I
104TH CONGRESS
1ST SESSION
H. R. 613
To amend the Internal Revenue Code of 1986 to impose penalties on self-
dealing between certain tax-exempt organizations and disqualified per-
sons, 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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Tax Exemption
Accountability Act’’.
SEC. 2. PENALTIES ON SELF-DEALING BY CHARITIES AND
CERTAIN 
OTHER 
TAX-EXEMPT 
ORGANIZA-
TIONS.
(a) IN GENERAL.—Part I of subchapter B of chapter
68 of the Internal Revenue Code of 1986 (relating to gen-
eral provisions) is amended by adding at the end the fol-
lowing new section:
‘‘SEC. 6716. SELF-DEALING BY CHARITIES AND CERTAIN
OTHER TAX-EXEMPT ORGANIZATIONS.
‘‘(a) INITIAL PENALTIES.—In the case of an act of
self-dealing between a disqualified person and an applica-
ble tax-exempt organization—
‘‘(1) ON THE ORGANIZATION.—There is hereby
imposed a penalty equal to the product of—
‘‘(A) the amount involved in the act of self-
dealing, and
‘‘(B) the highest rate of tax specified in
section 11.
The penalty imposed by this paragraph shall be paid
by the organization with respect to which such act
occurred.
‘‘(2) ON THE MANAGEMENT.—There is hereby
imposed on the participation of any organization
manager of an organization in any act of self-dealing
which occurs with respect to such organization,
knowing that it is such an act, a penalty equal to
21⁄2 percent of the amount involved with respect to
such act for each year (or part thereof) in the tax-
able period, unless such participation is not willful
and is due to reasonable cause. The penalty imposed
by this paragraph shall be paid by the organization
manager who participated in the act of self-dealing.
‘‘(3) ON THE BENEFICIARY.—There is hereby
imposed on any self-dealing a penalty equal to 5 per-
cent of the amount involved with respect to such act
for each year (or part thereof) in the taxable period.
The penalty imposed by this paragraph shall be paid
by the beneficiary (other than an organization man-
ager acting only as such) of such act.
‘‘(b) EXCEPTION.—If—
‘‘(1) it is established to the satisfaction of the Sec-
retary that a person otherwise required to pay a penalty
under subsection (a) with respect to any act of self-dealing
did not know that the act was an act of self-dealing,
‘‘(2) the applicable tax-exempt organization
submits to the Secretary, for each of the 3 calendar
years following the calendar year in which the act
occurred, a statement by a qualified independent
auditor that such organization was described in
paragraph (3) or (4) section 501(c) (as the case may
be) and exempt from tax under section 501(a) for
each such year, and
‘‘(3) such act is corrected within the taxable pe-
riod,
then such penalty shall not be imposed on such person.
‘‘(c) ADDITIONAL PENALTIES
IF ACT
NOT COR-
RECTED.—
‘‘(1) ON THE MANAGEMENT.—In any case in
which an additional penalty is imposed by paragraph
(1), if an organization manager refused to agree to
part or all of the correction, there is hereby imposed
a penalty equal to 50 percent of the amount involved
with respect to such act. The penalty imposed by
this paragraph shall be paid by any organization
manager who refused to agree to part or all of the
correction.
‘‘(2) ON THE BENEFICIARY.—In any case in
which an additional penalty is imposed by paragraph
(1), there is hereby imposed a penalty equal to 200
percent of the amount involved with respect to such
act. The penalty imposed by this paragraph shall be
paid by the beneficiary (other than an organization
manager acting only as such) of such act.
‘‘(d) SELF-DEALING.—For purposes of this section—
‘‘(1) IN
GENERAL.—The term ‘self-dealing’
means any direct or indirect—
‘‘(A) sale or exchange, or leasing, of prop-
erty between an applicable tax-exempt organiza-
tion and a disqualified person;
‘‘(B) lending of money or other extension
of credit between an applicable tax-exempt or-
ganization and a disqualified person;
‘‘(C) furnishing of goods, services, or facili-
ties between an applicable tax-exempt organiza-
tion and a disqualified person;
‘‘(D) payment of compensation (or pay-
ment or reimbursement of expenses) by an ap-
plicable tax-exempt organization to a disquali-
fied person;
‘‘(E) transfer to, or use by or for the bene-
fit of, a disqualified person of the income or as-
sets of an applicable tax-exempt organization;
and
‘‘(F) agreement to make any payment of
money or other property to a government offi-
cial (as defined in section 4946(c)), other than
an agreement to employ such individual for any
period after the termination of his government
service if such individual is terminating his gov-
ernment service within a 90-day period.
‘‘(2) SPECIAL RULES.—For purposes of para-
graph (1)—
‘‘(A) the transfer of real or personal prop-
erty by a disqualified person to an applicable
tax-exempt organization shall be treated as a
sale or exchange if the property is subject to a
mortgage or similar lien which the organization
assumes or if it is subject to a mortgage or
similar lien which a disqualified person placed
on the property within the 10-year period end-
ing on the date of the transfer;
‘‘(B) the lending of money by a disquali-
fied person to an applicable tax-exempt organi-
zation shall not be an act of self-dealing if the
loan is without interest or other charge (deter-
mined without regard to section 7872) and if
the proceeds of the loan are used exclusively for
the exempt purposes of the organization;
‘‘(C) the furnishing of goods, services, or
facilities by a disqualified person to an applica-
ble tax-exempt organization shall not be an act
of self-dealing if the furnishing is without
charge and if the goods, services, or facilities so
In making the determination under subparagraph
(B), the Secretary shall take into account the extent
and duration of the self-dealing, the amount in-
volved, and whether such self-dealing was corrected
in a timely manner.
‘‘(3) SELF-DEALING.—For purposes of this sub-
section, the term ‘self-dealing’ has the meaning
given such term by section 6716(d).’’
(c) APPLICATION OF PRIVATE INUREMENT RULE TO
ORGANIZATIONS DESCRIBED
IN SECTION 501(c)(4).—
Paragraph (4) of section 501(c) of such Code is amended
to read as follows:
‘‘(4)(A) Civic leagues or organizations not orga-
nized for profit but operated exclusively for the pro-
motion of social welfare and no part of the net earn-
ings of which inures to the benefit of any private
shareholder or individual.
‘‘(B) Local associations of employees—
‘‘(i) the membership of which is limited to
the employees of a designated person or persons
in a particular municipality,
‘‘(ii) which is operated exclusively for char-
itable, educational, or recreational purposes,
and