3076 federal register /vol. 67, no. 15/wednesday, … federal register/vol. 67, no. 15/wednesday,...

3076 Federal Register / Vol. 67, No. 15 / Wednesday, January 23, 2002 / Rules and Regulations

country where the condition has been oris currently marketed as a prescriptiondrug or as an OTC drug or product.Provide individual adverse drugexperience reports (FDA Form 3500A orequivalent) along with a summary of allserious adverse drug experiences andexpected or frequently reported sideeffects for the condition. Individualreports that are not in English must betranslated to English in accordance with§ 10.20(c)(2) of this chapter.

(g) Administrative procedures. Theagency may use an advisory reviewpanel to evaluate the safety andeffectiveness data in accord with theprovisions of § 330.10(a)(3).Alternatively, the agency may evaluatethe data in conjunction with theadvisory review panel or on its ownwithout using an advisory review panel.The agency will use the safety,effectiveness, and labeling standards in§ 330.10(a)(4)(i) through (a)(4)(vi) inevaluating the data.

(1) If the agency uses an advisoryreview panel to evaluate the data, thepanel may submit its recommendationsin its official minutes of meeting(s) or bya report under the provisions of§ 330.10(a)(5).

(2) The agency may act on an advisoryreview panel’s recommendations usingthe procedures in §§ 330.10(a)(2) and330.10(a)(6) through (a)(10).

(3) If the condition is initiallydetermined to be generally recognizedas safe and effective for OTC use in theUnited States, the agency will proposeto include it in an appropriate OTC drugmonograph(s), either by amending anexisting monograph(s) or establishing anew monograph(s), if necessary.

(4) If the condition is initiallydetermined not to be generallyrecognized as safe and effective for OTCuse in the United States, the agency willinform the sponsor and other interestedparties who have submitted data of itsdetermination by letter, a copy of whichwill be placed on public display in thedocket established in the DocketsManagement Branch. The agency willpublish a notice of proposed rulemakingto include the condition in § 310.502 ofthis chapter.

(5) Interested parties will have anopportunity to submit comments andnew data. The agency will subsequentlypublish a final rule (or reproposal ifnecessary) in the Federal Register.

(h) Marketing. A condition submittedunder this section for consideration inthe OTC drug monograph system maybe marketed in accordance with anapplicable final OTC drug monograph(s)only after the agency determines thatthe condition is generally recognized assafe and effective and includes it in the

appropriate OTC drug finalmonograph(s), and the conditioncomplies with paragraph (i) of thissection. When an OTC drug monographhas not been finalized and finalizationis not imminent, after the agency hasevaluated the comments to a proposedrule to include a new condition in atentative final monograph as generallyrecognized as safe and effective and theagency has not changed its position asa result of the comments, and thecondition complies with paragraph (i) ofthis section, the agency may publish anotice of enforcement policy that allowsmarketing to begin pending completionof the final monograph subject to therisk that the agency may, prior to or inthe final monograph, adopt a differentposition that could require relabeling,recall, or other regulatory action.

(i) Compendial monograph. Anyactive ingredient or botanical drugsubstance included in a final OTC drugmonograph or the subject of anenforcement notice described inparagraph (h) of this section must berecognized in an official USP–NF drugmonograph that sets forth its standardsof identity, strength, quality, and purity.Sponsors must include an official orproposed compendial monograph aspart of the safety and effectiveness datasubmission listed in § 330.10(a)(2)under item VII of the outline entitled‘‘OTC DRUG REVIEW INFORMATION.’’

Dated: January 11, 2001.Margaret M. Dotzel,Associate Commissioner for Policy.[FR Doc. 02–1457 Filed 1–22–02; 8:45 am]BILLING CODE 4160–01–S

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 53, 301, and 602

[TD 8978]

RIN 1545–AY65

Excise Taxes on Excess BenefitTransactions

AGENCY: Internal Revenue Service (IRS),Treasury.ACTION: Final regulations and removal oftemporary regulations.

SUMMARY: This document contains finalregulations relating to the excise taxeson excess benefit transactions undersection 4958 of the Internal RevenueCode, as well as certain amendmentsand additions to existing Income TaxRegulations affected by section 4958.Section 4958 was enacted by the

Taxpayer Bill of Rights 2. Section 4958imposes excise taxes on any transactionthat provides excess economic benefitsto a person in a position to exercisesubstantial influence over the affairs ofa public charity or a social welfareorganization.

DATES: Effective Date: These regulationsare effective January 23, 2002.

Applicability Date: These regulationsapply as of January 23, 2002.FOR FURTHER INFORMATION CONTACT:Phyllis D. Haney, (202) 622–4290 (not atoll-free number).SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of informationcontained in these final regulations havebeen reviewed and approved by theOffice of Management and Budget inaccordance with the PaperworkReduction Act (44 U.S.C. 3507) undercontrol number 1545–1623. Responsesto these collections of information arerequired to obtain the benefit of therebuttable presumption that atransaction is reasonable or at fairmarket value.

An agency may not conduct orsponsor, and a person is not required torespond to, a collection of informationunless the collection of informationdisplays a valid control numberassigned by the Office of Managementand Budget.

The estimated annual burden perrecordkeeper varies from 3 hours to 308hours, depending on individualcircumstances, with an estimatedweighted average of 6 hours, 3 minutes.

Comments concerning the accuracy ofthis burden estimate and suggestions forreducing this burden should be sent tothe Internal Revenue Service, Attn: IRSReports Clearance Officer,W:CAR:MP:FP:S Washington, DC 20224,and to the Office of Management andBudget, Attn: Desk Officer for theDepartment of the Treasury, Office ofInformation and Regulatory Affairs,Washington, DC 20503.

Books or records relating to thiscollection of information must beretained as long as their contents maybecome material in the administrationof any internal revenue law. Generally,tax returns and tax return informationare confidential, as required by 26U.S.C. 6103.

Background

Section 4958 was added to theInternal Revenue Code (Code) by theTaxpayer Bill of Rights 2, Public Law104–168 (110 Stat. 1452), enacted July30, 1996. The section 4958 excise taxesgenerally apply to excess benefit

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3077Federal Register / Vol. 67, No. 15 / Wednesday, January 23, 2002 / Rules and Regulations

transactions occurring on or afterSeptember 14, 1995. Any disqualifiedperson who benefits from an excessbenefit transaction with an applicabletax-exempt organization is liable for atax of 25 percent of the excess benefit.The person is also liable for a tax of 200percent of the excess benefit if theexcess benefit is not corrected by acertain date. A disqualified person isgenerally defined as a person in aposition to exercise substantialinfluence over the affairs of theapplicable tax-exempt organization. Anapplicable tax-exempt organization isan organization described in Codesection 501(c)(3) or (4) and exempt fromtax under section 501(a). Additionally,organization managers who participatein an excess benefit transactionknowingly, willfully, and withoutreasonable cause, are liable for a tax of10 percent of the excess benefit. The taxfor which all participating organizationmanagers are liable cannot exceed$10,000 for any one excess benefittransaction.

On August 4, 1998, a notice ofproposed rulemaking (REG–246256–96)clarifying certain definitions and rulescontained in section 4958 waspublished in the Federal Register (63FR 41486). The IRS received numerouswritten comments responding to thisnotice. A public hearing was held onMarch 16 and 17, 1999. Those proposedregulations were revised in response towritten and oral comments, andreplaced by temporary regulations (TD8920, 66 FR 2144) and a cross-referencing notice of proposedrulemaking (REG–246256–96, 66 FR2173) on January 10, 2001. A fewwritten comments were received inresponse to the notice of proposedrulemaking of January 10, 2001. Apublic hearing was held July 31, 2001.After consideration of all commentsreceived, the January 2001 cross-referencing proposed regulations undersection 4958 are revised and publishedin final form, and the temporaryregulations removed. The major areas ofthe comments and revisions arediscussed below.

Explanation and Summary ofComments

Tax Paid by Organization ManagersOrganization managers who

participate in an excess benefittransaction knowingly, willfully, andwithout reasonable cause, are liable fora tax equal to 10 percent of the excessbenefit. The temporary regulationsprovide that an organization manager’sparticipation in an excess benefittransaction will ordinarily not be

considered knowing to the extent that,after full disclosure of the factualsituation to an appropriate professional,the organization manager relies on areasoned written opinion of thatprofessional with respect to elements ofthe transaction within the professional’sexpertise. For this purpose, appropriateprofessionals are legal counsel(including in-house counsel), certifiedpublic accountants or accounting firmswith expertise regarding the relevant taxlaw matters, and independent valuationexperts who meet specifiedrequirements. Oral comments at thepublic hearing objected to this safeharbor, suggesting instances of theunreliability of appraisers andaccountants. The final regulations retainthis safe harbor. The IRS and theTreasury Department believe that anorganization manager who has soughtand relied upon an appropriateprofessional opinion has not ‘‘fail[ed] tomake reasonable attempts to ascertainwhether the transaction is an excessbenefit transaction’’, which is a requiredelement of knowing for this purpose.

The temporary regulations provide anadditional safe harbor: that anorganization manager’s participation ina transaction will ordinarily not beconsidered knowing if the managerrelies on the fact that the requirementsgiving rise to the rebuttablepresumption of reasonableness aresatisfied with respect to the transaction.Several comments were receivedrequesting that the safe harbor bemodified, either to apply if theorganization manager ‘‘reasonablybelieves’’ that the requirements for thepresumption are satisfied, or toeliminate the reliance requirement. Inresponse to these comments, the finalregulations no longer require that theorganization manager rely on the factthat the requirements of the rebuttablepresumption of reasonableness aresatisfied. The final regulations state thatthe organization manager’s participationin a transaction will ordinarily not beconsidered knowing if the appropriateauthorized body has met therequirements of the rebuttablepresumption with respect to thetransaction. The IRS and the TreasuryDepartment note that the relief given bythis provision is only a safe harbor, sothat failure to satisfy its requirementsdoes not necessarily mean that theorganization manager acted knowingly.

Definition of Applicable Tax-ExemptOrganization

The temporary regulations providethat any governmental entity that isexempt from (or not subject to) taxationwithout regard to section 501(a) is not

an applicable tax-exempt organizationfor purposes of section 4958. Acomment was received requesting thatthe final regulations clarify whethersection 115 entities are excepted fromthe definition of applicable tax-exemptorganization. Because section 115exempts certain income, and not theentity itself, the reference in thetemporary regulations to anygovernmental entity ‘‘exempt from tax’’without regard to section 501(a) isunclear. The final regulations providethat for purposes of section 4958, agovernmental unit or an affiliate of agovernmental unit is not an applicabletax-exempt organization if it is: (1)Exempt from (or not subject to) taxationwithout regard to section 501(a); or (2)relieved from filing an annual returnpursuant to the authority of TreasuryRegulations under section 6033.

Regulations under section 6033 grantthe Commissioner authority to relieveorganizations from filing an annualreturn required by that section in caseswhere the returns are not necessary forthe efficient administration of theinternal revenue laws. Under thisauthority, Rev. Proc. 95–48 (1995–2 C.B.418) relieves ‘‘governmental units’’ andcertain ‘‘affiliates of governmentalunits’’ from the annual filingrequirement. A governmental unit asdefined in this revenue procedurealready falls within the exceptionprovided in the section 4958 temporaryregulations for ‘‘any governmental entitythat is exempt from (or not subject to)taxation without regard to section501(a)’’. An affiliate of a governmentalunit that is relieved from filing anannual return by Rev. Proc. 95–48 (andthus also excepted from the definition ofan applicable tax-exempt organizationunder these section 4958 finalregulations) includes any organizationdescribed in section 501(c) that has aruling or determination from the IRSthat: (1) Its income, derived fromactivities constituting the basis for itsexemption under section 501(c), isexcluded from gross income undersection 115; (2) it is entitled to receivedeductible charitable contributionsunder section 170(c)(1) on the basis thatthe contributions are ‘‘for the use of’’governmental units; or (3) it is a whollyowned instrumentality of a State foremployment tax purposes. Anorganization described in section 501(c)that does not have such a ruling ordetermination may also qualify as anaffiliate of a governmental unit forpurposes of the revenue procedure if: (1)It is either ‘‘operated, supervised, orcontrolled by’’ governmental unitswithin the meaning of regulations under



section 509; (2) it possesses at least twoaffiliation factors listed in Rev. Proc.95–48; and (3) its filing of Form 990,‘‘Return of Organization Exempt FromIncome Tax’’, is not otherwise necessaryto the efficient administration of theinternal revenue laws.

A comment was also receivedrequesting that the final regulationsexclude from the definition ofapplicable tax-exempt organizationcollectively bargained apprenticeshipfunds subject to the rules of the LaborManagement Relations Act of 1947 (61Stat. 157) and the Employee RetirementIncome Security Act of 1974 (88 Stat.854) (ERISA). The commenter statedthat, like governmental entities, thesefunds seek recognition under Codesection 501(c)(3) on a strictly voluntarybasis, and are also eligible for taxexemption under Code section 501(c)(5).The commenter also stated thatapplying section 4958 to these fundswould provide an unnecessary layer ofregulation, because these plans alreadyare subject to ERISA.

The final regulations do not exceptcollectively bargained apprenticeshipfunds from the definition of applicabletax-exempt organization. However, inresponse to this comment, the finalregulations provide a special exceptionunder section 4958 for transactions thatare covered by a final individualprohibited transaction exemption issuedby the Department of Labor. The finalregulations provide that section 4958does not apply to any payment madepursuant to, and in accordance with, afinal individual prohibited transactionexemption issued by the Department ofLabor under ERISA with respect to atransaction involving a plan that is anapplicable tax-exempt organization.Before granting an individual prohibitedtransaction exemption under ERISA, theDepartment of Labor must determinethat the particular transaction is in theinterests of the plan and its participants,and is protective of the rights ofparticipants in the plan. The IRS andthe Treasury Department believe thatthe similarity between the ERISAstandard (‘‘in the interests of’’ and‘‘protective of the rights of’’participants) and the fair market valuestandard of section 4958 warrants thisspecial exception.

Definition of Disqualified PersonThe preamble of the temporary

regulations noted that the IRS and theTreasury Department consideredadopting a special rule with respect toso-called donor-advised fundsmaintained by applicable tax-exemptorganizations, and requested commentsregarding potential issues raised by

applying the fair market value standardof section 4958 to distributions from adonor-advised fund to (or for the use of)the donor or advisor. Several commentswere received on this issue. Most of thecomments objected to treating a donoror advisor to this type of fund as adisqualified person based solely oninfluence over a donor-advised fund.Others stated that the existing factorscontained in the temporary regulationswere adequate to find disqualifiedperson status in appropriatecircumstances. One commenterrequested that if section 4958 were toapply to transactions involving donor-advised funds, the fair market standardshould apply, and requested additionaldefinitions and exclusions if the finalregulations contained specific rules forthese types of funds.

In response to these comments, thefinal regulations do not adopt a specialrule regarding any donor or advisor toa donor-advised fund. Thus, the generalrules of § 53.4958–3 will apply todetermine if a donor or advisor is adisqualified person.

Some additional comments werereceived on other specific rules of thedisqualified person definition containedin the temporary regulations. The finalregulations do not change the rules ordescriptions contained in the definition.However, several of the comments arediscussed below to explain why the IRSand the Treasury Department concludedthat changes were not necessary ordesirable. Other comments suggestedchanges to the examples. In response tothose comments, several examples inthis section of the final regulations wererevised from the temporary regulations,as discussed below.

The temporary regulations state thatan organization described in section501(c)(4) is deemed not to havesubstantial influence with respect toanother applicable tax-exemptorganization described in section501(c)(4). A section 501(c)(4)organization can, however, havesubstantial influence with respect to anorganization described in section501(c)(3). A commenter requested thatsection 501(c)(4) organizations beexcluded from disqualified personstatus with respect to all applicable tax-exempt organizations.

The IRS and the Treasury Departmentdecline to expand the exclusion forsection 501(c)(4) organizations. Asection 501(c)(4) organization canengage in certain activities (such aspolitical campaign activities) that asection 501(c)(3) organization cannot.Accordingly, the IRS and the TreasuryDepartment are concerned abouttransactions in which a section 501(c)(3)

organization may provide an excessbenefit to a section 501(c)(4)organization to avoid limitations ofsection 501(c)(3).

Oral comments at the public hearingobjected to including, as one of thefactors tending to show no substantialinfluence, the fact that the person’s solerelationship to an applicable tax-exemptorganization is as a contractor (such asan attorney, accountant, or investmentmanager or advisor) providingprofessional advice to the organization.The commenter suggested that theseproviders of professional advice have agreat deal of influence over applicabletax-exempt organizations, but choosenot to exercise that influence. The IRSand the Treasury Department believethat the description of this factor in thetemporary regulations includessufficient safeguards to protect theorganization. Accordingly, the finalregulations retain this factor.Additionally, being in this category ofpersons is merely a factor tending toshow no substantial influence. Inappropriate circumstances, the IRScould still conclude that a personostensibly described in this categorywas a disqualified person based on allrelevant facts and circumstances.

Another comment objected to thestandard of one of the factors tending toshow substantial influence: that aperson’s compensation is primarilybased on revenues derived fromactivities of the organization that theperson controls. The commentersuggested that this factor be modified toprovide that revenues controlled by theperson also represent a substantial partof the organization’s total revenues. TheIRS and the Treasury Department do notbelieve that a change is necessary. Thefactor at issue is only one of manyfactors that may be considered, and willbe considered in conjunction with allrelevant facts and circumstances.

Another comment requested furtherrevision to two factors tending to showsubstantial influence. The first factorstates that the person has or sharesauthority to control or determine asubstantial portion of the organization’scapital expenditures, operating budget,or compensation for employees. Thesecond factor states that the personmanages a discrete segment or activityof the organization that represents asubstantial portion of the activities,assets, income, or expense of theorganization, as compared to theorganization as a whole. The commentersuggested that the first factor issufficient, and requested that the secondfactor be deleted. Alternatively, thecommenter requested that the finalregulations define the term substantial,



and recommended a safe harborpercentage of 15 percent.

The IRS and the Treasury Departmentdid not revise these two factors tendingto show substantial influence. The IRSand the Treasury Department do notbelieve that these two factors areredundant, as they address budget andmanagement authority, respectively,and these two functions may reside indifferent persons. In addition, as withany of the listed factors, these twofactors are considered along with allother relevant facts and circumstances.

