I
105TH CONGRESS
1ST SESSION
H. R. 239
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 7, 1997
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
Secretary 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) of 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
furnished are used exclusively for the exempt
purposes of the organization;
‘‘(D) the furnishing of goods, services, or
facilities by an applicable tax-exempt organiza-
tion to a disqualified person shall not be an act
of self-dealing if—
‘‘(i) such furnishing is made on a
basis no more favorable than that on which
such goods, services, or facilities are made
available to the general public, and
‘‘(ii) the value of the goods, services,
or facilities so furnished in any transaction
(or series of related transactions) does not
exceed $100;
‘‘(E) except in the case of the payment of
compensation to (or the payment or reimburse-
ment of expenses of) a government official (as
defined in section 4946(c)), the payment of
compensation (and the payment or reimburse-
ment of expenses) by an applicable tax-exempt
organization to a disqualified person for per-
sonal services which are reasonable and nec-
essary to carrying out the exempt purpose of
the organization shall not be an act of self-deal-
ing if the compensation (or payment or reim-
bursement)—
‘‘(i) is not excessive, and
‘‘(ii) is at an annual rate not in excess
of the rate in effect under section 5312 of
title 5, United States Code (relating to
Level I of the Executive Schedule);
‘‘(F) any transaction between an applicable
tax-exempt organization and a corporation
which is a disqualified person, pursuant to any
liquidation, merger, redemption, recapitaliza-
tion, or other corporate adjustment, organiza-
tion, or reorganization, shall not be an act of
self-dealing if—
‘‘(i) there is a market on an estab-
lished securities market or otherwise for
any stock in such corporation, and
‘‘(ii) all of the securities of the same
class as that held by the organization are
subject to the same terms and such terms
provide for receipt by the organization of
no less than fair market value;
‘‘(G) in the case of a government official
(as defined in section 4946(c)), paragraph (1)
shall in addition not apply to—
‘‘(i) prizes and awards which are sub-
ject to the provisions of section 74(b)
(without regard to paragraph (3) thereof),
if the recipients of such prizes and awards
are selected from the general public,
‘‘(ii) 
scholarships 
and 
fellowship
grants which would be subject to the provi-
sions of section 117(a) (as in effect on the
day before the date of the enactment of the
Tax Reform Act of 1986) and are to be
used for study at an educational organiza-
tion described in section 170(b)(1)(A)(ii),
‘‘(iii) any annuity or other payment
(forming part of a stock-bonus, pension, or
profit-sharing plan) by a trust which is a
qualified trust under section 401,
‘‘(iv) any annuity or other payment
under a plan which meets the requirements
of section 404(a)(2),
‘‘(v) any contribution or gift (other
than a contribution or gift of money) to, or
services of facilities made available to, any
such individual, if the aggregate value of
such contributions, gifts, services, and fa-
cilities to, or made available to, such indi-
vidual during any calendar year does not
exceed $25,
‘‘(vi) any payment made under chap-
ter 41 of title 5, United States Code, or
‘‘(vii) any payment or reimbursement
of traveling expenses for travel solely from
one point in the United States to another
point in the United States, but only if such
payment or reimbursement does not exceed
the actual cost of the transportation in-
volved plus an amount for all other travel-
ing expenses not in excess of 125 percent
of the maximum amount payable under
section 5702 of title 5, United States
Code, for like travel by employees of the
United States; and
‘‘(H) the leasing by a disqualified person
to an applicable tax-exempt organization of of-
fice space for use by the organization in a
building with other tenants who are not dis-
qualified persons shall not be treated as an act
of self-dealing if—
‘‘(i) such leasing of office space is
pursuant to a binding lease which was in
effect on October 9, 1969, or pursuant to
renewals of such a lease;
‘‘(ii) the execution of such lease was
not a prohibited transaction (within the
meaning of section 503(b) or any cor-
responding provision of prior law) at the
time of such execution; and
‘‘(iii) the terms of the lease (or any
renewal) reflect an arm’s-length trans-
action.
‘‘(e) OTHER DEFINITIONS.—For purposes of this
section—
‘‘(1) 
APPLICABLE
TAX-EXEMPT
ORGANIZA-
TION.—The term ‘applicable tax-exempt organiza-
tion’ means any organization which (without regard
to any act of self-dealing) would be described in
paragraph (3) or (4) of section 501(c) and exempt
from tax under section 501(a).
