41486 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

landing in the Tampa area and aircraft

landing in the Sarasota/Fort Myers area

that are currently routed over the St.

Petersburg VORTAC. Also, the

separation of J–41 and J–43 before the

St. Petersburg VORTAC would increase

capacity in the National Airspace

System by eliminating a choke point at

the St. Petersburg VORTAC. This

proposed modification of J–41 would

increase system capacity, enhance

safety, and improve the management of

air traffic operations in the west Florida

area.

Jet route designations are published in

paragraph 2004 of FAA Order 7400.9E,

dated September 10, 1997, and effective

September 16, 1997, which is

incorporated by reference in 14 CFR

71.1. The jet route listed in this

document would be published

subsequently in the Order.

The FAA has determined that this

proposed regulation only involves an

established body of technical

regulations for which frequent and

routine amendments are necessary to

keep them operationally current.

Therefore, this regulation: (1) is not a

‘‘significant regulatory action’’ under

Executive Order 12866; (2) is not a

‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034; February 26, 1979); and (3)

does not warrant preparation of a

Regulatory Evaluation as the anticipated

impact is so minimal. Since this is a

routine matter that will only affect air

traffic procedures and air navigation, it

is certified that this proposed rule,

when promulgated, will not have a

significant economic impact on a

substantial number of small entities

under the criteria of the Regulatory

Flexibility Act.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference,

Navigation (air).

The Proposed Amendment

In consideration of the foregoing, the

Federal Aviation Administration

proposes to amend 14 CFR part 71 as

follows:

PART 71—DESIGNATION OF CLASS A,

CLASS B, CLASS C, CLASS D, AND

CLASS E AIRSPACE AREAS;

AIRWAYS; ROUTES; AND REPORTING

POINTS

1. The authority citation for part 71

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389.

§ 71.1 [Amended]

2. The incorporation by reference in

14 CFR 71.1 of the Federal Aviation

Administration Order 7400.9E, Airspace

Designations and Reporting Points,

dated September 10, 1997, and effective

September 16, 1997, is amended as

follows:

Paragraph 2004—Jet Routes

* * * * *

J–41 [Revised]

From Key West, FL; Lee County, FL;

Sarasota, FL; INT Sarasota 336°T(338°M) and

Seminole, FL, 150°T(148°M) radials;

Seminole, FL; Montgomery, AL; Vulcan, AL;

Memphis, TN; Springfield, MO; Kansas City,

MO; to Omaha, NE.

* * * * *

Issued in Washington, DC, on July 27,

1998.

Reginald C. Matthews,

Acting Program Director for Air Traffic

Airspace Management.

[FR Doc. 98–20789 Filed 8–3–98; 8:45 am]

BLLING CODE 4910–13–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 53 and 301

[REG–246256–96]

RIN 1545–AV60

Failure by Certain Charitable

Organizations To Meet Certain

Qualification Requirements; Taxes on

Excess Benefit Transactions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to the

excise taxes on excess benefit

transactions under section 4958 of the

Internal Revenue Code (Code), as well

as certain amendments and additions to

existing Income Tax Regulations

affected by section 4958. Section 4958

was enacted in section 1311 of the

Taxpayer Bill of Rights 2. Section 4958

generally is effective for transactions

occurring on or after September 14,

1995. Section 4958 imposes excise taxes

on transactions that provide excess

economic benefits to disqualified

persons of public charities and social

welfare organizations. The proposed

regulations clarify certain definitions

and rules contained in section 4958.

DATES: Written comments and requests

for a teleconference must be received by

November 2, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–246256–96),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered between the

hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:T:R (REG–246256–96),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW,

Washington, DC. Alternatively,

taxpayers may submit comments

electronically via the Internet by

selecting the ‘‘Tax Regs’’ option on the

IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/prod/

taxlregs/comments.html.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Phyllis D.

Haney of the Office of Associate Chief

Counsel (Employee Benefits and Exempt

Organizations), (202) 622–4290;

concerning submissions, LaNita

VanDyke, (202) 622-7190 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information

contained in this notice of proposed

rulemaking have been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the

collections of information should be

sent to the Office of Management and

Budget, Attn: Desk Officer for the

Department of Treasury, Office of

Information and Regulatory Affairs,

Washington, DC 20503, with copies to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, OP:FS:FP,

Washington, DC 20224. Comments on

the collection of information should be

received by October 5, 1998. Comments

are specifically requested concerning:

Whether the proposed collections of

information are necessary for the proper

performance of the functions of the Internal

Revenue Service, including whether the

information will have practical utility;

The accuracy of the estimated burden

associated with the proposed collections of

information (see below);

How the quality, utility, and clarity of the

information to be collected may be enhanced;

How the burden of complying with the

proposed collections of information may be

minimized, including through the

application of automated collection

techniques or other forms of information

technology; and

Estimates of capital or start-up costs and

costs of operation, maintenance, and

purchase of service to provide information.
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41487

The collections of information in this

proposed regulation are in 26 CFR

53.4958-6(a)(2), 53.4958–6(a)(3),

53.4958–6(d)(2), and 53.4958–6(d)(3).

This information is required for an

applicable tax-exempt organization to

avail itself of a rebuttable presumption

that payments under a compensation

arrangement between the organization

and a disqualified person are

reasonable, or a transfer of property,

right to use property, or any other

benefit or privilege between the

organization and a disqualified person

is at fair market value. This information

will be used by the organization’s

governing body, or committee thereof, to

document the basis for its determination

that compensation was reasonable or

any other benefit was at fair market

value. The collections of information are

required to obtain the benefit of this

rebuttable presumption of

reasonableness. The likely

recordkeepers are nonprofit institutions.

Estimated total annual recordkeeping

burden: 910,083 hours.

The estimated annual burden per

recordkeeper varies from 3 hours to 308

hours, depending on individual

circumstances, with an estimated

weighted average of 6 hours, 3 minutes.

Estimated number of recordkeepers:

150,427.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless it displays a valid control

number assigned by the Office of

Management and Budget.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

This document provides rules

regarding section 4958 excise taxes on

excess benefit transactions. Section

4958 was added to the Code by the

Taxpayer Bill of Rights 2, Public Law

104–168 (110 Stat. 1452), enacted July

30, 1996. The section 4958 excise taxes

generally apply to excess benefit

transactions occurring on or after

September 14, 1995. They do not apply,

however, to any benefit arising from a

transaction pursuant to any written

contract that was binding on September

13, 1995, and continued in force

through the time of the transaction.

An excess benefit transaction subject

to tax under section 4958 is any

transaction in which an economic

benefit provided by an applicable taxexempt organization to, or for the use of,

any disqualified person exceeds the

value of consideration received by the

organization in exchange for the benefit.

An excess benefit transaction also

includes certain revenue-sharing

transactions. An applicable tax-exempt

organization is any organization

described in section 501(c)(3) (except

private foundations) or section 501(c)(4)

at the time of the excess benefit

transaction or at any time during the

five-year period ending on the date of

the transaction. The excess benefit is

generally the excess of the value of the

benefit provided to a disqualified

person over the value of the

consideration received by the

organization.

A disqualified person is any person

who was, at any time during the 5-year

period ending on the date of the excess

benefit transaction, in a position to

exercise substantial influence over the

affairs of the organization. A

disqualified person also includes any

family member of a person described in

the preceding sentence or any entity in

which at least 35 percent of the control

or beneficial interest is held by such a

person.

There are three taxes under section

4958. Disqualified persons are liable for

the first two taxes, which are imposed

as follows: Pursuant to section

4958(a)(1), a tax of 25 percent of the

excess benefit must be paid by any

disqualified person who benefits from

an excess benefit transaction with an

applicable tax-exempt organization.

Pursuant to section 4958(b), a tax of 200

percent of the excess benefit must be

paid by any disqualified person who

benefits from an excess benefit

transaction if that transaction is not

corrected before the earlier of either the

date a deficiency notice is mailed with

respect to the 25 percent tax or the date

the 25 percent tax is assessed.

Certain organization managers are

liable for the third tax, which is

imposed as follows: Pursuant to section

4958(a)(2), a tax of 10 percent of the

excess benefit must be paid by any

organization manager who participates

in an excess benefit transaction

knowingly, willfully, and without

reasonable cause. An organization

manager is an officer, director, or trustee

of the organization, or any individual

having powers or responsibilities

similar to those of an officer, director, or

trustee. The tax that must be paid by

participating organization managers for

any one excess benefit transaction

cannot exceed $10,000.

The IRS notified the general public of

the new section 4958 excise taxes in

Notice 96–46 (1996–2 C.B. 112). Notice

96–46 also solicited comments to be

used in drafting these proposed

regulations.

Comments Received Pursuant to Notice

96–46

In response to its request for

comments in Notice 96–46, the IRS

received 28 comment letters addressing

a variety of topics pertaining to section

4958. Some general comments requested

that in applying the section 4958 excise

taxes the IRS avoid creating

administrative burdens on the vast

majority of charities and only scrutinize

a narrowly targeted group of charities

prone to abuse the inurement

prohibition. Most comments, however,

focused on specific definitions or other

statutory language in section 4958. A

brief summary of the most frequently

made suggestions follows. All of the

comments were given consideration in

preparing these proposed regulations.

Commentators made suggestions

regarding the definition of disqualified

person, including applying a facts and

circumstances test that annunciates only

general principles; using a test that does

not treat all of an organization’s officers

as necessarily being disqualified

persons; deferring to an organization’s

own internal good-faith identification of

disqualified persons; treating certain

donors as disqualified persons under

standards similar to those for private

foundation substantial contributors;

clarifying that a donor is not in a

position to exercise substantial

influence over the affairs of an

organization solely by reason of having

made a large donation; including as

disqualified persons those persons who

provide advice and consultation to

organizations regarding potential excess

benefit transactions; providing that a

person does not become a disqualified

person with respect to a transaction as

a result of the transaction (thus a person

who negotiated a compensation

arrangement in good faith before

entering into an employment

relationship would not become a

disqualified person by virtue of the

negotiation); and excluding certain

independent contractors from

disqualified person status.

Commentators on the tax to be paid

by organization managers who

participate in an excess benefit

transaction knowingly, willfully, and

without reasonable cause suggested the

following: defining organization

manager narrowly; using the principles

of the regulations under sections 4946

and 4955 in defining organization
41488 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

manager; excluding in-house counsel

and independent contractors (attorneys,

accountants, etc.) from the definition;

using an organization’s bylaws as the

source of determining whether an

individual is an officer, director, or

trustee; excluding managers who voted

against an excess benefit transaction

from joint and several liability for any

10% tax associated with the transaction;

using the definitions in current section

4946 private foundation regulations for

knowing, willful, and reasonable cause;

allowing managers to rely on advice of

legal counsel to prove their

participation in a transaction was due to

reasonable cause, and expanding the

category of persons qualified to render

opinions with this effect. Although the

proposed regulations provide that only

advice of counsel in a reasoned written

legal opinion protects organization

managers in this regard, the IRS invites

further comments on this topic. The IRS

also requests that such comments

address whether, to be consistent on

this point, other regulations (e.g.,

§ 53.4941 and § 53.4945) should be

amended as well.

Numerous comments were received

on determining reasonable

compensation for services and fair

market value in sale or exchange

transactions. Commentators asked the

IRS to use existing law standards under

section 162 for determining reasonable

compensation and to provide special

standards for new organizations in the

start-up phase of operations. With

respect to compensation, some

commentators also requested objective

standards or charts of reasonable

compensation amounts; others

requested that the regulations not

impose strict dollar limitations on what

would constitute reasonable

compensation.

Several commentators made

suggestions regarding the requirement

that an organization must demonstrate

its intent to treat economic benefits as

compensation in order to treat the

benefit as being provided in exchange

for services. These suggestions included

using a facts and circumstances test to

determine whether an organization

clearly indicated its intent to treat a

benefit as compensation; considering

certain small amounts inadvertently not

included in a disqualified person’s

reported compensation as de minimis

and not triggering section 4958 taxes;

and allowing a reasonable cause

exception under which items that were

not reported as compensation could still

be treated as provided in exchange for

services.

A number of commentators requested

that the definition of an excess benefit

transaction exclude the provision of

certain types of benefits to a disqualified

person. These benefits included

economic benefits made available to the

general public on at least as favorable a

basis; economic benefits that are de

minimis fringe benefits under section

132; reimbursements for expenses of

administration of an organization; and

incidental benefits.

Commentators provided a wide range

of suggestions on the subject of which

revenue-sharing arrangements should

constitute excess benefit transactions.

Suggestions included incorporating

existing IRS unpublished guidance in a

safe harbor rule; using the principles of

Rev. Rul. 69–383 (1969–2 C.B. 113), to

determine whether a particular plan of

compensation results in prohibited

inurement or private benefit; limiting

the category of revenue-sharing

arrangements that constitute excess

benefit transactions to arrangements

based on the organization’s revenues

only; and applying regulations on

revenue-sharing arrangements

prospectively, with transition rules for

existing arrangements.

Many comments were received on the

rebuttable presumption of

reasonableness that is described in the

legislative history as arising when a

board of directors approves certain

compensation arrangements or other

transactions. The following suggestions

were submitted in multiple comments:

that the presumption apply when an

applicable organization’s board

approves general guidelines for entering

into transactions with disqualified

persons rather than voting on each

individual transaction; that the

regulations require a determination of

reasonableness at the time the

organization makes a payment to a

disqualified person; that the

presumption apply when approval is

given by a compensation committee that

is not composed exclusively of directors

or trustees; that the board or committee

be considered independent if members

recuse themselves when they have

conflicts of interest; that the regulations

clarify whether a joint compensation

committee composed of representatives

from several affiliated organizations

would be a committee of each of the

respective boards; that the regulations

allow an organization’s board to

delegate the responsibility for setting

compensation to an independent

committee; that the regulations use

examples to define what is an

independent firm that can produce

salary surveys that will serve as

appropriate data on comparability; that

the regulations clarify that the

rebuttable presumption is a safe harbor

and no negative inference should be

drawn if an organization does not avail

itself of that safe harbor; and that the

regulations clarify that compensation

outside the range of comparables is not

per se unreasonable. Some church

representatives submitted comments

noting that the religious beliefs of some

churches and some state laws regarding

churches prevent churches from

benefitting from the rebuttable

presumption of reasonableness because

of the identity of the parties required to

approve compensation arrangements or

other transactions. While these

proposed regulations do not provide a

special exception for churches from the

requirements that must be met to give

rise to the rebuttable presumption, they

do provide churches with a special rule

stating that the procedures of section

7611 will be used in initiating and

conducting any inquiry or examination

into whether an excess benefit

transaction has occurred between a

church and a disqualified person. For

purposes of this rule, the reasonable

belief required to initiate a church tax

inquiry is satisfied if there is a

reasonable belief that a section 4958 tax

is due from a disqualified person with

respect to a transaction involving a

church.

