NOTE: 501(c)(3) private foundations are subject to similar regulations found in Section 4941 of the Internal Revenue Code.
If you are not a disqualified person, then you cannot be subject to an excess benefit (your transaction with the non-profit organization is considered to be at arm's length).
The organizational managers who participated in the transaction may also be fined an aggregate of $10,000 per violation and are jointly and severally liable for payment of such penalty.
The Taxpayer Bill of Rights 2 (effective July 30, 1996) added section 4958 to the Internal Revenue Code.
On September 9, 2005, the IRS announced proposed rulemaking to clarify the relationship between penalties imposed under section 4958 and revocation of exempt status.
The regulations make it clear that a contractor who acts solely in a capacity as an attorney, accountant, or investment manager or advisor is not an officer.
If an organization manager relies on a reasoned written opinion of an appropriate professional, his or her participation will ordinarily not be considered knowing.
In addition, an organization manager's participation is ordinarily not considered knowing if the requirements of the rebuttable presumption of reasonableness are satisfied.
Under this safe harbor, compensation is presumed to be reasonable and a property transfer is presumed to be at fair market value if: (1) the compensation arrangement or terms of transfer are approved, in advance, by an authorized body of the exempt organization, composed entirely of individuals without a conflict of interest, (2) the board or committee obtained and relied upon appropriate data as to comparability in making its determination; and (3) the board or committee adequately documented the basis for its determination, concurrently with making the decision.
In order to prevent the IRS's invocation of intermediate sanctions, any individual serving on the governing body of the organization may not have a conflict of interest regarding the transaction, and if they are on the governing body and have a conflict, they may answer questions posed by other members, but they must recuse themselves in the decision-making process, including debate.
By Steven T. Miller, Director, Exempt Organizations I.R.S., expressing his personal views regarding the Temporary Regulations interpreting the benefit limitation provisions of Section 4958 of the Internal Revenue Code.
Steven T. Miller's 2nd article explaining (in his personal view) how to determine which officials are covered and suggesting a relatively simple process for ensuring full compliance.