I
103D CONGRESS
1ST SESSION
H. R. 3697
To amend the Internal Revenue Code of 1986 to impose excise taxes on
acts of self-dealing and private inurement by certain tax-exempt organizations.
IN THE HOUSE OF REPRESENTATIVES
NOVEMBER 22, 1993
Mr. STARK introduced the following bill; which was referred to the Committee
on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to impose
excise taxes on acts of self-dealing and private inurement
by certain tax-exempt organizations.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. EXCISE TAXES ON ACTS OF SELF-DEALING AND
PRIVATE INUREMENT BY CERTAIN TAX-EX-
EMPT ORGANIZATIONS.
(a) IN GENERAL.—Chapter 42 of the Internal Reve-
nue Code of 1986 (relating to private foundations and cer-
tain other tax-exempt organizations) is amended by redes-
ignating subchapter D as subchapter E and by inserting
after subchapter C the following new subchapter:
‘‘SUBCHAPTER D—ACTS OF SELF-DEALING AND PRI-
VATE INUREMENT BY CERTAIN EXEMPT ORGANIZA-
TIONS
‘‘Sec. 4958. Taxes on certain acts of self-dealing.
‘‘Sec. 4959. Taxes on private inurement.
‘‘Sec. 4960. Other definitions.
‘‘SEC. 4958. TAXES ON CERTAIN ACTS OF SELF-DEALING.
‘‘(a) INITIAL TAXES.—
‘‘(1) ON SELF-DEALER.—There is hereby im-
posed a tax on each act of self-dealing between a
disqualified person and an applicable tax-exempt or-
ganization. The amount of such tax shall be 5 per-
cent of the amount involved with respect to the act
of self-dealing for each year (or part thereof) in the
taxable period. The tax imposed by this paragraph
shall be paid by any disqualified person (other than
an organization manager acting only as such) who
participates in the act of self-dealing.
‘‘(2) ON
ORGANIZATION
MANAGER.—In any
case in which a tax is imposed by paragraph (1),
there is hereby imposed on the participation of any
organization manager in any act of self-dealing be-
tween a disqualified person and an applicable tax-ex-
empt organization, knowing that it is such an act,
a tax equal to 2.5 percent of the amount involved
with respect to such act of self-dealing for each year
(or part thereof) in the taxable period, unless such
participation is not willful and is due to reasonable
cause. The tax imposed by this paragraph shall be
paid by any organization manager who participated
in the act of self-dealing.
‘‘(b) ADDITIONAL TAXES.—
‘‘(1) ON SELF-DEALER.—In any case in which
an initial tax is imposed by subsection (a)(1) on any
act of self-dealing between a disqualified person and
an applicable tax-exempt organization and such act
is not corrected within the taxable period, there is
hereby imposed a tax equal to 200 percent of the
amount involved. The tax imposed by this paragraph
shall be paid by any disqualified person (other than
an organization manager acting only as such) who
participated in the act of self-dealing.
‘‘(2) ON
ORGANIZATION
MANAGER.—In any
case in which an additional tax is imposed by para-
graph (1), if an organization manager refused to
agree to part or all of the correction, there is hereby
imposed a tax equal to 50 percent of the amount in-
volved. The tax imposed by this paragraph shall be
paid by any organization manager who refused to
agree to part or all of the correction.
‘‘(c) SPECIAL RULES.—
‘‘(1) JOINT AND SEVERAL LIABILITY.—If more
than one person is liable under any paragraph of
subsection (a) or (b) with respect to any one act of
self-dealing, all such persons shall be jointly and sev-
erally liable under such paragraph with respect to
such act.
‘‘(2) $10,0000 LIMIT FOR MANAGEMENT.—With
respect to any one act of self-dealing, the maximum
amount of the tax imposed by subsection (a)(2) shall
not exceed $10,000, and the maximum amount of
the tax imposed by subsection (b)(2) shall not ex-
ceed $10,000.
‘‘(d) SELF-DEALING.—For purposes of this section—
‘‘(1) IN
GENERAL.—Except as provided by
paragraph (2), the term ‘self-dealing’ means any di-
rect or indirect—
‘‘(A) transfer, lease, or license of property
between an applicable tax-exempt organization
and a disqualified person, and
‘‘(B) lending of money or other extension
of credit between an applicable tax-exempt or-
ganization and a disqualified person.
