I

104TH CONGRESS

1ST SESSION H. R. 613

To amend the Internal Revenue Code of 1986 to impose penalties on selfdealing between certain tax-exempt organizations and disqualified persons, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 20, 1995

Mr. MENENDEZ introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to impose

penalties on self-dealing between certain tax-exempt

organizations and disqualified persons, and for other

purposes.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Tax Exemption

5 Accountability Act’’.
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1 SEC. 2. PENALTIES ON SELF-DEALING BY CHARITIES AND

2 CERTAIN OTHER TAX-EXEMPT ORGANIZA3 TIONS.

4 (a) IN GENERAL.—Part I of subchapter B of chapter

5 68 of the Internal Revenue Code of 1986 (relating to gen6 eral provisions) is amended by adding at the end the fol7 lowing new section:

8 ‘‘SEC. 6716. SELF-DEALING BY CHARITIES AND CERTAIN

9 OTHER TAX-EXEMPT ORGANIZATIONS.

10 ‘‘(a) INITIAL PENALTIES.—In the case of an act of

11 self-dealing between a disqualified person and an applica12 ble tax-exempt organization—

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

14 imposed a penalty equal to the product of—

15 ‘‘(A) the amount involved in the act of self16 dealing, and

17 ‘‘(B) the highest rate of tax specified in

18 section 11.

19 The penalty imposed by this paragraph shall be paid

20 by the organization with respect to which such act

21 occurred.

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

23 imposed on the participation of any organization

24 manager of an organization in any act of self-dealing

25 which occurs with respect to such organization,

26 knowing that it is such an act, a penalty equal to
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21 1 ⁄2 percent of the amount involved with respect to

2 such act for each year (or part thereof) in the tax3 able period, unless such participation is not willful

4 and is due to reasonable cause. The penalty imposed

5 by this paragraph shall be paid by the organization

6 manager who participated in the act of self-dealing.

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

8 imposed on any self-dealing a penalty equal to 5 per9 cent of the amount involved with respect to such act

10 for each year (or part thereof) in the taxable period.

11 The penalty imposed by this paragraph shall be paid

12 by the beneficiary (other than an organization man13 ager acting only as such) of such act.

14 ‘‘(b) EXCEPTION.—If—

15 ‘‘(1) it is established to the satisfaction of the Sec16 retary that a person otherwise required to pay a penalty

17 under subsection (a) with respect to any act of self-dealing

18 did not know that the act was an act of self-dealing,

19 ‘‘(2) the applicable tax-exempt organization

20 submits to the Secretary, for each of the 3 calendar

21 years following the calendar year in which the act

22 occurred, a statement by a qualified independent

23 auditor that such organization was described in

24 paragraph (3) or (4) section 501(c) (as the case may
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1 be) and exempt from tax under section 501(a) for

2 each such year, and

3 ‘‘(3) such act is corrected within the taxable pe4 riod,

5 then such penalty shall not be imposed on such person.

6 ‘‘(c) ADDITIONAL PENALTIES IF ACT NOT COR7 RECTED.—

8 ‘‘(1) ON THE MANAGEMENT.—In any case in

9 which an additional penalty is imposed by paragraph

10 (1), if an organization manager refused to agree to

11 part or all of the correction, there is hereby imposed

12 a penalty equal to 50 percent of the amount involved

13 with respect to such act. The penalty imposed by

14 this paragraph shall be paid by any organization

15 manager who refused to agree to part or all of the

16 correction.

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

18 which an additional penalty is imposed by paragraph

19 (1), there is hereby imposed a penalty equal to 200

20 percent of the amount involved with respect to such

21 act. The penalty imposed by this paragraph shall be

22 paid by the beneficiary (other than an organization

23 manager acting only as such) of such act.

24 ‘‘(d) SELF-DEALING.—For purposes of this section—
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1 ‘‘(1) IN GENERAL.—The term ‘self-dealing’

2 means any direct or indirect—

3 ‘‘(A) sale or exchange, or leasing, of prop4 erty between an applicable tax-exempt organiza5 tion and a disqualified person;

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

7 of credit between an applicable tax-exempt or8 ganization and a disqualified person;

9 ‘‘(C) furnishing of goods, services, or facili10 ties between an applicable tax-exempt organiza11 tion and a disqualified person;

12 ‘‘(D) payment of compensation (or pay13 ment or reimbursement of expenses) by an ap14 plicable tax-exempt organization to a disquali15 fied person;

16 ‘‘(E) transfer to, or use by or for the bene17 fit of, a disqualified person of the income or as18 sets of an applicable tax-exempt organization;

19 and

20 ‘‘(F) agreement to make any payment of

21 money or other property to a government offi22 cial (as defined in section 4946(c)), other than

23 an agreement to employ such individual for any

24 period after the termination of his government
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1 service if such individual is terminating his gov2 ernment service within a 90-day period.