Several comments were received on

the relationship between revocation of

tax-exempt status and the taxes imposed

under section 4958, recommending that

the regulations follow the legislative

history on this question. The IRS

intends to exercise its administrative

discretion in enforcing the requirements

of sections 4958, 501(c)(3) and 501(c)(4)

in accordance with the direction given

in the legislative history. The legislative

history specifically provides that the

IRS may still revoke the tax-exempt

status of an organization for violating

the inurement proscription, with or

without imposition of section 4958

excise taxes. It further provides that, in

practice, the excise taxes imposed by

section 4958 will be the sole sanction

imposed in those cases in which the

excess benefit does not rise to a level

where it calls into question whether, on

the whole, the organization functions as

a charitable or other tax-exempt

organization. In determining whether an

excess benefit transaction rises to such

a level, factors relating to the

organization’s general pattern of

compliance with the requirements of

section 501(c)(3) or (4) and other

applicable Federal and State laws will

be taken into account. These factors

would include whether the organization

has been involved in repeated excess

benefit transactions; the size and scope
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41489

of the excess benefit transaction;

whether, after concluding that it has

been party to an excess benefit

transaction, the organization has

implemented safeguards to prevent

future recurrences; and whether there

was compliance with other applicable

laws. The IRS intends to publish the

factors that it will consider in exercising

its administrative discretion in guidance

issued in conjunction with the issuance

of final regulations under section 4958.

Explanation of Provisions

Overview

This document contains proposed

regulations that add new regulations

under section 4958, and that amend and

add to existing Income Tax and Excise

Tax Regulations under sections 4963,

6213, 6501, 7422, and 7611. The

explanation of these proposed

regulations is grouped into two parts:

the substantive section 4958 regulations,

and regulations under the provisions

amended to reflect various effects of the

enactment of section 4958 on

abatement, Tax Court petitions, statute

of limitations, refund actions, and

church tax inquiries and examinations.

The proposed § 53.4958 regulations are

described in more detail in this

preamble under Section I, Taxes on

excess benefit transactions, immediately

below. The proposed amendments and

additions to regulations under various

procedural and administrative

provisions affected by the enactment of

section 4958 are described in Section II,

Amendment of regulations under

various procedural and administrative

provisions, below.

I. Taxes on Excess Benefit Transactions

The proposed regulations describe the

three taxes imposed under section 4958

on excess benefit transactions between

an applicable tax-exempt organization

and a disqualified person. Two of the

taxes are paid by certain disqualified

persons who benefit economically from

a transaction, and the other tax is paid

by certain organization managers who

participate in the transaction

knowingly, willfully, and without

reasonable cause.

A disqualified person who receives an

excess benefit from a transaction is

liable for a tax equal to 25 percent of the

excess benefit. If the excess benefit is

not corrected within the taxable period,

that disqualified person is then liable

for a tax of 200 percent of the excess

benefit. Taxable period is defined as the

period beginning on the date the

transaction occurs and ending on the

earlier of the date of mailing a notice of

deficiency for the 25 percent tax or the

date on which the 25 percent tax is

assessed.

Correction is defined in the proposed

regulations as 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 had

been dealing under the highest fiduciary

standards. Correction of the excess

benefit occurs if the disqualified person

repays the applicable tax-exempt

organization an amount of money equal

to the excess benefit, plus any

additional amount needed to

compensate the organization for the loss

of the use of the money or other

property during the period commencing

on the date the excess benefit

transaction occurs and ending on the

date the excess benefit is corrected.

Correction may also be accomplished, in

certain circumstances, by returning

property to the organization and taking

any additional steps necessary to make

the organization whole. If the excess

benefit transaction consists of the

payment of compensation for services

under a contract that has not been

completed, termination of the

employment or independent contractor

relationship between the organization

and the disqualified person is not

required in order to correct. However,

the terms of any ongoing compensation

arrangement may need to be modified to

avoid future excess benefit transactions.

If the excess benefit is corrected within

the correction period, then under the

rules of section 4961 the 200 percent tax

under section 4958(b) is not assessed. If

the excess benefit is corrected within

the correction period and it is

established to the satisfaction of the

Secretary that the excess benefit

transaction was due to reasonable cause

and not to willful neglect, then under

the rules of section 4962 the 25 percent

tax under section 4958(a)(1) will be

abated.

Each organization manager who

participated in the excess benefit

transaction, knowing that it was such a

transaction, unless such participation

was not willful and was due to

reasonable cause, is liable for a tax equal

to 10 percent of the excess benefit, not

to exceed an aggregate amount of

$10,000 with respect to any one excess

benefit transaction. An organization

manager is, 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. Independent

contractors, acting in a capacity as

attorneys, accountants, and investment

managers and advisors, are not officers.

Any person who has authority merely to

recommend particular administrative or

policy decisions, but not to implement

them without approval of a superior, is

not an officer. An individual who is not

an officer, director, or trustee, yet serves

on a committee of the governing body of

an applicable tax-exempt organization

that is invoking the rebuttable

presumption of reasonableness

(described later in this section) based on

the committee’s action, however, is an

organization manager for purposes of

the 10 percent tax.

The definitions provided in the

proposed regulations for the terms

participation, knowing, willful, and due

to reasonable cause with respect to

organization managers for section 4958

purposes parallel the definitions of

those terms used with respect to

foundation managers in the section 4941

regulations. If an organization manager,

after full disclosure of the factual

situation to legal counsel (including inhouse counsel) relies on the advice of

such counsel expressed in a reasoned

written legal opinion that a transaction

is not an excess benefit transaction

under section 4958, that manager’s

participation in such transaction will

ordinarily not be considered knowing or

willful, and will ordinarily be

considered due to reasonable cause,

even if the transaction is subsequently

held to be an excess benefit transaction.

With respect to any specific excess

benefit transaction, if more than one

person is liable for any of the taxes

imposed by section 4958, all persons

with respect to whom a particular tax is

imposed are jointly and severally liable

for that tax. For instance, if more than

one disqualified person benefits from

the same transaction, all the benefitting

disqualified persons are jointly and

severally liable for the respective

section 4958(a)(1) or (b) taxes on that

transaction. Where an organization

manager also receives an excess benefit

from an excess benefit transaction, the

manager may be liable for both taxes

imposed by section 4958(a).

Except as otherwise provided in the

proposed regulations, a transaction

occurs on the date on which a

disqualified person receives an

economic benefit from the applicable

tax-exempt organization for federal

income tax purposes. In the case of

payment of deferred compensation, the

transaction occurs on the date the

deferred compensation is earned and

vested.

The proposed regulations crossreference sections 6501(e)(3) and 6501(l)

and the regulations thereunder, as
41490 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

amended, for statute of limitations rules

for section 4958 excise taxes. Thus, the

statute of limitations for imposition of

tax under section 4958 generally begins

to run as of the date the applicable taxexempt organization files its return

(Form 990) for the year in which the

excess benefit transaction occurred.

The proposed regulations provide that

the taxes imposed on excess benefit

transactions apply to transactions

occurring on or after September 14,

1995. However, these taxes do not apply

to a transaction pursuant to a written

contract that was binding on September

13, 1995, and at all times thereafter

before the transaction occurred. A

written binding contract that is

terminable or subject to cancellation by

the applicable tax-exempt organization

without the disqualified person’s

consent is treated as a new contract as

of the date that any such termination or

cancellation, if made, would be

effective. If a binding written contract is

materially modified (including

situations in which the contract is

amended to extend its term or to

increase the amount of compensation

payable to the disqualified person), it is

treated as a new contract entered into as

of the date of the material modification.

Definition of Applicable Tax-Exempt

Organization

The proposed regulations generally

define an applicable tax-exempt

organization as any organization that,

without regard to any excess benefit, is

or would have been described in

sections 501(c)(3) or (4) and exempt

from tax under section 501(a) at any

time during a five-year period ending on

the date of an excess benefit transaction

(the lookback period). In the specific

case of any transaction occurring before

September 14, 2000, the lookback

period begins on September 14, 1995,

and ends on the date of the transaction.

To be described in section 501(c)(3)

for purposes of section 4958, an

organization must meet the

requirements of section 508 (subject to

any applicable exceptions provided by

that section). A private foundation as

defined in section 509(a) is not an

applicable tax-exempt organization for

section 4958 purposes. An organization

that has applied for and received

recognition of exemption as an

organization described in section

501(c)(4) is an applicable tax-exempt

organization for section 4958 purposes.

In addition, an organization that has

sought to take advantage of section

501(c)(4) status by filing an application

for recognition of exemption under

section 501(c)(4) with the IRS, filing an

information return as a section 501(c)(4)

organization under the Code or

regulations promulgated thereunder, or

otherwise holding itself out as being

described in section 501(c)(4), is an

applicable tax-exempt organization for

section 4958 purposes.

A foreign organization that receives

substantially all of its support from

sources outside of the United States is

not an applicable tax-exempt

organization for section 4958 purposes.

Section 4948(b) generally states that

chapter 42 taxes, including section 4958

taxes on excess benefit transactions, do

not apply to any foreign organization

that has received substantially all of its

support from sources outside the United

States.

Definition of Disqualified Person

The proposed regulations define a

disqualified person as a person who,

with respect to any transaction with an

applicable tax-exempt organization, at

any time during a five-year period

beginning after September 13, 1995, and

ending on the date of such transaction,

was in a position to exercise substantial

influence over the affairs of the

organization. Certain persons are

statutorily defined to be disqualified

persons under section 4958(f), including

certain family members of disqualified

persons (spouse, brothers or sisters (by

whole or half blood), spouses of

brothers or sisters (by whole or half

blood), ancestors, children,

grandchildren, great grandchildren, and

spouses of children, grandchildren, and

great grandchildren), and 35 percent

controlled entities (a corporation in

which a disqualified person owns more

than 35 percent of the combined voting

power; a partnership in which a

disqualified person owns more than 35

percent of the profits interest; or a trust

or estate in which a disqualified person

owns more than 35 percent of the

beneficial interest).

The proposed regulations specifically

identify certain persons as having

substantial influence over the affairs of

an applicable tax-exempt organization.

These specified persons include any

individual who serves as a voting

member on the governing body of the

organization; any individual or

individuals who have the power or

responsibilities of the president, chief

executive officer or chief operating

officer of an organization; any

individual or individuals who have the

power or responsibilities of treasurer or

chief financial officer of an organization;

and any person who has a material

financial interest in certain providersponsored organizations in which a

hospital that is an applicable tax-exempt

organization participates.

The proposed regulations deem two

categories of persons not to have

substantial influence over the affairs of

an applicable tax-exempt organization.

The first category comprises other

applicable tax-exempt organizations

described in section 501(c)(3). The

second category comprises any

employee who, for the taxable year in

which the benefits are provided,

receives economic benefits, directly or

indirectly from the organization, of less

than the amount of compensation

referenced for a highly compensated

employee in section 414(q)(1)(B)(i), who

is not a statutorily-defined disqualified

person and not specifically identified by

the regulations as having substantial

influence, and is not a substantial

contributor to the organization within

the meaning of section 507(d)(2).

The proposed regulations provide that

except as specified in the categories set

forth in the statute or the preceding

parts of the regulation, the

determination of whether a person has

substantial influence over the affairs of

an organization is based on all relevant

facts and circumstances. A person who

has managerial control over a discrete

segment of an organization may

nonetheless be in a position to exercise

substantial influence over the affairs of

the entire organization. Facts and

circumstances tending to show that a

person has substantial influence over

the affairs of an organization include,

but are not limited to, the following:

that the person founded the

organization; that the person is a

substantial contributor (within the

meaning of section 507(d)(2)) to the

organization; that the person’s

compensation is based on revenues

derived from activities of the

organization that the person controls;

that the person has authority to control

or determine a significant portion of the

organization’s capital expenditures,

operating budget, or compensation for

employees; that the person has

managerial authority or serves as a key

advisor to a person with managerial

authority; or that the person owns a

controlling interest in a corporation,

partnership, or trust that is a

disqualified person.

Facts and circumstances tending to

show that a person does not have

substantial influence over the affairs of

an organization include but are not

limited to, the following: that the person

has taken a bona fide vow of poverty as

an employee, agent, or on behalf of a

religious organization; that the person is

an independent contractor, such as an

attorney, accountant, or investment

manager or advisor, acting in that

capacity, unless the person is acting in
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41491

that capacity with respect to a

transaction from which the person

might economically benefit either

directly or indirectly (aside from fees

received for the professional services

rendered); and that any preferential

treatment a person receives based on the

size of that person’s donation is also

offered to any other donor making a

comparable contribution as part of a

solicitation intended to attract a

substantial number of contributions.

In the case of multiple organizations

affiliated by common control or

governing documents, the determination

of whether a person does or does not

have substantial influence will be made

separately for each applicable taxexempt organization.

Excess Benefit Transaction

The proposed regulations state that an

excess benefit transaction is any

transaction in which an economic

benefit is provided by an applicable taxexempt 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. An excess

benefit transaction also includes certain

revenue-sharing transactions (described

later in this section). A benefit can be

provided indirectly if it is provided

through one or more entities controlled

by or affiliated with the applicable taxexempt organization.

Certain economic benefits provided

by an applicable tax-exempt

organization to a disqualified person are

disregarded for purposes of section

4958. These include paying reasonable

expenses for members of the governing

body of an applicable tax-exempt

organization to attend meetings of the

governing body of the organization, not

including expenses for luxury travel or

spousal travel; an economic benefit

provided to a disqualified person that

the disqualified person receives solely

as a member of, or volunteer for, the

organization, if the benefit is provided

to members of the public in exchange

for a membership fee of $75 or less per

year; and an economic benefit provided

to a disqualified person that the

disqualified person receives solely as a

member of a charitable class the

applicable tax-exempt organization

intends to benefit.

The proposed regulations provide that

the payment of a premium for an

insurance policy providing liability

insurance to a disqualified person to

cover any taxes imposed under this

section or indemnification of a

disqualified person for such taxes by an

applicable tax-exempt organization is

not an excess benefit transaction if the

premium or the indemnification is

treated as compensation to the

disqualified person when paid, and the

total compensation paid to the

disqualified person is reasonable.

The proposed regulations provide that

if the amount of the economic benefit

provided by the applicable tax-exempt

organization exceeds the fair market

value of the consideration, the excess is

the excess benefit on which tax is

imposed by section 4958. Rules

concerning the excess benefit in certain

revenue-sharing transactions are

described later in this section. The fair

market value of property is the price at

which property or the right to use

property would change hands between

a willing buyer and a willing seller,

neither being under any compulsion to

buy, sell, or transfer property or the

right to use property, and both having

reasonable knowledge of relevant facts.

Compensation

Compensation for the performance of

services is reasonable only if it is an

amount that would ordinarily be paid

for like services by like enterprises

under like circumstances. Generally, the

circumstances to be taken into

consideration are those existing at the

date when the contract for services was

made. However, where reasonableness

of compensation cannot be determined

based on circumstances existing at the

date when the contract for services was

made, then that determination is made

based on all facts and circumstances, up

to and including circumstances as of the

date of payment. In no event shall

circumstances existing at the date when

the contract is questioned be considered

in making a determination of the

reasonableness of compensation. A

written binding contract that is

terminable or subject to cancellation by

the applicable tax-exempt organization

without the disqualified person’s

consent is treated as a new contract as

of the date that any such termination or

cancellation, if made, would be

effective. If a binding written contract is

materially modified (which includes

amending the contract to extend its term

or increase the amount of compensation

payable to the disqualified person), it is

treated as a new contract entered into as

of the date of the material modification.

Examples illustrate whether the

reasonableness of compensation can be

determined based on circumstances

existing at the time a contract for the

performance of services was made. In

accordance with the legislative history,

the fact that a State or local legislative

or agency body has authorized or

approved a particular compensation

package paid to a disqualified person is

not determinative of the reasonableness

of compensation paid for purposes of

section 4958 excise taxes. Under the

proposed regulations, the fact that a

particular compensation package is

authorized or approved by a court also

is not determinative of the

reasonableness of compensation paid to

a disqualified person.

