Internal Revenue Bulletin 1998-34 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
T.D.8777, page 4.
Final regulations under section 465 of the Code relate to
qualified nonrecourse financing.
EMPLOYEE PLANS
Notice 98–44, page 7.
Weighted average interest rate update. This notice
sets forth for determining for August 1998 the weighted
average interest rate and the resulting permissible range
of interest rates used to calculate current liability for pur-
poses of the full funding limitation of section 412(c)(7) of
the Code as amended by the Omnibus Budget Reconcilia-
tion Act of 1987 and by the Uruguay Round Agreements
Act (GATT).
EXEMPT ORGANIZATIONS
Announcement 98–80, page 32.
A list is given of organizations now classified as private
foundations.
REG-246256–96, page 9.
Proposed regulations under section 4958 of the Code re-
late to the excise taxes on excess benefit transactions.
ADMINISTRATIVE
Rev. Proc. 98–45, page 8.
Low-income housing tax credit. This procedure publishes
the amounts of unused housing credit carryovers allocated to
qualified states under section 42(h)(3)(D) of the Code for cal-
endar year 1998.
Notice 98–38, page 7.
SRLY notice. The Treasury Department and the Service are
considering an approach to simplify Separate Return Limita-
tion Year (SRLY) rules applicable to consolidated groups. Com-
ments are requested about the advisability of adopting this
approach. The new approach would base the SRLY limitation
on an expectation of the amount of income to be generated
using the methodology of section 382 of the Code.
Announcement 98–77, page 30.
Comments are requested on proposed training materials
discussing the application of section 119 of the Code to the
provision of employee meals in the hospitality industry.
Announcement 98–78, page 30.
The Service announces a settlement initiative allowing hospi-
tality industry taxpayers to resolve issues relating to the provi-
sion of employee meals.
Announcement 98–79, page 31.
The public hearing for proposed regulation REG–209682–94,
1998–17 I.R.B. 20, is changed to September 10, 1998.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1998–34
August 24, 1998
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 35.
IRB 1998-34 8/19/98 1:34 PM Page 1

Mission of the Service
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, effi-
ciency, and fairness.
2
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to adminis-
ter the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provi-
sions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protect-
ing the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesi-
tate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, howev-
er, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.
IRB 1998-34 8/19/98 1:34 PM Page 2

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
3
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
IRB 1998-34 8/19/98 1:34 PM Page 3

August 24, 199841998–34 I.R.B.
Section 465–Qualified
Nonrecourse Financing
26 CFR 1.465–27: Qualified nonrecourse financing.
T.D. 8777
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Qualified Nonrecourse Financing
Under Section 465(b)(6)
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations on certain issues regard-
ing qualified nonrecourse financing under
section 465(b)(6). These final regulations
affect individuals and C corporations for
which the stock ownership requirement of
section 542(a)(2) is satisfied. These regu-
lations provide guidance on certain issues
relating to section 465(b)(6).
DATES: Effective date: These regula-
tions are effective August 4, 1998.
Applicability dates: See Effective
Dates under Supplementary Information
of the preamble.
FOR FURTHER INFORMATION CON-
TACT: Jeff Erickson at (202) 622-3070
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part 1
to provide rules regarding qualified non-
recourse financing under section
465(b)(6). Section 465 limits a taxpayer’s
loss deduction for an activity to the tax-
payer’s amount at risk in the activity at
the close of the taxable year. A taxpayer’s
amount at risk generally includes the
amount of any cash and the adjusted tax
basis of any property contributed by the
taxpayer to the activity plus any amounts
borrowed for use in the activity to the ex-
tent the taxpayer is personally liable for
repayment. For the activity of holding
real property, section 465(b)(6) provides
that a taxpayer may include as an amount
at risk the taxpayer’s share of any quali-
fied nonrecourse financing that is secured
by real property used in the activity of
holding real property, even though the
taxpayer is not personally liable for re-
payment of the financing.