3 ‘‘(2) SPECIAL RULES.—For purposes of para4 graph (1)—

5 ‘‘(A) the transfer of real or personal prop6 erty by a disqualified person to an applicable

7 tax-exempt organization shall be treated as a

8 sale or exchange if the property is subject to a

9 mortgage or similar lien which the organization

10 assumes or if it is subject to a mortgage or

11 similar lien which a disqualified person placed

12 on the property within the 10-year period end13 ing on the date of the transfer;

14 ‘‘(B) the lending of money by a disquali15 fied person to an applicable tax-exempt organi16 zation shall not be an act of self-dealing if the

17 loan is without interest or other charge (deter18 mined without regard to section 7872) and if

19 the proceeds of the loan are used exclusively for

20 the exempt purposes of the organization;

21 ‘‘(C) the furnishing of goods, services, or

22 facilities by a disqualified person to an applica23 ble tax-exempt organization shall not be an act

24 of self-dealing if the furnishing is without

25 charge and if the goods, services, or facilities so
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1 furnished are used exclusively for the exempt

2 purposes of the organization;

3 ‘‘(D) the furnishing of goods, services, or

4 facilities by an applicable tax-exempt organiza5 tion to a disqualified person shall not be an act

6 of self-dealing if—

7 ‘‘(i) such furnishing is made on a

8 basis no more favorable than that on which

9 such goods, services, or facilities are made

10 available to the general public, and

11 ‘‘(ii) the value of the goods, services,

12 or facilities so furnished in any transaction

13 (or series of related transactions) does not

14 exceed $100;

15 ‘‘(E) except in the case of the payment of

16 compensation to (or the payment or reimburse17 ment of expenses of) a government official (as

18 defined in section 4946(c)), the payment of

19 compensation (and the payment or reimburse20 ment of expenses) by an applicable tax-exempt

21 organization to a disqualified person for per22 sonal services which are reasonable and nec23 essary to carrying out the exempt purpose of

24 the organization shall not be an act of self-deal-
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1 ing if the compensation (or payment or reim2 bursement)—

3 ‘‘(i) is not excessive, and

4 ‘‘(ii) is at an annual rate not in excess

5 of the rate in effect under section 5312 of

6 title 5, United States Code (relating to

7 Level I of the Executive Schedule);

8 ‘‘(F) any transaction between an applicable

9 tax-exempt organization and a corporation

10 which is a disqualified person, pursuant to any

11 liquidation, merger, redemption, recapitaliza12 tion, or other corporate adjustment, organiza13 tion, or reorganization, shall not be an act of

14 self-dealing if—

15 ‘‘(i) there is a market on an estab16 lished securities market or otherwise for

17 any stock in such corporation, and

18 ‘‘(ii) all of the securities of the same

19 class as that held by the organization are

20 subject to the same terms and such terms

21 provide for receipt by the organization of

22 no less than fair market value;

23 ‘‘(G) in the case of a government official

24 (as defined in section 4946(c)), paragraph (1)

25 shall in addition not apply to—
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1 ‘‘(i) prizes and awards which are sub2 ject to the provisions of section 74(b)

3 (without regard to paragraph (3) thereof),

4 if the recipients of such prizes and awards

5 are selected from the general public,

6 ‘‘(ii) scholarships and fellowship

7 grants which would be subject to the provi8 sions of section 117(a) (as in effect on the

9 day before the date of the enactment of the

10 Tax Reform Act of 1986) and are to be

11 used for study at an educational organiza12 tion described in section 170(b)(1)(A)(ii),