In response to a comment regardingthe examples of this section, the finalregulations revise an example thatconcludes that a hospital managementcompany is a disqualified person withrespect to the applicable tax-exemptorganization. The comment stated thatthe example could create confusionbecause its language does not matchneatly with the factors tending to showsubstantial influence listed in thetemporary regulations. The commenteralso pointed out that, under the facts ofthe example, the functions of themanagement company seemed close tothose of a president, chief executiveofficer, or chief operating officer, one ofthe categories of persons who aredeemed to have substantial influence.The example is revised in the finalregulations to illustrate that themanagement company is a disqualifiedperson per se, because it has ultimateresponsibility for supervising themanagement of the hospital, consistentwith the regulatory description of thefunctions of a president, chief executiveofficer, or chief operating officer. Byconcluding that the managementcompany is a disqualified person, thisexample also addresses a commentrequesting that final regulations clarifywhether only individuals could bepersons having substantial influence.

Economic Benefit Provided Indirectly

One comment analyzed examples inthe temporary regulations defining anindirect excess benefit transaction. Thecommenter questioned one example inwhich the benefits provided to adisqualified person by an applicabletax-exempt organization and an entitycontrolled by the organization areevaluated in the aggregate, and theexcess over reasonable compensation forthe services performed by thedisqualified person for both entities istreated as an excess benefit. Thecommenter recommended that theexample be deleted or revised so thatthe reasonableness of compensationprovided by each entity is evaluatedseparately.

The rules governing an indirect excessbenefit transaction are intended toprevent an applicable tax-exemptorganization from avoiding section 4958by using a controlled entity to provideexcess benefits to a disqualified person.Thus, for purposes of section 4958,economic benefits provided by acontrolled entity will be treated asprovided by the applicable tax-exemptorganization. Likewise, the IRS and theTreasury Department believe that anyservices performed by the disqualifiedperson for a controlled entity should betaken into account in determining thereasonableness of compensation paid bythe applicable tax-exempt organization.Accordingly, this example is notchanged in the final regulations.However, the IRS and the TreasuryDepartment agree with the commenterthat the payment of compensation by anapplicable tax-exempt organization to adisqualified person for servicesprovided to a controlled entity, otherthan a wholly-owned subsidiary, mayraise private benefit issues if the otherinvestors in the entity do not make aproportional contribution. Accordingly,another example in this section ismodified to clarify that the controlledentity for which the disqualified personperforms services is a wholly-ownedsubsidiary of the applicable tax-exemptorganization.

Initial Contract ExceptionThe temporary regulations provide

that section 4958 does not apply to anyfixed payment made to a personpursuant to an initial contract,regardless of whether the paymentwould otherwise constitute an excessbenefit transaction. For this purpose, aninitial contract is defined as a bindingwritten contract between an applicabletax-exempt organization and a personwho was not a disqualified personimmediately prior to entering into thecontract. A fixed payment means anamount of cash or other propertyspecified in the contract, or determinedby a fixed formula specified in thecontract, which is paid or transferred inexchange for the provision of specifiedservices or property. A fixed formulamay incorporate an amount thatdepends upon future specified events orcontingencies (e.g., revenues generatedby activities of the organization),provided that no person exercisesdiscretion when calculating the amountof a payment or deciding whether tomake a payment. The temporaryregulations include examples toillustrate the application of the initialcontract rule.

Several comments were received onthis section of the temporary

regulations, including comments onspecific examples. Severalcommentators requested a more liberaldefinition of initial contract. Forinstance, requests were received toextend the initial contract exception tocases where there is othercontemporaneous written evidence ofthe terms of employment (but not abinding contract), or for the rule tocover cases where the parties agree tosubstantial terms of the person’semployment, but where a final contracthas not been signed before the personbegins performing services for theorganization. As the term bindingwritten contract is governed by Statelaw, in some cases that term may in factbe satisfied by an exchange of writingsindicating the substantial terms of anagreement. However, the IRS and theTreasury Department decline to revisethe regulatory definition of this termfrom that contained in the temporaryregulations.

One commenter at the public hearingrequested that the final regulationseliminate the initial contract exception.In this commenter’s view, the SeventhCircuit in United Cancer Council, Inc. v.Commissioner of Internal Revenue, 165F.3d 1173 (7th Cir. 1999), rev’ing andremanding 109 T.C. 326 (1997), focusedon the wrong moment in time todetermine insider status (analogous todisqualified person status under section4958). The commenter suggested that aperson’s insider status should bedetermined at the time payments aremade to the person. Therefore, thecommenter recommended that the IRSand the Treasury Department decline tofollow the reasoning of the SeventhCircuit’s decision in the United CancerCouncil case in the final regulations.Alternatively, the commenter requestedthat, if the initial contract exception isretained in the section 4958 finalregulations, the IRS and the TreasuryDepartment revise the private benefitstandard under the section 501(c)(3)regulations to require that any privatebenefit conferred by a transaction mustbe insubstantial relative to the publicbenefit resulting from the transaction(rather than the public benefit resultingfrom the organization’s overallactivities).

Although the United Cancer Councilcase addressed the issue of privateinurement under the standards ofsection 501(c)(3) in connection withrevocation of the organization’s taxexemption, the temporary regulationsaddress the concerns expressed in theSeventh Circuit’s opinion in UnitedCancer Council in the context of section4958. The Seventh Circuit concludedthat prohibited inurement under section



501(c)(3) cannot result from acontractual relationship negotiated atarm’s length with a party having noprior relationship with the organization,regardless of the relative bargainingstrength of the parties or resultantcontrol over the tax-exempt organizationcreated by the terms of the contract. Thetemporary regulations provide that, tothe extent that an applicable tax-exemptorganization and a person who is not yeta disqualified person enter into abinding written contract that specifiesthe amounts to be paid to the person (orspecifies an objective formula forcalculating those amounts), those fixedpayments are not subject to scrutinyunder section 4958, even if paid afterthe person becomes a disqualifiedperson. However, the initial contractexception does not apply if the contractis materially modified or if the personfails to substantially perform his or herobligations under the contract. The IRSand the Treasury Department believethat the fact that the initial contract isscrutinized again when either of thesesituations occurs provides adequateprotection to the applicable tax-exemptorganization. In addition, the suggestedrevisions to the regulations undersection 501(c)(3) are beyond the scopeof this regulations project.

Several comments on specificexamples in the initial contractexception section of the temporaryregulations were received. One writercommented that in the exampleinvolving a hospital managementcompany, the structure of themanagement fee gives the managementcompany an incentive to provide charitycare regardless of whether the hospitalhas the financial resources to pay for it.The intent of that example is merely toillustrate a fixed payment determinedby a fixed formula specified in thecontract, where the formulaincorporates an amount that isdependent on future specified events,but where no person exercisesdiscretion when calculating the amountof a payment under the contract.Therefore, the example remainsunchanged in the final regulations.

Additional comments were receivedaddressing the example in which thesame hospital management companyalso received reimbursements for certainexpenses in addition to the fixedmanagement fee. The temporaryregulations provide that any amountpaid to a person under a reimbursement(or similar) arrangement wherediscretion is exercised with respect tothe amount of expenses incurred orreimbursed is not a fixed payment forpurposes of the section 4958 initialcontract exception. A request was made

to distinguish such reimbursementarrangements from paymentsdetermined by a fixed formula based onrevenues from a particular activity,where a person has discretion over theextent of the activity. The IRS and theTreasury Department believe thatreimbursement payments shouldgenerally be evaluated forreasonableness for purposes of section4958. Consequently, the example is notmodified in the final regulations, exceptto clarify that the management fee is afixed payment, even though thereimbursement payments under thecontract are not. However, as discussedbelow, the IRS and the TreasuryDepartment also believe thatreimbursement arrangements that meetthe requirements of § 1.62–2(c) (expensereimbursements pursuant to anaccountable plan) do not raise the sameconcerns as other reimbursementpayments, because of the requirementsto qualify as an accountable plan.Accordingly, the final regulationsdisregard amounts reimbursed toemployees pursuant to an accountableplan (see the discussion of this topic inthis preamble under the heading‘‘Disregarded Economic Benefits’’).Because the hospital managementcompany in the example is a contractor,and not an employee, the expensereimbursements do not fall within thisexception for expense reimbursementspursuant to an accountable plan.

Disregarded Economic BenefitsThe temporary regulations provide

that all fringe benefits excluded fromincome under section 132 (except forcertain liability insurance premiums,payments or reimbursements) aredisregarded for section 4958 purposes.To provide consistent treatment ofbenefits provided in cash and in kind,the final regulations also disregardexpense reimbursements paid pursuantto an accountable plan that meets therequirements of § 1.62–2(c). Thus, as isthe case with section 132(d) workingcondition fringe benefits, existingstandards under section 162 and section274 will apply to determine whetheremployee expense reimbursements aredisregarded for section 4958 purposes,or are treated as part of the disqualifiedperson’s compensation for purposes ofdetermining reasonableness undersection 4958.

Several comments were receivedrequesting that lodging furnished for theconvenience of the employer (i.e.,meeting the requirements of section119) be disregarded for section 4958purposes. These comments suggestedthat benefits excluded from grossincome under section 119 should be

disregarded for purposes of section 4958because the policy rationale underlyingsection 119 is the same as thatunderlying section 132. However, thereare differences between the twosections. In general, section 132 benefitsare subject to nondiscrimination rules orare de minimis in amount, which is notthe case with section 119 benefits. Thevalue of housing benefits is potentiallymuch larger than many of the section132 benefits, and therefore a greaterpotential for abuse exists in the section119 area. Accordingly, the IRS and theTreasury Department believe it isappropriate to treat section 119 benefitsdifferently from section 132 benefits byrequiring an evaluation forreasonableness.

The temporary regulations disregardeconomic benefits provided to a donorsolely on account of a contributiondeductible under section 170 if tworequirements are met. First, any non-disqualified person making acontribution above a specified amountto the organization is given the optionof receiving substantially the sameeconomic benefit. Second, thedisqualified person and a significantnumber of non-disqualified persons infact make a contribution of at least thespecified amount. Several commentswere received requesting additionalguidance with respect to thesedisregarded benefits. One commenterasked that the rule be revised to addresscontributions that are not deductible bythe donor in the current year because ofthe percentage limitations under section170(b). That commenter also requestedthat the final regulations provide forsituations where no other donor makesa comparable contribution to thespecific applicable tax-exemptorganization. In that instance, thecommenter requested that the benefitsbe considered in relation to benefitscustomarily provided by similarorganizations for that level ofcontribution. Another commenterrequested that any benefit provided to adonor be disregarded if the value of thebenefit does not exceed the value of thedonation and the donor treats thebenefit as a quid pro quo that reducesthe donor’s charitable contributiondeduction.

The IRS and the Treasury Departmentdecline to address situations where adisqualified person makes a uniquecontribution to an applicable tax-exempt organization. As a practicalmatter, an excess benefit transactionwould never arise in connection with acontribution to an applicable tax-exempt organization, where the value ofthe contribution exceeds the value ofany benefit the donor receives in return.



However, in response to comments, thefinal regulations clarify that economicbenefits made available on equal termsto a disqualified person and asignificant number of other donors whomake charitable contributions (withinthe meaning of section 170) above aspecified amount may be disregardedfor purposes of section 4958, even if thedisqualified person cannot claim adeduction under section 170 withrespect to the contribution, because thedisqualified person does not itemizedeductions, or is subject to thepercentage limitations under section170(b).

Timing of ReasonablenessDetermination

The temporary regulations providethat reasonableness is determined withrespect to any fixed payment (as definedfor purposes of the initial contract rule)at the time the parties enter into thecontract. For non-fixed payments,reasonableness is determined based onall facts and circumstances, up to andincluding circumstances as of the dateof payment. A comment requested thatfinal regulations clarify that the timingfor determining the reasonableness of abenefit is not affected by the existenceof a substantial risk of forfeiture. Inresponse to this comment, the finalregulations are revised to clarify that thegeneral timing rules apply to propertysubject to a substantial risk of forfeiture.Therefore, if the property subject to asubstantial risk of forfeiture satisfies thedefinition of fixed payment,reasonableness is determined at the timethe parties enter into the contractproviding for the transfer of theproperty. If the property is not a fixedpayment, then reasonableness isdetermined based on all facts andcircumstances, up to and includingcircumstances as of the date of payment.An example is also added to illustratehow the regular timing rules fordetermining reasonableness for section4958 purposes apply to property that issubject to a substantial risk of forfeiture.

Contemporaneous SubstantiationThe temporary regulations provide

that an organization must providewritten substantiation that iscontemporaneous with the transfer ofbenefits at issue in order to provideclear and convincing evidence of itsintent to treat benefits provided to adisqualified person as compensation forservices. This requirement may besatisfied by either: (1) The organizationreporting the economic benefit ascompensation on an original Federal taxinformation return, or on an amendedFederal tax information return filed

prior to the commencement of an IRSexamination of the applicable tax-exempt organization or the disqualifiedperson for the taxable year in which thetransaction occurred; or (2) the recipientdisqualified person reporting the benefitas income on the person’s originalFederal tax return, or on the person’samended Federal tax return filed priorto the commencement of an IRSexamination. The final regulationsclarify that for an amended return filedby a disqualified person to beconsidered contemporaneoussubstantiation, the person must file anamended return prior to the earlier ofthe following dates: (1) Commencementof an IRS examination; or (2) the firstdocumentation in writing by the IRS ofa potential excess benefit transaction.

The temporary regulations providethat, if a benefit is not reported on areturn filed with the IRS, other writtencontemporaneous evidence (such as anapproved written employment contractexecuted on or before the date of thetransfer) may be used to demonstratethat the appropriate decision-makingbody or an authorized officer approveda transfer as compensation for servicesin accordance with establishedprocedures. A comment was receivedrequesting that the reference to‘‘established procedures’’ be deleted.

The final regulations retain thereference to ‘‘established procedures’’because it appears in the legislativehistory to section 4958 (See H. REP. NO.506, 104th Congress, 2d SESS. (1996),53, 57). The IRS will interpret the termestablished procedures to refer to theorganization’s usual practice forapproving compensation, not to requirean organization to have a formal writtenprocedure for approving compensation.For clarity, the final regulations replacethe term authorized officer with ‘‘officerauthorized to approve compensation’.

The final regulations also clarify thatwritten evidence upon which theapplicable tax-exempt organizationbased a reasonable belief that a benefitwas nontaxable can serve as writtencontemporaneous evidencedemonstrating that a transfer wasapproved as compensation, even if theorganization’s belief later proves to beerroneous. The written evidence musthave been in existence on or before thedue date of the applicable Federal taxreturn (including extensions but notamendments). The final regulationsinclude an example illustrating thisrule.

Finally, the final regulations providethat in no event will an economicbenefit that a disqualified personobtains by theft or fraud be treated as

consideration for the performance ofservices.

Transaction in Which the Amount of theEconomic Benefit is Determined inWhole or in Part by the Revenues of Oneor More Activities of the Organization

Section 4958(c)(2) identifies a secondtype of excess benefit transaction: anytransaction in which the amount of anyeconomic benefit provided to or for theuse of a disqualified person isdetermined in whole or in part by therevenues of one or more activities of theapplicable tax-exempt organization,where the transaction results inimpermissible inurement under section501(c)(3) or (4). The statute provides,however, that this type of transaction isonly an excess benefit transaction to theextent provided in regulationsprescribed by the Secretary.

The August 1998 proposedregulations provided standards fordetermining when a revenue-sharingtransaction constitutes an excess benefittransaction. Numerous comments werereceived on this section of the proposedregulations. Commenters offeredmultiple, often conflicting, suggestionsand recommendations to address themany issues raised with respect torevenue-sharing transactions.

The temporary regulations reserve thesection of the regulations governingrevenue-sharing transactions. Thetemporary regulations provide that,until specific rules are issued to regulatesuch transactions, all transactions withdisqualified persons (regardless ofwhether the person’s compensation iscomputed by reference to revenues ofthe organization) will be evaluatedunder general rules defining an excessbenefit transaction in § 53.4958–4T. Awritten comment was receivedsupporting the decision to reserve thatsection of the regulations. However, aspeaker at the public hearing objected tothe lack of specific limits on revenue-sharing transactions in the temporaryregulations. The speaker would allowonly a small percentage of a disqualifiedperson’s salary to be based on anapplicable tax-exempt organization’srevenues.

Another comment asked whetherrevenue-sharing transactions that arereasonable in amount may nonethelessviolate the inurement prohibition, sothat they jeopardize the organization’stax-exempt status. The temporaryregulations and these final regulationsmake clear that the general exemptionstandards of sections 501(c)(3) and (4)still apply. Under these standards,inurement may exist even though adisqualified person receives areasonable amount from a revenue-



sharing arrangement. However, mostsituations that constitute inurement willalso violate the general rules of§ 53.4958–4 (e.g., exceed reasonablecompensation).

The final regulations continue toreserve the separate section governingrevenue-sharing transactions. The IRSand the Treasury Department willcontinue to monitor these types oftransactions, and if appropriate, willconsider issuing specific rules toregulate them. Any later regulations thatmay become necessary will be issued inproposed form.

The final regulations provide that thegeneral rules of § 53.4958–4 apply to alltransactions with disqualified persons,regardless of whether the amount of thebenefit provided is determined, inwhole or in part, by the revenues of oneor more activities of the organization.

Rebuttable Presumption That aTransaction Is Not an Excess BenefitTransaction

An informal question was presentedwith respect to the definition ofauthorized body contained in thetemporary regulations for purposes ofthe rebuttable presumption ofreasonableness. The IRS was askedwhether approval by one authorizedofficial of an applicable tax-exemptorganization could satisfy therequirement of approval by anauthorized body for purposes ofestablishing the presumption. Under theregulatory definition of authorized bodyin both the temporary regulations andthese final regulations, a singleindividual may constitute either acommittee of the governing body or aparty authorized by the governing bodyto act on its behalf, if State law allowsa single individual to act in either ofthese capacities.

CorrectionSeveral comments were received with

respect to the specific correction rulescontained in the temporary regulations.One commenter requested that, in thecase of an excess benefit involving atransfer of property by an applicabletax-exempt organization to adisqualified person, the final regulationsbe modified to require the return of thespecific property if the organizationwants the property back. Thecommenter suggested that such a rulewould be consistent with the privatefoundation self-dealing regulationsunder section 4941, which requirerescission of the transaction wherepossible. Rescission is appropriateunder section 4941, where mosttransactions between a privatefoundation and a disqualified person are

absolutely prohibited. By contrast,section 4958 is intended to ensure thattransactions between an applicable tax-exempt organization and a disqualifiedperson, which are permissible, do notresult in an excess benefit to thedisqualified person. Therefore, nochange has been made in the finalregulations on this point.

