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Sanctions on charities for self-dealing and certain other activities.

Sec. 501(c)(3) organizations are classified as either private foundations or public charities. Under current law, excise taxes may bc imposed on private foundations, their managers and certain disqualified persons for engaging in certain "self-dealing" and "taxable expenditure" transactions. Current law does not generally provide for similar excise taxes on Sec. 501(c)(3) public charities or Sec. 501(c)(4) organizations that engage in self-dealing or transactions that result in private inurement. The only sanction presently available to the IRS is revocation of the organization's exempt status, which in most circumstances is a disproportionate sanction for the prohibited transaction.

On Nov. 22, 1993l Rep. Pete Stark (D-Cal.) introduced HR 3697, the Exempt Organization Reform Act of 1993, which would impose intermediatc sanctions on Sec. 501(c)(3) public charities and Sec. 501(c)(4) organizations. These sanctions are in the form of two-tier excise taxes. One would be on "disqualified persons" for "selfdealing"; the other would be for private inurement. The bill defines a disqualified person as an organizational manager for a five-year period prior to the prohibited transaction, certain family members, officers, directors or trustees, as well as persons performing substantial medical services, such as physicians. An initial tax of 5% of the amount involved would be imposed on disqualified persons participating in a self-dealing transaction. An initial tax of 2.5% (up to $10,000) would be imposed on organizational managers who knowingly participated in the selfdealing. Eor transactions not "corrected," there would be second tier taxes of up to 200% of the amount involved on the disqualified person and 50% (up to $10,000) for participating managers.

In cases of private inurement, the organization would be subject to a first tier penalty of 10% of the taxable inurement, 5% could be imposed on beneficiaries of the inurement and a 2.5% penalty on organizational managers (up to $10,000). The second tier tax would be up to 100% on the organizational manager, 200% on the beneficiary and 50% of the taxable inurement amount on a manager who refuses to "correct" within a specified time.

Note that these rules parallel the private foundation excise tax provisions for penalties on self-dealing. Exempt organizations should become familiar with these provisions; any new legislation will likely mirror those rules.

From Janet Buehler, J.D., Washington, D.C.
COPYRIGHT 1994 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Buehler, Janet
Publication:The Tax Adviser
Article Type:Brief Article
Date:Apr 1, 1994
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