‘‘(2) DISQUALIFIED PERSON.—
‘‘(A) IN GENERAL.—The term ‘disqualified
person’ means, with respect to any trans-
action—
‘‘(i) any person who was an organiza-
tion manager at any time during the 5-
year period ending on the date of such
transaction.
‘‘(ii) any member of a family (as de-
fined in section 4946(d)) of any person de-
scribed in clause (i),
‘‘(iii) any 5-percent controlled entity
of persons described in clauses (i) and (ii),
and
‘‘(iv) any government official (as de-
fined in section 4946(c)).
‘‘(B) SPECIAL RULE FOR PRIVATE FOUN-
DATIONS.—With respect to any transaction in-
volving a private foundation—
‘‘(i) the term ‘disqualified person’ in-
cludes a substantial contributor (as defined
in section 4946(a)(2)) to such foundation
and any person described in section
4946(a)(1)(C) with respect to such a con-
tributor, and
‘‘(ii) such substantial contributor shall
be treated as described in clause (i) of sub-
paragraph (A) for purposes of applying
this section with respect to such founda-
tion.
‘‘(3) ORGANIZATION MANAGER.—The term ‘or-
ganization manager’ means, with respect to any ap-
plicable tax-exempt organization—
‘‘(A) any officer, director, or trustee of
such organization (or any individual having
powers or responsibilities similar to those of of-
ficers, directors, or trustees of the organiza-
tion), and
‘‘(B) with respect to any act (or failure to
act), the employees of the organization having
authority or responsibility with respect to such
act (or failure to act).
‘‘(4) 5-PERCENT CONTROLLED ENTITY.—
‘‘(A) 5-PERCENT CONTROLLED ENTITY.—
The term ‘5-percent controlled entity’ means—
‘‘(i) a corporation in which persons
described in subparagraph (A) or (B) of
paragraph (2) own more than 5 percent of
the combined voting power,
‘‘(ii) a partnership in which such per-
sons own more than 5 percent of the prof-
its interest, and
‘‘(iii) a trust or estate in which such
persons own more than 5 percent of the
beneficial interest.
‘‘(B) 
CONSTRUCTIVE
OWNERSHIP
RULES.—Rules similar to the rules of para-
graphs (3) and (4) of section 4946(a) shall
apply for purposes of this paragraph.
‘‘(5) 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 with respect to the penalty imposed by
subsection (a)(1) under section 6212,
‘‘(B) the date on which the penalty im-
posed by subsection (a)(1) is assessed, or
‘‘(C) the date on which correction of the
act of self-dealing is completed.
‘‘(6) AMOUNT INVOLVED.—The term ‘amount
involved’ means, with respect to any act of self-deal-
ing, the greater of the amount of money and the fair
market value of the other property given or the
amount of money and the fair market value of the
other property received; except that, in the case of
services described in subsection (d)(2)(E), the
amount involved shall be only the excess compensa-
tion. For purposes of the preceding sentence, the
fair market value—
‘‘(A) in the case of the taxes imposed by
subsection (a), shall be determined as of the
date on which the act of self-dealing occurs;
and
‘‘(B) in the case of the taxes imposed by
subsection (c), shall be the highest fair market
value during the taxable period.
‘‘(7) CORRECTION.—The terms ‘correction’ and
‘correct’ mean, with respect to any act of self-deal-
ing, undoing the transaction to the extent possible,
but in any case placing the applicable tax-exempt or-
ganization in a financial position not worse than
that in which it would be if the disqualified person
were dealing under the highest fiduciary standards.
‘‘(f) SPECIAL RULES.—
‘‘(1) JOINT AND SEVERAL LIABILITY.—If more
than one person is liable under any paragraph of
subsection (a) or (c) 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) MINISTERS.—Clause (ii) of subsection
(d)(2)(E) shall not apply to compensation paid by a
church to a duly ordained, commissioned, or licensed
minister thereof for the performance of sacerdotal
duties.’’
(b) REVOCATION OF EXEMPTION OF CERTAIN CHAR-
ITIES FOR ACTS OF SELF-DEALING.—Section 501 of such
Code is amended by redesignating subsection (o) as sub-
section (p) and by inserting after subsection (n) the follow-
ing new subsection:
‘‘(o) REVOCATION
OF
EXEMPTION
OF
CERTAIN
CHARITIES FOR ACTS OF SELF-DEALING.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), an organization which would (without re-
gard to any act of self-dealing) be described in para-
graph (3) or (4) of subsection (c) shall not be ex-
empt from tax under subsection (a) if there is any
act of self-dealing between such organization and
any person who is a disqualified person (as defined
in section 6716(e)) with respect to such organiza-
tion.