Another commenter requestedadditional guidance on the rulesgoverning correction in the case of anapplicable tax-exempt organization thathas ceased to exist, or is no longer tax-exempt. The temporary regulationsprovide that, in such cases, thecorrection amount may not be paid to anorganization that is related to thedisqualified person. The commenternoted that the ‘‘related to’’ standard isimprecise. The commenter suggestedreplacing this standard with arequirement that the recipientorganization in these instances either bea publicly-supported charity withrespect to which the disqualified personhas no authority to make or recommendgrants, or an organization selected withthe consent of the appropriate Stateofficial.

In response to this comment, the finalregulations require that a section501(c)(3) organization receiving thecorrection amount be a publicly-supported charity that has been inexistence as such for a continuousperiod of at least 60 calendar monthsending on the correction date. The timein existence requirement prevents thedisqualified person from creating a neworganization to receive the correctionamount. The final regulations alsorequire that the organization receivingthe correction amount does not allowthe disqualified person to make orrecommend any grants or distributionsby the organization. The finalregulations replace the relatednessstandard with a requirement that thedisqualified person is not also adisqualified person with respect to theorganization receiving the correctionamount. Similar requirements, exceptfor the publicly-supported charityrequirement, apply to a section 501(c)(4)organization receiving the correctionamount.

Factors To Determine WhetherRevocation Is Appropriate

The preamble of the August 1998proposed regulations listed four factorsthat the IRS will consider indetermining whether to revoke anapplicable tax-exempt organization’sexempt status: (1) Whether theorganization has been involved inrepeated excess benefit transactions; (2)the size and scope of the excess benefit

transaction; (3) whether, afterconcluding that it has been party to anexcess benefit transaction, theorganization has implementedsafeguards to prevent futurerecurrences; and (4) whether there wascompliance with other applicable laws.The preamble of the temporaryregulations indicates that the IRS willpublish guidance regarding the factorsthat it will consider in enforcing therequirements of sections 4958, 501(c)(3),and 501(c)(4), as it gains moreexperience in administering section4958. One comment was receivedrecommending several factors inaddition to the four factors. The IRScontinues to consider the suggestedadditions and revisions. Until itpublishes a revised or expanded list offactors, the IRS will consider allrelevant facts and circumstances in theadministration of section 4958 cases.

Other Substantiation RequirementsThe final regulations add a special

rule clarifying that compliance with thespecific substantiation rules of theregulations does not relieve applicabletax-exempt organizations of other rulesand requirements of the Code,regulations, Revenue Rulings, and otherguidance issued by the IRS (such as thesubstantiation rules of sections 162 and274, or § 1.6001–1(a) and (c)).

Special AnalysesIt has been determined that this

Treasury decision is not a significantregulatory action as defined inExecutive Order 12866. Therefore, aregulatory assessment is not required. Afinal regulatory flexibility analysis hasbeen prepared for a collection ofinformation in this Treasury decisionunder 5 U.S.C. 604.

Final Regulatory Flexibility AnalysisThese final regulations clarifying

section 4958 of the Code (Taxes onexcess benefit transactions) may have animpact on small organizations if thoseorganizations avail themselves of therebuttable presumption ofreasonableness described in theregulations (26 CFR 53.4958–6(a)(2),53.4958–6(a)(3), 53.4958–6(c)(2), and53.4958–6(c)(3)). The rebuttablepresumption is available because thelegislative history of section 4958 (H.REP. 104–506 at 56–7, March 28, 1996)stated that parties to a transactionshould be entitled to rely on such arebuttable presumption that acompensation arrangement or a propertytransaction between certainorganizations and disqualified personsof the organizations is reasonable or atfair market value. The legislative history



further instructed the Secretary of theTreasury and the IRS to issue guidancein connection with the standard forestablishing reasonable compensation orfair market value that incorporates thispresumption.

The objective for the rebuttablepresumption is to allow organizationsthat satisfy the three requirements topresume that compensationarrangements and property transactionsentered into with disqualified personspursuant to satisfaction of thoserequirements are reasonable or at fairmarket value. In such cases, the section4958 excise taxes can be imposed onlyif the IRS develops sufficient contraryevidence to rebut the probative value ofthe evidence put forth by the parties tothe transaction. The legal basis for theproposed rule is Code sections 4958 and7805.

The final rule affects organizationsdescribed in Code sections 501(c)(3) and(4) (applicable tax-exemptorganizations). Some applicable tax-exempt organizations may be smallorganizations, defined in 5 U.S.C. 601(4)as any not-for-profit enterprise which isindependently owned and operated andis not dominant in its field.

The proposed recordkeeping burdenentails obtaining and relying onappropriate comparability data anddocumenting the basis of anorganization’s determination thatcompensation is reasonable, or aproperty transfer (or transfer of the rightto use property) is at fair market value.These actions are necessary to meet twoof the requirements specified in thelegislative history for obtaining therebuttable presumption ofreasonableness. The skills necessary forthese actions are of the type required forobtaining and considering comparabilitydata, and for documenting themembership and actions of thegoverning board or relevant committeeof the organization. Applicable tax-exempt organizations that are smallentities of the class that files Form 990-EZ, ‘‘Short Form Return of OrganizationExempt From Income Tax’’ (i.e., thosewith gross receipts of less than $100,000and assets of less than $250,000), areunlikely to undertake fulfilling therequirements of the rebuttablepresumption of reasonableness, andtherefore will not be affected by therecordkeeping burden. All other classesof applicable tax-exempt organizationsthat file Form 990, ‘‘Return ofOrganization Exempt from Income Tax’’,up to organizations with assets of $50million, are likely to be smallorganizations that avail themselves ofthe rebuttable presumption ofreasonableness. These classes range

from organizations with assets of$100,000 to $50 million. The final rulecontains a less burdensome safe harborfor one of the requirements (obtainingcomparability data on compensation) fororganizations with annual gross receiptsof less than $1 million. The IRS is notaware of any other relevant Federalrules which may duplicate, overlap, orconflict with the final rule. A lessburdensome alternative for smallorganizations would be to exempt thoseentities from the requirements forestablishing the rebuttable presumptionof reasonableness. However, it is notconsistent with the statute to alloworganizations to rely on thispresumption without satisfying someconditions. Satisfaction of therequirements as outlined in thelegislative history leads to a benefit, butfailure to satisfy them does notnecessarily lead to a penalty. A moreburdensome alternative would be torequire all applicable tax-exemptorganizations under Code section 4958to satisfy the three requirements of therebuttable presumption ofreasonableness under all circumstances.

Pursuant to section 7805(f) of theCode, this final regulation will besubmitted to the Chief Counsel forAdvocacy of the Small BusinessAdministration for comment on itsimpact on business.

Drafting Information

The principal author of theseregulations is Phyllis D. Haney, Office ofDivision Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities). However, other personnelfrom the IRS and the TreasuryDepartment participated in theirdevelopment.

List of Subjects

26 CFR Part 53

Excise taxes, Foundations,Investments, Lobbying, Reporting andrecordkeeping requirements, Trusts andtrustees.

26 CFR Part 301

Employment taxes, Estate taxes,Excise taxes, Gift taxes, Income taxes,Penalties, Reporting and recordkeepingrequirements.

26 CFR Part 602

Reporting and recordkeepingrequirements.

Amendments to the Regulations

Accordingly, 26 CFR parts 53, 301,and 602 are amended as follows:

PART 53—FOUNDATION AND SIMILAREXCISE TAXES

1. The authority citation for part 53continues to read as follows:

Authority: 26 U.S.C. 7805.

1a. Sections 53.4958–0T through53.4958–8T are removed.

2. Sections 53.4958–0 through53.4958–8 are added to read as follows:

§ 53.4958–0 Table of contents.

This section lists the major captionscontained in §§ 53.4958–1 through53.4958–8.

Section 53.4958–1 Taxes on Excess BenefitTransactions

(a) In general.(b) Excess benefit defined.(c) Taxes paid by disqualified person.(1) Initial tax.(2) Additional tax on disqualified person.(i) In general.(ii) Taxable period.(iii) Abatement if correction during the

correction period.(d) Tax paid by organization managers.(1) In general.(2) Organization manager defined.(i) In general.(ii) Special rule for certain committee

members.(3) Participation.(4) Knowing.(i) In general.(ii) Amplification of general rule.(iii) Reliance on professional advice.(iv) Satisfaction of rebuttable presumption of

reasonableness.(5) Willful.(6) Due to reasonable cause.(7) Limits on liability for management.(8) Joint and several liability.(9) Burden of proof.(e) Date of occurrence.(1) In general.(2) Special rules.(3) Statute of limitations rules.(f) Effective date for imposition of taxes.(1) In general.(2) Existing binding contracts.

Section 53.4958–2 Definition of ApplicableTax-Exempt Organization

(a) Organizations described in section501(c)(3) or (4) and exempt from taxunder section 501(a).

(1) In general.(2) Exceptions from definition of applicable

tax-exempt organization.(i) Private foundation.(ii) Governmental unit or affiliate.(3) Organizations described in section

501(c)(3).(4) Organizations described in section

501(c)(4).(5) Effect of non-recognition or revocation of

exempt status.(b) Special rules.(1) Transition rule for lookback period.(2) Certain foreign organizations.



Section 53.4958–3 Definition ofDisqualified Person

(a) In general.(1) Scope of definition.(2) Transition rule for lookback period.(b) Statutory categories of disqualified

persons.(1) Family members.(2) Thirty-five percent controlled entities.(i) In general.(ii) Combined voting power.(iii) Constructive ownership rules.(A) Stockholdings.(B) Profits or beneficial interest.(c) Persons having substantial influence.(1) Voting members of the governing body.(2) Presidents, chief executive officers, or

chief operating officers.(3) Treasurers and chief financial officers.(4) Persons with a material financial interest

in a provider-sponsored organization.(d) Persons deemed not to have substantial

influence.(1) Tax-exempt organizations described in

section 501(c)(3).(2) Certain section 501(c)(4) organizations.(3) Employees receiving economic benefits of

less than a specified amount in a taxableyear.

(e) Facts and circumstances govern in allother cases.

(1) In general.(2) Facts and circumstances tending to show

substantial influence.(3) Facts and circumstances tending to show

no substantial influence.(f) Affiliated organizations.(g) Examples.

Section 53.4958–4 Excess BenefitTransaction

(a) Definition of excess benefit transaction.(1) In general.(2) Economic benefit provided indirectly.(i) In general.(ii) Through a controlled entity.(A) In general.(B) Definition of control.(1) In general.(2) Constructive ownership.(iii) Through an intermediary.(iv) Examples.(3) Exception for fixed payments made

pursuant to an initial contract.(i) In general.(ii) Fixed payment.(A) In general.(B) Special rules.(iii) Initial contract.(iv) Substantial performance required.(v) Treatment as a new contract.(vi) Evaluation of non-fixed payments.(vii) Examples.(4) Certain economic benefits disregarded for

purposes of section 4958.(i) Nontaxable fringe benefits.(ii) Expense reimbursement payments

pursuant to accountable plans.(iii) Certain economic benefits provided to a

volunteer for the organization.(iv) Certain economic benefits provided to a

member of, or donor to, the organization.(v) Economic benefits provided to a

charitable beneficiary.(vi) Certain economic benefits provided to a

governmental unit.

(5) Exception for certain payments madepursuant to an exemption granted by theDepartment of Labor under ERISA.

(b) Valuation standards.(1) In general.(i) Fair market value of property.(ii) Reasonable compensation.(A) In general.(B) Items included in determining the value

of compensation for purposes ofdetermining reasonableness undersection 4958.

(C) Inclusion in compensation forreasonableness determination does notgovern income tax treatment.

(2) Timing of reasonableness determination.(i) In general.(ii) Treatment as a new contract.(iii) Examples.(c) Establishing intent to treat economic

benefit as consideration for theperformance of services.

(1) In general.(2) Nontaxable benefits.(3) Contemporaneous substantiation.(i) Reporting of benefit.(A) In general.(B) Failure to report due to reasonable cause.(ii) Other written contemporaneous evidence.(4) Examples.

Section 53.4958–5 Transaction in Whichthe Amount of the Economic Benefit IsDetermined in Whole or in Part by theRevenues of One or More Activities of theOrganization. [Reserved]

Section 53.4958–6 Rebuttable presumptionthat a transaction is not an excess benefittransaction.

(a) In general.(b) Rebutting the presumption.(c) Requirements for invoking rebuttable

presumption.(1) Approval by an authorized body.(i) In general.(ii) Individuals not included on authorized

body.(iii) Absence of conflict of interest.(2) Appropriate data as to comparability.(i) In general.(ii) Special rule for compensation paid by

small organizations.(iii) Application of special rule for small

organizations.(iv) Examples.(3) Documentation.(d) No presumption with respect to non-fixed

payments until amounts are determined.(1) In general.(2) Special rule for certain non-fixed

payments subject to a cap.(e) No inference from absence of

presumption.(f) Period of reliance on rebuttable

presumption.

Section 53.4958–7 Correction

(a) In general.(b) Form of correction.(1) Cash or cash equivalents.(2) Anti-abuse rule.(3) Special rule relating to nonqualified

deferred compensation.(4) Return of specific property.(i) In general.(ii) Payment not equal to correction amount.

(iii) Disqualified person may not participatein decision.

(c) Correction amount.(d) Correction where contract has been

partially performed.(e) Correction in the case of an applicable

tax-exempt organization that has ceasedto exist, or is no longer tax-exempt.

(1) In general.(2) Section 501(c)(3) organizations.(3) Section 501(c)(4) organizations.(f) Examples.

Section 53.4958–8 Special Rules

(a) Substantive requirements for exemptionstill apply.

(b) Interaction between section 4958 andsection 7611 rules for church taxinquiries and examinations.

(c) Other substantiation requirements.

§ 53.4958–1 Taxes on excess benefittransactions.

(a) In general. Section 4958 imposesexcise taxes on each excess benefittransaction (as defined in section4958(c) and § 53.4958–4) between anapplicable tax-exempt organization (asdefined in section 4958(e) and§ 53.4958–2) and a disqualified person(as defined in section 4958(f)(1) and§ 53.4958–3). A disqualified person whoreceives an excess benefit from anexcess benefit transaction is liable forpayment of a section 4958(a)(1) excisetax equal to 25 percent of the excessbenefit. If an initial tax is imposed bysection 4958(a)(1) on an excess benefittransaction and the transaction is notcorrected (as defined in section4958(f)(6) and § 53.4958–7) within thetaxable period (as defined in section4958(f)(5) and paragraph (c)(2)(ii) of thissection), then any disqualified personwho received an excess benefit from theexcess benefit transaction on which theinitial tax was imposed is liable for anadditional tax of 200 percent of theexcess benefit. An organization manager(as defined in section 4958(f)(2) andparagraph (d) of this section) whoparticipates in an excess benefittransaction, knowing that it was such atransaction, is liable for payment of asection 4958(a)(2) excise tax equal to 10percent of the excess benefit, unless theparticipation was not willful and wasdue to reasonable cause. If anorganization manager also receives anexcess benefit from an excess benefittransaction, the manager may be liablefor both taxes imposed by section4958(a).

(b) Excess benefit defined. An excessbenefit is the amount by which thevalue of the economic benefit providedby an applicable tax-exemptorganization directly or indirectly to orfor the use of any disqualified personexceeds the value of the consideration



(including the performance of services)received for providing such benefit.

(c) Taxes paid by disqualifiedperson—(1) Initial tax. Section4958(a)(1) imposes a tax equal to 25percent of the excess benefit on eachexcess benefit transaction. The section4958(a)(1) tax shall be paid by anydisqualified person who received anexcess benefit from that excess benefittransaction. With respect to any excessbenefit transaction, if more than onedisqualified person is liable for the taximposed by section 4958(a)(1), all suchpersons are jointly and severally liablefor that tax.

(2) Additional tax on disqualifiedperson—(i) In general. Section 4958(b)imposes a tax equal to 200 percent ofthe excess benefit in any case in whichsection 4958(a)(1) imposes a 25-percenttax on an excess benefit transaction andthe transaction is not corrected (asdefined in section 4958(f)(6) and§ 53.4958–7) within the taxable period(as defined in section 4958(f)(5) andparagraph (c)(2)(ii) of this section). If adisqualified person makes a payment ofless than the full correction amountunder the rules of § 53.4958–7, the 200-percent tax is imposed only on theunpaid portion of the correction amount(as described in § 53.4958–7(c)). The taximposed by section 4958(b) is payableby any disqualified person who receivedan excess benefit from the excess benefittransaction on which the initial tax wasimposed by section 4958(a)(1). Withrespect to any excess benefittransaction, if more than onedisqualified person is liable for the taximposed by section 4958(b), all suchpersons are jointly and severally liablefor that tax.

(ii) Taxable period. Taxable periodmeans, with respect to any excessbenefit transaction, the period beginningwith the date on which the transactionoccurs and ending on the earlier of—

(A) The date of mailing a notice ofdeficiency under section 6212 withrespect to the section 4958(a)(1) tax; or

(B) The date on which the taximposed by section 4958(a)(1) isassessed.

(iii) Abatement if correction duringthe correction period. For rules relatingto abatement of taxes on excess benefittransactions that are corrected withinthe correction period, as defined insection 4963(e), see sections 4961(a),4962(a), and the regulations thereunder.The abatement rules of section 4961specifically provide for a 90-daycorrection period after the date ofmailing a notice of deficiency undersection 6212 with respect to the section4958(b) 200-percent tax. If the excessbenefit is corrected during that

correction period, the 200-percent taximposed shall not be assessed, and ifassessed the assessment shall be abated,and if collected shall be credited orrefunded as an overpayment. For specialrules relating to abatement of the 25-percent tax, see section 4962.

(d) Tax paid by organizationmanagers—(1) In general. In any case inwhich section 4958(a)(1) imposes a tax,section 4958(a)(2) imposes a tax equal to10 percent of the excess benefit on theparticipation of any organizationmanager who knowingly participated inthe excess benefit transaction, unlesssuch participation was not willful andwas due to reasonable cause. Anyorganization manager who soparticipated in the excess benefittransaction must pay the tax.

(2) Organization manager defined—(i)In general. An organization manager is,with respect to any applicable tax-exempt organization, any officer,director, or trustee of such organization,or any individual having powers orresponsibilities similar to those ofofficers, directors, or trustees of theorganization, regardless of title. Aperson is an officer of an organization ifthat person—

(A) Is specifically so designated underthe certificate of incorporation, by-laws,or other constitutive documents of theorganization; or

(B) Regularly exercises generalauthority to make administrative orpolicy decisions on behalf of theorganization. A contractor who actssolely in a capacity as an attorney,accountant, or investment manager oradvisor, is not an officer. For purposesof this paragraph (d)(2)(i)(B), any personwho has authority merely to recommendparticular administrative or policydecisions, but not to implement themwithout approval of a superior, is not anofficer.