On August 13, 1997, the IRS published
in the Federal Register(62 FR 43295
[REG–105160–97, 1997–37 I.R.B. 22]) a
notice of proposed rulemaking regarding
section 465(b)(6). A number of com-
ments were received on the proposed reg-
ulations. The public hearing scheduled
for December 10, 1997, was canceled be-
cause no one requested to speak. After
considering the written comments, the
proposed regulations are adopted as re-
vised by this Treasury decision.
Explanation of Provisions
I. Secured by Real Property
A. Proposed Rule
Section 465(b)(6)(A) provides that
qualified nonrecourse financing must be
secured by real property used in the activ-
ity of holding real property. The proposed
regulations provided that a financing can
be a qualified nonrecourse financing if, in
addition to the real property used in the
activity of holding real property, the fi-
nancing is secured by other property that
is incidental to the activity of holding real
property (incidental property).
B. Discussion of Comments
A commentator recommended that the
final regulations clarify the term inciden-
tal property. Another commentator asked
that the IRS and Treasury define inciden-
tal property as any property with a value
of not more than 15 percent of the value
of the real property held by the borrowing
partnership. A third commentator ex-
plained that real estate partnerships often
hold assets in addition to real property
and incidental property. This commenta-
tor was concerned that only financings
held by partnerships that own only real
estate assets could satisfy the proposed
regulations. Under the final regulations,
if the total gross fair market value of
property that is neither real property used
in the activity of holding real property nor
incidental property is less than 10 percent
of the total gross fair market value of all
the property securing the financing, such
other property is ignored in determining
whether the financing satisfies the se-
cured-by-real-property requirement.
Another commentator asked for a look-
through rule for partnerships that own an
interest in another partnership to deter-
mine the character of the assets securing a
qualified nonrecourse financing. The
final regulations adopt this suggestion by
requiring a borrower (whether or not a
partnership) to determine the character of
its assets by treating itself as owning di-
rectly its proportional share of the assets
in any partnership in which it owns (di-
rectly or indirectly through a chain of
partnerships) an equity interest. If a bor-
rower pledges a partnership interest as se-
curity for a financing, the partnership as-
sets attributable to the borrower’s
proportional share of the partnership’s as-
sets will be treated as security for the fi-
nancing.
Commentators also asked under what
circumstances qualified nonrecourse fi-
nancing will be treated as secured by real
property. Because this issue is closely-re-
lated to the determination of whether the
personal liability of a partnership will be
disregarded, those issues are addressed
together and are discussed in II. Personal
Liability of this preamble.
A commentator suggested that the final
regulations adopt a rule to allocate a sin-
gle debt obligation among multiple
brother-sister partnerships when the
obligation is secured by the assetsof more
than one partnership. The IRS and Trea-
sury believe this issue is beyond the scope
of these regulations.
II. Personal Liability
A. Proposed Rule
Section 465(b)(6)(B)(iii) provides that,
except to the extent provided in regula-
tions, no person may be personally liable
for repayment of a qualified nonrecourse
financing. The proposed regulations pro-
vided that the personal liability of a part-
nership (including a limited liability com-
pany that is treated as a partnership) is
disregarded in determining whether a fi-
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
IRB 1998-34 8/19/98 1:34 PM Page 4

nancing is a qualified nonrecourse financ-
ing if the entity’s only assets are real
property used in the activity of holding
real property or both real property and
other property that is incidental to the ac-
tivity of holding real property, and no
other person is liable for the financing.
B. Discussion of Comments
Commentators focused on how the pro-
posed regulations apply to tiered partner-
ship structures—when a partnership (the
upper-tier partnership) owns a partnership
interest in another partnership (the lower-
tier partnership). These commentators
questioned whether the personal liability
of an upper-tier partnership that holds, di-
rectly or indirectly, only real property or
incidental property should disqualify a fi-
nancing under section 465(b)(6). As
mentioned in I. Secured by Real Property
of this preamble, commentators also re-
quested guidance as to the situations in
which a nonrecourse financing will be
treated as secured by real property.
In order to address these comments, the
final regulations adopt a three-part test.