Compensation for purposes of section

4958 includes all items of compensation

provided by an applicable tax-exempt

organization in exchange for the

performance of services by a

disqualified person. These items of

compensation include, but are not

limited to, all forms of cash and

noncash compensation, including

salary, fees, bonuses, and severance

payments paid, and all forms of deferred

compensation that is earned and vested,

whether or not funded, and whether or

not paid under a deferred compensation

plan that is a qualified plan under

section 401(a). If deferred compensation

for services performed in multiple prior

years vests in a later year, then that

compensation is attributed to the years

in which the services were performed.

Compensation also includes the amount

of premiums paid for liability or any

other insurance coverage, as well as any

payment or reimbursement by the

organization of charges, expenses, fees,

or taxes not covered ultimately by the

insurance coverage; all other benefits,

whether or not included in income for

tax purposes, including payments to

welfare benefit plans on behalf of the

disqualified persons, such as plans

providing medical, dental, life

insurance, severance pay, and disability

benefits, and both taxable and

nontaxable fringe benefits (other than

working condition fringe benefits

described in section 132(d) and de

minimis fringe benefits described in

section 132(e)), including expense

allowances or reimbursements or

foregone interest on loans that the

recipient must report as income on his

separate income tax return; and any

economic benefit provided by the

applicable tax-exempt organization

directly or indirectly through another

entity, owned, controlled by or affiliated

with the applicable tax-exempt

organization, whether such other entity

is taxable or tax-exempt.

An economic benefit that an

applicable tax-exempt organization

provides to, or for the use, of a

disqualified person is not treated as

consideration for the performance of

services unless the organization clearly

indicates its intent to treat the benefit as

compensation when the benefit is paid.
41492 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

An applicable tax-exempt organization

will be treated as having intended to

provide an economic benefit as

compensation for services only if it

provides clear and convincing evidence

of having that intent when the benefit

was paid. An applicable tax-exempt

organization can provide clear and

convincing evidence of such intent by

reporting the economic benefit as

compensation on original or amended

federal tax information returns with

respect to the payment (e.g., Form W–

2 or 1099) or with respect to the

organization (e.g., Form 990), filed

before the commencement of an IRS

examination in which the reporting of

the benefit is questioned. For purposes

of section 4958 and these proposed

regulations, an IRS examination of an

applicable tax-exempt organization has

commenced if the organization has

received written notification from the

Exempt Organizations Division of an

impending Exempt Organizations

examination, or written notification of

an impending referral for an Exempt

Organizations examination, and also

includes having been under an Exempt

Organizations examination that is now

in Appeals or in litigation for issues

raised in an Exempt Organizations

examination of the period in which the

excess benefit transaction occurred.

Reporting of an economic benefit to

provide clear and convincing evidence

of intent is also accomplished if the

recipient disqualified person reports the

benefit as income on the person’s Form

1040 for the year in which the benefit

is received. If the amount of an

economic benefit paid to a disqualified

person is not reported and should have

been reported on any information return

issued by the applicable tax-exempt

organization, and the failure to report

was due to reasonable cause as defined

under section 6724 regulations, then the

organization is deemed to satisfy the

clear and convincing evidence

requirement. To show that its failure to

report an economic benefit that should

have been reported on an information

return was due to reasonable cause, the

applicable tax-exempt organization

must establish that there are significant

mitigating factors with respect to its

failure to report, or the failure arose

from events beyond the organization’s

control, and the organization acted in a

responsible manner both before and

after the failure occurred. If an

organization fails to provide clear and

convincing evidence that it intended to

provide an economic benefit as

compensation for services when paid,

any services provided by the

disqualified person will not be treated

as provided in consideration for the

economic benefit.

Transaction in Which Amount of

Economic Benefit Determined in Whole

or in Part by the Revenues of One or

More Activities of the Organization

The proposed regulations apply a

facts and circumstances test to assess

whether a transaction in which the

amount of an economic benefit provided

by an applicable tax-exempt

organization to or for the use of a

disqualified person is determined in

whole or in part by the revenues of one

or more activities of the applicable taxexempt organization (revenue-sharing

transaction) results in inurement, and

therefore constitutes an excess benefit

transaction. A revenue-sharing

transaction may constitute an excess

benefit transaction regardless of whether

the economic benefit provided to the

disqualified person exceeds the fair

market value of the consideration

provided in return if, at any point, it

permits a disqualified person to receive

additional compensation without

providing proportional benefits that

contribute to the organization’s

accomplishment of its exempt purpose.

If the economic benefit is provided as

compensation for services, relevant facts

and circumstances include, but are not

limited to, the relationship between the

size of the benefit provided and the

quality and quantity of the services

provided, as well as the ability of the

party receiving the compensation to

control the activities generating the

revenues on which the compensation is

based.

The type of revenue-sharing

transaction described in the proposed

regulations constitutes an excess benefit

transaction if it occurs on or after the

date of publication of final regulations.

The excess benefit in such a transaction

consists of the entire economic benefit

provided. Any revenue-sharing

transaction occurring after September

13, 1995, may still constitute an excess

benefit transaction if the economic

benefit provided to the disqualified

person exceeds the fair market value of

the consideration provided in return.

Before the date of publication of final

regulations, however, the excess benefit

shall consist only of that portion of the

economic benefit that exceeds the fair

market value of the consideration

provided in return. Examples are

provided of revenue-sharing

transactions that do and do not

constitute excess benefit transactions.

Rebuttable Presumption That

Transaction Is Not an Excess Benefit

Transaction

The proposed regulations provide that

a compensation arrangement between

an applicable tax-exempt organization

and a disqualified person is presumed

to be reasonable, and a transfer of

property, a right to use property, or any

other benefit or privilege between an

applicable tax-exempt organization and

a disqualified person is presumed to be

at fair market value, if three conditions

are satisfied. The three conditions are as

follows: (1) the compensation

arrangement or terms of transfer are

approved by the organization’s

governing body or a committee of the

governing body composed entirely of

individuals who do not have a conflict

of interest with respect to the

arrangement or transaction; (2) the

governing body, or committee thereof,

obtained and relied upon appropriate

data as to comparability prior to making

its determination; and (3) the governing

body or committee adequately

documented the basis for its

determination concurrently with

making that determination. The

presumption established by satisfying

these three requirements may be

rebutted by additional information

showing that the compensation was not

reasonable or that the transfer was not

at fair market value.

To the extent permitted under local

law, the governing body of an applicable

tax-exempt organization may authorize

other parties to act on its behalf by

following specified procedures that

satisfy the three requirements for

invoking the rebuttable presumption of

reasonableness. An arrangement or

transaction that is subsequently

approved by the board’s designee or

designees in accordance with those

procedures shall be subject to the

rebuttable presumption even though the

governing body does not vote separately

on the specific arrangement or

transaction.

With respect to the first requirement,

the proposed regulations provide that

the governing body is the board of

directors, board of trustees, or

equivalent controlling body of the

applicable tax-exempt organization. A

committee of the governing body may be

composed of any individuals permitted

under state law to serve on such a

committee, and may act on behalf of the

governing body to the extent permitted

by state law. However, any members of

such a committee who are not members

of the governing body are deemed to be

organization managers for purposes of

the tax imposed by section 4958(a)(2) if
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41493

the organization is invoking the

rebuttable presumption based on the

actions of the committee. A person is

not included on an organization’s

governing body or committee thereof

when the governing body or committee

is reviewing a transaction if that person

meets with the other members only to

answer questions, and otherwise recuses

himself from the meeting and is not

present during debate and voting on the

transaction or compensation

arrangement.

The proposed regulations provide that

a member of the governing body, or

committee thereof, does not have a

conflict of interest with respect to a

compensation arrangement or

transaction if the member is not the

disqualified person and is not related to

any disqualified person participating in

or economically benefitting from the

compensation arrangement or

transaction; is not in an employment

relationship subject to the direction or

control of any disqualified person

participating in or economically

benefitting from the compensation

arrangement or transaction; is not

receiving compensation or other

payments subject to approval by any

disqualified person participating in or

economically benefitting from the

compensation arrangement or

transaction; has no material financial

interest affected by the compensation

arrangement or transaction; and, as

prescribed in the legislative history,

does not approve a transaction

providing economic benefits to any

disqualified person participating in the

compensation arrangement or

transaction, who in turn has approved

or will approve a transaction providing

economic benefits to the member. An

arrangement or transaction has not been

approved by a committee of a governing

body if, under the governing documents

of the organization or state law, the

committee’s decision must be ratified by

the full governing body in order to

become effective.

With respect to the second

requirement for the rebuttable

presumption of reasonableness, the

proposed regulations provide that a

governing body or committee has

appropriate data on comparability if,

given the knowledge and expertise of its

members, it has information sufficient

to determine whether a compensation

arrangement will result in the payment

of reasonable compensation or a

transaction will be for fair market value.

Relevant information includes, but is

not limited to, compensation levels paid

by similarly situated organizations, both

taxable and tax-exempt, for functionally

comparable positions; the availability of

similar services in the geographic area

of the applicable tax-exempt

organization; independent

compensation surveys compiled by

independent firms; actual written offers

from similar institutions competing for

the services of the disqualified person;

and independent appraisals of the value

of property that the applicable taxexempt organization intends to

purchase from, or sell or provide to the

disqualified person.

A special rule is provided for

organizations with annual gross receipts

of less than $1 million. Under this rule,

when the governing body reviews

compensation arrangements, it will be

considered to have appropriate data as

to comparability if it has data on

compensation paid by five comparable

organizations in the same or similar

communities for similar services. No

inference is intended with respect to

whether circumstances falling outside

this safe harbor will meet the

requirements with respect to the

collection of appropriate data.

For purposes of the third requirement

of the rebuttable presumption of

reasonableness under the proposed

regulations, to be documented

adequately, the written or electronic

records of the governing body or

committee must note the terms of the

transaction that was approved and the

date it was approved; the members of

the governing body or committee who

were present during debate on the

transaction or arrangement that was

approved and those who voted on it; the

comparability data obtained and relied

upon by the committee and how the

data was obtained; and the actions taken

with respect to consideration of the

transaction by anyone who is otherwise

a member of the governing body or

committee but who had a conflict of

interest with respect to the transaction

or arrangement. If the governing body or

committee determines that reasonable

compensation for a specific arrangement

or fair market value in a specific

transaction is higher or lower than the

range of comparable data obtained, the

governing body or committee must

record the basis for its determination.

For a decision to be documented

concurrently, records must be prepared

by the next meeting of the governing

body or committee occurring after the

final action or actions of the governing

body or committee are taken. Records

must be reviewed and approved by the

governing body or committee as

reasonable, accurate and complete

within a reasonable time period

thereafter.

If reasonableness of the compensation

cannot be determined based on

circumstances existing at the date when

a contract for services was made, then

the rebuttable presumption cannot arise

until circumstances exist so that

reasonableness of compensation can be

determined, and the three requirements

for the presumption subsequently are

satisfied.

The fact that a transaction between an

applicable tax-exempt organization and

a disqualified person is not subject to

the presumption described in this

section shall not create any inference

that the transaction is an excess benefit

transaction. Neither shall the fact that a

transaction qualifies for the

presumption exempt or relieve any

person from compliance with any

federal or state law imposing any

obligation, duty, responsibility, or other

standard of conduct with respect to the

operation or administration of any

applicable tax-exempt organization. The

rebuttable presumption applies to all

payments made or transactions

completed in accordance with a contract

provided that the three requirements of

the rebuttable presumption were met at

the time the contract was agreed upon.

Special Rules

The proposed regulations provide that

the excise taxes imposed by section

4958 do not affect the substantive

statutory standards for tax exemption

under sections 501(c)(3) or (4).

Organizations are described in those

sections only if no part of their net

earnings inure to the benefit of any

private shareholder or individual.

The proposed regulations provide that

the procedures of section 7611 will be

used in initiating and conducting any

inquiry or examination into whether an

excess benefit transaction has occurred

between a church and a disqualified

person. For purposes of this rule, the

reasonable belief required to initiate a

church tax inquiry is satisfied if there is

a reasonable belief that a section 4958

tax is due from a disqualified person

with respect to a transaction involving

a church. Any additional procedures

that apply when determining whether

disqualified persons are liable for taxes

as a result of transactions with

organizations other than churches will

apply when determining whether

disqualified persons are liable for taxes

as a result of transactions with

churches.

II. Amendment of Regulations Under

Various Procedural and Administrative

Provisions

The proposed regulations amend the

section 4963 regulations to include

section 4958 taxes in the list of taxes

subject to abatement under sections
41494 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

4961 and 4962; amend the section 6213

regulations to suspend the time period

for filing a Tax Court petition for the

time allowed by the Commissioner to

correct a section 4958 transaction;

amend the section 6501 regulations to

allow the filing of an information return

by an applicable tax-exempt

organization to begin the three-year

limitation on assessment and collection

for section 4958 taxes (or six years if an

organization failed to disclose an item);

amend the section 7422 regulations to

apply existing rules for refund

proceedings to section 4958 taxes; and

amend section 7611 regulations to crossreference the rules governing the

interaction between section 4958 and

section 7611 in these proposed

regulations.

Except as otherwise specified in the

text of the final regulations, these

regulations will be effective upon

publication of the final regulations in

the Federal Register. Taxpayers may

rely on these proposed regulations for

guidance pending the issuance of final

regulations. If, and to the extent, future

guidance is more restrictive than the

guidance in these proposed regulations,

the future guidance will be applied

without retroactive effect.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required.

An initial regulatory flexibility

analysis has been prepared as required

for the collection of information in this

notice of proposed rulemaking under 5

U.S.C. 603. The analysis follows:

Initial Regulatory Flexibility Analysis

These proposed regulations clarifying

section 4958 of the Code (Taxes on

excess benefit transactions) may have an

impact on small organizations if those

organizations avail themselves of the

rebuttable presumption of

reasonableness described in the

regulations (26 C.F.R. 53.4958–6(a)(2),

53.4958–6(a)(3), 53.4958-6(d)(2), and

53.4958–6(d)(3)). The rebuttable

presumption is being considered

because the legislative history of section

4958 (H. REP. 104–506 at 56–7, March

28, 1996) stated that parties to a

transaction should be entitled to rely on

such a rebuttable presumption that a

compensation arrangement or a property

transaction between certain

organizations and disqualified persons

of the organizations is reasonable or at

fair market value. The legislative history

further instructed the Secretary of the

Treasury and the IRS to issue guidance

in connection with the standard for

establishing reasonable compensation or

fair market value that incorporates this

presumption.

The objective for the rebuttable

presumption is to allow organizations

that satisfy the three requirements to

presume that compensation

arrangements and property transactions

entered into with disqualified persons

pursuant to satisfaction of those

requirements are reasonable or at fair

market value. In such cases, the section

4958 excise taxes can be imposed only

if the IRS develops sufficient contrary

evidence to rebut the probative value of

the evidence put forth by the parties to

the transaction. The legal basis for the

proposed rule is Code sections 4958 and

7805.

The proposed rule affects

organizations described in sections

501(c)(3) and (4) (applicable tax-exempt

organizations). Some applicable taxexempt organizations may be small

organizations, defined in 5 U.S.C. 601(4)

as any not-for-profit enterprise which is

independently owned and operated and

is not dominant in its field.

The proposed recordkeeping burden

entails obtaining and relying on

appropriate comparability data and

documenting the basis of an

organization’s determination that

compensation is reasonable, or a

property transfer (or transfer of the right

to use property) is at fair market value.