(ii) Special rule for certain committeemembers. An individual who is not anofficer, director, or trustee, yet serves ona committee of the governing body of anapplicable tax-exempt organization (oras a designee of the governing bodydescribed in § 53.4958–6(c)(1)) that isattempting to invoke the rebuttablepresumption of reasonablenessdescribed in § 53.4958–6 based on thecommittee’s (or designee’s) actions, isan organization manager for purposes ofthe tax imposed by section 4958(a)(2).

(3) Participation. For purposes ofsection 4958(a)(2) and this paragraph(d), participation includes silence orinaction on the part of an organizationmanager where the manager is under aduty to speak or act, as well as anyaffirmative action by such manager. Anorganization manager is not considered

to have participated in an excess benefittransaction, however, where themanager has opposed the transaction ina manner consistent with the fulfillmentof the manager’s responsibilities to theapplicable tax-exempt organization.

(4) Knowing—(i) In general. Forpurposes of section 4958(a)(2) and thisparagraph (d), a manager participates ina transaction knowingly only if theperson—

(A) Has actual knowledge of sufficientfacts so that, based solely upon thosefacts, such transaction would be anexcess benefit transaction;

(B) Is aware that such a transactionunder these circumstances may violatethe provisions of Federal tax lawgoverning excess benefit transactions;and

(C) Negligently fails to makereasonable attempts to ascertainwhether the transaction is an excessbenefit transaction, or the manager is infact aware that it is such a transaction.

(ii) Amplification of general rule.Knowing does not mean having reasonto know. However, evidence tending toshow that a manager has reason to knowof a particular fact or particular rule isrelevant in determining whether themanager had actual knowledge of sucha fact or rule. Thus, for example,evidence tending to show that amanager has reason to know ofsufficient facts so that, based solelyupon such facts, a transaction would bean excess benefit transaction is relevantin determining whether the manager hasactual knowledge of such facts.

(iii) Reliance on professional advice.An organization manager’s participationin a transaction is ordinarily notconsidered knowing within the meaningof section 4958(a)(2), even though thetransaction is subsequently held to bean excess benefit transaction, to theextent that, after full disclosure of thefactual situation to an appropriateprofessional, the organization managerrelies on a reasoned written opinion ofthat professional with respect toelements of the transaction within theprofessional’s expertise. For purposes ofsection 4958(a)(2) and this paragraph(d), a written opinion is reasoned eventhough it reaches a conclusion that issubsequently determined to be incorrectso long as the opinion addresses itselfto the facts and the applicablestandards. However, a written opinionis not reasoned if it does nothing morethan recite the facts and express aconclusion. The absence of a writtenopinion of an appropriate professionalwith respect to a transaction shall not,by itself, however, give rise to anyinference that an organization managerparticipated in the transaction



knowingly. For purposes of thisparagraph, appropriate professionals onwhose written opinion an organizationmanager may rely, are limited to—

(A) Legal counsel, including in-housecounsel;

(B) Certified public accountants oraccounting firms with expertiseregarding the relevant tax law matters;and

(C) Independent valuation expertswho—

(1) Hold themselves out to the publicas appraisers or compensationconsultants;

(2) Perform the relevant valuations ona regular basis;

(3) Are qualified to make valuations ofthe type of property or servicesinvolved; and

(4) Include in the written opinion acertification that the requirements ofparagraphs (d)(4)(iii)(C)(1) through (3) ofthis section are met.

(iv) Satisfaction of rebuttablepresumption of reasonableness. Anorganization manager’s participation ina transaction is ordinarily notconsidered knowing within the meaningof section 4958(a)(2), even though thetransaction is subsequently held to bean excess benefit transaction, if theappropriate authorized body has met therequirements of § 53.4958–6(a) withrespect to the transaction.

(5) Willful. For purposes of section4958(a)(2) and this paragraph (d),participation by an organizationmanager is willful if it is voluntary,conscious, and intentional. No motive toavoid the restrictions of the law or theincurrence of any tax is necessary tomake the participation willful.However, participation by anorganization manager is not willful ifthe manager does not know that thetransaction in which the manager isparticipating is an excess benefittransaction.

(6) Due to reasonable cause. Anorganization manager’s participation isdue to reasonable cause if the managerhas exercised responsibility on behalf ofthe organization with ordinary businesscare and prudence.

(7) Limits on liability for management.The maximum aggregate amount of taxcollectible under section 4958(a)(2) andthis paragraph (d) from organizationmanagers with respect to any one excessbenefit transaction is $10,000.

(8) Joint and several liability. In anycase where more than one person isliable for a tax imposed by section4958(a)(2), all such persons shall bejointly and severally liable for the taxesimposed under section 4958(a)(2) withrespect to that excess benefittransaction.

(9) Burden of proof. For provisionsrelating to the burden of proof in casesinvolving the issue of whether anorganization manager has knowinglyparticipated in an excess benefittransaction, see section 7454(b) and§ 301.7454–2 of this chapter. In thesecases, the Commissioner bears theburden of proof.

(e) Date of occurrence—(1) In general.Except as otherwise provided, an excessbenefit transaction occurs on the date onwhich the disqualified person receivesthe economic benefit for Federal incometax purposes. When a single contractualarrangement provides for a series ofcompensation or other payments to (orfor the use of) a disqualified person overthe course of the disqualified person’staxable year (or part of a taxable year),any excess benefit transaction withrespect to these aggregate payments isdeemed to occur on the last day of thetaxable year (or if the paymentscontinue for part of the year, the date ofthe last payment in the series).

(2) Special rules. In the case ofbenefits provided pursuant to aqualified pension, profit-sharing, orstock bonus plan, the transaction occurson the date the benefit is vested. In thecase of a transfer of property that issubject to a substantial risk of forfeitureor in the case of rights to futurecompensation or property (includingbenefits under a nonqualified deferredcompensation plan), the transactionoccurs on the date the property, or therights to future compensation orproperty, is not subject to a substantialrisk of forfeiture. However, where thedisqualified person elects to include anamount in gross income in the taxableyear of transfer pursuant to section83(b), the general rule of paragraph(e)(1) of this section applies to theproperty with respect to which thesection 83(b) election is made. Anyexcess benefit transaction with respectto benefits under a deferredcompensation plan which vest duringany taxable year of the disqualifiedperson is deemed to occur on the lastday of such taxable year. For the rulesgoverning the timing of thereasonableness determination fordeferred, contingent, and certain othernoncash compensation, see § 53.4958–4(b)(2).

(3) Statute of limitations rules. Seesections 6501(e)(3) and (l) and theregulations thereunder for statute oflimitations rules as they apply to section4958 excise taxes.

(f) Effective date for imposition oftaxes—(1) In general. The section 4958taxes imposed on excess benefittransactions or on participation inexcess benefit transactions apply to

transactions occurring on or afterSeptember 14, 1995.

(2) Existing binding contracts. Thesection 4958 taxes do not apply to anytransaction occurring pursuant to awritten contract that was binding onSeptember 13, 1995, and at all timesthereafter before the transaction occurs.A written binding contract that isterminable or subject to cancellation bythe applicable tax-exempt organizationwithout the disqualified person’sconsent (including as the result of abreach of contract by the disqualifiedperson) and without substantial penaltyto the organization, is no longer treatedas a binding contract as of the earliestdate that any such termination orcancellation, if made, would beeffective. If a binding written contract ismaterially changed, it is treated as anew contract entered into as of the datethe material change is effective. Amaterial change includes an extensionor renewal of the contract (other than anextension or renewal that results fromthe person contracting with theapplicable tax-exempt organizationunilaterally exercising an optionexpressly granted by the contract), or amore than incidental change to anypayment under the contract.

§ 53.4958–2 Definition of applicable tax-exempt organization.

(a) Organizations described in section501(c)(3) or (4) and exempt from taxunder section 501(a)—(1) In general. Anapplicable tax-exempt organization isany organization that, without regard toany excess benefit, would be describedin section 501(c)(3) or (4) and exemptfrom tax under section 501(a). Anapplicable tax-exempt organization alsoincludes any organization that wasdescribed in section 501(c)(3) or (4) andwas exempt from tax under section501(a) at any time during a five-yearperiod ending on the date of an excessbenefit transaction (the lookbackperiod).

(2) Exceptions from definition ofapplicable tax-exempt organization—(i)Private foundation. A privatefoundation as defined in section 509(a)is not an applicable tax-exemptorganization for section 4958 purposes.

(ii) Governmental unit or affiliate. Agovernmental unit or an affiliate of agovernmental unit is not an applicabletax-exempt organization for section4958 purposes if it is—

(A) Exempt from (or not subject to)taxation without regard to section501(a); or

(B) Relieved from filing an annualreturn pursuant to the authority of§ 1.6033–2(g)(6).



(3) Organizations described in section501(c)(3). An organization is describedin section 501(c)(3) for purposes ofsection 4958 only if the organization—

(i) Provides the notice described insection 508; or

(ii) Is described in section 501(c)(3)and specifically is excluded from therequirements of section 508 by thatsection.

(4) Organizations described in section501(c)(4). An organization is describedin section 501(c)(4) for purposes ofsection 4958 only if the organization—

(i) Has applied for and receivedrecognition from the Internal RevenueService as an organization described insection 501(c)(4); or

(ii) Has filed an application forrecognition under section 501(c)(4) withthe Internal Revenue Service, has filedan annual information return as asection 501(c)(4) organization under theInternal Revenue Code or regulationspromulgated thereunder, or hasotherwise held itself out as beingdescribed in section 501(c)(4) andexempt from tax under section 501(a).

(5) Effect of non-recognition orrevocation of exempt status. Anorganization is not described inparagraph (a)(3) or (4) of this sectionduring any period covered by a finaldetermination or adjudication that theorganization is not exempt from taxunder section 501(a) as an organizationdescribed in section 501(c)(3) or (4), solong as that determination oradjudication is not based uponparticipation in inurement or one ormore excess benefit transactions.However, the organization may be anapplicable tax-exempt organization forthat period as a result of the five-yearlookback period described in paragraph(a)(1) of this section.

(b) Special rules—(1) Transition rulefor lookback period. In the case of anyexcess benefit transaction occurringbefore September 14, 2000, the lookbackperiod described in paragraph (a)(1) ofthis section begins on September 14,1995, and ends on the date of thetransaction.

(2) Certain foreign organizations. Aforeign organization, recognized by theInternal Revenue Service or by treaty,that receives substantially all of itssupport (other than gross investmentincome) from sources outside of theUnited States is not an organizationdescribed in section 501(c)(3) or (4) forpurposes of section 4958.

§ 53.4958–3 Definition of disqualifiedperson.

(a) In general—(1) Scope of definition.Section 4958(f)(1) defines disqualifiedperson, with respect to any transaction,

as any person who was in a position toexercise substantial influence over theaffairs of an applicable tax-exemptorganization at any time during the five-year period ending on the date of thetransaction (the lookback period).Paragraph (b) of this section describespersons who are defined to bedisqualified persons under the statute,including certain family members of anindividual in a position to exercisesubstantial influence, and certain 35-percent controlled entities. Paragraph(c) of this section describes persons ina position to exercise substantialinfluence over the affairs of anapplicable tax-exempt organization byvirtue of their powers andresponsibilities or certain interests theyhold. Paragraph (d) of this sectiondescribes persons deemed not to be ina position to exercise substantialinfluence. Whether any person who isnot described in paragraph (b), (c) or (d)of this section is a disqualified personwith respect to a transaction forpurposes of section 4958 is based on allrelevant facts and circumstances, asdescribed in paragraph (e) of thissection. Paragraph (f) of this sectiondescribes special rules for affiliatedorganizations. Examples in paragraph(g) of this section illustrate thesecategories of persons.

(2) Transition rule for lookbackperiod. In the case of any excess benefittransaction occurring before September14, 2000, the lookback period describedin paragraph (a)(1) of this section beginson September 14, 1995, and ends on thedate of the transaction.

(b) Statutory categories of disqualifiedpersons—(1) Family members. A personis a disqualified person with respect toany transaction with an applicable tax-exempt organization if the person is amember of the family of a person whois a disqualified person described inparagraph (a) of this section (other thanas a result of this paragraph) withrespect to any transaction with the sameorganization. For purposes of thefollowing sentence, a legally adoptedchild of an individual is treated as achild of such individual by blood. Aperson’s family is limited to—

(i) Spouse;(ii) Brothers or sisters (by whole or

half blood);(iii) Spouses of brothers or sisters (by

whole or half blood);(iv) Ancestors;(v) Children;(vi) Grandchildren;(vii) Great grandchildren; and(viii) Spouses of children,

grandchildren, and great grandchildren.(2) Thirty-five percent controlled

entities—(i) In general. A person is a

disqualified person with respect to anytransaction with an applicable tax-exempt organization if the person is a35-percent controlled entity. A 35-percent controlled entity is—

(A) A corporation in which personsdescribed in this section (except inparagraphs (b)(2) and (d) of this section)own more than 35 percent of thecombined voting power;

(B) A partnership in which personsdescribed in this section (except inparagraphs (b)(2) and (d) of this section)own more than 35 percent of the profitsinterest; or

(C) A trust or estate in which personsdescribed in this section (except inparagraphs (b)(2) and (d) of this section)own more than 35 percent of thebeneficial interest.

(ii) Combined voting power. Forpurposes of this paragraph (b)(2),combined voting power includes votingpower represented by holdings of votingstock, direct or indirect, but does notinclude voting rights held only as adirector, trustee, or other fiduciary.

(iii) Constructive ownership rules—(A) Stockholdings. For purposes ofsection 4958(f)(3) and this paragraph(b)(2), indirect stockholdings are takeninto account as under section 267(c),except that in applying section267(c)(4), the family of an individualshall include the members of the familyspecified in section 4958(f)(4) andparagraph (b)(1) of this section.

(B) Profits or beneficial interest. Forpurposes of section 4958(f)(3) and thisparagraph (b)(2), the ownership ofprofits or beneficial interests shall bedetermined in accordance with the rulesfor constructive ownership of stockprovided in section 267(c) (other thansection 267(c)(3)), except that inapplying section 267(c)(4), the family ofan individual shall include the membersof the family specified in section4958(f)(4) and paragraph (b)(1) of thissection.

(c) Persons having substantialinfluence. A person who holds any ofthe following powers, responsibilities,or interests is in a position to exercisesubstantial influence over the affairs ofan applicable tax-exempt organization:

(1) Voting members of the governingbody. This category includes anyindividual serving on the governingbody of the organization who is entitledto vote on any matter over which thegoverning body has authority.

(2) Presidents, chief executive officers,or chief operating officers. This categoryincludes any person who, regardless oftitle, has ultimate responsibility forimplementing the decisions of thegoverning body or for supervising themanagement, administration, or



operation of the organization. A personwho serves as president, chief executiveofficer, or chief operating officer has thisultimate responsibility unless theperson demonstrates otherwise. If thisultimate responsibility resides with twoor more individuals (e.g., co-presidents),who may exercise such responsibility inconcert or individually, then eachindividual is in a position to exercisesubstantial influence over the affairs ofthe organization.

(3) Treasurers and chief financialofficers. This category includes anyperson who, regardless of title, hasultimate responsibility for managing thefinances of the organization. A personwho serves as treasurer or chieffinancial officer has this ultimateresponsibility unless the persondemonstrates otherwise. If this ultimateresponsibility resides with two or moreindividuals who may exercise theresponsibility in concert orindividually, then each individual is ina position to exercise substantialinfluence over the affairs of theorganization.

(4) Persons with a material financialinterest in a provider-sponsoredorganization. For purposes of section4958, if a hospital that participates in aprovider-sponsored organization (asdefined in section 1855(e) of the SocialSecurity Act, 42 U.S.C. 1395w–25) is anapplicable tax-exempt organization,then any person with a materialfinancial interest (within the meaning ofsection 501(o)) in the provider-sponsored organization has substantialinfluence with respect to the hospital.

(d) Persons deemed not to havesubstantial influence. A person isdeemed not to be in a position toexercise substantial influence over theaffairs of an applicable tax-exemptorganization if that person is describedin one of the following categories:

(1) Tax-exempt organizationsdescribed in section 501(c)(3). Thiscategory includes any organizationdescribed in section 501(c)(3) andexempt from tax under section 501(a).

(2) Certain section 501(c)(4)organizations. Only with respect to anapplicable tax-exempt organizationdescribed in section 501(c)(4) and§ 53.4958–2(a)(4), this category includesany other organization so described.

(3) Employees receiving economicbenefits of less than a specified amountin a taxable year. This categoryincludes, for the taxable year in whichbenefits are provided, any full- or part-time employee of the applicable tax-exempt organization who—

(i) Receives economic benefits,directly or indirectly from theorganization, of less than the amount

referenced for a highly compensatedemployee in section 414(q)(1)(B)(i);

(ii) Is not described in paragraph (b)or (c) of this section with respect to theorganization; and

(iii) Is not a substantial contributor tothe organization within the meaning ofsection 507(d)(2)(A), taking into accountonly contributions received by theorganization during its current taxableyear and the four preceding taxableyears.

(e) Facts and circumstances govern inall other cases—(1) In general. Whethera person who is not described inparagraph (b), (c) or (d) of this sectionis a disqualified person depends uponall relevant facts and circumstances.

(2) Facts and circumstances tendingto show substantial influence. Facts andcircumstances tending to show that aperson has substantial influence overthe affairs of an organization include,but are not limited to, the following—

(i) The person founded theorganization;

(ii) The person is a substantialcontributor to the organization (withinthe meaning of section 507(d)(2)(A)),taking into account only contributionsreceived by the organization during itscurrent taxable year and the fourpreceding taxable years;

(iii) The person’s compensation isprimarily based on revenues derivedfrom activities of the organization, or ofa particular department or function ofthe organization, that the personcontrols;

(iv) The person has or sharesauthority to control or determine asubstantial portion of the organization’scapital expenditures, operating budget,or compensation for employees;

(v) The person manages a discretesegment or activity of the organizationthat represents a substantial portion ofthe activities, assets, income, orexpenses of the organization, ascompared to the organization as awhole;

(vi) The person owns a controllinginterest (measured by either vote orvalue) in a corporation, partnership, ortrust that is a disqualified person; or

(vii) The person is a non-stockorganization controlled, directly orindirectly, by one or more disqualifiedpersons.

