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Legal Memorandum: Organizations and Individuals Affected by I.R.C. 4958

Issue: Under federal law, what organizations and individuals are affected by I.R.C. 4958?

Area of Law: Tax Law
Keywords: Excise taxes; Disqualified person; Applicable persons and organizations
Jurisdiction: Federal
Cited Cases: None
Cited Statutes: I.R.C. 4958, § 4941, § 4958(f)(1); Treas. Reg. § 53.4958‑3(a)(1), § 53.4958‑3
Date: 05/01/2005

Section 4958 applies to all organizations exempt under section 501(c)(3) (other than private foundations) and section 501(c)(4).  Pursuant to section 4958, the IRS may impose intermediate sanctions on (1) any “disqualified person” who receives an excess benefit from an exempt organization, and (2) any “organization manager” who approves the excess benefit transaction.[1]  The statute and the regulations define “disqualified person” as anyone in a position to exercise substantial influence over the exempt organization’s affairs at any time during the five-year period preceding the date of the excess benefit transaction.[2]  The regulations also include a lengthy list of individuals and entities that are automatically defined as “disqualified persons,” including family members, board members, and executive officers.[3]  The regulations exclude from the definition of “disqualified persons” (a) 501(c)(3) organizations; (b) certain 501(c)(4) organizations, including other organizations described in 501(c)(4); and (c) employees who do not fall within one of the listed categories provided they are not considered highly compensated employees or substantial contributors to the exempt organization.[4]  The IRS determines whether any other person is a disqualified person based on relevant facts and circumstances, including whether the person founded the organization or is a substantial contributor, how the organization compensates the person, and the authority the person exercises over the organization’s affairs.[5]  Conversely, facts and circumstances tending to show that a person is not a disqualified person include (a) with respect to religious organizations, the person has taken a vow of poverty; (b) the person is a contractor whose sole […]

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