Source: http://www.lawandfreedom.com/site/nonprofit/consider.html
Timestamp: 2014-12-23 05:03:35
Document Index: 37456248

Matched Legal Cases: ['§ 6033', '§ 6033', '§ 6033', '§ 527', '§ 501', '§ 6033', '§ 115', '§ 501', '§ 115', '§ 501', '§ 6033', '§ 6033', '§ 162', '§ 6033', '§ 6033', '§ 6033', '§ 6033']

A. LOBBYING: PROXY TAX
P.L. 103-66, the Revenue Reconciliation Act of 1993, established the "special rules relating to lobbying activities" found at Internal Revenue Code ("IRC") § 6033(e). The proxy tax does not apply to 501(c)(3)s, or to other nonprofits making only in-house lobbying expenditures(1) of $2,000 or less. IRC § 6033(e)(1)(B).
P.L. 104-188, the Small Business Job Protection Act of 1996, clarified that the provisions of IRC § 6033(e) shall not apply to any amount which is taxed under IRC § 527(f).(2)
Of all the nonprofits which are tax-exempt under IRC § 501(a), only 501(c)(4)s (excluding veterans organizations), 501(c)(5) agricultural and horticultural associations, and 501(c)(6) trade associations are subject to either the reporting requirements or the proxy tax imposed by IRC § 6033(e). Rev. Proc. 95-35. However, these 501(c)(4)s and (c)(5)s can also avoid the reporting requirements if more than 90 percent of all annual dues are either received from: (1) persons, families, or entities paying annual dues of $55 or less; or (2) 501(c)(3)s, state governments, local governments, entities which are tax-exempt under IRC § 115, or the nonprofits which are tax-exempt under § 501(a), described above. Rev. Procs. 95-35, 97-57 (setting standard at $55 or less for 1998). Further, 501(c)(6)s can avoid the reporting requirements if more than 90 percent of all annual dues are received from 501(c)(3)s, state governments, local governments, entities which are tax-exempt under IRC § 115, or the nonprofits which are tax-exempt under IRC § 501(a), described above. Rev. Proc. 95-35.
Additionally, a nonprofit which is otherwise subject to the proxy tax requirements can obtain exemption from the requirements by maintaining records establishing that 90 percent or more of the annual dues (or similar amounts) paid to the organization are not deductible without regard to section 162(e) and either: (1) notify the Service that it is described in section 6033(e)(3) on any Form 990 that it is required to file; or (2) request a private letter ruling that substantially all the annual dues (or similar amounts) paid to the organization are not deductible, either directly or indirectly, without regard to section 162(e). Rev. Proc. 95-35.
The IRC § 6033(e) reporting requirements are as follows: "the nonprofit shall include on any return required to be filed under [IRC § 6033(a)] for such year information setting forth the total expenditures of the organization to which [IRC] § 162(e)(1) applies and the total amount of the dues or other similar amounts paid to the organization to which such expenditures are allocable, and (ii) except as provided in [IRC § 6033(e)(2)(A)(i) and (3)], shall, at the time of assessment or payment of such dues or other similar amounts, provide notice to each person making such payment which contains a reasonable estimate of the portion of such dues or other similar amounts to which such expenditures are so allocable." Under § 6033(e)(2)(A)(i), a nonprofit may elect not to provide the notice described above for any taxable year, however, it must then pay at the highest corporate income tax rate (currently 35 percent) on "the aggregate amount not included in such notices by reason of such election or failure." See also 1997 IRS Form 990-T (Exempt Organization Business Tax Return), Instructions, p. 12.
The proxy tax may be waived by the IRS, if the organization agrees to adjust the estimates contained in its notices for the following tax year -- "to correct any failures." IRC § 6033(e)(2)(B). The IRS may also require the calculation of proxy tax be reflected in any payment of estimated tax: IRC § 6033(e)(2)(C) states that the proxy tax "shall be treated in the same manner" as income taxes.
B. INTERMEDIATE SANCTIONS
IRC section 4958 was enacted as part of the Taxpayer Bill of Rights 2, which was signed by President Clinton on July 30, 1996. IRC section 4958 creates three levels of excise tax for "excess benefit" transactions by organizations described at IRC sections 501(c)(3) and 501(c)(4): the section 4958(a)(1) excise tax, the section 4958(b) excise tax, and the section 4958(a)(2) excise tax. They are commonly referred to as "intermediate sanctions" because they allow the IRS to impose financial penalties (rather than revocation of tax-exempt status) for excess benefit transactions. Previously the IRS was limited to revocation of tax-exempt status for minor offenses, which it tried to avoid.