Under the final regulations, the personal
liability of any partnership will be disre-
garded and, provided certain other re-
quirements are satisfied, the financing
will be treated as qualified nonrecourse fi-
nancing secured by real property if (i) the
only persons personally liable to repay the
financing are partnerships; (ii) each part-
nership with personal liability holds only
property that is permitted as security for
qualified nonrecourse financing (applying
a look-through rule for lower-tier partner-
ships); and (iii) in exercising its remedies
to collect on the financing in a default or
default-like situation, the lender may pro-
ceed only against property that is permit-
ted as security for qualified nonrecourse
financing and that is held by the partner-
ship or partnerships (applying a look-
through rule for lower-tier partnerships).
Similar principles apply in determining
the treatment of financing incurred by an
entity that is disregarded for federal tax
purposes under §301.7701–3 of the Pro-
cedure and Administration Regulations.
The final regulations contain three exam-
ples illustrating the application of these
rules to tiered partnerships and one exam-
ple addressing a situation that involves a
disregarded entity.
III. Other Issues
A commentator asked that the final reg-
ulations clarify whether an entity is disre-
garded for purposes of section 465(b)(6)
if that entity is disregarded as separate
from its owner under §301.7701–3. An
entity that is disregarded as an entity sep-
arate from its owner under §301.7701–3
is disregarded under section 465(b)(6).
Certain rules that apply to financings in-
volving disregarded entities are discussed
above.
Commentators also raised several other
issues, including the treatment of publicly
traded financing, that are beyond the
scope of these regulations.
IV. Effective Dates
The final regulations are effective for
any financing incurred on or after August
4, 1998. In response to comments, how-
ever, the final regulations include a provi-
sion allowing taxpayers to apply the regu-
lations retroactively for financing incurred
before August 4, 1998. If a taxpayer
chooses to apply these regulations retroac-
tively to financing incurred before August
4, 1998, the IRS will require the taxpayer
to reduce the amounts at risk as a result of
the application of the regulations to tax-
able years ending before August 4, 1998,
only to the extent the application increases
the losses allowed for such years.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the regulation does not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis is not re-
quired. Pursuant to section 7805(f), the
notice of proposed rulemaking preceding
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these regula-
tions is Jeff Erickson, Office of the Assis-
tant Chief Counsel (Passthroughs and
Special Industries), IRS. However, other
personnel from the offices of
the IRS and Treasury Department partici-
pated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is
amended as follows:
PART 1–INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
§1.465–27 also issued under 26 U.S.C.
465(b)(6)(B)(iii). * * *
Par. 2. Section 1.465–27 is added to
read as follows:
§1.465–27 Qualified nonrecourse
financing.
(a) In general. Notwithstanding any
provision of section 465(b) or the regula-
tions under section 465(b), for an activity
of holding real property, a taxpayer is
considered at risk for the taxpayer’s share
of any qualified nonrecourse financing
which is secured by real property used in
such activity.
(b)Qualified nonrecourse financing se-
cured by real property—(1) In general.
For purposes of section 465(b)(6) and this
section, the term qualified nonrecourse fi-
nancing means any financing—
(i) Which is borrowed by the taxpayer
with respect to the activity of holding real
property;
(ii) Which is borrowed by the taxpayer
from a qualified person or represents a
loan from any federal, state, or local gov-
ernment or instrumentality thereof, or is
guaranteed by any federal, state, or local
government;
(iii) For which no person is personally
liable for repayment, taking into account
paragraphs (b)(3), (4), and (5) of this sec-
tion; and
(iv) Which is not convertible debt.
(2) Security for qualified nonrecourse
financing—(i) Types of property. For a
taxpayer to be considered at risk under
section 465(b)(6), qualified nonrecourse
financing must be secured only by real
1998–34 I.R.B.5August 24, 1998
IRB 1998-34 8/19/98 1:34 PM Page 5

property used in the activity of holding
real property. For this purpose, however,
property that is incidental to the activity
of holding real property will be disre-
garded. In addition, for this purpose,
property that is neither real property used
in the activity of holding real property nor
incidental property will be disregarded if
the aggregate gross fair market value of
such property is less than 10 percent of
the aggregate gross fair market value of
all the property securing the financing.
