GUIDANCE PROVIDED ON EXCISE TAXES IMPOSED ON EXCESS BENEFIT TRANSACTIONS.

Notice 96-46

[1] This notice summarizes certain aspects of Taxpayer Bill of Rights 2 related to excise taxes on excess benefit transactions involving organizations described in section 501(c)(3) (except private foundations) and section 501(c)(4). Taxpayer Bill of Rights 2, Pub. L. No. 104-168, 110 Stat. 1452, (TBOR2) was enacted July 30, 1996. This notice also provides guidance with respect to the filing of returns for these excise taxes, and solicits comments to be considered in drafting future guidance. See Notice 96-47, page 8, this Bulletin, for aspects of TBOR2 related to the express prohibition of private inurement for section 501(c)(4) organizations, and Notice 96-48, page 9, this Bulletin, for disclosure requirements for, and increases in certain penalties on, exempt organizations generally.

I. IN GENERAL

[2] Section 1311(a) of TBOR2 creates new section 4958, which imposes excise taxes on excess benefit transactions. An excess benefit transaction subject to tax under section 4958 is any transaction in which an economic benefit is provided by an organization described in section 501(c)(3) (except for a private foundation) or section 501(c)(4) directly or indirectly to, or for the use of, any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing the benefit. A disqualified person is any person who was, at any time during the 5- year period ending on the date of the excess benefit transaction, in a position to exercise substantial influence over the affairs of the organization. Disqualified persons also include family members and certain entities in which at least 35 percent of the control or beneficial interests are held by persons described in the preceding sentence. An organization manager is an officer, director, trustee, or any individual having powers or responsibilities similar to those of an officer, director, or trustee.

[3] Section 4958 imposes three taxes. The first tax is equal to 25 percent of the excess benefit amount, and is to be paid by any disqualified person who engages in an excess benefit transaction (section 4958(a)(1)). The second tax is equal to 200 percent of the excess benefit amount, and is to be paid by any disqualified person if the excess benefit transaction is not corrected within the taxable period (section 4958(b)). The third tax is equal to 10 percent of the excess benefit amount, and is to be paid by any organization manager who knowingly participates in an excess benefit transaction (section 4958(a)(2)). With respect to any one excess benefit transaction, the maximum amount of this third tax may not exceed $10,000.

II. EFFECTIVE DATE FOR EXCISE TAXES

[4] The new section 4958 excise taxes apply to excess benefit transactions occurring on or after September 14, 1995. They do not apply, however, to any benefit arising from a transaction pursuant to any written contract that was binding on September 13, 1995, and continued in force through the time of the transaction.

III. RETURNS FOR PAYMENT OF EXCISE TAXES

[5] Charities and other persons liable for certain Chapter 41 or Chapter 42 excise taxes must file returns on Form 4720 to calculate and report the taxes due. The Treasury Department will issue regulations providing that disqualified persons and organization managers (or their 35 percent controlled entities) liable for section 4958 excise taxes on excess benefit transactions are required to file an annual return on Form 4720. For excess benefit transactions that occurred after September 13, 1995, in a taxable year ending before December 31, 1996, the persons liable for payment of the excise taxes must use the 1995 Form 4720 to calculate and report those taxes. The Service will revise Form 4720 for taxable years ending on or after December 31, 1996.

[6] The Treasury Department will also issue regulations which will provide that returns on Form 4720 for taxable years ending after September 13, 1995, and on or before July 30, 1996 (the date of TBOR2's enactment), will be due on December 15, 1996. Returns for taxable years ending after July 30, 1996, will be due on the 15th day of the fifth month following the close of that taxable year.

[7] The person filing should clearly mark the top of the 1995 Form 4720 that it is for payment of section 4958 excise taxes. Use Part II-A, columns (a), (b), and (h) to report information about the person(s) liable and the amount of the tax; use Schedule A columns (b), (c), (e), and (f) (if a transaction with a disqualified person, using the 25 percent tax rate), or (b), (c), (e), and (g) (if a transaction with an organization manager, using the 10 percent tax rate) to provide other information requested about the transaction.

IV. REPORTING REQUIREMENTS FOR SECTION 4958 EXCISE TAXES

[8] Section 1312(a) of TBOR2 amends section 6033(b) to require section 501(c)(3) organizations to report the amounts of the taxes paid under section 4958 with respect to excess benefit transactions involving the organization, as well as any other information the Secretary may require concerning those transactions. Section 6033(f) is also amended to impose the same filing requirements on section 501(c)(4) organizations. These amendments only apply to returns for taxable years beginning after July 30, 1996. Accordingly, affected organizations do not have to include information on taxes paid under section 4958, or any other information that may be required with respect to excess benefit transactions, on their returns for taxable years beginning before July 31, 1996.

V. COMMENTS ON FUTURE GUIDANCE INVITED

[9] The Service invites comments on the amendments made by sections 1311(a) and 1312 of TBOR2 (new section 4958 and reporting requirements related to those excise taxes). The Service will consider these comments in drafting future guidance. In order to issue this guidance promptly, the Service requests that written comments be submitted by December 12, 1996. Send submissions to: CC:DOM:CORP:R (Notice 96-46), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (Notice 96-46), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet directly to the IRS internet site at htpi//www.irs.ustreas.gov/prod/tax_regs/comments.html.

[10] The principal author of this notice is Phyllis Haney of the Office of Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding this notice contact Ms. Haney on (202) 622-4290 (not a toll-free call).