These actions are necessary to meet two

of the requirements specified in the

legislative history for obtaining the

rebuttable presumption of

reasonableness. The skills necessary for

these actions are of the type required for

obtaining and considering comparability

data, and for documenting the

membership and actions of the

governing board or relevant committee

of the organization. Applicable taxexempt organizations that are small

entities of the class that files Form 990-

EZ (i.e., those with gross receipts of less

than $100,000 and assets of less than

$250,000) are unlikely to undertake

fulfilling the requirements of the

rebuttable presumption of

reasonableness, and therefore will not

be affected by the recordkeeping

burden. All other classes of applicable

tax-exempt organizations that file Form

990, up to organizations with assets of

$50 million, are likely to be small

organizations that avail themselves of

the rebuttable presumption of

reasonableness. These classes range

from organizations with assets of

$100,000 to $50 million. The proposed

rule currently contains a less

burdensome safe harbor for one of the

requirements (obtaining comparability

data on compensation) for organizations

with annual gross receipts of less than

$1 million. The IRS is not aware of any

other relevant federal rules which may

duplicate, overlap, or conflict with the

proposed rule. A less burdensome

alternative for small organizations

would be to exempt those entities from

the requirements for establishing the

rebuttable presumption of

reasonableness. However, it is not

consistent with the statute to allow

organizations to rely on this

presumption without satisfying some

conditions. Satisfaction of the

requirements as outlined in the

legislative history leads to a benefit, but

failure to satisfy them does not

necessarily lead to a penalty. A more

burdensome alternative would be to

require all applicable tax-exempt

organizations under Code section 4958

to satisfy the three requirements of the

rebuttable presumption of

reasonableness under all circumstances.

Pursuant to section 7805(f) of the

Internal Revenue Code, this notice of

proposed rulemaking will be submitted

to the Chief Counsel for Advocacy of the

Small Business Administration for

comment on its impact on business.

Comments and Requests for a Public

Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (a signed original and

eight (8) copies) that are submitted

timely to the IRS. All comments will be

available for public inspection and

copying. A teleconference public

hearing may be scheduled if requested

in writing by a person wishing to testify

outside the Washington, DC area who

timely submits written comments. A

request for a hearing by video

conference was made on April 7, 1998,

by the Taxation Section of the Los

Angeles County Bar Association. If a

teleconference public hearing is

scheduled, notice of the date, time,

place, and remote teleconference sites

for the hearing will be published in the

Federal Register.

In addition to several areas mentioned

earlier in this preamble, specific

comments are requested with respect to

certain issues raised by these proposed

regulations. Concerning the relationship

between revocation of tax-exempt status

and the taxes imposed under section

4958, comments are invited to be

considered in preparing guidance

outlining the factors the IRS will

consider in exercising its administrative

discretion in accordance with the

legislative history. Comments are also

requested with regard to the rule under
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41495

which an economic benefit provided to,

or for the use of, a disqualified person

will not be treated as consideration for

the performance of services absent the

clear indication of the organization’s

intent to treat the benefit as

compensation when the benefit is paid.

Specifically, comments are requested on

appropriate ways of applying this rule

that will not create an unnecessary

burden on affected organizations.

Additionally, comments are requested

with respect to the effect of the

proposed regulations on different

compensation arrangements, including

revenue-based compensation, deferred

compensation, and the use of options as

compensation.

Drafting Information

The principal author of these

regulations is Phyllis D. Haney, Office of

Associate Chief Counsel (Employee

Benefits and Exempt Organizations).

However, other personnel from the IRS

and Treasury Department participated

in their development.

List of Subjects

26 CFR Part 53

Excise taxes, Foundations,

Investments, Lobbying, Reporting and

recordkeeping requirements, Trusts and

trustees.

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR Parts 53 and 301

are proposed to be amended as follows:

PART 53—FOUNDATION AND SIMILAR

EXCISE TAXES

Paragraph 1. The authority citation

for part 53 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 2. Sections 53.4958–0 through

53.4958–7 are added to read as follows:

§ 53.4958–0 Table of contents.

This section lists the captions

contained in §§ 53.4958–1 through

53.4958–7.

§ 53.4958–1 Taxes on excess benefit

transactions.

(a) In general.

(b) Excess benefit defined.

(c) Taxes paid by disqualified person.

(1) Initial tax.

(2) Additional tax on disqualified person.

(i) In general.

(ii) Correction.

(iii) Taxable period.

(iv) Abatement if correction during the

correction period.

(d) Tax paid by organization managers.

(1) In general.

(2) Organization manager defined.

(i) In general.

(ii) Special rule for certain committee

members.

(3) Participation.

(4) Knowing.

(i) In general.

(ii) Special rule.

(5) Willful.

(6) Due to reasonable cause.

(7) Advice of counsel.

(8) Limits on liability for management.

(9) Joint and several liability.

(e) Date of occurrence.

(f) Statute of limitations.

(g) Effective date for imposition of taxes.

(1) In general.

(2) Existing binding contracts.

§ 53.4958–2—Definition of applicable taxexempt organization.

(a) In general.

(b) Section 501(c)(3) organizations.

(c) Section 501(c)(4) organizations.

§ 53.4958–3—Definition of disqualified

person.

(a) In general.

(b) Statutory categories of disqualified

persons.

(1) Family members.

(2) Thirty-five percent controlled entities.

(i) In general.

(ii) Combined voting power.

(iii) Constructive ownership rules.

(A) Stockholdings.

(B) Profits or beneficial interest.

(c) Persons having substantial influence.

(1) Individuals serving on the governing

body who are entitled to vote.

(2) Presidents, chief executive officers, or

chief operating officers.

(3) Treasurers and chief financial officers.

(4) Persons with a material financial

interest in a provider-sponsored organization.

(d) Persons deemed not to have substantial

influence.

(1) Applicable tax-exempt organizations

described in section 501(c)(3).

(2) Employees receiving economic benefits

of less than specified amount in a taxable

year.

(i) In general.

(ii) Examples.

(e) Facts and circumstances govern in all

other cases.

(1) In general.

(2) Facts and circumstances tending to

show substantial influence.

(3) Facts and circumstances tending to

show no substantial influence.

(f) Examples.

(g) Affiliated organizations.

§ 53.4958–4 Excess benefit transaction.

(a) Definition of excess benefit transaction.

(1) In general.

(2) Economic benefit provided directly or

indirectly.

(3) Certain economic benefits disregarded

for purposes of section 4958.

(i) Reimbursements for reasonable

expenses of attending meetings of governing

body.

(ii) Economic benefits provided to a

disqualified person solely as a member of, or

volunteer for, the organization.

(iii) Economic benefits provided to a

disqualified person solely as a member of a

charitable class.

(4) Insurance or indemnification of excise

taxes.

(b) Standards for identifying excess

benefits.

(1) In general.

(2) Fair market value for transfer of

property.

(3) Reasonable compensation.

(i) In general.

(ii) Items included in determining the

value of compensation for purposes of

section 4958.

(iii) Examples.

(c) Establishing intent to treat economic

benefit as consideration for the performance

of services.

(1) In general.

(2) Clear and convincing evidence of

intent.

(i) In general.

(ii) Reporting of benefit.

(iii) Failure to report due to reasonable

cause.

(3) Effect of failing to establish intent.

(4) Examples.

§ 53.4958–5 Transaction in which amount

of economic benefit determined in whole or

in part by the revenues of one or more

activities of the organization.

(a) In general.

(b) Special rule for allocation or return of

net margins or capital to members of certain

cooperatives.

(c) Rules effective prospectively.

(d) Examples.

§ 53.4958–6 Rebuttable presumption that

transaction is not an excess benefit

transaction.

(a) In general.

(b) Delegation pursuant to procedures.

(c) Rebutting the presumption.

(d) Requirements for invoking rebuttable

presumption.

(1) Disinterested governing body or

committee.

(i) In general.

(ii) Persons not included on governing

body or committee.

(iii) Absence of conflict of interest.

(iv) Rule where ratification of full

governing body required.

(2) Appropriate data as to comparability.

(i) In general.

(ii) Special rule for compensation paid by

small organizations.

(iii) Additional rules for special rule for

small organizations.

(iv) Examples.

(3) Documentation.

(e) No presumption until circumstances

exist to determine reasonableness of

compensation.

(f) No inference from absence of

presumption.

(g) Period of reliance on rebuttable

presumption.
41496 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

§ 53.4958–7 Special rules.

(a) Substantive requirements for exemption

still apply.

(b) Interaction between section 4958 and

section 7611 rules for church tax inquiries

and examinations.

§ 53.4958–1 Taxes on excess benefit

transactions.

(a) In general. Section 4958 imposes

excise taxes on each excess benefit

transaction (as defined in section

4958(c) and § 53.4958–4 and § 53.4958–

5) between an applicable tax-exempt

organization (as defined in section

4958(e) and § 53.4958–2) and a

disqualified person (as defined in

section 4958(f)(1) and § 53.4958–3). A

disqualified person who receives an

excess benefit from an excess benefit

transaction is liable for payment of a

section 4958(a)(1) excise tax equal to 25

percent of the excess benefit. If an initial

tax is imposed by section 4958(a)(1) on

an excess benefit transaction and the

transaction is not corrected within the

taxable period, then any disqualified

person who received an excess benefit

from the excess benefit transaction on

which the initial tax was imposed is

liable for an additional tax of 200

percent of the excess benefit. An

organization manager (as defined in

section 4958(f)(2) and paragraph (d) of

this section) who participates in an

excess benefit transaction, knowing that

it was such a transaction, is liable for

payment of a section 4958(a)(2) excise

tax equal to 10 percent of the excess

benefit, unless the participation was not

willful and was due to reasonable cause.

If an organization manager also receives

an excess benefit from an excess benefit

transaction, the manager may be liable

for both taxes imposed by section

4958(a).

(b) Excess benefit defined. Except as

provided in § 53.4958–5 with respect to

certain revenue-sharing transactions, an

excess benefit is the value of the

economic benefit provided by an

applicable tax-exempt organization

directly or indirectly to or for the use of

any disqualified person that exceeds the

value of the consideration (including

the performance of services) received by

the organization for providing such

benefit.

(c) Taxes paid by disqualified

person—(1) Initial tax. Section

4958(a)(1) imposes a tax equal to 25

percent of the excess benefit on each

excess benefit transaction. The section

4958(a)(1) tax shall be paid by any

disqualified person who received an

excess benefit from that excess benefit

transaction. With respect to any excess

benefit transaction, if more than one

disqualified person is liable for the tax

imposed by section 4958(a)(1), all such

persons are jointly and severally liable

for that tax.

(2) Additional tax on disqualified

person—(i) In general. Section 4958(b)

imposes a tax equal to 200 percent of

the excess benefit in any case in which

a section 4958(a)(1) tax is imposed on

an excess benefit transaction and the

transaction is not corrected (as defined

in section 4958(f)(6) and paragraph

(c)(2)(ii) of this section) within the

taxable period (as defined in section

4958(f)(5) and paragraph (c)(2)(iii) of

this section). The tax imposed by

section 4958(b) is payable by any

disqualified person who received an

excess benefit from the excess benefit

transaction on which the initial tax was

imposed by section 4958(a)(1). With

respect to any excess benefit

transaction, if more than one

disqualified person is liable for the tax

imposed by section 4958(b), all such

persons are jointly and severally liable

for that tax.

(ii) Correction. Correction means, 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 had been

dealing under the highest fiduciary

standards. Correction of the excess

benefit occurs if the disqualified person

repays the applicable tax-exempt

organization an amount of money equal

to the excess benefit, plus any

additional amount needed to

compensate the organization for the loss

of the use of the money or other

property during the period commencing

on the date of the excess benefit

transaction and ending on the date the

excess benefit is corrected. Correction

may also be accomplished, in certain

circumstances, by returning property to

the organization and taking any

additional steps necessary to make the

organization whole. If the excess benefit

transaction consists of the payment of

compensation for services under a

contract that has not been completed,

termination of the employment or

independent contractor relationship

between the organization and the

disqualified person is not required in

order to correct. However, the terms of

any ongoing compensation arrangement

may need to be modified to avoid future

excess benefit transactions.

(iii) Taxable period. 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 earlier of—

(A) The date of mailing a notice of

deficiency under section 6212 with

respect to the section 4958(a)(1) tax; or

(B) The date on which the tax

imposed by section 4958(a)(1) is

assessed.

(iv) Abatement if correction during

the correction period. For rules relating

to abatement of taxes on excess benefit

transactions that are corrected within

the correction period, as defined in

section 4963(e), see sections 4961(a),

4962(a), and the regulations thereunder.

(d) Tax paid by organization

managers—(1) In general. In any case in

which section 4958(a)(1) imposes a tax,

section 4958(a)(2) imposes a tax equal to

10 percent of the excess benefit on the

participation of any organization

manager who knowingly participated in

the excess benefit transaction, unless

such participation was not willful and

was due to reasonable cause. The tax is

to be paid by any organization manager

who so participated.

(2) Organization manager defined—(i)

In general. An organization manager is,

with respect to any applicable taxexempt 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, regardless of title. A

person shall be considered an officer of

an organization if—

(A) That person is specifically so

designated under the certificate of

incorporation, by-laws, or other

constitutive documents of the

organization; or

(B) That person regularly exercises

general authority to make administrative

or policy decisions on behalf of the

organization. Independent contractors,

acting in a capacity as attorneys,

accountants, and investment managers

and advisors, are not officers. Any

person who has authority merely to

recommend particular administrative or

policy decisions, but not to implement

them without approval of a superior, is

not an officer.

(ii) Special rule for certain committee

members. An individual who is not an

officer, director, or trustee, yet serves on

a committee of the governing body of an

applicable tax-exempt organization that

is invoking the rebuttable presumption

of reasonableness described in

§ 53.4958–6 based on the committee’s

actions, is an organization manager for

purposes of the tax imposed by section

4958(a)(2).

(3) Participation. For purposes of

section 4958(a)(2) and this paragraph

(d), participation includes silence or

inaction on the part of an organization

manager where the manager is under a
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41497

duty to speak or act, as well as any

affirmative action by such manager.

However, an organization manager will

not be considered to have participated

in an excess benefit transaction where

the manager has opposed such

transaction in a manner consistent with

the fulfillment of the manager’s

responsibilities to the applicable taxexempt organization.

(4) Knowing—(i) In general. For

purposes of section 4958(a)(2) and this

paragraph (d), a person participates in a

transaction knowing that it is an excess

benefit transaction only if the person—

(A) Has actual knowledge of sufficient

facts so that, based solely upon such

facts, such transaction would be an

excess benefit transaction;

(B) Is aware that such an act under

these circumstances may violate the

provisions of federal tax law governing

excess benefit transactions; and

(C) Negligently fails to make

reasonable attempts to ascertain

whether the transaction is an excess

benefit transaction, or the person is in

fact aware that it is such a transaction.

(ii) Special rule. Knowing does not

mean having reason to know. However,

evidence tending to show that a person

has reason to know of a particular fact

or particular rule is relevant in

determining whether the person had

actual knowledge of such a fact or rule.

Thus, for example, evidence tending to

show that a person has reason to know

of sufficient facts so that, based solely

upon such facts, a transaction would be

an excess benefit transaction is relevant

in determining whether the person has

actual knowledge of such facts.

(5) Willful. For purposes of section

4958(a)(2) and this paragraph (d),

participation by an organization

manager is willful if it is voluntary,

conscious, and intentional. No motive to

avoid the restrictions of the law or the

incurrence of any tax is necessary to

make the participation willful.