(ii) Look-through rule for partnerships.
For purposes of paragraph (b)(2)(i) of this
section, a borrower shall be treated as
owning directly its proportional share of
the assets in a partnership in which the
borrower owns (directly or indirectly
through a chain of partnerships) an equity
interest.
(3) Personal liability; partial liability.
If one or more persons are personally li-
able for repayment of a portion of a fi-
nancing, the portion of the financing for
which no person is personally liable may
qualify as qualified nonrecourse financ-
ing.
(4) Partnership liability. For purposes
of section 465(b)(6) and this paragraph
(b), the personal liability of any partner-
ship for repayment of a financing is disre-
garded and, provided the requirements
contained in paragraphs (b)(1)(i), (ii), and
(iv) of this section are satisfied, the fi-
nancing will be treated as qualified nonre-
course financing secured by real property
if—
(i) The only persons personally liable
to repay the financing are partnerships;
(ii) Each partnership with personal lia-
bility holds only property described in
paragraph (b)(2)(i) of this section (apply-
ing the principles of paragraph (b)(2)(ii)
of this section in determining the property
held by each partnership); and
(iii) In exercising its remedies to collect
on the financing in a default or default-
like situation, the lender may proceed
only against property that is described in
paragraph (b)(2)(i) of this section and that
is held by the partnership or partnerships
(applying the principles of paragraph
(b)(2)(ii) of this section in determining
the property held by the partnership or
partnerships).
(5) Disregarded entities. Principles
similar to those described in paragraph
(b)(4) of this section shall apply in deter-
mining whether a financing of an entity
that is disregarded for federal tax pur-
poses under §301.7701–3 of this chapter
is treated as qualified nonrecourse financ-
ing secured by real property.
(6) Examples. The following examples
illustrate the rules of this section:
Example 1. Personal liability of a partnership;
incidental property. (i) X is a limited liability com-
pany that is classified as a partnership for federal tax
purposes. X engages only in the activity of holding
real property. In addition to real property used in the
activity of holding real property, X owns office
equipment, a truck, and maintenance equipment that
it uses to support the activity of holding real prop-
erty. X borrows $500 to use in the activity. X is per-
sonally liable on the financing, but no member of X
and no other person is liable for repayment of the fi-
nancing under local law. The lender may proceed
against all of X’s assets if X defaults on the financ-
ing.
(ii) Under paragraph (b)(2)(i) of this section, the
personal property is disregarded as incidental prop-
erty used in the activity of holding real property.
Under paragraph (b)(4) of this section, the personal
liability of X for repayment of the financing is disre-
garded and, provided the requirements contained in
paragraphs (b)(1)(i), (ii), and (iv) of this section are
satisfied, the financing will be treated as qualified
nonrecourse financing secured by real property.
Example 2. Bifurcation of a financing. The facts
are the same as in Example 1, except that A, a mem-
ber of X, is personally liable for repayment of $100
of the financing. If the requirements contained in
paragraphs (b)(1)(i), (ii), and (iv) of this section are
satisfied, then under paragraph (b)(3) of this section,
the portion of the financing for which A is not per-
sonally liable for repayment ($400) will be treated
as qualified nonrecourse financing secured by real
property.
Example 3. Personal liability; tiered partner-
ships. (i) UTP1 and UTP2, both limited liability
companies classified as partnerships, are the only
general partners in Y, a limited partnership. Y bor-
rows $500 with respect to the activity of holding real
property. The financing is a general obligation of Y.
UTP1 and UTP2, therefore, are personally liable to
repay the financing. Under section 752, UTP1’s
share of the financing is $300, and UTP2’s share is
$200. No person other than Y, UTP1, and UTP2 is
personally liable to repay the financing. Y, UTP1,
and UTP2 each hold only real property.
(ii) Under paragraph (b)(4) of this section, the
personal liability of Y, UTP1, and UTP2 to repay the
financing is disregarded and, provided the require-
ments of paragraphs (b)(1)(i), (ii), and (iv) of this
section are satisfied, UTP1’s $300 share of the fi-
nancing and UTP2’s $200 share of the financing will
be treated as qualified nonrecourse financing se-
cured by real property.