13 ‘‘(iii) any annuity or other payment

14 (forming part of a stock-bonus, pension, or

15 profit-sharing plan) by a trust which is a

16 qualified trust under section 401,

17 ‘‘(iv) any annuity or other payment

18 under a plan which meets the requirements

19 of section 404(a)(2),

20 ‘‘(v) any contribution or gift (other

21 than a contribution or gift of money) to, or

22 services of facilities made available to, any

23 such individual, if the aggregate value of

24 such contributions, gifts, services, and fa25 cilities to, or made available to, such indi-
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1 vidual during any calendar year does not

2 exceed $25,

3 ‘‘(vi) any payment made under chap4 ter 41 of title 5, United States Code, or

5 ‘‘(vii) any payment or reimbursement

6 of traveling expenses for travel solely from

7 one point in the United States to another

8 point in the United States, but only if such

9 payment or reimbursement does not exceed

10 the actual cost of the transportation in11 volved plus an amount for all other travel12 ing expenses not in excess of 125 percent

13 of the maximum amount payable under

14 section 5702 of title 5, United States

15 Code, for like travel by employees of the

16 United States; and

17 ‘‘(H) the leasing by a disqualified person

18 to an applicable tax-exempt organization of of19 fice space for use by the organization in a

20 building with other tenants who are not dis21 qualified persons shall not be treated as an act

22 of self-dealing if—

23 ‘‘(i) such leasing of office space is

24 pursuant to a binding lease which was in
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1 effect on October 9, 1969, or pursuant to

2 renewals of such a lease;

3 ‘‘(ii) the execution of such lease was

4 not a prohibited transaction (within the

5 meaning of section 503(b) or any cor6 responding provision of prior law) at the

7 time of such execution; and

8 ‘‘(iii) the terms of the lease (or any

9 renewal) reflect an arm’s-length trans10 action.

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

12 section—

13 ‘‘(1) APPLICABLE TAX-EXEMPT ORGANIZA14 TION.—The term ‘applicable tax-exempt organiza15 tion’ means any organization which (without regard

16 to any act of self-dealing) would be described in

17 paragraph (3) or (4) of section 501(c) and exempt

18 from tax under section 501(a).

19 ‘‘(2) DISQUALIFIED PERSON.—

20 ‘‘(A) IN GENERAL.—The term ‘disqualified

21 person’ means, with respect to any trans22 action—

23 ‘‘(i) any person who was an organiza24 tion manager at any time during the 5-
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1 year period ending on the date of such

2 transaction.

3 ‘‘(ii) any member of a family (as de4 fined in section 4946(d)) of any person de5 scribed in clause (i),

6 ‘‘(iii) any 5-percent controlled entity

7 of persons described in clauses (i) and (ii),

8 and

9 ‘‘(iv) any government official (as de10 fined in section 4946(c)).

11 ‘‘(B) SPECIAL RULE FOR PRIVATE FOUN12 DATIONS.—With respect to any transaction in13 volving a private foundation—

14 ‘‘(i) the term ‘disqualified person’ in15 cludes a substantial contributor (as defined

16 in section 4946(a)(2)) to such foundation

17 and any person described in section

18 4946(a)(1)(C) with respect to such a con19 tributor, and

20 ‘‘(ii) such substantial contributor shall

21 be treated as described in clause (i) of sub22 paragraph (A) for purposes of applying

23 this section with respect to such founda24 tion.
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1 ‘‘(3) ORGANIZATION MANAGER.—The term ‘or2 ganization manager’ means, with respect to any ap3 plicable tax-exempt organization—

4 ‘‘(A) any officer, director, or trustee of

5 such organization (or any individual having

6 powers or responsibilities similar to those of of7 ficers, directors, or trustees of the organiza8 tion), and

9 ‘‘(B) with respect to any act (or failure to

10 act), the employees of the organization having

11 authority or responsibility with respect to such

12 act (or failure to act).

13 ‘‘(4) 5-PERCENT CONTROLLED ENTITY.—

14 ‘‘(A) 5-PERCENT CONTROLLED ENTITY.—

15 The term ‘5-percent controlled entity’ means—

16 ‘‘(i) a corporation in which persons

17 described in subparagraph (A) or (B) of

18 paragraph (2) own more than 5 percent of

19 the combined voting power,

20 ‘‘(ii) a partnership in which such per21 sons own more than 5 percent of the prof22 its interest, and

23 ‘‘(iii) a trust or estate in which such

24 persons own more than 5 percent of the

25 beneficial interest.
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1 ‘‘(B) CONSTRUCTIVE OWNERSHIP

2 RULES.—Rules similar to the rules of para3 graphs (3) and (4) of section 4946(a) shall

4 apply for purposes of this paragraph.