‘‘(2) EXCEPTION.—Paragraph (1) shall not
apply to an organization if—
‘‘(A) there has been no prior act of self-
dealing by such organization (or any prede-
cessor), and
‘‘(B) the Secretary determines that revoca-
tion of such exemption is inappropriate.
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
‘‘(iii) no part of the net earnings of which
inures to the benefit of any private shareholder
or individual.’’
(d) REPEAL OF EXCISE TAX ON SELF-DEALING BY
PRIVATE FOUNDATIONS.—Section 4941 of such Code is
hereby repealed.
(e) CLERICAL AMENDMENTS.—
(1) The table of sections of part I of subchapter
B of chapter 68 of such Code is amended by adding
at the end the following new item:
‘‘Sec. 6716. Self-dealing by charities and certain other tax-exempt
organizations.’’
(2) The table of sections of subchapter A of
chapter 42 of such Code is amended by striking the
item relating to section 4941.
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to transactions after the date
of the enactment of this Act.
(2) EXCEPTION FOR CERTAIN COMPENSATION
PAID PURSUANT TO BINDING CONTRACTS.—Clause
(ii) of section 6716(d)(2)(E) of the Internal Revenue
Code of 1986 (as added by this section) shall not
apply to compensation which is paid—
(A) before the date which is 2 years after
the date of the enactment of this Act, and
(B) pursuant to a contract which is bind-
ing on January 1, 1995, and at all times there-
after before the date such compensation is paid.
SEC. 3. INCREASE IN PENALTIES FOR FAILURE TO FILE
TIMELY ANNUAL RETURNS REQUIRED BY
SECTION 6033 AND TO PERMIT TIMELY IN-
SPECTION OF SUCH RETURNS.
(a) INCREASE IN PENALTY.—The material following
clause (ii) of section 6652(c)(1)(A) of the Internal Reve-
nue Code of 1986 (relating to returns by exempt organiza-
tions and certain trusts) is amended to read as follows:
‘‘there shall be paid by the exempt organization an amount
equal to 3 percent of its gross receipts (for the year for
which such return is required to be filed) for each 30-day
period (or portion thereof) that such failure continues.’’
(b) INCREASE IN PENALTY FOR FAILURE TO PERMIT
PUBLIC INSPECTION OF ANNUAL RETURNS.—Subpara-
graph (C) of section 6652(c)(1) of such Code is amended
by striking ‘‘$10’’ and inserting ‘‘$25’’.
(c) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendment made
by subsection (a) shall apply to returns the due date
for which (determined without regard to any exten-
sion of time filing) is after the date of the enactment
of this Act.
(2) SUBSECTION (b).—The amendment made
by subsection (b) shall apply to requests made more
than 180 days after the date of the enactment of
this Act.
SEC. 4. NATIONAL CLEARINGHOUSE FOR ACCESS TO AN-
NUAL RETURNS OF EXEMPT ORGANIZATIONS,
ETC.
(a) IN GENERAL.—The Secretary of the Treasury or
his delegate shall establish a clearinghouse from which in-
dividuals may inspect or receive copies of annual returns
filed under section 6033 of the Internal Revenue Code of
1986 by organizations to which subsection (d) or (e)(1)
of section 6104 of such Code applies. Inspection shall be
permitted without charge, and copies shall be provided
without charge other than a reasonable fee for any repro-
duction and mailing costs.
(b) PERIOD OF AVAILABILITY.—Copies of a return
shall be available under subsection (a) only during the 3-
year period beginning on the last day prescribed for filing
such return (determined with regard to any extension of
time for filing).
(c) NO INSPECTION REQUIRED AT REGIONAL OR
DISTRICT
OFFICES
AFTER
CLEARINGHOUSE
ESTAB-
LISHED.—After the date of the clearinghouse is estab-
lished under subsection (a), no organization shall be re-
quired to permit inspections under section 6104(e)(1) of
such Code at any regional or district office.
(d) AUTHORIZATION.—There are authorized to be ap-
propriated such sums as may be necessary to carry out
this section.
Æ