Example 4. Personal liability; tiered partner-
ships. The facts are the same as in Example 3,except
that Y’s general partners are UTP1 and B, an indi-
vidual. Because B, an individual, is also personally
liable to repay the $500 financing, the entire financ-
ing fails to satisfy the requirement in paragraph
(b)(1)(iii) of this section. Accordingly, UTP1’s $300
share of the financing will not be treated as qualified
nonrecourse financing secured by real property.
Example 5. Personal liability; tiered partner-
ships. The facts are the same as in Example 3,except
that Y is a limited liability company and UTP1 and
UTP2 are not personally liable for the debt. How-
ever, UTP1 and UTP2 each pledge property as secu-
rity for the loan that is other than real property used
in the activity of holding real property and other
than property that is incidental to the activity of
holding real property. The fair market value of the
property pledged by UTP1 and UTP2 is greater than
10 percent of the sum of the aggregate gross fair
market value of the property held by Y and the ag-
gregate gross fair market value of the property
pledged by UTP1 and UTP2. Accordingly, the fi-
nancing fails to satisfy the requirement in paragraph
(b)(1)(iii) of this section by virtue of its failure to
satisfy paragraph (b)(4)(iii) of this section. There-
fore, the financing is not qualified nonrecourse fi-
nancing secured by real property.
Example 6. Personal liability; Disregarded en-
tity. (i) X is a single member limited liability com-
pany that is disregarded as an entity separate from
its owner for federal tax purposes under
§301.7701–3 of this chapter. X owns certain real
property and property that is incidental to the activ-
ity of holding the real property. X does not own any
other property. For federal tax purposes, A, the sole
member of X, is considered to own all of the prop-
erty held by X and is engaged in the activity of hold-
ing real property through X. X borrows $500 and
uses the proceeds to purchase additional real prop-
erty that is used in the activity of holding real prop-
erty. X is personally liable to repay the financing,
but A is not personally liable for repayment of the fi-
nancing under local law. The lender may proceed
against all of X’s assets if X defaults on the financ-
ing.
(ii) X is disregarded so that the assets and liabili-
ties of X are treated as the assets and liabilities of A.
However, A is not personally liable for the $500 lia-
bility. Provided that the requirements contained in
paragraphs (b)(1)(i), (ii), and (iv) of this section are
satisfied, the financing will be treated as qualified
nonrecourse financing secured by real property with
respect to A.
(c) Effective date. This section is effec-
tive for any financing incurred on or after
August 4, 1998. Taxpayers, however,
may apply this section retroactively for fi-
nancing incurred before August 4, 1998.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved July 16, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on
August 3, 1998, 8:45 a.m., and published in the issue
of the Federal Register for August 4, 1998, 63 F.R.
41420)
August 24, 199861998–34 I.R.B.
IRB 1998-34 8/19/98 1:34 PM Page 6

SRLY Notice
Notice 98–38
In 1991, the Treasury Department and
the Internal Revenue Service issued pro-
posed regulations concerning the applica-
tion of the separate return limitation year
(SRLY) rules to net operating loss and
capital loss carryovers and carrybacks,
and built-in deductions. On June 27,
1996, these regulations, substantially un-
changed, were re-proposed and issued as
temporary regulations in T.D. 8677,
1996–2 C.B. 119. On January 12, 1998 in
T.D. 8751, 1998–10 I.R.B. 23, (modified
only as to effective date on March 16,
1998 in T.D. 8766, 1998–16 I.R.B. 17)
the Treasury Department and the Service
published regulations extending the prin-
ciples of the new temporary regulations to
certain tax credits and related attributes.
In addition, T.D. 8751 eliminated the ap-
plication of the SRLY rules to foreign tax
credits and overall foreign losses.
Comments have been received in re-
sponse to each set of proposed regula-
tions. The preamble to the temporary reg-
ulations stated that all of the comments
would be considered in finalizing the tem-
porary SRLY regulations. Many of the
comments asserted that the amendment to
§382 of the Internal Revenue Code in
1986 adequately addressed Congressional
concerns regarding loss trafficking.