5 ‘‘(5) TAXABLE PERIOD.—The term ‘taxable pe6 riod’ means, with respect to any act of self-dealing,

7 the period beginning with the date on which the act

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

9 ‘‘(A) the date of mailing a notice of defi10 ciency with respect to the penalty imposed by

11 subsection (a)(1) under section 6212,

12 ‘‘(B) the date on which the penalty im13 posed by subsection (a)(1) is assessed, or

14 ‘‘(C) the date on which correction of the

15 act of self-dealing is completed.

16 ‘‘(6) AMOUNT INVOLVED.—The term ‘amount

17 involved’ means, with respect to any act of self-deal18 ing, the greater of the amount of money and the fair

19 market value of the other property given or the

20 amount of money and the fair market value of the

21 other property received; except that, in the case of

22 services described in subsection (d)(2)(E), the

23 amount involved shall be only the excess compensa24 tion. For purposes of the preceding sentence, the

25 fair market value—
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1 ‘‘(A) in the case of the taxes imposed by

2 subsection (a), shall be determined as of the

3 date on which the act of self-dealing occurs;

4 and

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

6 subsection (c), shall be the highest fair market

7 value during the taxable period.

8 ‘‘(7) CORRECTION.—The terms ‘correction’ and

9 ‘correct’ mean, with respect to any act of self-deal10 ing, undoing the transaction to the extent possible,

11 but in any case placing the applicable tax-exempt or12 ganization in a financial position not worse than

13 that in which it would be if the disqualified person

14 were dealing under the highest fiduciary standards.

15 ‘‘(f) SPECIAL RULES.—

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

17 than one person is liable under any paragraph of

18 subsection (a) or (c) with respect to any one act of

19 self-dealing, all such persons shall be jointly and sev20 erally liable under such paragraph with respect to

21 such act.

22 ‘‘(2) MINISTERS.—Clause (ii) of subsection

23 (d)(2)(E) shall not apply to compensation paid by a

24 church to a duly ordained, commissioned, or licensed
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1 minister thereof for the performance of sacerdotal

2 duties.’’

3 (b) REVOCATION OF EXEMPTION OF CERTAIN CHAR4 ITIES FOR ACTS OF SELF-DEALING.—Section 501 of such

5 Code is amended by redesignating subsection (n) as sub6 section (o) and by inserting after subsection (m) the fol7 lowing new subsection:

8 ‘‘(n) REVOCATION OF EXEMPTION OF CERTAIN

9 CHARITIES FOR ACTS OF SELF-DEALING.—

10 ‘‘(1) IN GENERAL.—Except as provided in para11 graph (2), an organization which would (without re12 gard to any act of self-dealing) be described in para13 graph (3) or (4) of subsection (c) shall not be ex14 empt from tax under subsection (a) if there is any

15 act of self-dealing between such organization and

16 any person who is a disqualified person (as defined

17 in section 6716(e)) with respect to such organiza18 tion.

19 ‘‘(2) EXCEPTION.—Paragraph (1) shall not

20 apply to an organization if—

21 ‘‘(A) there has been no prior act of self22 dealing by such organization (or any prede23 cessor), and

24 ‘‘(B) the Secretary determines that revoca25 tion of such exemption is inappropriate.
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1 In making the determination under subparagraph

2 (B), the Secretary shall take into account the extent

3 and duration of the self-dealing, the amount in4 volved, and whether such self-dealing was corrected

5 in a timely manner.

6 ‘‘(3) SELF-DEALING.—For purposes of this sub7 section, the term ‘self-dealing’ has the meaning

8 given such term by section 6716(d).’’

9 (c) APPLICATION OF PRIVATE INUREMENT RULE TO

10 ORGANIZATIONS DESCRIBED IN SECTION 501(c)(4).—

11 Paragraph (4) of section 501(c) of such Code is amended

12 to read as follows:

13 ‘‘(4)(A) Civic leagues or organizations not orga14 nized for profit but operated exclusively for the pro15 motion of social welfare and no part of the net earn16 ings of which inures to the benefit of any private

17 shareholder or individual.

