapter E. Abatement of first and second tier taxes in certain cases.’’
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1 (d) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to transactions occurring on or

3 after January 1, 1994.

Æ