‘‘(2) EXCEPTIONS.—The term ‘self-dealing’
shall not include—
‘‘(A) the lending of money by a disqualified
person to an applicable tax-exempt organization
if the loan is without interest or other charge
(determined without regard to section 7872)
and if the proceeds of the loan are used exclu-
sively for exempt purposes,
‘‘(B) the furnishing of goods or facilities
by a disqualified person to an applicable tax-ex-
empt organization if the furnishing is without
charge and if the goods or facilities so fur-
nished are used exclusively for exempt purposes,
and
‘‘(C) any transfer, lease, or license of prop-
erty if—
‘‘(i) such transfer, lease, or license (as
the case may be) is by a disqualified per-
son in the ordinary course of such disquali-
fied person’s trade or business and such
transaction is on a basis comparable to the
basis on which similar transactions are
made in the ordinary course of such trade
or business with other parties, or
‘‘(ii) such transfer, lease, or license
(as the case may be) is by an applicable
tax-exempt organization in the ordinary
course of its activities and such transaction
is made on a basis comparable to the basis
on which similar transactions are made in
the ordinary course of such activities with
other parties.
‘‘(3) EXEMPT
PURPOSE.—For purposes of
paragraph (2), the term ‘exempt purpose’ means—
‘‘(A) in the case of an organization de-
scribed in section 501(c)(3), any purpose speci-
fied in section 501(c)(3), and
‘‘(B) in the case of an organization de-
scribed in section 501(c)(4), any purposes spec-
ified in section 501(c)(4).
‘‘(e) OTHER DEFINITIONS.—For purposes of this
section—
‘‘(1) TAXABLE PERIOD.—The term ‘taxable pe-
riod’ means, with respect to any act of self-dealing,
the period beginning with the date on which the act
of self-dealing occurs and ending on the earliest of—
‘‘(A) the date of mailing a notice of defi-
ciency under section 6212 with respect to the
tax imposed by subsection (a)(1),
‘‘(B) the date on which the tax imposed by
subsection (a)(1) is assessed, or
‘‘(C) the date on which correction of the
act of self-dealing is completed.
‘‘(2) AMOUNT INVOLVED.—The term ‘amount
involved’ means, with respect to any act of self-deal-
ing, the greater of the amount of money and fair
market value of other property given, or the amount
of money and fair market value of other property re-
ceived. In the case of a lease or license, the amount
involved is the fair market value of the leased or li-
censed property. For purposes of this paragraph—
‘‘(A) in the case of the taxes imposed by
subsection (a), fair market value shall be deter-
mined as of the date on which the act of self-
dealing occurs, and
‘‘(B) in the case of the taxes imposed by
subsection (b), fair market value shall be the
highest fair market value during the taxable
period.
‘‘(3) CORRECTION.—The terms ‘correction’ and
‘correct’ mean, with respect to any act of self-deal-
ing transaction, undoing the transaction to the ex-
tent possible, but in any case place the applicable
tax-exempt organization in a financial position not
worse than that in which it would be if the disquali-
fied person were dealing under the highest fiduciary
standards.
‘‘SEC. 4959. TAXES ON PRIVATE INUREMENT.
‘‘(a) INITIAL TAXES.—
‘‘(1) ON THE ORGANIZATION.—There is hereby
imposed on any taxable inurement a tax equal to 10
percent of the amount thereof. The tax imposed by
this paragraph shall be paid by the organization
with respect to which such inurement occurred.
‘‘(2) ON THE MANAGEMENT.—There is hereby
imposed on the participation of any organization
manager 
of 
an 
organization 
in 
any 
taxable
inurement which occurs with respect to such organi-
zation, knowing that it is taxable inurement, a tax
equal to 21⁄2 percent of the amount thereof, unless
such participation is not willful and is due to reason-
able cause. The tax imposed by this paragraph shall
be paid by the organization manager who partici-
pated in the taxable inurement.
‘‘(3) ON THE BENEFICIARY.—There is hereby
imposed on any taxable inurement a tax equal to 5
percent of the amount thereof. The tax imposed by
this paragraph shall be paid by the beneficiary of
such inurement.
‘‘(b) ADDITIONAL TAXES.—
‘‘(1) ON THE ORGANIZATION.—In any case in
which an initial tax is imposed by subsection (a)(1)
on any taxable inurement and such inurement is not
corrected within the taxable period, there is hereby
imposed a tax equal to 100 percent of the amount
of the taxable inurement. The tax imposed by this
paragraph shall be paid by the organization with re-
spect to which such inurement occurred.