(3) Facts and circumstances tendingto show no substantial influence. Factsand circumstances tending to show thata person does not have substantialinfluence over the affairs of anorganization include, but are not limitedto, the following—

(i) The person has taken a bona fidevow of poverty as an employee, agent,or on behalf, of a religious organization;

(ii) The person is a contractor (such asan attorney, accountant, or investmentmanager or advisor) whose solerelationship to the organization isproviding professional advice (withouthaving decision-making authority) withrespect to transactions from which thecontractor will not economically benefiteither directly or indirectly (aside fromcustomary fees received for theprofessional advice rendered);

(iii) The direct supervisor of theindividual is not a disqualified person;

(iv) The person does not participate inany management decisions affecting theorganization as a whole or a discretesegment or activity of the organizationthat represents a substantial portion ofthe activities, assets, income, orexpenses of the organization, ascompared to the organization as awhole; or

(v) Any preferential treatment aperson receives based on the size of thatperson’s contribution is also offered toall other donors making a comparablecontribution as part of a solicitationintended to attract a substantial numberof contributions.

(f) Affiliated organizations. In the caseof multiple organizations affiliated bycommon control or governingdocuments, the determination ofwhether a person does or does not havesubstantial influence shall be madeseparately for each applicable tax-exempt organization. A person may bea disqualified person with respect totransactions with more than oneapplicable tax-exempt organization.

(g) Examples. The following examplesillustrate the principles of this section.A finding that a person is a disqualifiedperson in the following examples doesnot indicate that an excess benefittransaction has occurred. If a person isa disqualified person, the rules ofsection 4958(c) and § 53.4958–4 applyto determine whether an excess benefittransaction has occurred. The examplesare as follows:

Example 1. N, an artist by profession,works part-time at R, a local museum. In thefirst taxable year in which R employs N, Rpays N a salary and provides no additionalbenefits to N except for free admission to themuseum, a benefit R provides to all of itsemployees and volunteers. The totaleconomic benefits N receives from R duringthe taxable year are less than the amountreferenced for a highly compensatedemployee in section 414(q)(1)(B)(i). The part-time job constitutes N’s only relationshipwith R. N is not related to any otherdisqualified person with respect to R. N isdeemed not to be in a position to exercisesubstantial influence over the affairs of R.Therefore, N is not a disqualified person withrespect to R in that year.

Example 2. The facts are the same as inExample 1, except that in addition to the



salary that R pays N for N’s services duringthe taxable year, R also purchases one of N’spaintings for $x. The total of N’s salary plus$x exceeds the amount referenced for highlycompensated employees in section414(q)(1)(B)(i). Consequently, whether N is ina position to exercise substantial influenceover the affairs of R for that taxable yeardepends upon all of the relevant facts andcircumstances.

Example 3. Q is a member of K, a section501(c)(3) organization with a broad-basedpublic membership. Members of K areentitled to vote only with respect to theannual election of directors and the approvalof major organizational transactions such asa merger or dissolution. Q is not related toany other disqualified person of K. Q has noother relationship to K besides being amember of K and occasionally makingmodest donations to K. Whether Q is adisqualified person is determined by allrelevant facts and circumstances. Q’s votingrights, which are the same as granted to allmembers of K, do not place Q in a positionto exercise substantial influence over K.Under these facts and circumstances, Q is nota disqualified person with respect to K.

Example 4. E is the headmaster of Z, aschool that is an applicable tax-exemptorganization for purposes of section 4958. Ereports to Z’s board of trustees and hasultimate responsibility for supervising Z’sday-to-day operations. For example, E canhire faculty members and staff, make changesto the school’s curriculum and disciplinestudents without specific board approval.Because E has ultimate responsibility forsupervising the operation of Z, E is in aposition to exercise substantial influenceover the affairs of Z. Therefore, E is adisqualified person with respect to Z.

Example 5. Y is an applicable tax-exemptorganization for purposes of section 4958 thatdecides to use bingo games as a method ofgenerating revenue. Y enters into a contractwith B, a company that operates bingo games.Under the contract, B manages the promotionand operation of the bingo activity, providesall necessary staff, equipment, and services,and pays Y q percent of the revenue from thisactivity. B retains the balance of theproceeds. Y provides no goods or services inconnection with the bingo operation otherthan the use of its hall for the bingo games.The annual gross revenue earned from thebingo games represents more than half of Y’stotal annual revenue. B’s compensation isprimarily based on revenues from an activityB controls. B also manages a discrete activityof Y that represents a substantial portion ofY’s income compared to the organization asa whole. Under these facts andcircumstances, B is in a position to exercisesubstantial influence over the affairs of Y.Therefore, B is a disqualified person withrespect to Y.

Example 6. The facts are the same as inExample 5, with the additional fact that Powns a majority of the stock of B and isactively involved in managing B. Because Powns a controlling interest (measured byeither vote or value) in and actively managesB, P is also in a position to exercisesubstantial influence over the affairs of Y.Therefore, under these facts and

circumstances, P is a disqualified personwith respect to Y.

Example 7. A, an applicable tax-exemptorganization for purposes of section 4958,owns and operates one acute care hospital. B,a for-profit corporation, owns and operates anumber of hospitals. A and B form C, alimited liability company. In exchange forproportional ownership interests, Acontributes its hospital, and B contributesother assets, to C. All of A’s assets thenconsist of its membership interest in C. Acontinues to be operated for exempt purposesbased almost exclusively on the activities itconducts through C. C enters into amanagement agreement with a managementcompany, M, to provide day to daymanagement services to C. Subject tosupervision by C’s board, M is given broaddiscretion to manage C’s day to day operationand has ultimate responsibility forsupervising the management of the hospital.Because M has ultimate responsibility forsupervising the management of the hospitaloperated by C, A’s ownership interest in C isits primary asset, and C’s activities form thebasis for A’s continued exemption as anorganization described in section 501(c)(3),M is in a position to exercise substantialinfluence over the affairs of A. Therefore, Mis a disqualified person with respect to A.

Example 8. T is a large university and anapplicable tax-exempt organization forpurposes of section 4958. L is the dean of theCollege of Law of T, a substantial source ofrevenue for T, including contributions fromalumni and foundations. L is not related toany other disqualified person of T. L does notserve on T’s governing body or have ultimateresponsibility for managing the university aswhole. However, as dean of the College ofLaw, L plays a key role in faculty hiring anddetermines a substantial portion of thecapital expenditures and operating budget ofthe College of Law. L’s compensation isgreater than the amount referenced for ahighly compensated employee in section414(q)(1)(B)(i) in the year benefits areprovided. L’s management of a discretesegment of T that represents a substantialportion of the income of T (as compared toT as a whole) places L in a position toexercise substantial influence over the affairsof T. Under these facts and circumstances Lis a disqualified person with respect to T.

Example 9. S chairs a small academicdepartment in the College of Arts andSciences of the same university T describedin Example 8. S is not related to any otherdisqualified person of T. S does not serve onT’s governing body or as an officer of T. Asdepartment chair, S supervises faculty in thedepartment, approves the course curriculum,and oversees the operating budget for thedepartment. S’s compensation is greater thanthe amount referenced for a highlycompensated employee in section414(q)(1)(B)(i) in the year benefits areprovided. Even though S manages thedepartment, that department does notrepresent a substantial portion of T’sactivities, assets, income, expenses, oroperating budget. Therefore, S does notparticipate in any management decisionsaffecting either T as a whole, or a discretesegment or activity of T that represents a

substantial portion of its activities, assets,income, or expenses. Under these facts andcircumstances, S does not have substantialinfluence over the affairs of T, and thereforeS is not a disqualified person with respect toT.

Example 10. U is a large acute-carehospital that is an applicable tax-exemptorganization for purposes of section 4958. Uemploys X as a radiologist. X givesinstructions to staff with respect to theradiology work X conducts, but X does notsupervise other U employees or manage anysubstantial part of U’s operations. X’scompensation is primarily in the form of afixed salary. In addition, X is eligible toreceive an incentive award based onrevenues of the radiology department. X’scompensation is greater than the amountreferenced for a highly compensatedemployee in section 414(q)(1)(B)(i) in theyear benefits are provided. X is not relatedto any other disqualified person of U. X doesnot serve on U’s governing body or as anofficer of U. Although U participates in aprovider-sponsored organization (as definedin section 1855(e) of the Social Security Act),X does not have a material financial interestin that organization. X does not receivecompensation primarily based on revenuesderived from activities of U that X controls.X does not participate in any managementdecisions affecting either U as a whole or adiscrete segment of U that represents asubstantial portion of its activities, assets,income, or expenses. Under these facts andcircumstances, X does not have substantialinfluence over the affairs of U, and thereforeX is not a disqualified person with respect toU.

Example 11. W is a cardiologist and headof the cardiology department of the samehospital U described in Example 10. Thecardiology department is a major source ofpatients admitted to U and consequentlyrepresents a substantial portion of U’sincome, as compared to U as a whole. W doesnot serve on U’s governing board or as anofficer of U. W does not have a materialfinancial interest in the provider-sponsoredorganization (as defined in section 1855(e) ofthe Social Security Act) in which Uparticipates. W receives a salary andretirement and welfare benefits fixed by athree-year renewable employment contractwith U. W’s compensation is greater than theamount referenced for a highly compensatedemployee in section 414(q)(1)(B)(i) in theyear benefits are provided. As departmenthead, W manages the cardiology departmentand has authority to allocate the budget forthat department, which includes authority todistribute incentive bonuses amongcardiologists according to criteria that W hasauthority to set. W’s management of adiscrete segment of U that represents asubstantial portion of its income andactivities (as compared to U as a whole)places W in a position to exercise substantialinfluence over the affairs of U. Under thesefacts and circumstances, W is a disqualifiedperson with respect to U.

Example 12. M is a museum that is anapplicable tax-exempt organization forpurposes of section 4958. D providesaccounting services and tax advice to M as



a contractor in return for a fee. D has no otherrelationship with M and is not related to anydisqualified person of M. D does not provideprofessional advice with respect to anytransaction from which D mighteconomically benefit either directly orindirectly (aside from fees received for theprofessional advice rendered). Because D’ssole relationship to M is providingprofessional advice (without having decision-making authority) with respect totransactions from which D will noteconomically benefit either directly orindirectly (aside from customary feesreceived for the professional advicerendered), under these facts andcircumstances, D is not a disqualified personwith respect to M.

Example 13. F is a repertory theatercompany that is an applicable tax-exemptorganization for purposes of section 4958. Fholds a fund-raising campaign to pay for theconstruction of a new theater. J is a regularsubscriber to F’s productions who has mademodest gifts to F in the past. J has norelationship to F other than as a subscriberand contributor. F solicits contributions aspart of a broad public campaign intended toattract a large number of donors, including asubstantial number of donors making largegifts. In its solicitations for contributions, Fpromises to invite all contributors giving $zor more to a special opening production andparty held at the new theater. Thesecontributors are also given a special numberto call in F’s office to reserve tickets forperformances, make ticket exchanges, andmake other special arrangements for theirconvenience. J makes a contribution of $z toF, which makes J a substantial contributorwithin the meaning of section 507(d)(2)(A),taking into account only contributionsreceived by F during its current and the fourpreceding taxable years. J receives thebenefits described in F’s solicitation. BecauseF offers the same benefit to all donors of $zor more, the preferential treatment that Jreceives does not indicate that J is in aposition to exercise substantial influenceover the affairs of the organization. Therefore,under these facts and circumstances, J is nota disqualified person with respect to F.

§ 53.4958–4 Excess benefit transaction.(a) Definition of excess benefit

transaction—(1) In general. An excessbenefit transaction means anytransaction in which an economicbenefit is provided by an applicable tax-exempt organization directly orindirectly to or for the use of anydisqualified person, and the value of theeconomic benefit provided exceeds thevalue of the consideration (includingthe performance of services) received forproviding the benefit. Subject to thelimitations of paragraph (c) of thissection (relating to the treatment ofeconomic benefits as compensation forthe performance of services), todetermine whether an excess benefittransaction has occurred, allconsideration and benefits (exceptdisregarded benefits described in

paragraph (a)(4) of this section)exchanged between a disqualifiedperson and the applicable tax-exemptorganization and all entities theorganization controls (within themeaning of paragraph (a)(2)(ii)(B) of thissection) are taken into account. Forexample, in determining thereasonableness of compensation that ispaid (or vests, or is no longer subject toa substantial risk of forfeiture) in oneyear, services performed in prior yearsmay be taken into account. The rules ofthis section apply to all transactionswith disqualified persons, regardless ofwhether the amount of the benefitprovided is determined, in whole or inpart, by the revenues of one or moreactivities of the organization. For rulesregarding valuation standards, seeparagraph (b) of this section. For therequirement that an applicable tax-exempt organization clearly indicate itsintent to treat a benefit as compensationfor services when paid, see paragraph(c) of this section.

(2) Economic benefit providedindirectly—(i) In general. A transactionthat would be an excess benefittransaction if the applicable tax-exemptorganization engaged in it directly witha disqualified person is likewise anexcess benefit transaction when it isaccomplished indirectly. An applicabletax-exempt organization may provide anexcess benefit indirectly to adisqualified person through a controlledentity or through an intermediary, asdescribed in paragraphs (a)(2)(ii) and(iii) of this section, respectively.

(ii) Through a controlled entity—(A)In general. An applicable tax-exemptorganization may provide an excessbenefit indirectly through the use of oneor more entities it controls. Forpurposes of section 4958, economicbenefits provided by a controlled entitywill be treated as provided by theapplicable tax-exempt organization.

(B) Definition of control— (1) Ingeneral. For purposes of this paragraph,control by an applicable tax-exemptorganization means—

(i) In the case of a stock corporation,ownership (by vote or value) of morethan 50 percent of the stock in suchcorporation;

(ii) In the case of a partnership,ownership of more than 50 percent ofthe profits interests or capital interestsin the partnership;

(iii) In the case of a nonstockorganization (i.e., an entity in which noperson holds a proprietary interest), thatat least 50 percent of the directors ortrustees of the organization are eitherrepresentatives (including trustees,directors, agents, or employees) of, or

directly or indirectly controlled by, anapplicable tax-exempt organization; or

(iv) In the case of any other entity,ownership of more than 50 percent ofthe beneficial interest in the entity.

(2) Constructive ownership. Section318 (relating to constructive ownershipof stock) shall apply for purposes ofdetermining ownership of stock in acorporation. Similar principles shallapply for purposes of determiningownership of interests in any otherentity.

(iii) Through an intermediary. Anapplicable tax-exempt organization mayprovide an excess benefit indirectlythrough an intermediary. Anintermediary is any person (includingan individual or a taxable or tax-exemptentity) who participates in a transactionwith one or more disqualified persons ofan applicable tax-exempt organization.For purposes of section 4958, economicbenefits provided by an intermediarywill be treated as provided by theapplicable tax-exempt organizationwhen—

(A) An applicable tax-exemptorganization provides an economicbenefit to an intermediary; and

(B) In connection with the receipt ofthe benefit by the intermediary—

(1) There is evidence of an oral orwritten agreement or understanding thatthe intermediary will provide economicbenefits to or for the use of adisqualified person; or

(2) The intermediary provideseconomic benefits to or for the use of adisqualified person without a significantbusiness purpose or exempt purpose ofits own.

(iv) Examples. The followingexamples illustrate when economicbenefits are provided indirectly underthe rules of this paragraph (a)(2):

Example 1. K is an applicable tax-exemptorganization for purposes of section 4958. Lis a wholly-owned taxable subsidiary of K. Jis employed by K, and is a disqualifiedperson with respect to K. K pays J an annualsalary of $12m, and reports that amount ascompensation during calendar year 2001.Although J only performed services for K fornine months of 2001, J performed equivalentservices for L during the remaining threemonths of 2001. Taking into account all ofthe economic benefits K provided to J, andall of the services J performed for K and L,$12m does not exceed the fair market valueof the services J performed for K and L during2001. Therefore, under these facts, K does notprovide an excess benefit to J directly orindirectly.

Example 2. F is an applicable tax-exemptorganization for purposes of section 4958. Dis an entity controlled by F within themeaning of paragraph (a)(2)(ii)(B) of thissection. T is the chief executive officer (CEO)of F. As CEO, T is responsible for overseeingthe activities of F. T’s duties as CEO make



him a disqualified person with respect to F.T’s compensation package with F representsthe maximum reasonable compensation forT’s services as CEO. Thus, any additionaleconomic benefits that F provides to Twithout T providing additional considerationconstitute an excess benefit. D contracts withT to provide enumerated consulting servicesto D. However, the contract does not requireT to perform any additional services for Dthat T is not already obligated to perform asF’s chief executive officer. Therefore, anypayment to T pursuant to the consultingcontract with D represents an indirect excessbenefit that F provides through a controlledentity, even if F, D, or T treats the additionalpayment to T as compensation.

Example 3. P is an applicable tax-exemptorganization for purposes of section 4958. Sis a taxable entity controlled by P within themeaning of paragraph (a)(2)(ii)(B) of thissection. V is the chief executive officer of S,for which S pays V $w in salary and benefits.V also serves as a voting member of P’sgoverning body. Consequently, V is adisqualified person with respect to P. Pprovides V with $x representingcompensation for the services V provides Pas a member of its governing body. Although$x represents reasonable compensation forthe services V provides directly to P as amember of its governing body, the totalcompensation of $w + $x exceeds reasonablecompensation for the services V provides toP and S collectively. Therefore, the portionof total compensation that exceedsreasonable compensation is an excess benefitprovided to V.

Example 4. G is an applicable tax-exemptorganization for section 4958 purposes. F isa disqualified person who was last employedby G in a position of substantial influencethree years ago. H is an entity engaged inscientific research and is unrelated to eitherF or G. G makes a grant to H to fund aresearch position. H subsequently advertisesfor qualified candidates for the researchposition. F is among several highly qualifiedcandidates who apply for the researchposition. H hires F. There was no evidenceof an oral or written agreement orunderstanding with G that H will use G’sgrant to provide economic benefits to or forthe use of F. Although G provided economicbenefits to H, and in connection with thereceipt of such benefits, H will provideeconomic benefits to or for the use of F, Hacted with a significant business purpose orexempt purpose of its own. Under these facts,G did not provide an economic benefit to Findirectly through the use of an intermediary.

(3) Exception for fixed paymentsmade pursuant to an initial contract—(i) In general. Except as provided inparagraph (a)(3)(iv) of this section,section 4958 does not apply to any fixedpayment made to a person pursuant toan initial contract.

(ii) Fixed payment—(A) In general.For purposes of paragraph (a)(3)(i) ofthis section, fixed payment means anamount of cash or other propertyspecified in the contract, or determinedby a fixed formula specified in the

contract, which is to be paid ortransferred in exchange for theprovision of specified services orproperty. A fixed formula mayincorporate an amount that dependsupon future specified events orcontingencies, provided that no personexercises discretion when calculatingthe amount of a payment or decidingwhether to make a payment (such as abonus). A specified event orcontingency may include the amount ofrevenues generated by (or otherobjective measure of) one or moreactivities of the applicable tax-exemptorganization. A fixed payment does notinclude any amount paid to a personunder a reimbursement (or similar)arrangement where discretion isexercised by any person with respect tothe amount of expenses incurred orreimbursed.