On July 30, 1998, the IRS issued a Notice of Proposed Rulemaking, setting out proposed regulations implementing IRC section 4958.
Section 4958 taxes apply retroactively to transactions occurring on or after September 14, 1995, except for transactions occurring pursuant to a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurs. However, a 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. Additionally, a materially-modified contract is treated as a new contract.
In the following analysis, discussion of the proposed regulations is organized into discussions of each respective excise tax, followed by a discussion of revenue-sharing transactions and revocation of tax-exempt status. Words below that are bold and underlined are defined by the proposed regulations.
1. The Section 4958(a)(1) Excise Tax
This tax is to be paid by a disqualified person who receives an excess benefit from an excess benefit transaction with an applicable tax-exempt organization. The amount of the tax is to equal to 25 percent of the excess benefit received. The tax applies to each 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.
Section 53.4958-3 defines disqualified person as a person who was in a position to exercise substantial influence over the affairs of the organization at any time during the lookback period. This finding is to be based on all relevant facts and circumstances.
Persons having substantial influence include individuals serving on the governing body of the organization; presidents, chief executive officers, chief operating officers, or other individuals, regardless of title, who have or share ultimate responsibility for implementing the decisions of the governing body or supervising the management, administration, or operation of the applicable organization; and treasurers, chief financial officers, or other individuals, regardless of title, who have or share ultimate responsibility for managing the organization's financial assets and have or share authority to sign drafts or direct the signing of drafts, or authorize electronic transfer of funds, from organization bank accounts.
Also, a member of the family of a person having substantial influence is a disqualified person. A person's family includes a 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.
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 another 501(c)(3) organization; or an employee who receives economic benefits from the organization that are less than the compensation referenced for a highly compensated employee at IRC section 414(q)(1)(B)(i) (over $80,000), and is not on the governing body, a president, or a treasurer, and is not a substantial contributor to the organization within the meaning of section 507(d)(2) (i.e., contribute more than $5,000 where such amount is more than 2 percent of the total contributions).
Facts and circumstances tending to show that a person has substantial influence over the affairs of an organization include: founding the organization, being a substantial contributor (within the meaning of section 507(d)(2)), receiving compensation based on revenues derived from activities of the organization that the person controls, authority to control or determine a significant portion of the organization's capital expenditures, operating budget, or compensation for employees, managerial authority or service as a key advisor to a person with managerial authority, or a controlling interest in a corporation, partnership, or trust that is a disqualified person. A person who has managerial control over a discrete segment of an organization may be in a position to exercise substantial influence over the affairs of the entire organization.
Facts and circumstances tending to show that a person lacks substantial influence over the affairs of an organization include: a bona fide vow of poverty as an employee, agent, or on behalf of a religious organization, action as an independent contractor, such as an attorney, accountant, or investment manager or advisor (unless the person might economically benefit from the transaction either directly or indirectly (aside from fees received for the professional services rendered)), and any preferential treatment received based on the size of a 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.
Excess benefit is generally defined as 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. However, a revenue-sharing transaction may result in an excess benefit regardless of whether the economic benefit provided to the disqualified person exceeds the fair market value of the consideration provided. See "excess benefit transaction," infra.
Section 53.4958-1(e) states that, except as otherwise provided, an excess benefit transaction occurs when the disqualified person receives the economic benefit from the applicable tax-exempt organization for federal income tax purposes. Payment of deferred compensation occurs when the compensation is earned and vested.
"Excess Benefit Transaction"
Section 53.4958-4 defines an excess benefit transaction as a transaction in which an applicable tax-exempt organization provides an economic benefit to or for a disqualified person, where the value of the economic benefit provided exceeds the value of the consideration received. However, 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 it permits a disqualified person to receive additional compensation without providing proportional benefits that contribute to the organization's accomplishment of its exempt purpose.
Additionally, certain economic benefits will be disregarded for purposes of section 4958:
Payment of reasonable expenses for members of the governing body of an applicable tax-exempt organization to attend meetings of the governing body -- however, reasonable expenses do not include luxury travel or spousal travel;
Economic benefits provided to a disqualified person received solely as a member of, or volunteer for, the organization are disregarded if the benefit is provided to members of the public in exchange for a membership fee of $75 or less per year; and
Economic benefits provided to a disqualified person received solely as a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose.
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.
An excess 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 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.
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. Such intent is established only if the organization provides clear and convincing evidence that it intended the economic benefit to be compensation. Such clear an