However, participation by an

organization manager is not willful if

the manager does not know that the

transaction in which the manager is

participating is an excess benefit

transaction.

(6) Due to reasonable cause. An

organization manager’s participation is

due to reasonable cause if the manager

has exercised his responsibility on

behalf of the organization with ordinary

business care and prudence.

(7) Advice of counsel. If a person, after

full disclosure of the factual situation to

legal counsel (including in-house

counsel) relies on the advice of such

counsel expressed in a reasoned written

legal opinion that a transaction is not an

excess benefit transaction, the person’s

participation in such transaction will

ordinarily not be considered knowing or

willful and will ordinarily be

considered due to reasonable cause

within the meaning of section

4958(a)(2), even if such transaction is

subsequently held to be an excess

benefit transaction. For purposes of

satisfying the requirements of section

4958(a)(2), a written legal opinion is

reasoned so long as the opinion

addresses itself to the facts and

applicable law. However, a written legal

opinion is not reasoned if it does

nothing more than recite the facts and

express a conclusion. The absence of

advice of counsel with respect to an act

shall not, by itself, however, give rise to

any inference that a person participated

in such act knowingly, willfully, or

without reasonable cause.

(8) Limits on liability for management.

The maximum aggregate amount of tax

collectible under section 4958(a)(2) and

this paragraph (d) from organization

managers with respect to any one excess

benefit transaction is $10,000.

(9) Joint and several liability. In any

case where more than one person is

liable for a tax imposed by section

4958(a)(2), all such persons shall be

jointly and severally liable for the taxes

imposed under section 4958(a)(2) with

respect to that excess benefit

transaction.

(e) Date of occurrence. Except as

otherwise provided, an excess benefit

transaction occurs on the date on which

the disqualified person receives the

economic benefit from the applicable

tax-exempt organization for federal

income tax purposes. In the case of a

transaction consisting of payment of

deferred compensation, the transaction

occurs on the date the deferred

compensation is earned and vested.

(f) Statute of limitations. See sections

6501(e)(3) and 6501(l) and the

regulations thereunder, as amended, for

statute of limitations rules as they apply

to section 4958 excise taxes.

(g) Effective date for imposition of

taxes—(1) In general. The section 4958

taxes imposed on excess benefit

transactions or on participation in

excess benefit transactions apply to

transactions occurring on or after

September 14, 1995.

(2) Existing binding contracts. The

section 4958 taxes do not apply to any

transaction occurring pursuant to a

written contract that was binding on

September 13, 1995, and at all times

thereafter before the transaction occurs.

A written binding contract that is

terminable or subject to cancellation by

the applicable tax-exempt organization

without the disqualified person’s

consent is treated as a new contract as

of the date that any such termination or

cancellation, if made, would be

effective. If a binding written contract is

materially modified (a material

modification includes amending the

contract to extend its term or to increase

the amount of compensation payable to

the disqualified person), it is treated as

a new contract entered into as of the

date of the material modification.

§ 53.4958–2 Definition of applicable taxexempt organization.

(a) In general—(1) An applicable taxexempt organization is any organization

that, without regard to any excess

benefit, would be described in section

501(c)(3) or (4) and exempt from tax

under section 501(a). An applicable taxexempt organization also includes any

organization that was described in

section 501(c)(3) or (4) and was exempt

from tax under section 501(a) at any

time during a five-year period ending on

the date of an excess benefit transaction

(the lookback period).

(2) In the case of any transaction

occurring before September 14, 2000,

the lookback period begins on

September 14, 1995, and ends on the

date of the transaction.

(b) Section 501(c)(3) organizations. To

be described in section 501(c)(3) for

purposes of section 4958, an

organization must meet the

requirements of section 508 (subject to

any applicable exceptions provided by

that section). A foreign organization that

receives substantially all of its support

from sources outside of the United

States is not subject to the requirements

of section 508 and is not an organization

described in section 501(c)(3) for

purposes of section 4958. A private

foundation as defined in section 509(a)

is not an applicable tax-exempt

organization for section 4958 purposes.

(c) Section 501(c)(4) organizations. An

organization that has applied for and

received recognition of exemption as an

organization described in section

501(c)(4) is an applicable tax-exempt

organization for section 4958 purposes.

In addition, an organization that has

sought to take advantage of section

501(c)(4) status by filing an application

for recognition of exemption under

section 501(c)(4) with the Internal

Revenue Service, filing an information

return as a section 501(c)(4)

organization under the Internal Revenue

Code or regulations promulgated

thereunder, or otherwise holding itself

out as being described in section

501(c)(4), is an applicable tax-exempt

organization for section 4958 purposes.

A foreign organization that receives

substantially all of its support from

sources outside of the United States is
41498 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

not an applicable tax-exempt

organization for section 4958 purposes.

§ 53.4958–3 Definition of disqualified

person.

(a) In general. Section 4958(f)(1)

defines disqualified person, with

respect to any transaction, as any person

who was in a position to exercise

substantial influence over the affairs of

the organization at any time during the

five-year period ending on the date of

the transaction. If the five-year period

ending on the date of the transaction

would have begun on or before

September 13, 1995, then the preceding

sentence shall be applied to the period

beginning September 14, 1995, and

ending on the date of the transaction.

Paragraph (b) of this section further

describes other persons who are defined

to be disqualified persons under the

statute, including certain family

members of an individual in a position

to exercise substantial influence, and

certain 35 percent controlled entities.

Paragraph (c) of this section describes

persons in a position to exercise

substantial influence over the affairs of

an applicable tax-exempt organization

by virtue of their powers and

responsibilities or certain interests they

hold. Paragraph (d) of this section

describes persons deemed not to be in

a position to exercise substantial

influence. Whether any person not

described in paragraph (b), (c) or (d) of

this section is a disqualified person with

respect to the transaction for purposes

of section 4958 is based on all relevant

facts and circumstances, as described in

paragraph (e) of this section. Examples

in paragraphs (d)(2)(ii) and (f) of this

section illustrate these categories of

persons.

(b) Statutory categories of disqualified

persons—(1) Family members. A person

is a disqualified person with respect to

any transaction with an applicable taxexempt organization if the person is a

member of the family of another

disqualified person described in

paragraph (a) of this section with

respect to any transaction with the same

organization. A person’s family

includes—

(i) Spouse;

(ii) Brothers or sisters (by whole or

half blood);

(iii) Spouses of brothers or sisters (by

whole or half blood);

(iv) Ancestors;

(v) Children;

(vi) Grandchildren;

(vii) Great grandchildren; and

(viii) Spouses of children,

grandchildren, and great grandchildren.

(2) Thirty-five percent controlled

entities—(i) In general. A person is a

disqualified person with respect to any

transaction with an applicable taxexempt organization if the person is a 35

percent controlled entity. A 35 percent

controlled entity is—

(A) A corporation in which persons

described in this section (except in this

paragraph (b)(2) and paragraph (d) of

this section) own more than 35 percent

of the combined voting power;

(B) A partnership in which persons

described in this section (except in this

paragraph (b)(2) and paragraph (d) of

this section) own more than 35 percent

of the profits interest; or

(C) A trust or estate in which persons

described in this section (except in this

paragraph (b)(2) and paragraph (d) of

this section) own more than 35 percent

of the beneficial interest.

(ii) Combined voting power. For

purposes of this paragraph (b)(2),

combined voting power includes voting

power represented by holdings of voting

stock, direct or indirect, but does not

include voting rights held only as a

director or trustee.

(iii) Constructive ownership rules—

(A) Stockholdings. For purposes of

section 4958(f)(3) and this paragraph

(b)(2), indirect stockholdings are taken

into account as under section 267(c),

except that in applying section

267(c)(4), the family of an individual

shall include the members of the family

specified in section 4958(f)(4) and

paragraph (b)(1) of this section.

(B) Profits or beneficial interest. For

purposes of section 4958(f)(3) and this

paragraph (b)(2), the ownership of

profits or beneficial interests shall be

determined in accordance with the rules

for constructive ownership of stock

provided in section 267(c) (other than

section 267(c)(3)), except that in

applying section 267(c)(4), the family of

an individual shall include the members

of the family specified in section

4958(f)(4) and paragraph (b)(1) of this

section.

(c) Persons having substantial

influence. A person is in a position to

exercise substantial influence over the

affairs of an applicable tax-exempt

organization if that person has the

powers or responsibilities, or holds the

type of interests, described in one of the

following categories:

(1) Individuals serving on the

governing body who are entitled to vote.

This category includes any individual

serving on the governing body of the

organization who is entitled to vote on

matters over which the governing body

has authority.

(2) Presidents, chief executive officers,

or chief operating officers. This category

includes any individual who,

individually or with others, serves as

the president, chief executive officer, or

chief operating officer of the

organization. An individual serves as a

president, chief executive officer, or

chief operating officer, regardless of

title, if that individual has or shares

ultimate responsibility for

implementing the decisions of the

governing body or supervising the

management, administration, or

operation of the applicable organization.

(3) Treasurers and chief financial

officers. This category includes any

individual who, independently or with

others, serves as treasurer or chief

financial officer of the organization. An

individual serves as a treasurer or chief

financial officer, regardless of title, if

that individual has or shares ultimate

responsibility for managing the

organization’s financial assets and has

or shares authority to sign drafts or

direct the signing of drafts, or authorize

electronic transfer of funds, from

organization bank accounts.

(4) Persons with a material financial

interest in a provider-sponsored

organization. Pursuant to section 501(o),

this category includes any person with

a material financial interest in a

provider-sponsored organization (as

defined in section 1853(e) of the Social

Security Act (42 U.S.C. 1395w–23)) if a

hospital that participates in the

provider-sponsored organization is an

applicable tax-exempt organization.

(d) Persons deemed not to have

substantial influence. A person is

deemed not to be in a position to

exercise substantial influence over the

affairs of an applicable tax-exempt

organization if that person is described

in one of the following categories:

(1) Applicable tax-exempt

organizations described in section

501(c)(3). This category includes any

other applicable tax-exempt

organization described in section

501(c)(3).

(2) Employees receiving economic

benefits of less than specified amount in

a taxable year—(i) In general. This

category includes, for the taxable year in

which benefits are provided, any

employee of the applicable tax-exempt

organization who—

(A) Receives economic benefits,

directly or indirectly from the

organization, of less than the amount of

compensation referenced for a highly

compensated employee in section

414(q)(1)(B)(i);

(B) Is not described in § 53.4958–3(b)

or (c) with respect to the organization;

and

(C) Is not a substantial contributor to

the organization within the meaning of

section 507(d)(2).
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41499

(ii) Examples. The following

examples illustrate the category of

persons described in this paragraph

(d)(2):

Example 1. N, an artist by profession,

works part-time at R, a local museum. In the

first taxable year in which R employs N, R

pays N a modest salary and provides no

additional benefits to N except for free

admission to the museum, a benefit R

provides to all of its employees and

volunteers. The total economic benefits N

receives from R during the taxable year are

less than the amount of compensation

referenced for a highly compensated

employee in section 414(q)(1)(B)(i). The parttime job constitutes N’s only relationship

with R. N is not related to any other

disqualified person with respect to R. N is

deemed not to be in a position to exercise

substantial influence over the affairs of R.

Therefore N is not a disqualified person with

respect to any transaction involving N and R

in that year.

Example 2. The facts are the same as in

Example 1, except that in addition to the

modest salary that R pays N in exchange for

N’s provision of services to R during the

taxable year, R also purchases one of N’s

paintings for $90,000. The total economic

benefits provided by R to N in that year

exceed the amount of compensation

referenced for highly compensated

employees in section 414(q)(1)(B)(i).

Consequently, whether N is in a position to

exercise substantial influence over the affairs

of R for that taxable year depends upon all

relevant facts and circumstances.

(e) Facts and circumstances govern in

all other cases—(1) In general. Whether

a person who is not described in

paragraph (b), (c) or (d) of this section

is a disqualified person depends upon

all relevant facts and circumstances. A

person who has managerial control over

a discrete segment of an organization

may nonetheless be in a position to

exercise substantial influence over the

affairs of the entire organization.

(2) Facts and circumstances tending

to show substantial influence. Facts and

circumstances tending to show that a

person has substantial influence over

the affairs of an organization include,

but are not limited to, the following—

(i) The person founded the

organization;

(ii) The person is a substantial

contributor (within the meaning of

section 507(d)(2)) to the organization;

(iii) The person’s compensation is

based on revenues derived from

activities of the organization that the

person controls;

(iv) The person has authority to

control or determine a significant

portion of the organization’s capital

expenditures, operating budget, or

compensation for employees;

(v) The person has managerial

authority or serves as a key advisor to

a person with managerial authority; or

(vi) The person owns a controlling

interest in a corporation, partnership, or

trust that is a disqualified person.

(3) Facts and circumstances tending

to show no substantial influence. Facts

and circumstances tending to show that

a person does not have substantial

influence over the affairs of an

organization include, but are not limited

to—

(i) The person has taken a bona fide

vow of poverty as an employee, agent,

or on behalf of a religious organization;

(ii) The person is an independent

contractor, such as an attorney,

accountant, or investment manager or

advisor, acting in that capacity, unless

the person is acting in that capacity

with respect to a transaction from which

the person might economically benefit

either directly or indirectly (aside from

fees received for the professional

services rendered); and

(iii) Any preferential treatment a

person receives based on the size of that

person’s donation is also offered to any

other donor making a comparable

contribution as part of a solicitation

intended to attract a substantial number

of contributions.

(f) Examples. The following examples

illustrate the principles of this section.

Finding a person to be a disqualified

person in the following examples does

not indicate that an excess benefit

transaction has occurred, but only that

any transaction with the applicable taxexempt organization that provides

benefits to the disqualified person

directly or indirectly may be scrutinized

to determine whether it is an excess

benefit transaction:

Example 1. E is the headmaster of Z, a

school that is an applicable tax-exempt

organization for purposes of section 4958. E

reports to Z’s board of trustees and is the

principal employee responsible for

implementing the board’s decisions. E also

has ultimate responsibility for supervising

Z’s day-to-day operations. For example, E can

hire faculty members and staff, make changes

to the school’s curriculum and discipline

students without specific board approval.

Because E serves as the chief executive

officer of Z, E is in a position to exercise

substantial influence over the affairs of Z.

Therefore E is a disqualified person with

respect to any transaction involving Z that

provides economic benefits to E directly or

indirectly.

Example 2. G is a program officer at

community organization C, an applicable taxexempt organization for purposes of section

4958. G’s total compensation for the taxable

year, including benefits, is less than the

amount of compensation referenced for a

highly compensated employee in section

414(q)(1)(B)(i). G is not related to any other

disqualified person with respect to C. G does

not serve on C’s governing body and or as an

officer of C. G makes a modest annual

contribution to C, but is not a substantial

contributor to C (within the meaning of

section 507(d)(2)). G is deemed not to be in

a position to exercise substantial influence

over the affairs of C for this year because G

is an employee who receives economic

benefits for the year of less than the amount

of compensation referenced for a highly

compensated employee in section

414(q)(1)(B)(i). Therefore, for this year, G is

not a disqualified person with respect to any

transaction involving C that provides

economic benefits to G directly or indirectly.

Example 3. Y, an applicable tax-exempt

organization for purposes of section 4958,

enters into a contract with B, a company that

manages bingo games. Under the contract, B

agrees to provide all of the staff and

equipment necessary to carry out a bingo

operation one night per week, and to pay Y

q percent of the revenue from this activity.