Therefore, some commentators argued,
the SRLY rules should be eliminated in
whole or in part because the SRLY rules
have become superfluous, add unwar-
ranted complexity to the consolidated re-
turn system, and are easily avoided.
Other commentators have argued that the
SRLY rules should be retained.
Treasury and the Service have consid-
ered these arguments and believe that lim-
itations on the extent to which a consoli-
dated group can use attributes arising in a
separate return limitation year remain
necessary to protect the integrity of both
the separate return system and the consol-
idated return system. Treasury and the
Service, however, are concerned about
any complexity in applying the current
SRLY rules, particularly with respect to
situations where both the SRLY rules and
§ 382 apply.
Accordingly, Treasury and the Service
are considering, inter alia, an approach
that would replace the current SRLY limi-
tation with an approach modeled on §
382. While the temporary regulations
base the SRLY limitation on the income
actually generated by the SRLY member
(or SRLY subgroup), the approach under
consideration would base the limitation
on an expectation of the amount of in-
come to be generated. In other words, ap-
plying the methodology of § 382, the lim-
itation would be determined based on the
value of the member’s or subgroup’s
stock at the time it joins the consolidated
group, with appropriate adjustments (such
as adjustments for recognized built-in
gains) to reflect adjustments that would
be made under § 382.
Most instances in which a corporation
becomes a member of a consolidated
group involve an ownership change as de-
fined in § 382(g). In those cases, current
law requires taxpayers to calculate two
separate loss limitations — the SRLY lim-
itation and the § 382 limitation. By mak-
ing the SRLY limitation the same as the §
382 limitation, the proposed approach
would remove the need to make two sets
of calculations, thereby greatly simplify-
ing the loss limitation rules applicable to
consolidated groups.
In addition, adoption of this approach
would address concerns raised that the
SRLY rules are easily avoided through the
use of stuffing transactions (e.g., transfer-
ring income producing assets to the SRLY
member).
Treasury and the Service request com-
ments about the advisability of adopting
this approach. In particular, comments
are requested with respect to the follow-
ing:
1. Possible approaches to limit the use
of loss carrybacks;
2. The application of this approach to
credits (including foreign tax credits) and
overall foreign losses arising in separate
return limitation years;
3. The interaction of this approach
with the operation of § 382(l)(5) (relating
to corporations in a Title 11 or similar
case);
4. Determination of the effect on an
ongoing SRLY subgroup limitation when
a member of the subgroup leaves the con-
solidated group;
5. Whether special valuation rules will
be required to apply the § 382 mechanism
in situations where there is no § 382 own-
ership change; and
6. Possible transition rules for corpora-
tions that joined a consolidated group be-
fore the effective date of any new regula-
tions adopting this proposed approach.
Any regulations adopting a new
method of determining the SRLY limita-
tion would be initially issued as a notice
of proposed rulemaking. Treasury and
the Service would provide taxpayers and
their representatives another comment pe-
riod before regulations adopting such an
approach are finalized. The existing tem-
porary regulations will apply at least to
taxable years ending on or before Decem-
ber 31, 1998.
Comments should be sent to:
CC:DOM:CORP:R (Notice 98–38), room
5228, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, comments
may be hand delivered to
CC:DOM:CORP:R (Notice 98–38),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may transmit comments electronically via
the IRS Internet site at http://www/irs.us-
treas.gov/prod/tax-regs/comments.htm1.
To be considered, comments should be re-
ceived by November 15, 1998.
FOR FURTHER INFORMATION CON-
TACT: David Kessler or Roy Hirschhorn,
of the Office of the Assistant Chief Coun-
sel (Corporate), at (202) 622-7770 (not a
toll-free number).
Weighted Average Interest Rate
Update
Notice 98–44
Notice 88–73 provides guidelines for
determining the weighted average interest
rate and the resulting permissible range of
interest rates used to calculate current lia-
bility for the purpose of the full funding
limitation of § 412(c)(7) of the Internal
Revenue Code as amended by the Om-
nibus Budget Reconciliation Act of 1987
and as further amended by the Uruguay
Round Agreements Act, Pub. L. 103–465
(GATT).