18 ‘‘(B) Local associations of employees—

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

20 the employees of a designated person or persons

21 in a particular municipality,

22 ‘‘(ii) which is operated exclusively for char23 itable, educational, or recreational purposes,

24 and
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1 ‘‘(iii) no part of the net earnings of which

2 inures to the benefit of any private shareholder

3 or individual.’’

4 (d) REPEAL OF EXCISE TAX ON SELF-DEALING BY

5 PRIVATE FOUNDATIONS.—Section 4941 of such Code is

6 hereby repealed.

7 (e) CLERICAL AMENDMENTS.—

8 (1) The table of sections of part I of subchapter

9 B of chapter 68 of such Code is amended by adding

10 at the end the following new item:

‘‘Sec. 6716. Self-dealing by charities and certain other tax-exempt

organizations.’’

11 (2) The table of sections of subchapter A of

12 chapter 42 of such Code is amended by striking the

13 item relating to section 4941.

14 (f) EFFECTIVE DATE.—

15 (1) IN GENERAL.—The amendments made by

16 this section shall apply to transactions after the date

17 of the enactment of this Act.

18 (2) EXCEPTION FOR CERTAIN COMPENSATION

19 PAID PURSUANT TO BINDING CONTRACTS.—Clause

20 (ii) of section 6716(d)(2)(E) of the Internal Revenue

21 Code of 1986 (as added by this section) shall not

22 apply to compensation which is paid—

23 (A) before the date which is 2 years after

24 the date of the enactment of this Act, and
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1 (B) pursuant to a contract which is bind2 ing on January 1, 1995, and at all times there3 after before the date such compensation is paid.

4 SEC. 3. INCREASE IN PENALTIES FOR FAILURE TO FILE

5 TIMELY ANNUAL RETURNS REQUIRED BY

6 SECTION 6033 AND TO PERMIT TIMELY IN7 SPECTION OF SUCH RETURNS.

8 (a) INCREASE IN PENALTY.—The material following

9 clause (ii) of section 6652(c)(1)(A) of the Internal Reve10 nue Code of 1986 (relating to returns by exempt organiza11 tions and certain trusts) is amended to read as follows:

12 ‘‘there shall be paid by the exempt organization an amount

13 equal to 3 percent of its gross receipts (for the year for

14 which such return is required to be filed) for each 30-day

15 period (or portion thereof) that such failure continues.’’

16 (b) INCREASE IN PENALTY FOR FAILURE TO PERMIT

17 PUBLIC INSPECTION OF ANNUAL RETURNS.—Subpara18 graph (C) of section 6652(c)(1) of such Code is amended

19 by striking ‘‘$10’’ and inserting ‘‘$25’’.

20 (c) EFFECTIVE DATES.—

21 (1) SUBSECTION (a).—The amendment made

22 by subsection (a) shall apply to returns the due date

23 for which (determined without regard to any exten24 sion of time filing) is after the date of the enactment

25 of this Act.
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1 (2) SUBSECTION (b).—The amendment made

2 by subsection (b) shall apply to requests made more

3 than 180 days after the date of the enactment of

4 this Act.

5 SEC. 4. NATIONAL CLEARINGHOUSE FOR ACCESS TO AN6 NUAL RETURNS OF EXEMPT ORGANIZATIONS,

7 ETC.

8 (a) IN GENERAL.—The Secretary of the Treasury or

9 his delegate shall establish a clearinghouse from which in10 dividuals may inspect or receive copies of annual returns

11 filed under section 6033 of the Internal Revenue Code of

12 1986 by organizations to which subsection (d) or (e)(1)

13 of section 6104 of such Code applies. Inspection shall be

14 permitted without charge, and copies shall be provided

15 without charge other than a reasonable fee for any repro16 duction and mailing costs.

17 (b) PERIOD OF AVAILABILITY.—Copies of a return

18 shall be available under subsection (a) only during the 3-

19 year period beginning on the last day prescribed for filing

20 such return (determined with regard to any extension of

21 time for filing).

22 (c) NO INSPECTION REQUIRED AT REGIONAL OR

23 DISTRICT OFFICES AFTER CLEARINGHOUSE ESTAB24 LISHED.—After the date of the clearinghouse is estab25 lished under subsection (a), no organization shall be re-
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1 quired to permit inspections under section 6104(e)(1) of

2 such Code at any regional or district office.

3 (d) AUTHORIZATION.—There are authorized to be ap4 propriated such sums as may be necessary to carry out

5 this section.

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