B retains the balance of the proceeds. Y

provides no goods or services in connection

with the bingo operation other than the use

of its hall for the bingo game. The annual

gross revenue earned from the bingo game

represents more than half of Y’s total annual

revenue. B’s status as a disqualified person

is determined by all relevant facts and

circumstances. B’s compensation is based on

revenues from an activity B controls. B also

has full managerial authority over Y’s

principal source of income. Under these facts

and circumstances, B is in a position to

exercise substantial influence over the affairs

of Y. Therefore B is a disqualified person

with respect to any transaction involving Y

that provides economic benefits to B directly

or indirectly.

Example 4. The facts are the same as in

Example 3, with the additional fact that the

stock of B is 100 percent owned by P, an

individual who is actively involved in

managing B. Because P owns a controlling

interest (measured by either vote or value) in

and actively manages B, the facts and

circumstances establish that P is also in a

position to exercise substantial influence

over the affairs of Y. Therefore P is a

disqualified person with respect to any

transaction involving Y that provides

economic benefits to P directly or indirectly.

Example 5. A, an applicable tax-exempt

organization for purposes of section 4958,

owns and operates one acute care hospital. B

is a for-profit corporation that owns and

operates a number of hospitals. A and B form

C, a limited liability company. In exchange

for proportional ownership interests, A

contributes its hospital, and B contributes

other financial assets, to C. All of A’s assets

then consist of its membership interest in C.

A continues to be operated for exempt

purposes based almost exclusively on the

activities it conducts through C. C enters into

a management agreement with a management

company, M, to provide day-to-day

management services to C. M is generally

subject to supervision by C’s board, but M is

given broad discretion to manage C’s day-today operation. Under these facts and

circumstances, M is in a position to exercise

substantial influence over the affairs of A

because it has day to day control over the

hospital operated by C, A’s ownership

interest in C is its primary asset, and C’s
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activities form the basis for A’s continued

exemption as an organization described in

section 501(c)(3). Therefore, M is a

disqualified person with respect to any

transaction involving A, including any

transaction that A conducts through C, that

provides economic benefits to M directly or

indirectly.

Example 6. T is a large university and an

applicable tax-exempt organization for

purposes of section 4958. L is the dean of the

College of Law of T, a major source of

revenue for T. The College of Law is

important to T’s reputation for excellent

teaching and high quality faculty

scholarship. T relies on this reputation to

attract students and contributions from

alumni and foundations. L plays a key role

in faculty hiring and has authority to control

or determine a significant portion of T’s

capital expenditures and operating budget

because of L’s position in the College of Law.

L’s compensation is greater than the amount

of compensation referenced for a highly

compensated employee in section

414(q)(1)(B)(i) in the year benefits are

provided. Because of the importance of the

College of Law to T and L’s managerial

control over that segment of T, L is in a

position to exercise substantial influence

over the affairs of T. Therefore L is a

disqualified person with respect to any

transaction involving T that provides

economic benefits to L directly or indirectly.

Example 7. X is a radiologist employed by

U, a large acute-care hospital that is an

applicable tax-exempt organization for

purposes of section 4958. X has no

managerial authority over any part of U or its

operations. X gives instructions to staff with

respect to the radiology work X conducts, but

X does not serve as supervisor to other U

employees. X’s total compensation package

includes nontaxable retirement and welfare

benefits and a specified amount of salary. X’s

compensation is greater than the amount of

compensation referenced for a highly

compensated employee in section

414(q)(1)(B)(i) in the year benefits are

provided. X is not related to any other

disqualified person of U. X does not serve on

U’s governing body or as an officer of U.

Although U participates in a providersponsored organization (as defined in section

1853(e) of the Social Security Act), X does

not have a material financial interest in that

organization. Whether X is a disqualified

person is determined by all relevant facts and

circumstances. X did not found U, and

although X makes a modest annual financial

contribution to U, the amount of the

contribution does not make X a substantial

contributor within the meaning of section

507(d)(2). X does not receive compensation

based on revenues derived from activities of

U that X controls, and has no authority to

control or determine a significant portion of

U’s capital expenditures, operating budget, or

compensation for employees. Under these

facts and circumstances, X does not have

substantial influence over the affairs of U,

and therefore X is not a disqualified person

with respect to any transaction involving U

that provides economic benefits to X directly

or indirectly.

Example 8. W is a cardiologist and head of

the cardiology department of the same

hospital U described in Example 7. W does

not serve on U’s board and does not serve as

an officer of U. W does not have a material

financial interest in the provider-sponsored

organization (as defined in section 1853(e) of

the Social Security Act) in which U

participates. W is compensated personally

with a salary and retirement and welfare

benefits fixed by a three-year renewable

employment contract with U. W’s annual

amount of compensation exceeds the amount

referenced for a highly compensated

employee in section 414(q)(1)(B)(i). Whether

W is a disqualified person is determined by

all relevant facts and circumstances. W has

managerial authority for the cardiology

department. The cardiology department is a

principal source of patients admitted to U

and consequently a major source of revenue

for U. W also has authority to allocate the

budget for that department, which includes

authority to distribute incentive bonuses

among cardiologists according to criteria that

he has authority to set. The pool for the

bonuses is funded by a portion of U’s

revenues attributable to the cardiology

department. Because of the importance of the

cardiology department to U and W’s

managerial control over that segment of U, W

is in a position to exercise substantial

influence over the affairs of U. Therefore W

is a disqualified person with respect to any

transaction involving U that provides

economic benefits to W directly or indirectly.

Example 9. D is an accountant who

periodically provides accounting and tax

advisory services as an independent

contractor in return for a fee to M, a museum

that is an applicable tax-exempt organization

for purposes of section 4958. For several

years, D has advised M’s officers and

members of M’s governing body with respect

to accounting and tax matters. D’s firm also

prepares tax returns on behalf of M. D has no

relationship with M other than as a

professional accounting and tax advisor. D is

not related to any other disqualified person

of M. D’s firm has a policy prohibiting

employees from providing professional

advice with respect to a transaction from

which they might economically benefit either

directly or indirectly (aside from fees

received for the professional services

rendered). D abides by the firm’s policy in all

activities, including the work for M. Whether

D is a disqualified person is determined by

all relevant facts and circumstances. Because

D acts only in D’s capacity as an independent

contractor providing occasional professional

services to M and abides by the firm’s

conflict of interest policy, under these facts

and circumstances, D is not a disqualified

person with respect to any transaction with

M.

Example 10. F, a repertory theater

company that is an applicable tax-exempt

organization for purposes of section 4958,

holds a fund-raising campaign to pay for the

construction of a new theater. J is a regular

subscriber to F’s productions who has made

modest gifts to F in the past. J has no

relationship to F other than as a subscriber

and contributor. F solicits contributions as

part of a broad public campaign intended to

attract a large number of donors, including a

substantial number of donors making large

gifts. In its solicitations for contributions, F

promises to invite all contributors giving $z

or more to a special opening production and

party held at the new theater. These

contributors are also given a special number

to call in F’s office to reserve tickets for

performances, make ticket exchanges, and

make other special arrangements for their

convenience. J makes a contribution of $z to

F, which makes J a substantial contributor

within the meaning of section 507(d)(2). F

provides J with the preferential treatment

described in its solicitation. Whether J is a

disqualified person is determined by all

relevant facts and circumstances. Under

these facts and circumstances, any influence

that may arise from the size of J’s donation

is limited by F’s commitment to provide

similar treatment to any other member of the

public making a similar contribution and by

the nature of the benefits being offered.

Accordingly, the preferential treatment that J

receives does not indicate that J is in a

position to exercise substantial influence

over the affairs of the organization. Therefore,

barring a change in J’s relationship with F,

J is not a disqualified person with respect to

any transaction involving F that provides

economical benefits to J directly or

indirectly.

(g) Affiliated organizations. In the

case of multiple organizations affiliated

by common control or governing

documents, the determination of

whether a person does or does not have

substantial influence shall be made

separately for each applicable taxexempt organization.

§ 53.4958–4 Excess benefit transaction.

(a) Definition of excess benefit

transaction—(1) In general. An excess

benefit transaction means any

transaction in which an economic

benefit is provided by an applicable taxexempt organization directly or

indirectly, to or for the use of, any

disqualified person, and the value of the

economic benefit provided exceeds the

value of the consideration (including

the performance of services) received by

the organization for providing such

benefit. An excess benefit transaction

also includes certain revenue-sharing

transactions described in § 53.4958–5.

An economic benefit shall not be treated

as consideration for the performance of

services unless the organization

providing the benefit clearly indicates

its intent to treat the benefit as

compensation when the benefit is paid.

(2) Economic benefit provided directly

or indirectly. An excess benefit

transaction occurs when an applicable

tax-exempt organization provides an

excess benefit directly or indirectly to a

disqualified person. A benefit may be

provided indirectly through the use of

one or more entities controlled by or

affiliated with the applicable tax-exempt

organization. For example, if an
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applicable tax-exempt organization

causes its taxable subsidiary to pay

excessive compensation to, or engage in

a transaction at other than fair market

value with, a disqualified person of the

parent organization, the payment of the

compensation or the transfer of property

is an excess benefit transaction.

(3) Certain economic benefits

disregarded for purposes of section

4958. The following economic benefits

are disregarded for purposes of section

4958:

(i) Reimbursements for reasonable

expenses of attending meetings of

governing body. Paying reasonable

expenses for members of the governing

body of an applicable tax-exempt

organization to attend meetings of the

governing body of the organization will

be disregarded for purposes of section

4958. For purposes of the preceding

sentence, reasonable expenses do not

include luxury travel or spousal travel.

(ii) Economic benefits provided to a

disqualified person solely as a member

of, or volunteer for, the organization. An

economic benefit provided to a

disqualified person that the disqualified

person receives solely as a member of,

or volunteer for, the organization is

disregarded for purposes of section 4958

if the benefit is provided to members of

the public in exchange for a

membership fee of $75 or less per year.

Thus, for example, if a disqualified

person is also a member of the

organization and receives membership

benefits such as advance ticket

purchases and a discount at the

organization’s gift shop that would

normally be provided in exchange for a

membership fee of $75 or less per year,

then the membership benefit is

disregarded for purposes of section

4958.

(iii) Economic benefits provided to a

disqualified person solely as a member

of a charitable class. An economic

benefit provided to a disqualified

person that the disqualified person

receives solely as a member of a

charitable class that the applicable taxexempt organization intends to benefit

as part of the accomplishment of the

organization’s exempt purpose is

generally disregarded for purposes of

section 4958.

(4) Insurance or indemnification of

excise taxes. The payment of a premium

for an insurance policy providing

liability insurance to a disqualified

person for the taxes imposed under this

section or indemnification of a

disqualified person for such taxes by an

applicable tax-exempt organization will

not constitute an excess benefit

transaction for purposes of section 4958

if the premium or the indemnification is

treated as compensation to the

disqualified person when paid, and the

total compensation paid to the

disqualified person is reasonable.

(b) Standards for identifying excess

benefits—(1) In general. If an economic

benefit provided by the applicable taxexempt organization to or for the use of

any disqualified person exceeds the fair

market value of the consideration, the

excess is the excess benefit on which tax

is imposed by section 4958. See

§ 53.4958–5(c) for rules concerning the

excess benefit in certain revenuesharing transactions.

(2) Fair market value for transfer of

property. The fair market value of

property, including the right to use

property, is the price at which property

or the right to use property would

change hands between a willing buyer

and a willing seller, neither being under

any compulsion to buy, sell or transfer

property or the right to use property,

and both having reasonable knowledge

of relevant facts.

(3) Reasonable compensation—(i) In

general. Compensation paid may not

exceed what is reasonable under all the

circumstances. Compensation for the

performance of services is reasonable if

it is only such amount as would

ordinarily be paid for like services by

like enterprises under like

circumstances. Generally, the

circumstances to be taken into

consideration are those existing at the

date when the contract for services was

made. However, where reasonableness

of compensation cannot be determined

based on circumstances existing at the

date when the contract for services was

made, then that determination is made

based on all facts and circumstances, up

to and including circumstances as of the

date of payment. In no event shall

circumstances existing at the date when

the contract is questioned be considered

in making a determination of the

reasonableness of compensation. A

written binding contract that is

terminable or subject to cancellation by

the applicable tax-exempt organization

without the disqualified person’s

consent is treated as a new contract as

of the date that any such termination or

cancellation, if made, would be

effective. If a binding written contract is

materially modified, it is treated as a

new contract entered into as of the date

of the material modification. A material

modification includes, but is not limited

to, amending the contract to extend its

term or to increase the amount of

compensation payable to the

disqualified person. The fact that a State

or local legislative or agency body or

court has authorized or approved a

particular compensation package paid to

a disqualified person is not

determinative of the reasonableness of

compensation paid for purposes of

section 4958 excise taxes.

(ii) Items included in determining the

value of compensation for purposes of

section 4958. Compensation for

purposes of section 4958 includes all

items of compensation provided by an

applicable tax-exempt organization in

exchange for the performance of

services. These items of compensation

include, but are not limited to—

(A) All forms of cash and noncash

compensation, including salary, fees,

bonuses, and severance payments paid;

(B) All forms of deferred

compensation that is earned and vested,

whether or not funded, and whether or

not paid under a deferred compensation

plan that is a qualified plan under

section 401(a), but if deferred

compensation for services performed in

multiple prior years vests in a later year,

then that compensation is attributed to

the years in which the services were

performed;

(C) The amount of premiums paid for

liability or any other insurance

coverage, as well as any payment or

reimbursement by the organization of

charges, expenses, fees, or taxes not

covered ultimately by the insurance

coverage;

(D) All other benefits, whether or not

included in income for tax purposes,

including payments to welfare benefit

plans on behalf of the persons being

compensated, such as plans providing

medical, dental, life insurance,

severance pay, and disability benefits,

and both taxable and nontaxable fringe

benefits (other than working condition

fringe benefits described in section

132(d) and de minimis fringe benefits

described in section 132(e)), including

expense allowances or reimbursements

or foregone interest on loans that the

recipient must report as income on his

separate income tax return; and

(E) Any economic benefit provided by

an applicable tax-exempt organization,

whether provided directly or through

another entity owned, controlled by or

affiliated with the applicable tax-exempt

organization, whether such other entity

is taxable or tax-exempt.

(iii) Examples. The following

examples illustrate whether the

reasonableness of compensation can be

determined based on circumstances

existing at the time a contract for the

performance of services was made

under the rules of this paragraph (b)(3):

Example 1. G is an applicable tax-exempt

organization for purposes of section 4958. H

is an employee of G and a disqualified person

with respect to any transaction involving G

that provides economic benefits to H directly
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or indirectly. H’s multi-year employment

contract provides for payment of a salary and

provision of specific amounts of health and

retirement benefits. The contract provides for

an annual increase in H’s salary equal to the

percentage increase, if any, over the

preceding year in the Consumer Price Index

(CPI). The CPI for a year is determined using

an average of the monthly CPI as determined

for each month in that calendar year. The

health benefits consist of insurance coverage

under a plan that is available to all of G’s

employees. The retirement benefits are equal

to the maximum amount G is permitted to

contribute under the rules applicable to

qualified retirement plans. Under these facts,

the reasonableness of H’s compensation can

be determined based on the circumstances

existing at the time G and H enter into the

employment contract.

Example 2. N is an applicable tax-exempt

organization for purposes of section 4958. N

uses the cash method of accounting and a

calendar year as its taxable year. On January

2, N’s governing body enters into a one-year

employment contract for K, its new executive

director, who is a disqualified person with

respect to any transaction involving N and K.