(B) Special rules. Amounts payablepursuant to a qualified pension, profit-sharing, or stock bonus plan undersection 401(a), or pursuant to anemployee benefit program that is subjectto and satisfies coverage andnondiscrimination rules under theInternal Revenue Code (e.g., sections127 and 137), other thannondiscrimination rules under section9802, are treated as fixed payments forpurposes of this section, regardless ofthe applicable tax-exempt organization’sdiscretion with respect to the plan orprogram. The fact that a personcontracting with an applicable tax-exempt organization is expresslygranted the choice whether to accept orreject any economic benefit isdisregarded in determining whether thebenefit constitutes a fixed payment forpurposes of this paragraph.

(iii) Initial contract. For purposes ofparagraph (a)(3)(i) of this section, initialcontract means a binding writtencontract between an applicable tax-exempt organization and a person whowas not a disqualified person within themeaning of section 4958(f)(1) and§ 53.4958–3 immediately prior toentering into the contract.

(iv) Substantial performance required.Paragraph (a)(3)(i) of this section doesnot apply to any fixed payment madepursuant to the initial contract duringany taxable year of the personcontracting with the applicable tax-exempt organization if the person failsto perform substantially the person’sobligations under the initial contractduring that year.

(v) Treatment as a new contract. Awritten binding contract that providesthat the contract is terminable or subjectto cancellation by the applicable tax-exempt organization (other than as aresult of a lack of substantial

performance by the disqualified person,as described in paragraph (a)(3)(iv) ofthis section) without the other party’sconsent and without substantial penaltyto the organization is treated as a newcontract as of the earliest date that anysuch termination or cancellation, ifmade, would be effective. Additionally,if the parties make a material change toa contract, it is treated as a new contractas of the date the material change iseffective. A material change includes anextension or renewal of the contract(other than an extension or renewal thatresults from the person contracting withthe applicable tax-exempt organizationunilaterally exercising an optionexpressly granted by the contract), or amore than incidental change to anyamount payable under the contract. Thenew contract is tested under paragraph(a)(3)(iii) of this section to determinewhether it is an initial contract forpurposes of this section.

(vi) Evaluation of non-fixedpayments. Any payment that is not afixed payment (within the meaning ofparagraph (a)(3)(ii) of this section) isevaluated to determine whether itconstitutes an excess benefit transactionunder section 4958. In making thisdetermination, all payments andconsideration exchanged between theparties are taken into account, includingany fixed payments made pursuant toan initial contract with respect to whichsection 4958 does not apply.

(vii) Examples. The followingexamples illustrate the rules governingfixed payments made pursuant to aninitial contract. Unless otherwise stated,assume that the person contracting withthe applicable tax-exempt organizationhas performed substantially the person’sobligations under the contract withrespect to the payment. The examplesare as follows:

Example 1. T is an applicable tax-exemptorganization for purposes of section 4958. OnJanuary 1, 2002, T hires S as its chieffinancial officer by entering into a five-yearwritten employment contract with S. S wasnot a disqualified person within the meaningof section 4958(f)(1) and § 53.4958–3immediately prior to entering into theJanuary 1, 2002, contract (initial contract). S’sduties and responsibilities under the contractmake S a disqualified person with respect toT (see § 53.4958–3(a)). Under the initialcontract, T agrees to pay S an annual salaryof $200,000, payable in monthlyinstallments. The contract provides that,beginning in 2003, S’s annual salary will beadjusted by the increase in the ConsumerPrice Index (CPI) for the prior year. Section4958 does not apply because S’scompensation under the contract is a fixedpayment pursuant to an initial contractwithin the meaning of paragraph (a)(3) of thissection. Thus, for section 4958 purposes, itis unnecessary to evaluate whether any



portion of the compensation paid to Spursuant to the initial contract is an excessbenefit transaction.

Example 2. The facts are the same as inExample 1, except that the initial contractprovides that, in addition to a base salary of$200,000, T may pay S an annualperformance-based bonus. The contractprovides that T’s governing body willdetermine the amount of the annual bonus asof the end of each year during the term of thecontract, based on the board’s evaluation ofS’s performance, but the bonus cannotexceed $100,000 per year. Unlike the basesalary portion of S’s compensation, the bonusportion of S’s compensation is not a fixedpayment pursuant to an initial contract,because the governing body has discretionover the amount, if any, of the bonuspayment. Section 4958 does not apply topayment of the $200,000 base salary (asadjusted for inflation), because it is a fixedpayment pursuant to an initial contractwithin the meaning of paragraph (a)(3) of thissection. By contrast, the annual bonuses thatmay be paid to S under the initial contractare not protected by the initial contractexception. Therefore, each bonus paymentwill be evaluated under section 4958, takinginto account all payments and considerationexchanged between the parties.

Example 3. The facts are the same as inExample 1, except that in 2003, T changes itspayroll system, such that T makes biweekly,rather than monthly, salary payments to itsemployees. Beginning in 2003, T also grantsits employees an additional two days of paidvacation each year. Neither change is amaterial change to S’s initial contract withinthe meaning of paragraph (a)(3)(v) of thissection. Therefore, section 4958 does notapply to the base salary payments to S dueto the initial contract exception.

Example 4. The facts are the same as inExample 1, except that on January 1, 2003,S becomes the chief executive officer of Tand a new chief financial officer is hired. Atthe same time, T’s board of directorsapproves an increase in S’s annual basesalary from $200,000 to $240,000, effectiveon that day. These changes in S’semployment relationship constitute materialchanges of the initial contract within themeaning of paragraph (a)(3)(v) of this section.As a result, S is treated as entering into a newcontract with T on January 1, 2003, at whichtime S is a disqualified person within themeaning of section 4958(f)(1) and § 53.4958–3. T’s payments to S made pursuant to thenew contract will be evaluated under section4958, taking into account all payments andconsideration exchanged between the parties.

Example 5. J is a performing artsorganization and an applicable tax-exemptorganization for purposes of section 4958. Jhires W to become the chief executive officerof J. W was not a disqualified person withinthe meaning of section 4958(f)(1) and§ 53.4958–3 immediately prior to enteringinto the employment contract with J. As aresult of this employment contract, W’sduties and responsibilities make W adisqualified person with respect to J (see§ 53.4958–3(c)(2)). Under the contract, J willpay W $x (a specified amount) plus a bonusequal to 2 percent of the total season

subscription sales that exceed $100z. The $xbase salary is a fixed payment pursuant to aninitial contract within the meaning ofparagraph (a)(3) of this section. The bonuspayment is also a fixed payment pursuant toan initial contract within the meaning ofparagraph (a)(3) of this section, because noperson exercises discretion when calculatingthe amount of the bonus payment or decidingwhether the bonus will be paid. Therefore,section 4958 does not apply to any of J’spayments to W pursuant to the employmentcontract due to the initial contract exception.

Example 6. Hospital B is an applicable tax-exempt organization for purposes of section4958. Hospital B hires E as its chief operatingofficer. E was not a disqualified personwithin the meaning of section 4958(f)(1) and§ 53.4958–3 immediately prior to enteringinto the employment contract with HospitalB. As a result of this employment contract,E’s duties and responsibilities make E adisqualified person with respect to HospitalB (see § 53.4958–3(c)(2)). E’s initialemployment contract provides that E willhave authority to enter into hospitalmanagement arrangements on behalf ofHospital B. In E’s personal capacity, E ownsmore than 35 percent of the combined votingpower of Company X. Consequently, at thetime E becomes a disqualified person withrespect to B, Company X also becomes adisqualified person with respect to B (see§ 53.4958–3(b)(2)(i)(A)). E, acting on behalf ofHospital B as chief operating officer, entersinto a contract with Company X under whichCompany X will provide billing andcollection services to Hospital B. The initialcontract exception of paragraph (a)(3)(i) ofthis section does not apply to the billing andcollection services contract, because at thetime that this contractual arrangement wasentered into, Company X was a disqualifiedperson with respect to Hospital B. AlthoughE’s employment contract (which is an initialcontract) authorizes E to enter into hospitalmanagement arrangements on behalf ofHospital B, the payments made to CompanyX are not made pursuant to E’s employmentcontract, but rather are made by Hospital Bpursuant to a separate contractualarrangement with Company X. Therefore,even if payments made to Company X underthe billing and collection services contractare fixed payments (within the meaning ofparagraph (a)(3)(ii) of this section), section4958 nonetheless applies to payments madeby Hospital B to Company X because thebilling and collection services contract itselfdoes not constitute an initial contract underparagraph (a)(3)(iii) of this section.Accordingly, all payments made to CompanyX under the billing and collection servicescontract will be evaluated under section4958.

Example 7. Hospital C, an applicable tax-exempt organization, enters into a contractwith Company Y, under which Company Ywill provide a wide range of hospitalmanagement services to Hospital C. Uponentering into this contractual arrangement,Company Y becomes a disqualified personwith respect to Hospital C. The contractprovides that Hospital C will pay CompanyY a management fee of x percent of adjustedgross revenue (i.e., gross revenue increased

by the cost of charity care provided toindigents) annually for a five-year period.The management services contract specifiesthe cost accounting system and the standardsfor indigents to be used in calculating thecost of charity care. The cost accountingsystem objectively defines the direct andindirect costs of all health care goods andservices provided as charity care. BecauseCompany Y was not a disqualified personwith respect to Hospital C immediatelybefore entering into the management servicescontract, that contract is an initial contractwithin the meaning of paragraph (a)(3)(iii) ofthis section. The annual management feepaid to Company Y is determined by a fixedformula specified in the contract, and istherefore a fixed payment within themeaning of paragraph (a)(3)(ii) of this section.Accordingly, section 4958 does not apply tothe annual management fee due to the initialcontract exception.

Example 8. The facts are the same as inExample 7, except that the managementservices contract also provides that HospitalC will reimburse Company Y on a monthlybasis for certain expenses incurred byCompany Y that are attributable tomanagement services provided to Hospital C(e.g., legal fees and travel expenses).Although the management fee itself is a fixedpayment not subject to section 4958, thereimbursement payments that Hospital Cmakes to Company Y for the variousexpenses covered by the contract are notfixed payments within the meaning ofparagraph (a)(3)(ii) of this section, becauseCompany Y exercises discretion with respectto the amount of expenses incurred.Therefore, any reimbursement payments thatHospital C pays pursuant to the contract willbe evaluated under section 4958.

Example 9. X, an applicable tax-exemptorganization for purposes of section 4958,hires C to conduct scientific research. OnJanuary 1, 2003, C enters into a three-yearwritten employment contract with X (initialcontract). Under the terms of the contract, Cis required to work full-time at X’s laboratoryfor a fixed annual salary of $90,000.Immediately prior to entering into theemployment contract, C was not adisqualified person within the meaning ofsection 4958(f)(1) and § 53.4958–3, nor did Cbecome a disqualified person pursuant to theinitial contract. However, two years afterjoining X, C marries D, who is the child ofX’s president. As D’s spouse, C is adisqualified person within the meaning ofsection 4958(f)(1) and § 53.4958–3 withrespect to X. Nonetheless, section 4958 doesnot apply to X’s salary payments to C due tothe initial contract exception.

Example 10. The facts are the same as inExample 9, except that the initial contractincluded a below-market loan provisionunder which C has the unilateral right toborrow up to a specified dollar amount fromX at a specified interest rate for a specifiedterm. After C’s marriage to D, C borrowsmoney from X to purchase a home under theterms of the initial contract. Section 4958does not apply to X’s loan to C due to theinitial contract exception.

Example 11. The facts are the same as inExample 9, except that after C’s marriage to



D, C works only sporadically at thelaboratory, and performs no other services forX. Notwithstanding that C fails to performsubstantially C’s obligations under the initialcontract, X does not exercise its right toterminate the initial contract fornonperformance and continues to pay fullsalary to C. Pursuant to paragraph (a)(3)(iv)of this section, the initial contract exceptiondoes not apply to any payments madepursuant to the initial contract during anytaxable year of C in which C fails to performsubstantially C’s obligations under the initialcontract.

(4) Certain economic benefitsdisregarded for purposes of section4958. The following economic benefitsare disregarded for purposes of section4958—

(i) Nontaxable fringe benefits. Aneconomic benefit that is excluded fromincome under section 132, except anyliability insurance premium, payment,or reimbursement that must be takeninto account under paragraph(b)(1)(ii)(B)(2) of this section;

(ii) Expense reimbursement paymentspursuant to accountable plans.Amounts paid under reimbursementarrangements that meet therequirements of § 1.62–2(c) of thischapter;

(iii) Certain economic benefitsprovided to a volunteer for theorganization. An economic benefitprovided to a volunteer for theorganization if the benefit is provided tothe general public in exchange for amembership fee or contribution of $75or less per year;

(iv) Certain economic benefitsprovided to a member of, or donor to,the organization. An economic benefitprovided to a member of an organizationsolely on account of the payment of amembership fee, or to a donor solely onaccount of a contribution for which adeduction is allowable under section170 (charitable contribution), regardlessof whether the donor is eligible to claimthe deduction, if—

(A) Any non-disqualified personpaying a membership fee or making acharitable contribution above aspecified amount to the organization isgiven the option of receivingsubstantially the same economic benefit;and

(B) The disqualified person and asignificant number of non-disqualifiedpersons make a payment or charitablecontribution of at least the specifiedamount;

(v) Economic benefits provided to acharitable beneficiary. An economicbenefit provided to a person solelybecause the person is a member of acharitable class that the applicable tax-exempt organization intends to benefit

as part of the accomplishment of theorganization’s exempt purpose; and

(vi) Certain economic benefitsprovided to a governmental unit. Anytransfer of an economic benefit to or forthe use of a governmental unit definedin section 170(c)(1), if the transfer is forexclusively public purposes.

(5) Exception for certain paymentsmade pursuant to an exemption grantedby the Department of Labor underERISA. Section 4958 does not apply toany payment made pursuant to, and inaccordance with, a final individualprohibited transaction exemption issuedby the Department of Labor undersection 408(a) of the EmployeeRetirement Income Security Act of 1974(88 Stat. 854) (ERISA) with respect to atransaction involving a plan (as definedin section 3(3) of ERISA) that is anapplicable tax exempt organization.

(b) Valuation standards—(1) Ingeneral. This section provides rules fordetermining the value of economicbenefits for purposes of section 4958.

(i) Fair market value of property. Thevalue of property, including the right touse property, for purposes of section4958 is the fair market value (i.e., theprice at which property or the right touse property would change handsbetween a willing buyer and a willingseller, neither being under anycompulsion to buy, sell or transferproperty or the right to use property,and both having reasonable knowledgeof relevant facts).

(ii) Reasonable compensation—(A) Ingeneral. The value of services is theamount that would ordinarily be paidfor like services by like enterprises(whether taxable or tax-exempt) underlike circumstances (i.e., reasonablecompensation). Section 162 standardsapply in determining reasonableness ofcompensation, taking into account theaggregate benefits (other than anybenefits specifically disregarded underparagraph (a)(4) of this section)provided to a person and the rate atwhich any deferred compensationaccrues. The fact that a compensationarrangement is subject to a cap is arelevant factor in determining thereasonableness of compensation. Thefact that a State or local legislative oragency body or court has authorized orapproved a particular compensationpackage paid to a disqualified person isnot determinative of the reasonablenessof compensation for purposes of section4958.

(B) Items included in determining thevalue of compensation for purposes ofdetermining reasonableness undersection 4958. Except for economicbenefits that are disregarded forpurposes of section 4958 under

paragraph (a)(4) of this section,compensation for purposes ofdetermining reasonableness undersection 4958 includes all economicbenefits provided by an applicable tax-exempt organization in exchange for theperformance of services. These benefitsinclude, but are not limited to—

(1) All forms of cash and noncashcompensation, including salary, fees,bonuses, severance payments, anddeferred and noncash compensationdescribed in § 53.4958–1(e)(2);

(2) Unless excludable from income asa de minimis fringe benefit pursuant tosection 132(a)(4), the payment ofliability insurance premiums for, or thepayment or reimbursement by theorganization of—

(i) Any penalty, tax, or expense ofcorrection owed under section 4958;

(ii) Any expense not reasonablyincurred by the person in connectionwith a civil judicial or civiladministrative proceeding arising out ofthe person’s performance of services onbehalf of the applicable tax-exemptorganization; or

(iii) Any expense resulting from an actor failure to act with respect to whichthe person has acted willfully andwithout reasonable cause; and

(3) All other compensatory benefits,whether or not included in gross incomefor income tax purposes, includingpayments to welfare benefit plans, suchas plans providing medical, dental, lifeinsurance, severance pay, and disabilitybenefits, and both taxable andnontaxable fringe benefits (other thanfringe benefits described in section 132),including expense allowances orreimbursements (other than expensereimbursements pursuant to anaccountable plan that meets therequirements of § 1.62–2(c)), and theeconomic benefit of a below-market loan(within the meaning of section7872(e)(1)). (For this purpose, theeconomic benefit of a below-market loanis the amount deemed transferred to thedisqualified person under section7872(a) or (b), regardless of whethersection 7872 otherwise applies to theloan).

(C) Inclusion in compensation forreasonableness determination does notgovern income tax treatment. Thedetermination of whether any itemlisted in paragraph (b)(1)(ii)(B) of thissection is included in the disqualifiedperson’s gross income for income taxpurposes is made on the basis of theprovisions of chapter 1 of Subtitle A ofthe Internal Revenue Code, withoutregard to whether the item is taken intoaccount for purposes of determiningreasonableness of compensation undersection 4958.



(2) Timing of reasonablenessdetermination—(i) In general. The factsand circumstances to be taken intoconsideration in determiningreasonableness of a fixed payment(within the meaning of paragraph(a)(3)(ii) of this section) are thoseexisting on the date the parties enterinto the contract pursuant to which thepayment is made. However, in the eventof substantial non-performance,reasonableness is determined based onall facts and circumstances, up to andincluding circumstances as of the dateof payment. In the case of any paymentthat is not a fixed payment under acontract, reasonableness is determinedbased on all facts and circumstances, upto and including circumstances as of thedate of payment. In no event shallcircumstances existing at the date whenthe payment is questioned beconsidered in making a determination ofthe reasonableness of the payment.These general timing rules also apply toproperty subject to a substantial risk offorfeiture. Therefore, if the propertysubject to a substantial risk of forfeituresatisfies the definition of fixed payment(within the meaning of paragraph(a)(3)(ii) of this section), reasonablenessis determined at the time the partiesenter into the contract providing for thetransfer of the property. If the propertyis not a fixed payment, thenreasonableness is determined based onall facts and circumstances up to andincluding circumstances as of the dateof payment.