‘‘(2) ON THE MANAGEMENT.—In any case in
which an additional tax is imposed by paragraph (1),
if an organization manager refused to agree to part
or all of the correction, there is hereby imposed a
tax equal to 50 percent of the amount of the taxable
inurement. The tax imposed by this paragraph shall
be paid by any organization manager who refused to
agree to part or all of the correction.
‘‘(3) ON THE BENEFICIARY.—In any case in
which an additional tax is imposed by paragraph (1),
there is hereby imposed a tax equal to 200 percent
of the amount of the taxable inurement. The tax im-
posed by this paragraph shall be paid by the bene-
ficiary of such inurement.
‘‘(c) TAXABLE INUREMENT.—For purposes of this
section, the term ‘taxable inurement’ means any direct or
indirect inurement of any part of the net earnings of an
applicable tax-exempt organization to the benefit of any
disqualified person. Such term shall not include any act
of self-dealing on which tax is imposed under section 4958.
‘‘(d) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) JOINT AND SEVERAL LIABILITY.—If more
than one person is liable under any paragraph of
subsection (a) or (b) with respect to any one taxable
inurement, all such persons shall be jointly and sev-
erally liable under such paragraph with respect to
such inurement.
‘‘(2) LIMIT FOR MANAGEMENT.—With respect
to any 1 taxable inurement, the maximum amount
of the tax imposed by subsection (a)(2) shall not ex-
ceed $10,000, and the maximum amount of the tax
imposed by subsection (b)(2) shall not exceed
$10,000.
‘‘(e) OTHER DEFINITIONS.—For purposes of this
section—
‘‘(1) TAXABLE PERIOD.—The term ‘taxable pe-
riod’ means, with respect to any taxable inurement,
the period beginning with the date on which the
inurement occurs and ending on the earliest of—
‘‘(A) the date of mailing a notice of defi-
ciency under section 6212 with respect to the
tax imposed by subsection (a)(1), or
‘‘(B) the date on which the tax imposed by
subsection (a)(1) is assessed.
‘‘(2) CORRECTION.—The terms ‘correction’ and
‘correct’ 
mean, 
with 
respect 
to 
any 
taxable
inurement, undoing the inurement to the extent pos-
sible, establishing safeguards to prevent future tax-
able inurement, and where fully undoing the
inurement is not possible, such additional corrective
action as is prescribed by the Secretary by regula-
tions.
‘‘SEC. 4960. OTHER DEFINITIONS.
‘‘(a) APPLICABLE TAX-EXEMPT ORGANIZATION.—
For purposes of this subchapter, the term ‘applicable tax-
exempt organization’ means any organization which (with-
out regard to any act of self-dealing or taxable inurement)
would be described in paragraph (3) or (4) of section
501(c) and exempt from tax under section 501(a). Such
term shall not include any private foundation.
‘‘(b) DISQUALIFIED PERSON.—For purposes of this
subchapter, the term ‘disqualified person’ means, with re-
spect to any transaction—
‘‘(1) any person who was an organization man-
ager at any time during the 5-year period ending on
the date of such transaction,
‘‘(2) any member of a family (as defined in sec-
tion 4946(d)) of any person described in paragraph
(1), and
‘‘(3) any 35-percent controlled entity of persons
described in paragraph (1) or (2).
‘‘(c) ORGANIZATION MANAGER.—For purposes of
this subchapter, the term ‘organization manager’ means,
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 organiza-
tion). Such term includes any person performing substan-
tial medical services as a physician for the applicable tax-
exempt organization pursuant to an employment or other
contractual relationship.
‘‘(d) 35-PERCENT CONTROLLED ENTITY.—For pur-
poses of this section—
‘‘(1) 35-PERCENT CONTROLLED ENTITY.—The
term ‘35-percent controlled entity’ means—
‘‘(A) a corporation in which persons de-
scribed in paragraph (1) or (2) of subsection
(b) own more than 35 percent of the combined
voting power,
‘‘(B) a partnership in which such persons
own more than 35 percent of the profits inter-
est, and
‘‘(C) a trust or estate in which such per-
sons own more than 35 percent of the beneficial
interest.
‘‘(2) CONSTRUCTIVE
OWNERSHIP
RULES.—
Rules similar to the rules of paragraphs (3) and (4)
of section 4946(a) shall apply for purposes of this
subsection.’’
(b) APPLICATION OF PRIVATE INUREMENT RULE TO
TAX-EXEMPT CIVIC LEAGUES.—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, and