In addition to providing that K will receive

a specified amount of salary, deferred

compensation, and other health and

retirement benefits from N in return for K’s

services, the terms of the contract permit N’s

governing body to declare a bonus to be paid

to K at any time during the year covered by

the contract. Declaration and payment of any

bonus is within the governing body’s

discretion, with no specified limitations or

guidelines. The reasonableness of K’s

compensation cannot be determined based

on the circumstances existing as of the date

the contract was made because there were no

guidelines in the contract for the bonus that

N may potentially pay. Therefore, the

determination of whether N’s compensation

is reasonable must be made based on all

circumstances, up to and including

circumstances as of the date of payment of

any bonus actually paid under the contract.

If N pays K a bonus on December 31, the

reasonableness of K’s compensation must be

based on all circumstances from January 2

through December 31.

(c) Establishing intent to treat

economic benefit as consideration for

the performance of services—(1) In

general. An applicable tax-exempt

organization will be treated as having

intended to provide an economic benefit

as compensation for services only if the

organization provides clear and

convincing evidence that it intended to

so treat the economic benefit when the

benefit was paid.

(2) Clear and convincing evidence of

intent—(i) In general. If an applicable

tax-exempt organization or a

disqualified person reports an economic

benefit as described in paragraph

(c)(2)(ii) of this section then the

organization will have provided clear

and convincing evidence that it

intended to provide an economic benefit

as compensation for services when the

benefit was paid. If an applicable taxexempt organization’s failure to report

an economic benefit as required under

the Internal Revenue Code is due to

reasonable cause (within the meaning

§ 301.6724–1 of this chapter and

paragraph (c)(2)(iii) of this section), then

the organization will be treated as

having provided clear and convincing

evidence of the requisite intent. An

organization may use methods other

than those described in paragraphs

(c)(2)(ii) and (iii) of this section to

provide clear and convincing evidence

of its intent.

(ii) Reporting of benefit. The

organization reports the economic

benefit as compensation on original or

amended federal tax information returns

with respect to the payment (e.g., Form

W–2 or 1099) or with respect to the

organization (e.g., Form 990), filed

before the commencement of an Internal

Revenue Service examination in which

the reporting of the benefit is

questioned. For purposes of section

4958 and this section, an Internal

Revenue Service examination of an

applicable tax-exempt organization has

commenced if the organization has

received written notification from the

Exempt Organizations Division of an

impending Exempt Organizations

examination, or written notification of

an impending referral for an Exempt

Organizations examination, and also

includes having been under an Exempt

Organizations examination that is now

in Appeals or in litigation for issues

raised in an Exempt Organizations

examination of the period in which the

excess benefit transaction occurred.

Reporting of an economic benefit to

provide clear and convincing evidence

of intent is also accomplished if the

recipient disqualified person reports the

benefit as income on the person’s Form

1040 for the year in which the benefit

is received.

(iii) Failure to report due to

reasonable cause. To show that its

failure to report an economic benefit

that should have been reported on an

information return was due to

reasonable cause, an applicable taxexempt organization must establish that

there were significant mitigating factors

with respect to its failure to report (as

described in § 301.6724–1(b) of this

chapter), or the failure arose from events

beyond the organization’s control (as

described in § 301.6724–1(c) of this

chapter), and that the organization acted

in a responsible manner both before and

after the failure occurred (as described

in § 301.6724–1(d) of this chapter).

(3) Effect of failing to establish intent.

If an organization fails to provide clear

and convincing evidence that it

intended to provide an economic benefit

as compensation for services when paid,

any services provided by the

disqualified person will not be treated

as provided in consideration for the

economic benefit.

(4) Examples. The following examples

illustrate the rules for an organization to

establish its intent to treat an economic

benefit as consideration for the

performance of services as defined in

this paragraph (c):

Example 1. G is an applicable tax-exempt

organization for purposes of section 4958. G

hires an individual contractor, P, to design a

computer program for it, executes a contract

for that purpose, and pays P $1,000 in a

timely manner pursuant to the contract.

Before January 31 of the next year, G reports

the full amount paid to P under the contract

on a Form 1099 filed with the Internal

Revenue Service. G has provided clear and

convincing evidence of its intent to provide

the $1,000 paid to P as compensation for the

services P performed under the contract.

Example 2. The facts are the same as in

Example 1, except that the services are

provided by Corporation V. The contract

executed by Corporation V and G and placed

in G’s files indicates that the payment made

to Corporation V is in return for computer

programming services provided by

employees of Corporation V. G does not issue

an information return to Corporation V

because Corporation V is not an individual

taxpayer. The contract constitutes clear and

convincing evidence of G’s intent to provide

the payment as compensation for Corporation

V’s services.

Example 3. G is an applicable tax-exempt

organization for purposes of section 4958. D

is the chief operating officer of G, and a

disqualified person with respect to any

transaction involving G that provides

economic benefits to D directly or indirectly.

D receives a bonus at the end of the year. A

copy of the letter from G to D describing the

amount and the basis for D’s bonus is placed

in D’s personnel file. Information provided to

all employees in the personnel handbook

clearly states that bonuses are treated as

taxable income, and included in the total

wages figure reported on each employee’s

Form W–2. G’s accounting department

determines that the bonus is to be reported

on D’s Form W–2. Due to a computer

malfunction after data was entered

incorrectly by personnel of G’s accounting

department, the bonus is not reflected on D’s

Form W–2. As a result, D fails to report the

bonus on his individual income tax return.

G acts to amend Forms W–2 affected as soon

as G becomes aware of the data entry error

and consequent computer malfunction. G’s

failure to report the bonus on an information

return issued to D arose from events beyond

G’s control, and G acted in a responsible

manner both before and after the failure

occurred. Thus, because G had reasonable

cause for failing to report D’s bonus, G will

be treated as having clear and convincing

evidence of its intent to provide the bonus as

compensation for services when paid.
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41503

§ 53.4958–5 Transaction in which amount

of economic benefit determined in whole or

in part by the revenues of one or more

activities of the organization.

(a) In general. Whether a transaction

in which the amount of an economic

benefit provided by an applicable taxexempt organization to or for the use of

a disqualified person is determined in

whole or in part by the revenues of one

or more activities of the applicable taxexempt organization (revenue-sharing

transaction) results in inurement and

therefore constitutes an excess benefit

transaction, depends upon all relevant

facts and circumstances. A revenuesharing transaction may constitute an

excess benefit transaction regardless of

whether the economic benefit provided

to the disqualified person exceeds the

fair market value of the consideration

provided in return if, at any point, it

permits a disqualified person to receive

additional compensation without

providing proportional benefits that

contribute to the organization’s

accomplishment of its exempt purpose.

If the economic benefit is provided as

compensation for services, relevant facts

and circumstances include, but are not

limited to, the relationship between the

size of the benefit provided and the

quality and quantity of the services

provided, as well as the ability of the

party receiving the compensation to

control the activities generating the

revenues on which the compensation is

based.

(b) Special rule for allocation or

return of net margins or capital to

members of certain cooperatives. The

allocation or return of net margins or

capital to the members of certain

cooperatives in accordance with their

incorporating statute and bylaws does

not result in inurement of the net

earnings to the benefit of any private

shareholder or individual, and therefore

does not constitute an excess benefit

transaction for section 4958 purposes.

The preceding sentence applies to

cooperatives that were determined by

the Secretary of the Treasury or his

delegate to be described in section

501(c)(4) and exempt from tax under

section 501(a) before July 30, 1996, and

have substantially the same

incorporating statute and bylaws as

existed on July 30, 1996.

(c) Rules effective prospectively. The

rules in this section apply to any

revenue-sharing transaction described

in this section that occurs on or after the

date of publication of final regulations.

The excess benefit shall consist of the

entire economic benefit provided in any

transaction described in this section.

Any revenue-sharing transaction

occurring after September 13, 1995, may

still constitute an excess benefit

transaction if the economic benefit

provided to the disqualified person

exceeds the fair market value of the

consideration provided in return. Before

the date of publication of final

regulations, however, the excess benefit

shall consist only of that portion of the

economic benefit that exceeds the fair

market value of the consideration

provided in return.

(d) Examples. The following examples

illustrate the principles used in

determining whether a revenue-sharing

transaction constitutes an excess benefit

transaction under the rules of this

section:

Example 1. A is the manager of the

investment portfolio of M, an applicable taxexempt organization for purposes of section

4958. A and several other professional

investment managers work exclusively for M

in an office in M’s building. A’s

compensation consists of a flat base annual

salary, health insurance, eligibility to

participate in a retirement plan, and a bonus

that is equal to a percentage of any increase

in the value of M’s portfolio over the year

(net of expenses for investment management

other than the in-house managers’

compensation). The revenue-based portion of

A’s compensation gives A an incentive to

provide the highest quality service in order

to maximize benefits and minimize expenses

to M. A has a measure of control over the

activities generating the revenues on which

his bonus is based, but A can increase his

own compensation only if M also receives a

proportional benefit. Under these facts and

circumstances, the payment to A of the bonus

described above does not constitute an excess

benefit transaction under the rules of this

section.

Example 2. L, an applicable tax-exempt

organization for purposes of section 4958,

enters into a contract with H, a company who

manages charitable gaming activities for

public charities. As a result of the contractual

relationship, H becomes a disqualified

person with respect to any transaction

involving L that provides economic benefits

to H directly or indirectly. Under the

contract, H agrees to provide all of the staff

and equipment necessary to carry out

charitable gaming operations on behalf of L,

and to pay L z percent of the net profits,

which are calculated as the gross revenue

less rental for the equipment, wages for the

staff, prizes for the winners, and other

specified operating expenses. H retains the

balance of the proceeds after expenses and

after paying L its z percent of the net profits.

As manager, H controls the activities

generating the revenue on which its

compensation is based. In addition, because

H owns the equipment and employs the staff

needed to operate the charitable gaming

activities, H controls what L is charged,

including the profit H makes above the cost

of these items. Therefore, H can also control

the net revenues relative to the gross

revenues from the gaming activity. The

structure of the compensation H receives for

its services does not provide H with an

appropriate incentive to maximize benefits

and minimize costs to L. H benefits whether

expenses are high and net revenues are low

or expenses are low and net revenues are

high. By contrast, L suffers if expenses for the

charitable gaming operation are high and net

revenues are low. All of the gross revenues

generated by the charitable gaming operation

belong to L. The arrangement between H and

L allows a portion of those revenues to inure

to H. Therefore, this arrangement results in

the inurement of L’s net earnings to the

benefit of H, and the entire amount paid to

H under this arrangement constitutes an

excess benefit under the rules of this section.

Example 3. R, a professor and faculty

member at S, a university that is an

applicable tax-exempt organization for

purposes of section 4958, is the principal

investigator in charge of certain scientific

research at S. The research produces an

invention. In accordance with S’s agreement

with its faculty, S owns the invention. R

assists S in preparing a patent application. S

receives a patent for R’s invention, which S

owns. Also in accordance with S’s agreement

with its faculty, S grants R the right to receive

v percent of S’s royalties on the patent,

payable semi-annually. R also receives an

annual compensation package of salary and

benefits. The availability of revenue-based

compensation under these circumstances

does not give R any incentive or opportunity

to act contrary to S’s interests in

accomplishing its exempt purpose. R receives

the revenue-based compensation, i.e., the

percentage of royalties, as an incentive and

a reward for producing work of especially

high quality. In addition, any time R benefits

by receiving royalties, S benefits as well and

to a proportionate degree. Finally, because

the patent belongs to S, R has no control over

how the patent is used nor the stream of

revenue it generates. Under these facts and

circumstances, S’s payment of revenue-based

compensation to R does not constitute an

excess benefit transaction under the rules of

this section.

§ 53.4958–6 Rebuttable presumption that

transaction is not an excess benefit

transaction.

(a) In general. Payments under a

compensation arrangement between an

applicable tax-exempt organization and

a disqualified person shall be presumed

to be reasonable, and a transfer of

property, right to use property, or any

other benefit or privilege between an

applicable tax-exempt organization and

a disqualified person shall be presumed

to be at fair market value, if the

following conditions are satisfied—

(1) The compensation arrangement or

terms of transfer are approved by the

organization’s governing body or a

committee of the governing body

composed entirely of individuals who

do not have a conflict of interest with

respect to the arrangement or

transaction;

(2) The governing body, or committee

thereof, obtained and relied upon
41504 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

appropriate data as to comparability

prior to making its determination; and

(3) The governing body or committee

adequately documented the basis for its

determination concurrently with

making that determination.

(b) Delegation pursuant to procedures.

To the extent permitted under local law,

the governing body of an applicable taxexempt organization may authorize

other parties to act on its behalf by

following specified procedures that

satisfy the three requirements for

invoking the rebuttable presumption of

reasonableness. An arrangement or

transaction that is subsequently

approved by the board’s designee or

designees in accordance with those

procedures shall be subject to the

rebuttable presumption even though the

governing body does not vote separately

on the specific arrangement or

transaction.

(c) Rebutting the presumption. The

presumption established by satisfying

the three requirements of paragraph (a)

of this section may be rebutted by

additional information showing that the

compensation was not reasonable or

that the transfer was not at fair market

value.

(d) Requirements for invoking

rebuttable presumption—(1)

Disinterested governing body or

committee—(i) In general. The

governing body is the board of directors,

board of trustees, or equivalent

controlling body of the applicable taxexempt organization. A committee of

the governing body may be composed of

any individuals permitted under state

law to serve on such a committee, and

may act on behalf of the governing body

to the extent permitted by state law.

However, if the rebuttable presumption

arises as the result of actions taken by

a committee, any members of such a

committee who are not members of the

governing body are deemed to be

organization managers for purposes of

the tax imposed by section 4958(a)(2),

subject to the rules of § 53.4958–1(d).

(ii) Persons not included on governing

body or committee. For purposes of

determining whether the requirements

of paragraph (a) of this section have

been met with respect to a specific

transaction or compensation

arrangement, a person is not included

on the governing body or committee

when it is reviewing a transaction if that

person meets with other members only

to answer questions, and otherwise

recuses himself from the meeting and is

not present during debate and voting on

the transaction or compensation

arrangement.

(iii) Absence of conflict of interest. A

member of the governing body, or

committee thereof, does not have a

conflict of interest with respect to a

compensation arrangement or

transaction if the member—

(A) Is not the disqualified person and

is not related to any disqualified person

participating in or economically

benefiting from the compensation

arrangement or transaction by a

relationship described in section

4958(f)(4) or § 53.4958–3(b)(1);

(B) Is not in an employment

relationship subject to the direction or

control of any disqualified person

participating in or economically

benefiting from the compensation

arrangement or transaction;

(C) Is not receiving compensation or

other payments subject to approval by

any disqualified person participating in

or economically benefiting from the

compensation arrangement or

transaction;

(D) Has no material financial interest

affected by the compensation

arrangement or transaction; and

(E) Does not approve a transaction

providing economic benefits to any

disqualified person participating in the

compensation arrangement or

transaction, who in turn has approved

or will approve a transaction providing

economic benefits to the member.

(iv) Rule where ratification by full

governing body required. An

arrangement or transaction has not been

approved by a committee of a governing

body if, under the governing documents

of the organization or state law, the

committee’s decision must be ratified by

the full governing body in order to

become effective.