(ii) Treatment as a new contract. Forpurposes of paragraph (b)(2)(i) of thissection, a written binding contract thatprovides that the contract is terminableor subject to cancellation by theapplicable tax-exempt organizationwithout the other party’s consent andwithout substantial penalty to theorganization is treated as a new contractas of the earliest date that any suchtermination or cancellation, if made,would be effective. Additionally, if theparties make a material change to acontract (within the meaning ofparagraph (a)(3)(v) of this section), it istreated as a new contract as of the datethe material change is effective.

(iii) Examples. The followingexamples illustrate the timing of thereasonableness determination under therules of this paragraph (b)(2):

Example 1. G is an applicable tax-exemptorganization for purposes of section 4958. His an employee of G and a disqualified personwith respect to G. H’s new multi-yearemployment contract provides for paymentof a salary and provision of specific benefitspursuant to a qualified pension plan undersection 401(a) and an accident and healthplan that meets the requirements of section

105(h)(2). The contract provides that H’ssalary will be adjusted by the increase in theConsumer Price Index (CPI) for the prioryear. The contributions G makes to thequalified pension plan are equal to themaximum amount G is permitted tocontribute under the rules applicable toqualified plans. Under these facts, all itemscomprising H’s total compensation aretreated as fixed payments within the meaningof paragraph (a)(3)(ii) of this section.Therefore, the reasonableness of H’scompensation is determined based on thecircumstances existing at the time G and Henter into the employment contract.

Example 2. The facts are the same as inExample 1, except that the multi-yearemployment contract provides, in addition,that G will transfer title to a car to H underthe condition that if H fails to complete xyears of service with G, title to the car willbe forfeited back to G. All relevantinformation about the type of car to beprovided (including the make, model, andyear) is included in the contract. Althoughultimate vesting of title to the car iscontingent on H continuing to work for G forx years, the amount of property to be vested(i.e., the type of car) is specified in thecontract, and no person exercises discretionregarding the type of property or whether Hwill retain title to the property at the time ofvesting. Under these facts, the car is a fixedpayment within the meaning of paragraph(a)(3)(ii) of this section. Therefore, thereasonableness of H’s compensation,including the value of the car, is determinedbased on the circumstances existing at thetime G and H enter into the employmentcontract.

Example 3. N is an applicable tax-exemptorganization for purposes of section 4958. OnJanuary 2, N’s governing body enters into anew one-year employment contract with K,its executive director, who is a disqualifiedperson with respect to N. The contractprovides that K will receive a specifiedamount of salary, contributions to a qualifiedpension plan under section 401(a), and otherbenefits pursuant to a section 125 cafeteriaplan. In addition, the contract provides thatN’s governing body may, in its discretion,declare a bonus to be paid to K at any timeduring the year covered by the contract. K’ssalary and other specified benefits constitutefixed payments within the meaning ofparagraph (a)(3)(ii) of this section. Therefore,the reasonableness of those economicbenefits is determined on the date when thecontract was made. However, because thebonus payment is not a fixed payment withinthe meaning of paragraph (a)(3)(ii) of thissection, the determination of whether anybonus awarded to N is reasonable must bemade based on all facts and circumstances(including all payments and considerationexchanged between the parties), up to andincluding circumstances as of the date ofpayment of the bonus.

(c) Establishing intent to treateconomic benefit as consideration forthe performance of services—(1) Ingeneral. An economic benefit is nottreated as consideration for theperformance of services unless the

organization providing the benefitclearly indicates its intent to treat thebenefit as compensation when thebenefit is paid. Except as provided inparagraph (c)(2) of this section, anapplicable tax-exempt organization (orentity controlled by an applicable tax-exempt organization, within themeaning of paragraph (a)(2)(ii)(B) of thissection) is treated as clearly indicatingits intent to provide an economic benefitas compensation for services only if theorganization provides writtensubstantiation that is contemporaneouswith the transfer of the economic benefitat issue. If an organization fails toprovide this contemporaneoussubstantiation, any services provided bythe disqualified person will not betreated as provided in consideration forthe economic benefit for purposes ofdetermining the reasonableness of thetransaction. In no event shall aneconomic benefit that a disqualifiedperson obtains by theft or fraud betreated as consideration for theperformance of services.

(2) Nontaxable benefits. For purposesof section 4958(c)(1)(A) and this section,an applicable tax-exempt organization isnot required to indicate its intent toprovide an economic benefit ascompensation for services if theeconomic benefit is excluded from thedisqualified person’s gross income forincome tax purposes on the basis of theprovisions of chapter 1 of Subtitle A ofthe Internal Revenue Code. Examples ofthese benefits include, but are notlimited to, employer-provided healthbenefits and contributions to a qualifiedpension, profit-sharing, or stock bonusplan under section 401(a), and benefitsdescribed in sections 127 and 137.However, except for economic benefitsthat are disregarded for purposes ofsection 4958 under paragraph (a)(4) ofthis section, all compensatory benefits(regardless of the Federal income taxtreatment) provided by an organizationin exchange for the performance ofservices are taken into account indetermining the reasonableness of aperson’s compensation for purposes ofsection 4958.

(3) Contemporaneoussubstantiation—(i) Reporting ofbenefit—(A) In general. An applicabletax-exempt organization providescontemporaneous written substantiationof its intent to provide an economicbenefit as compensation if—

(1) The organization reports theeconomic benefit as compensation on anoriginal Federal tax information returnwith respect to the payment (e.g., FormW–2, ‘‘Wage and Tax Statement’’, orForm 1099, ‘‘Miscellaneous Income’’) orwith respect to the organization (e.g.,



Form 990, ‘‘Return of OrganizationExempt From Income Tax’’), or on anamended Federal tax information returnfiled prior to the commencement of anInternal Revenue Service examination ofthe applicable tax-exempt organizationor the disqualified person for the taxableyear in which the transaction occurred(as determined under § 53.4958–1(e)); or

(2) The recipient disqualified personreports the benefit as income on theperson’s original Federal tax return (e.g.,Form 1040, ‘‘U.S. Individual IncomeTax Return’’), or on the person’samended Federal tax return filed priorto the earlier of the following dates—

(i) Commencement of an InternalRevenue Service examination describedin paragraph (c)(3)(i)(A)(1) of thissection; or

(ii) The first documentation in writingby the Internal Revenue Service of apotential excess benefit transactioninvolving either the applicable tax-exempt organization or the disqualifiedperson.

(B) Failure to report due to reasonablecause. If an applicable tax-exemptorganization’s failure to report aneconomic benefit as required under theInternal Revenue Code is due toreasonable cause (within the meaning of§ 301.6724–1 of this chapter), then theorganization will be treated as havingclearly indicated its intent to provide aneconomic benefit as compensation forservices. To show that its failure toreport an economic benefit that shouldhave been reported on an informationreturn was due to reasonable cause, anapplicable tax-exempt organizationmust establish that there weresignificant mitigating factors withrespect to its failure to report (asdescribed in § 301.6724–1(b) of thischapter), or the failure arose from eventsbeyond the organization’s control (asdescribed in § 301.6724–1(c) of thischapter), and that the organization actedin a responsible manner both before andafter the failure occurred (as describedin § 301.6724–1(d) of this chapter).

(ii) Other written contemporaneousevidence. In addition, other writtencontemporaneous evidence may be usedto demonstrate that the appropriatedecision-making body or an officerauthorized to approve compensationapproved a transfer as compensation forservices in accordance with establishedprocedures, including but not limitedto—

(A) An approved written employmentcontract executed on or before the dateof the transfer;

(B) Documentation satisfying therequirements of § 53.4958–6(a)(3)indicating that an authorized bodyapproved the transfer as compensation

for services on or before the date of thetransfer; or

(C) Written evidence that was inexistence on or before the due date ofthe applicable Federal tax returndescribed in paragraph (c)(3)(i)(A)(1) or(2) of this section (including extensionsbut not amendments), of a reasonablebelief by the applicable tax-exemptorganization that a benefit was anontaxable benefit as defined inparagraph (c)(2) of this section.

(4) Examples. The following examplesillustrate the requirement that anorganization contemporaneouslysubstantiate its intent to provide aneconomic benefit as compensation forservices, as defined in paragraph (c) ofthis section:

Example 1. G is an applicable tax-exemptorganization for purposes of section 4958. Ghires an individual contractor, P, who is alsothe child of a disqualified person of G, todesign a computer program for it. G executesa contract with P for that purpose inaccordance with G’s established procedures,and pays P $1,000 during the year pursuantto the contract. Before January 31 of the nextyear, G reports the full amount paid to Punder the contract on a Form 1099 filed withthe Internal Revenue Service. G will betreated as providing contemporaneouswritten substantiation of its intent to providethe $1,000 paid to P as compensation for theservices P performed under the contract byvirtue of either the Form 1099 filed with theInternal Revenue Service reporting theamount, or by virtue of the written contractexecuted between G and P.

Example 2. G is an applicable tax-exemptorganization for purposes of section 4958. Dis the chief operating officer of G, and adisqualified person with respect to G. Dreceives a bonus at the end of the year. G’saccounting department determines that thebonus is to be reported on D’s Form W–2.Due to events beyond G’s control, the bonusis not reflected on D’s Form W–2. As a result,D fails to report the bonus on his individualincome tax return. G acts to amend FormsW–2 affected as soon as G is made aware ofthe error during an Internal Revenue Serviceexamination. G’s failure to report the bonuson an information return issued to D arosefrom events beyond G’s control, and G actedin a responsible manner both before and afterthe failure occurred. Thus, because G hadreasonable cause (within the meaning§ 301.6724–1 of this chapter) for failing toreport D’s bonus, G will be treated asproviding contemporaneous writtensubstantiation of its intent to provide thebonus as compensation for services whenpaid.

Example 3. H is an applicable tax-exemptorganization and J is a disqualified personwith respect to H. J’s written employmentagreement provides for a fixed salary of $y.J’s duties include soliciting funds for variousprograms of H. H raises a large portion of itsfunds in a major metropolitan area.Accordingly, H maintains an apartment therein order to provide a place to entertainpotential donors. H makes the apartment

available exclusively to J to assist in thefundraising. J’s written employment contractdoes not mention the use of the apartment.H obtains the written opinion of a benefitscompensation expert that the rental value ofthe apartment is not includable in J’s incomeby reason of section 119, based on theexpectation that the apartment will be usedfor fundraising activities. Consequently, Hdoes not report the rental value of theapartment on J’s Form W–2, which otherwisecorrectly reports J’s taxable compensation. Jdoes not report the rental value of theapartment on J’s individual Form 1040. Later,the Internal Revenue Service correctlydetermines that the requirements of section119 were not satisfied. Because of the writtenexpert opinion, H has written evidence of itsreasonable belief that use of the apartmentwas a nontaxable benefit as defined inparagraph (c)(2) of this section. Thatevidence was in existence on or before thedue date of the applicable Federal tax return.Therefore, H has demonstrated its intent totreat the use of the apartment ascompensation for services performed by J.

§ 53.4958–5 Transaction in which theamount of the economic benefit isdetermined in whole or in part by therevenues of one or more activities of theorganization. [Reserved]

§ 53.4958–6 Rebuttable presumption that atransaction is not an excess benefittransaction.

(a) In general. Payments under acompensation arrangement arepresumed to be reasonable, and atransfer of property, or the right to useproperty, is presumed to be at fairmarket value, if the followingconditions are satisfied—

(1) The compensation arrangement orthe terms of the property transfer areapproved in advance by an authorizedbody of the applicable tax-exemptorganization (or an entity controlled bythe organization within the meaning of§ 53.4958–4(a)(2)(ii)(B)) composedentirely of individuals who do not havea conflict of interest (within themeaning of paragraph (c)(1)(iii) of thissection) with respect to thecompensation arrangement or propertytransfer, as described in paragraph (c)(1)of this section;

(2) The authorized body obtained andrelied upon appropriate data as tocomparability prior to making itsdetermination, as described inparagraph (c)(2) of this section; and

(3) The authorized body adequatelydocumented the basis for itsdetermination concurrently withmaking that determination, as describedin paragraph (c)(3) of this section.

(b) Rebutting the presumption. If thethree requirements of paragraph (a) ofthis section are satisfied, then theInternal Revenue Service may rebut thepresumption that arises under



paragraph (a) of this section only if itdevelops sufficient contrary evidence torebut the probative value of thecomparability data relied upon by theauthorized body. With respect to anyfixed payment (within the meaning of§ 53.4958–4(a)(3)(ii)), rebuttal evidenceis limited to evidence relating to factsand circumstances existing on the datethe parties enter into the contractpursuant to which the payment is made(except in the event of substantialnonperformance). With respect to allother payments (including non-fixedpayments subject to a cap, as describedin paragraph (d)(2) of this section),rebuttal evidence may include facts andcircumstances up to and including thedate of payment. See § 53.4958–4(b)(2)(i).

(c) Requirements for invokingrebuttable presumption—(1) Approvalby an authorized body—(i) In general.An authorized body means—

(A) The governing body (i.e., theboard of directors, board of trustees, orequivalent controlling body) of theorganization;

(B) A committee of the governingbody, which may be composed of anyindividuals permitted under State lawto serve on such a committee, to theextent that the committee is permittedby State law to act on behalf of thegoverning body; or

(C) To the extent permitted underState law, other parties authorized bythe governing body of the organizationto act on its behalf by followingprocedures specified by the governingbody in approving compensationarrangements or property transfers.

(ii) Individuals not included onauthorized body. For purposes ofdetermining whether the requirementsof paragraph (a) of this section havebeen met with respect to a specificcompensation arrangement or propertytransfer, an individual is not includedon the authorized body when it isreviewing a transaction if thatindividual meets with other membersonly to answer questions, and otherwiserecuses himself or herself from themeeting and is not present duringdebate and voting on the compensationarrangement or property transfer.

(iii) Absence of conflict of interest. Amember of the authorized body does nothave a conflict of interest with respectto a compensation arrangement orproperty transfer only if the member—

(A) Is not a disqualified personparticipating in or economicallybenefitting from the compensationarrangement or property transfer, and isnot a member of the family of any suchdisqualified person, as described insection 4958(f)(4) or § 53.4958–3(b)(1);

(B) Is not in an employmentrelationship subject to the direction orcontrol of any disqualified personparticipating in or economicallybenefitting from the compensationarrangement or property transfer;

(C) Does not receive compensation orother payments subject to approval byany disqualified person participating inor economically benefitting from thecompensation arrangement or propertytransfer;

(D) Has no material financial interestaffected by the compensationarrangement or property transfer; and

(E) Does not approve a transactionproviding economic benefits to anydisqualified person participating in thecompensation arrangement or propertytransfer, who in turn has approved orwill approve a transaction providingeconomic benefits to the member.

(2) Appropriate data as tocomparability—(i) In general. Anauthorized body has appropriate data asto comparability if, given the knowledgeand expertise of its members, it hasinformation sufficient to determinewhether, under the standards set forthin § 53.4958–4(b), the compensationarrangement in its entirety is reasonableor the property transfer is at fair marketvalue. In the case of compensation,relevant information includes, but is notlimited to, compensation levels paid bysimilarly situated organizations, bothtaxable and tax-exempt, for functionallycomparable positions; the availability ofsimilar services in the geographic areaof the applicable tax-exemptorganization; current compensationsurveys compiled by independent firms;and actual written offers from similarinstitutions competing for the servicesof the disqualified person. In the case ofproperty, relevant information includes,but is not limited to, currentindependent appraisals of the value ofall property to be transferred; and offersreceived as part of an open andcompetitive bidding process.

(ii) Special rule for compensationpaid by small organizations. Fororganizations with annual gross receipts(including contributions) of less than $1million reviewing compensationarrangements, the authorized body willbe considered to have appropriate dataas to comparability if it has data oncompensation paid by three comparableorganizations in the same or similarcommunities for similar services. Noinference is intended with respect towhether circumstances falling outsidethis safe harbor will meet therequirement with respect to thecollection of appropriate data.

(iii) Application of special rule forsmall organizations. For purposes of

determining whether the special rule forsmall organizations described inparagraph (c)(2)(ii) of this sectionapplies, an organization may calculateits annual gross receipts based on anaverage of its gross receipts during thethree prior taxable years. If anyapplicable tax-exempt organization iscontrolled by or controls another entity(as defined in § 53.4958–4(a)(2)(ii)(B)),the annual gross receipts of suchorganizations must be aggregated todetermine applicability of the specialrule stated in paragraph (c)(2)(ii) of thissection.

(iv) Examples. The followingexamples illustrate the rules forappropriate data as to comparability forpurposes of invoking the rebuttablepresumption of reasonablenessdescribed in this section. In allexamples, compensation refers to theaggregate value of all benefits providedin exchange for services. The examplesare as follows:

Example 1. Z is a university that is anapplicable tax-exempt organization forpurposes of section 4958. Z is negotiating anew contract with Q, its president, becausethe old contract will expire at the end of theyear. In setting Q’s compensation for itspresident at $600x per annum, the executivecommittee of the Board of Trustees reliessolely on a national survey of compensationfor university presidents that indicatesuniversity presidents receive annualcompensation in the range of $100x to $700x;this survey does not divide its data by anycriteria, such as the number of studentsserved by the institution, annual revenues,academic ranking, or geographic location.Although many members of the executivecommittee have significant businessexperience, none of the members has anyparticular expertise in higher educationcompensation matters. Given the failure ofthe survey to provide information specific touniversities comparable to Z, and because noother information was presented, theexecutive committee’s decision with respectto Q’s compensation was not based uponappropriate data as to comparability.

Example 2. The facts are the same asExample 1, except that the nationalcompensation survey divides the dataregarding compensation for universitypresidents into categories based on variousuniversity-specific factors, including the sizeof the institution (in terms of the number ofstudents it serves and the amount of itsrevenues) and geographic area. The surveydata shows that university presidents atinstitutions comparable to and in the samegeographic area as Z receive annualcompensation in the range of $200x to $300x.The executive committee of the Board ofTrustees of Z relies on the survey data andits evaluation of Q’s many years of service asa tenured professor and high-rankinguniversity official at Z in setting Q’scompensation at $275x annually. The datarelied upon by the executive committee



constitutes appropriate data as tocomparability.