(2) Appropriate data as to

comparability—(i) In general. A

governing body or committee has

appropriate data as to comparability if,

given the knowledge and expertise of its

members, it has information sufficient

to determine whether, under the

standards set forth in § 53.4958–4(b), a

compensation arrangement will result in

the payment of reasonable

compensation or a transaction will be

for fair market value. Relevant

information would include, but not be

limited to, compensation levels paid by

similarly situated organizations, both

taxable and tax-exempt, for functionally

comparable positions; the availability of

similar services in the geographic area

of the applicable tax-exempt

organization; independent

compensation surveys compiled by

independent firms; actual written offers

from similar institutions competing for

the services of the disqualified person;

and independent appraisals of the value

of property that the applicable

organization intends to purchase from,

or sell or provide to, the disqualified

person.

(ii) Special rule for compensation

paid by small organizations. For

organizations with annual gross receipts

of less than $1 million reviewing

compensation arrangements, the

governing body or committee will be

considered to have appropriate data as

to comparability if it has data on

compensation paid by five comparable

organizations in the same or similar

communities for similar services. No

inference is intended with respect to

whether circumstances falling outside

this safe harbor will meet the

requirement with respect to the

collection of appropriate data.

(iii) Additional rules for special rule

for small organizations. For purposes of

determining applicability of the special

rule for small organizations described in

paragraph (d)(2)(ii) of this section, a

rolling average based on the three prior

taxable years may be used to calculate

annual gross receipts of an organization.

If any applicable tax-exempt

organization is affiliated with another

entity by common control or governing

documents, the annual gross receipts of

all such related organizations must be

aggregated to determine applicability of

the special rule stated in paragraph

(d)(2)(ii) of this section.

(iv) Examples. The following

examples illustrate the rules for

appropriate data as to comparability for

purposes of invoking the rebuttable

presumption of reasonableness

described in this section:

Example 1. Z is a large university that is

an applicable tax-exempt organization for

purposes of section 4958. Z has had gross

receipts of $200 million for the preceding

three taxable years. Z is negotiating a new

contract with its president because the old

contract will expire at the end of the year. In

determining the compensation for its

president, the executive committee of the

Board of Trustees relies on a national survey

of compensation for university presidents;

this survey does not divide its data by any

measure of university size or any other

criteria. None of the members of the

executive committee has any particular

expertise in higher education compensation

matters, although many members have

significant business experience. Given the

lack of specificity in the data collected and

the lack of relevant expertise and experience

of the executive committee members, the

data relied on by the executive committee

does not constitute appropriate data as to

comparability.

Example 2. X, a tax-exempt hospital that is

an applicable tax-exempt organization for

purposes of section 4958, has average annual

gross receipts of $250 million. Before

renewing the contracts of X’s chief executive

officer and chief financial officer, X’s

governing board commissioned a customized
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules 41505

compensation survey from an independent

firm that specializes in consulting on issues

related to executive placement and

compensation. The survey covered

executives with comparable responsibilities

at a significant number of hospitals. The

survey data are sorted by a number of

different variables, including the size of the

hospitals and the nature of the services they

provide, the level of experience and specific

responsibilities of the executives, and the

composition of the compensation packages.

The board members were provided with the

survey results, a detailed written analysis

comparing the hospital’s executives to those

covered by the survey and an opportunity to

ask questions of a member of the firm that

prepared the survey. The survey, as prepared

and presented to X’s board, constitutes

appropriate data as to comparability.

Example 3. W is a local repertory theater

and an applicable tax-exempt organization

for purposes of section 4958. W has had

annual gross receipts ranging from $400,000

to $800,000 over its past three taxable years.

In determining the next year’s compensation

for W’s artistic director, the board relies on

data compiled from a telephone survey of six

other unrelated repertory theaters of similar

size in various communities throughout the

same geographic region. A member of the

board drafts a brief written summary of the

salary information obtained from this

informal survey. This information is later

included in a written report that also

includes information about the membership

of the board of directors, and an evaluation

of the artistic director’s prior salary and

performance that is discussed and voted on

by the board. The salary information

obtained in the telephone survey is

appropriate data as to comparability.

(3) Documentation—(i) For a decision

to be documented adequately, the

written or electronic records of the

governing body or committee must

note—

(A) The terms of the transaction that

was approved and the date it was

approved;

(B) The members of the governing

body or committee who were present

during debate on the transaction or

arrangement that was approved and

those who voted on it;

(C) The comparability data obtained

and relied upon by the committee and

how the data was obtained; and

(D) The actions taken with respect to

consideration of the transaction by

anyone who is otherwise a member of

the governing body or committee but

who had a conflict of interest with

respect to the transaction or

arrangement.

(ii) If the governing body or

committee determines that reasonable

compensation for a specific arrangement

or fair market value in a specific

transaction is higher or lower than the

range of comparable data obtained, the

governing body or committee must

record the basis for its determination.

For a decision to be documented

concurrently, records must be prepared

by the next meeting of the governing

body or committee occurring after the

final action or actions of the governing

body or committee are taken. Records

must be reviewed and approved by the

governing body or committee as

reasonable, accurate and complete

within a reasonable time period

thereafter.

(e) No presumption until

circumstances exist to determine

reasonableness of compensation. If

reasonableness of the compensation

cannot be determined based on

circumstances existing at the date when

a contract for services was made, then

the rebuttable presumption of this

section cannot arise until circumstances

exist so that reasonableness of

compensation can be determined, and

the three requirements for the

presumption under paragraph (d) of this

section subsequently are satisfied. See

§ 53.4958–4(b)(3)(i).

(f) No inference from absence of

presumption. The fact that a transaction

between an applicable tax-exempt

organization and a disqualified person

is not subject to the presumption

described in this section shall not create

any inference that the transaction is an

excess benefit transaction. Neither shall

the fact that a transaction qualifies for

the presumption exempt or relieve any

person from compliance with any

federal or state law imposing any

obligation, duty, responsibility, or other

standard of conduct with respect to the

operation or administration of any

applicable tax-exempt organization.

(g) Period of reliance on rebuttable

presumption. The rebuttable

presumption applies to all payments

made or transactions completed in

accordance with a contract provided

that the three requirements of the

rebuttable presumption were met at the

time the contract was agreed upon.

§ 53.4958–7 Special rules.

(a) Substantive requirements for

exemption still apply. The excise taxes

imposed by section 4958 do not affect

the substantive statutory standards for

tax exemption under sections 501(c)(3)

or (4). Organizations are described in

those sections only if no part of their net

earnings inure to the benefit of any

private shareholder or individual.

(b) Interaction between section 4958

and section 7611 rules for church tax

inquiries and examinations. The

procedures of section 7611 will be used

in initiating and conducting any inquiry

or examination into whether an excess

benefit transaction has occurred

between a church and a disqualified

person. For purposes of this rule, the

reasonable belief required to initiate a

church tax inquiry is satisfied if there is

a reasonable belief that a section 4958

tax is due from a disqualified person

with respect to a transaction involving

a church. See § 301.7611–1 Q&A 19 of

this chapter.

§ 53.4963–1 [Amended]

Par. 3. In § 53.4963–1, paragraphs (a),

(b), and (c) are amended by adding the

reference ‘‘4958,’’ immediately after the

reference ‘‘4955,’’ in each place it

appears.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 4. The authority citation for part

301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

§ 301.6213–1 [Amended]

Par. 5. Section 301.6213–1, paragraph

(e) is amended by adding the reference

‘‘4958,’’ immediately after the reference

‘‘4955,’’ in the first sentence.

§ 301.6501(e)–1 [Amended]

Par. 6. Section 301.6501(e)–1 is

amended as follows:

1. Paragraph (c)(3)(ii), first and second

sentences are amended by removing the

language ‘‘or trust’’ and adding ‘‘trust, or

other organization’’ in its place.

2. Paragraph (c)(3)(ii), the first

sentence is amended by removing the

language ‘‘and 4953’’ and adding ‘‘4953,

and 4958’’ in its place.

§ 301.6501(n)–1 [Amended]

Par. 7. Section 301.6501(n)–1 is

amended as follows:

1. The paragraph heading for

paragraph (a) is amended by removing

the language ‘‘or trust’’ and adding

‘‘trust, or other organization’’ in its

place.

2. Paragraph (a)(1), the first sentence

is amended by removing the language

‘‘or trust’’ and adding ‘‘trust, or other

organization’’ in its place.

3. Paragraph (b), the heading and the

first sentence are amended by removing

the language ‘‘or trust’’ and adding

‘‘trust, or other organization’’ in its

place.

§ 301.7422–1 [Amended]

Par. 8. In section 301.7422–1,

paragraphs (a) introductory text, (c)

introductory text and (d) are amended

by adding the reference ‘‘4958,’’

immediately after the reference ‘‘4955,’’.

§ 301.7611–1 [Amended]

Par. 9. In § 301.7611–1, the Table of

Contents is amended by adding
41506 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 / Proposed Rules

‘‘Application to Section 4958......19’’

immediately after ‘‘Effective

Date......18’’.

Par. 10. In § 301.7611–1, an

undesignated centerheading and Q–19

and A–19 are added to read as follows:

§ 301.7611–1 Questions and answers

relating to church tax inquiries and

examinations.

* * * * *

Application to Section 4958

Q–19: When do the church tax

inquiry and examination procedures

described in section 7611 apply to a

determination of whether there was an

excess benefit transaction described in

section 4958?

A–19: See § 53.4958–7(b) of this

chapter for rules governing the

interaction between section 4958 excise

taxes on excess benefit transactions and

section 7611 church tax inquiry and

examination procedures.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98–20419 Filed 7–30–98; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamation

and Enforcement

30 CFR Part 904

[SPATS No. AR–030–FOR]

Arkansas Regulatory Program

AGENCY: Office of Surface Mining

Reclamation and Enforcement (OSM),

Interior.

ACTION: Proposed rule; Reopening and

extension of public comment period on

proposed amendment.

SUMMARY: OSM is announcing receipt of

revisions pertaining to a previously

proposed amendment to the Arkansas

regulatory program (hereinafter referred

to as the ‘‘Arkansas program’’) under the

Surface Mining Control and

Reclamation Act of 1977 (SMCRA). The

revisions for Arkansas’s proposed rules

pertain to ASCMRC 701.5, Definitions;

ASCMRC 780.14, Operations Plan: Maps

and Plans; ASCMRC 816.46, Hydrologic

Balance: Siltation Structures; ASCMRC

816.56, Hydrologic Balance: Postmining

Rehabilitation of Sedimentation Ponds,

Diversions, Impoundments, and

Treatment Facilities; ASCMRC 816.102,

Backfilling and Grading: General

Grading Requirements; ASCMRC

823.11, Applicability; and ASCMRC

823.15, Revegetation and Restoration of

Soil Productivity. Arkansas also

proposes to change the old name of the

‘‘U.S. Soil Conservation Service’’ to its

new name of ‘‘Natural Resources

Conservation Service’’ throughout its

regulations. The amendment is intended

to revise the Arkansas program to be

consistent with the corresponding

Federal regulations and to enhance

enforcement of the State program.

DATES: Written comments must be

received by 4:00 p.m., c.d.t., August 19,

1998.

ADDRESSES: Written comments should

be mailed or hand delivered to Michael

C. Wolfrom, Director, Tulsa Field Office

at the address listed below.

Copies of the Arkansas program, the

proposed amendment, and all written

comments received in response to this

document will be available for public

review at the addresses listed below

during normal business hours, Monday

through Friday, excluding holidays.

Each requester may receive one free

copy of the proposed amendment by

contacting OSM’s Tulsa Field Office.

Michael C. Wolfrom, Director, Tulsa

Field Office, Office of Surface Mining

Reclamation and Enforcement, 5100

East Skelly Drive, Suite 470, Tulsa,

Arkansas 74135–6547, Telephone:

(918) 581–6430.

Arkansas Department of Pollution

Control and Ecology, Surface Mining

and Reclamation Division, 8001

National Drive, Little Rock, Arkansas

72219–8913, Telephone (501) 682-

0744.

FOR FURTHER INFORMATION CONTACT:

Michael C. Wolfrom, Director, Tulsa

Field Office, Telephone: (918) 581–

6430.

SUPPLEMENTARY INFORMATION:

I. Background on the Arkansas Program

II. Discussion of the Proposed Amendment

III. Public Comment Procedures

IV. Procedural Determinations

I. Background on the Arkansas

Program

On November 21, 1980, the Secretary

of the Interior conditionally approved

the Arkansas program. Background

information on the Arkansas program,

including the Secretary’s findings, the

disposition of comments, and the

conditions of approval can be found in

the November 21, 1980, Federal

Register (45 FR 77003). Arkansas

amended its program by submitting

provisions that satisfied all of the

conditions of the Secretary’s approval of

November 21, 1980. Effective January

22, 1982, OSM removed the conditions

of the approval of the Arkansas

permanent regulatory program.

Information on the removal of the

conditions can be found in the January

22, 1982, Federal Register (47 FR 3108).

Subsequent actions concerning the

conditions of approval and program

amendments can be found at 30 CFR

904.12, 904.15, and 904.16.

II. Discussion of the Proposed

Amendment

By letter dated February 6, 1998

(Administrative Record No. AR–561),

Arkansas submitted a proposed

amendment to its program pursuant to

SMCRA. Arkansas submitted the

proposed amendment in response to a

June 17, 1997, letter (Administrative

Record No. AR–559) that OSM sent to

Arkansas in accordance with 30 CFR

732.17(c), and at its own initiative. The

provisions of Arkansas Surface Coal

Mining and Reclamation Code

(ASCMRC) that Arkansas proposes to

amend are: ASCMRC 761.5, Definitions;

ASCMRC 780.25, Reclamation Plan:

Siltation Structures, Impoundments,

Banks, Dams, and Embankments;

ASCMRC 780.35, Disposal of Excess

Spoil; ASCMRC 785.17, Prime

Farmlands; ASCMRC 816.21, Topsoil:

General Requirements; ASCMRC 816.22,

Topsoil: Removal; ASCMRC 816.23,

Topsoil: Storage; ASCMRC 816.24,

Topsoil: Redistribution; ASCMRC

816.25, Topsoil: Nutrients and Soil

Amendments; ASCMRC 816.56,

Hydrologic Balance: Postmining

Rehabilitation of Sedimentation Ponds,

Diversions, Impoundments, and

Treatment Facilities; ASCMRC 816.74,

Disposal of Excess Spoil: Pre-existing

Benches; ASCMRC 816.102, Backfilling

and grading: General Grading

Requirements; ASCMRC 816.103,

Backfilling and grading: Covering Coal

and Acid and toxic forming materials;

ASCMRC 816.104–S, Backfilling and

Grading: Thin Overburden; ASCMRC

816.105–S, Backfilling and Grading:

Thick Overburden; ASCMRC 816.106,

Backfilling and Grading: Steep Slopes;

ASCMRC Part 826, Special State

Program Performance Standards—

Operations on Steep Slopes; ASCMRC

816.107, Backfilling and Grading

Previously Mined Areas; ASCMRC Part

823, Special State Program Performance

Standards—Operations on Prime

Farmland; ASCMRC 845.18, Procedures

for Assessment Conference; and

ASCMRC 845.19, Request for

Adjudicatory Public Hearing. Arkansas

also proposed to make editorial and

reference changes in the following

sections of ASCMRC: 780.18(b)(7),

Reclamation plan: general requirements;

785.15(b) and (c), Steep slope mining;

785.16(a), (c)(6), and (d)(1), Permits

incorporating variances from

approximate original contour restoration

requirements for steep slope mining;