Example 3. X is a tax-exempt hospital thatis an applicable tax-exempt organization forpurposes of section 4958. Before renewingthe contracts of X’s chief executive officerand chief financial officer, X’s governingboard commissioned a customizedcompensation survey from an independentfirm that specializes in consulting on issuesrelated to executive placement andcompensation. The survey coveredexecutives with comparable responsibilitiesat a significant number of taxable and tax-exempt hospitals. The survey data are sortedby a number of different variables, includingthe size of the hospitals and the nature of theservices they provide, the level of experienceand specific responsibilities of theexecutives, and the composition of theannual compensation packages. The boardmembers were provided with the surveyresults, a detailed written analysis comparingthe hospital’s executives to those covered bythe survey, and an opportunity to askquestions of a member of the firm thatprepared the survey. The survey, as preparedand presented to X’s board, constitutesappropriate data as to comparability.

Example 4. The facts are the same asExample 3, except that one year later, X isnegotiating a new contract with its chiefexecutive officer. The governing board of Xobtains information indicating that therelevant market conditions have not changedmaterially, and possesses no otherinformation indicating that the results of theprior year’s survey are no longer valid.Therefore, X may continue to rely on theindependent compensation survey preparedfor the prior year in setting annualcompensation under the new contract.

Example 5. W is a local repertory theaterand an applicable tax-exempt organizationfor purposes of section 4958. W has hadannual gross receipts ranging from $400,000to $800,000 over its past three taxable years.In determining the next year’s compensationfor W’s artistic director, the board of directorsof W relies on data compiled from atelephone survey of three other unrelatedperforming arts organizations of similar sizein similar communities. A member of theboard drafts a brief written summary of theannual compensation information obtainedfrom this informal survey. The annualcompensation information obtained in thetelephone survey is appropriate data as tocomparability.

(3) Documentation—(i) For a decisionto be documented adequately, thewritten or electronic records of theauthorized body must note—

(A) The terms of the transaction thatwas approved and the date it wasapproved;

(B) The members of the authorizedbody who were present during debateon the transaction that was approvedand those who voted on it;

(C) The comparability data obtainedand relied upon by the authorized bodyand how the data was obtained; and

(D) Any actions taken with respect toconsideration of the transaction by

anyone who is otherwise a member ofthe authorized body but who had aconflict of interest with respect to thetransaction.

(ii) If the authorized body determinesthat reasonable compensation for aspecific arrangement or fair marketvalue in a specific property transfer ishigher or lower than the range ofcomparability data obtained, theauthorized body must record the basisfor its determination. For a decision tobe documented concurrently, recordsmust be prepared before the later of thenext meeting of the authorized body or60 days after the final action or actionsof the authorized body are taken.Records must be reviewed and approvedby the authorized body as reasonable,accurate and complete within areasonable time period thereafter.

(d) No presumption with respect tonon-fixed payments until amounts aredetermined—(1) In general. Except asprovided in paragraph (d)(2) of thissection, in the case of a payment that isnot a fixed payment (within themeaning of § 53.4958–4(a)(3)(ii)), therebuttable presumption of this sectionarises only after the exact amount of thepayment is determined, or a fixedformula for calculating the payment isspecified, and the three requirements forthe presumption under paragraph (a) ofthis section subsequently are satisfied.See § 53.4958–4(b)(2)(i).

(2) Special rule for certain non-fixedpayments subject to a cap. If theauthorized body approves anemployment contract with adisqualified person that includes a non-fixed payment (such as a discretionarybonus) subject to a specified cap, theauthorized body may establish arebuttable presumption with respect tothe non-fixed payment at the time theemployment contract is entered into if—

(i) Prior to approving the contract, theauthorized body obtains appropriatecomparability data indicating that afixed payment of up to a certain amountto the particular disqualified personwould represent reasonablecompensation;

(ii) The maximum amount payableunder the contract (taking into accountboth fixed and non-fixed payments)does not exceed the amount referred toin paragraph (d)(2)(i) of this section; and

(iii) The other requirements for therebuttable presumption ofreasonableness under paragraph (a) ofthis section are satisfied.

(e) No inference from absence ofpresumption. The fact that a transactionbetween an applicable tax-exemptorganization and a disqualified personis not subject to the presumptiondescribed in this section neither creates

any inference that the transaction is anexcess benefit transaction, nor exemptsor relieves any person from compliancewith any Federal or state law imposingany obligation, duty, responsibility, orother standard of conduct with respectto the operation or administration of anyapplicable tax-exempt organization.

(f) Period of reliance on rebuttablepresumption. Except as provided inparagraph (d) of this section withrespect to non-fixed payments, therebuttable presumption applies to allpayments made or transactionscompleted in accordance with acontract, provided that the provisions ofparagraph (a) of this section were met atthe time the parties entered into thecontract.

§ 53.4958–7 Correction.(a) In general. An excess benefit

transaction is corrected by undoing theexcess benefit to the extent possible,and taking any additional measuresnecessary to place the applicable tax-exempt organization involved in theexcess benefit transaction in a financialposition not worse than that in which itwould be if the disqualified person weredealing under the highest fiduciarystandards. Paragraph (b) of this sectiondescribes the acceptable forms ofcorrection. Paragraph (c) of this sectiondefines the correction amount.Paragraph (d) of this section describescorrection where a contract has beenpartially performed. Paragraph (e) ofthis section describes correction wherethe applicable tax-exempt organizationinvolved in the transaction has ceasedto exist or is no longer tax-exempt.Paragraph (f) of this section providesexamples illustrating correction.

(b) Form of correction—(1) Cash orcash equivalents. Except as provided inparagraphs (b)(3) and (4) of this section,a disqualified person corrects an excessbenefit only by making a payment incash or cash equivalents, excludingpayment by a promissory note, to theapplicable tax-exempt organizationequal to the correction amount, asdefined in paragraph (c) of this section.

(2) Anti-abuse rule. A disqualifiedperson will not satisfy the requirementsof paragraph (b)(1) of this section if theCommissioner determines that thedisqualified person engaged in one ormore transactions with the applicabletax-exempt organization to circumventthe requirements of this correctionsection, and as a result, the disqualifiedperson effectively transferred propertyother than cash or cash equivalents.

(3) Special rule relating tononqualified deferred compensation. Ifan excess benefit transaction results, inwhole or in part, from the vesting (as



described in § 53.4958–1(e)(2)) ofbenefits provided under a nonqualifieddeferred compensation plan, then, to theextent that such benefits have not yetbeen distributed to the disqualifiedperson, the disqualified person maycorrect the portion of the excess benefitresulting from the undistributeddeferred compensation by relinquishingany right to receive the excess portionof the undistributed deferredcompensation (including any earningsthereon).

(4) Return of specific property—(i) Ingeneral. A disqualified person may,with the agreement of the applicabletax-exempt organization, make apayment by returning specific propertypreviously transferred in the excessbenefit transaction. In this case, thedisqualified person is treated as makinga payment equal to the lesser of—

(A) The fair market value of theproperty determined on the date theproperty is returned to the organization;or

(B) The fair market value of theproperty on the date the excess benefittransaction occurred.

(ii) Payment not equal to correctionamount. If the payment described inparagraph (b)(4)(i) of this section is lessthan the correction amount (asdescribed in paragraph (c) of thissection), the disqualified person mustmake an additional cash payment to theorganization equal to the difference.Conversely, if the payment described inparagraph (b)(4)(i) of this sectionexceeds the correction amount (asdescribed in paragraph (c) of thissection), the organization may make acash payment to the disqualified personequal to the difference.

(iii) Disqualified person may notparticipate in decision. Any disqualifiedperson who received an excess benefitfrom the excess benefit transaction maynot participate in the applicable tax-exempt organization’s decision whetherto accept the return of specific propertyunder paragraph (b)(4)(i) of this section.

(c) Correction amount. The correctionamount with respect to an excess benefittransaction equals the sum of the excessbenefit (as defined in § 53.4958–1(b))and interest on the excess benefit. Theamount of the interest charge forpurposes of this section is determinedby multiplying the excess benefit by aninterest rate, compounded annually, forthe period from the date the excessbenefit transaction occurred (as definedin § 53.4958–1(e)) to the date ofcorrection. The interest rate used forthis purpose must be a rate that equalsor exceeds the applicable Federal rate(AFR), compounded annually, for themonth in which the transaction

occurred. The period from the date theexcess benefit transaction occurred tothe date of correction is used todetermine whether the appropriate AFRis the Federal short-term rate, theFederal mid-term rate, or the Federallong-term rate. See section1274(d)(1)(A).

(d) Correction where contract hasbeen partially performed. If the excessbenefit transaction arises under acontract that has been partiallyperformed, termination of thecontractual relationship between theorganization and the disqualified personis not required in order to correct.However, the parties may need tomodify the terms of any ongoingcontract to avoid future excess benefittransactions.

(e) Correction in the case of anapplicable tax-exempt organization thathas ceased to exist, or is no longer tax-exempt—(1) In general. A disqualifiedperson must correct an excess benefittransaction in accordance with thisparagraph where the applicable tax-exempt organization that engaged in thetransaction no longer exists or is nolonger described in section 501(c)(3) or(4) and exempt from tax under section501(a).

(2) Section 501(c)(3) organizations. Inthe case of an excess benefit transactionwith a section 501(c)(3) applicable tax-exempt organization, the disqualifiedperson must pay the correction amount,as defined in paragraph (c) of thissection, to another organizationdescribed in section 501(c)(3) andexempt from tax under section 501(a) inaccordance with the dissolution clausecontained in the constitutive documentsof the applicable tax-exemptorganization involved in the excessbenefit transaction, provided that—

(i) The organization receiving thecorrection amount is described insection 170(b)(1)(A) (other than insection 170(b)(1)(A)(vii) and (viii)) andhas been in existence and so describedfor a continuous period of at least 60calendar months ending on thecorrection date;

(ii) The disqualified person is not alsoa disqualified person (as defined in§ 53.4958–3) with respect to theorganization receiving the correctionamount; and

(iii) The organization receiving thecorrection amount does not allow thedisqualified person (or personsdescribed in § 53.4958–3(b) with respectto that person) to make or recommendany grants or distributions by theorganization.

(3) Section 501(c)(4) organizations. Inthe case of an excess benefit transactionwith a section 501(c)(4) applicable tax-

exempt organization, the disqualifiedperson must pay the correction amount,as defined in paragraph (c) of thissection, to a successor section 501(c)(4)organization or, if no tax-exemptsuccessor, to any organization describedin section 501(c)(3) or (4) and exemptfrom tax under section 501(a), providedthat the requirements of paragraphs(e)(2)(i) through (iii) of this section aresatisfied (except that the requirementthat the organization receiving thecorrection amount is described insection 170(b)(1)(A) (other than insection 170(b)(1)(A)(vii) and (viii)) shallnot apply if the organization isdescribed in section 501(c)(4)).

(f) Examples. The following examplesillustrate the principles of this sectiondescribing the requirements ofcorrection:

Example 1. W is an applicable tax-exemptorganization for purposes of section 4958. Dis a disqualified person with respect to W. Wemployed D in 1999 and made paymentstotaling $12t to D as compensationthroughout the taxable year. The fair marketvalue of D’s services in 1999 was $7t. Thus,D received excess compensation in theamount of $5t, the excess benefit forpurposes of section 4958. In accordance with§ 53.4958–1(e)(1), the excess benefittransaction with respect to the series ofcompensatory payments during 1999 isdeemed to occur on December 31, 1999, thelast day of D’s taxable year. In order tocorrect the excess benefit transaction on June30, 2002, D must pay W, in cash or cashequivalents, excluding payment with apromissory note, $5t (the excess benefit) plusinterest on $5t for the period from the datethe excess benefit transaction occurred to thedate of correction (i.e., December 31, 1999, toJune 30, 2002). Because this period is notmore than three years, the interest rate Dmust use to determine the interest on theexcess benefit must equal or exceed theshort-term AFR, compounded annually, forDecember, 1999 (5.74%, compoundedannually).

Example 2. X is an applicable tax-exemptorganization for purposes of section 4958. Bis a disqualified person with respect to X. OnJanuary 1, 2000, B paid X $6v for PropertyF. Property F had a fair market value of $10von January 1, 2000. Thus, the salestransaction on that date provided an excessbenefit to B in the amount of $4v. In orderto correct the excess benefit on July 5, 2005,B pays X, in cash or cash equivalents,excluding payment with a promissory note,$4v (the excess benefit) plus interest on $4vfor the period from the date the excessbenefit transaction occurred to the date ofcorrection (i.e., January 1, 2000, to July 5,2005). Because this period is over three butnot over nine years, the interest rate B mustuse to determine the interest on the excessbenefit must equal or exceed the mid-termAFR, compounded annually, for January,2000 (6.21%, compounded annually).

Example 3. The facts are the same as inExample 2, except that B offers to return



Property F. X agrees to accept the return ofProperty F, a decision in which B does notparticipate. Property F has declined in valuesince the date of the excess benefittransaction. On July 5, 2005, the property hasa fair market value of $9v. For purposes ofcorrection, B’s return of Property F to X istreated as a payment of $9v, the fair marketvalue of the property determined on the datethe property is returned to the organization.If $9v is greater than the correction amount($4v plus interest on $4v at a rate that equalsor exceeds 6.21%, compounded annually, forthe period from January 1, 2000, to July 5,2005), then X may make a cash payment toB equal to the difference.

Example 4. The facts are the same as inExample 3, except that Property F hasincreased in value since January 1, 2000, thedate the excess benefit transaction occurred,and on July 5, 2005, has a fair market valueof $13v. For purposes of correction, B’sreturn of Property F to X is treated as apayment of $10v, the fair market value of theproperty on the date the excess benefittransaction occurred. If $10v is greater thanthe correction amount ($4v plus interest on$4v at a rate that equals or exceeds 6.21%,compounded annually, for the period fromJanuary 1, 2000, to July 5, 2005), then X maymake a cash payment to B equal to thedifference.

Example 5. The facts are the same as inExample 2. Assume that the correctionamount B paid X in cash on July 5, 2005, was$5.58v. On July 4, 2005, X loaned $5.58v toB, in exchange for a promissory note signedby B in the amount of $5.58v, payable withinterest at a future date. These facts indicatethat B engaged in the loan transaction tocircumvent the requirement of this sectionthat (except as provided in paragraph (b)(3)or (4) of this section), the correction amountmust be paid only in cash or cashequivalents. As a result, the Commissionermay determine that B effectively transferredproperty other than cash or cash equivalents,and therefore did not satisfy the correctionrequirements of this section.

§ 53.4958–8 Special rules.(a) Substantive requirements for

exemption still apply. Section 4958 doesnot affect the substantive standards fortax exemption under section 501(c)(3) or(4), including the requirements that theorganization be organized and operatedexclusively for exempt purposes, andthat no part of its net earnings inure tothe benefit of any private shareholder orindividual. Thus, regardless of whethera particular transaction is subject toexcise taxes under section 4958, existingprinciples and rules may be implicated,such as the limitation on private benefit.For example, transactions that are notsubject to section 4958 because of theinitial contract exception described in§ 53.4958–4(a)(3) may, under certaincircumstances, jeopardize theorganization’s tax-exempt status.

(b) Interaction between section 4958and section 7611 rules for church taxinquiries and examinations. The

procedures of section 7611 will be usedin initiating and conducting any inquiryor examination into whether an excessbenefit transaction has occurredbetween a church and a disqualifiedperson. For purposes of this rule, thereasonable belief required to initiate achurch tax inquiry is satisfied if there isa reasonable belief that a section 4958tax is due from a disqualified personwith respect to a transaction involvinga church. See § 301.7611–1 Q&A 19 ofthis chapter.

(c) Other substantiation requirements.These regulations, in § 53.4958–4(c)(3),set forth specific substantiation rules.Compliance with the specificsubstantiation rules of that section doesnot relieve applicable tax-exemptorganizations of other rules andrequirements of the Internal RevenueCode, regulations, Revenue Rulings, andother guidance issued by the InternalRevenue Service (including thesubstantiation rules of sections 162 and274, or § 1.6001–1(a) and (c) of thischapter).

PART 301—PROCEDURE ANDADMINISTRATION

3. The authority citation for part 301continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

§ 301.7611–1 [Amended]

4. In § 301.7611–1, Q–19 and A–19 atthe end of the section are revised to readas follows:

§ 301.7611–1 Questions and answersrelating to church tax inquiries andexaminations.

* * * * *

Application to Section 4958

Q–19: When do the church taxinquiry and examination proceduresdescribed in section 7611 apply to adetermination of whether there was anexcess benefit transaction described insection 4958?

A–19: See § 53.4958–7(b) of thischapter for rules governing theinteraction between section 4958 excisetaxes on excess benefit transactions andsection 7611 church tax inquiry andexamination procedures.

PART 602—OMB CONTROL NUMBERSUNDER THE PAPERWORKREDUCTION ACT

5. The authority citation for part 602continues to read as follows:

Authority: 26 U.S.C. 7805.6. In § 602.101, paragraph (b) is

amended by removing the entry for‘‘53.4958–6T’’ and adding an entry for

‘‘53.4958–6’’ to the table in numericalorder to read as follows:

§ 602.101 OMB control numbers.

* * * * *(b) * * *

CFR part or section whereidentified and described

CurrentOMB

control No.

* * * * *53.4958–6 ................................. 1545–1623

* * * * *

Approved: December 21, 2001.Robert E. Wenzel,Deputy Commissioner of Internal Revenue.Mark Weinberger,Assistant Secretary of the Treasury.[FR Doc. 02–985 Filed 1–22–02; 8:45 am]BILLING CODE 4830–01–P

DEPARTMENT OF VETERANSAFFAIRS

38 CFR Parts 19 and 20

RIN 2900–AK91

Board of Veterans’ Appeals: ObtainingEvidence and Curing ProceduralDefects Without Remanding

AGENCY: Department of Veterans Affairs.ACTION: Final rule.

SUMMARY: This document amends theAppeals Regulations and Rules ofPractice of the Board of Veterans’Appeals (Board) to permit the Board toobtain evidence, clarify the evidence,cure a procedural defect, or perform anyother action essential for a properappellate decision in any appealproperly before it without having toremand the appeal to the agency oforiginal jurisdiction. It also allows theBoard to consider additional evidencewithout having to refer the evidence tothe agency of original jurisdiction forinitial consideration and without havingto obtain the appellant’s waiver. Byreducing the number of appealsremanded, VA intends to shorten appealprocessing time and to reduce thebacklog of claims awaiting decision.DATES: Effective Date: Theseamendments are effective February 22,2002.

Applicability Date: Theseamendments apply to appeals for whichthe notice of disagreement was filed onor after February 22, 2002, and toappeals pending, whether at the Boardof Veterans’ Appeals, the United StatesCourt of Appeals for Veterans Claims, or


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