1998–34 I.R.B.7August 24, 1998
Part III. Administrative, Procedural, and Miscellaneous
IRB 1998-34 8/19/98 1:34 PM Page 7

The average yield on the 30-year Trea-
sury Constant Maturities for July 1998 is
5.68 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
Drafting Information
The principal author of this notice is
Donna Prestia of the Employee Plans Di-
vision. For further information regarding
this notice, call (202) 622-6076 between
2:30 and 3:30 p.m. Eastern time (not a
toll-free number). Ms. Prestia’s number
is (202) 622-7473 (also not a toll-free
number).
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, § 42; 1.42–14.)
Rev. Proc. 98–45
SECTION 1. PURPOSE
This revenue procedure publishes the
amounts of unused housing credit carry-
overs allocated to qualified states under §
42(h)(3)(D) of the Internal Revenue Code
for calendar year 1998.
SECTION 2. BACKGROUND
Rev. Proc. 92–31, 1992–1 C.B. 775, pro-
vides guidance to state housing credit
agencies of qualified states on the proce-
dure for requesting an allocation of unused
housing credit carryovers under §
42(h)(3)(D). Section 4.06 of Rev. Proc.
92–31 provides that the Internal Revenue
Service will publish in the Internal Rev-
enue Bulletin the amount
of unused hous-
ing credit carryovers allocated to qualified
states for a calendar year from a national
pool of unused credit authority (the Na-
tional Pool). This revenue procedure pub-
lishes these amounts for calendar year
1998.
SECTION 3. PROCEDURE
The unused housing credit carryover
amount allocated from the National Pool
by the Secretary to each qualified state for
calendar year 1998 is as follows:
Qualified StateAmount Allocated
Alabama$ 22,393
Alaska3,158
Arizona23,617
California167,305
Colorado20,185
Delaware3,795
Florida75,979
Georgia38,814
Idaho6,274
Illinois61,679
Indiana30,404
Iowa14,787
Kansas13,455
Kentucky20,262
Maine6,440
Maryland26,412
Massachusetts31,721
Qualified StateAmount Allocated
Michigan50,677
Minnesota24,296
Mississippi14,160
Missouri28,009
Nebraska8,591
Nevada8,695
New Jersey41,754
New Mexico8,970
New York94,038
North Carolina38,498
North Dakota3,323
Ohio57,998
Oklahoma17,198
Oregon16,815
Pennsylvania62,322
Rhode Island5,117
South Carolina19,495
South Dakota3,826
Tennessee27,832
Texas100,789
Utah10,676
Vermont3,054
Virginia34,915
Washington29,087
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective for
allocations of housing credit dollar
amounts attributable to the National Pool
component of a qualified state’s housing
credit ceiling for calendar year 1998.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Christopher J. Wilson of the
Office of Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding this
revenue procedure, contact Mr. Wilson on
(202) 622-3040 (not a toll-free call).
August 24, 199881998–34 I.R.B.
90% to 106%90% to 110%
WeightedPermissiblePermissible
MonthYearAverageRangeRange
August19986.515.86 to 6.905.86 to 7.16
IRB 1998-34 8/19/98 1:34 PM Page 8

Notice of Proposed Rulemaking
Failure by Certain Charitable
Organizations To Meet Certain
Qualification Requirements;
Taxes on Excess Benefit
Transactions
REG–246256–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations relating to the excise
taxes on excess benefit transactions under
section 4958 of the Internal Revenue
Code (Code), as well as certain amend-
ments and additions to existing Income
Tax Regulations affected by section 4958.
Section 4958 was enacted in section 1311
of the Taxpayer Bill of Rights 2. Section
4958 generally is effective for transac-
tions occurring on or after September 14,
1995. Section 4958 imposes excise taxes
on transactions that provide excess eco-
nomic benefits to disqualified persons of
public charities and social welfare organi-
zations. The proposed regulations clarify
certain definitions and rules contained in
section 4958.
DATES: Written comments and requests
for a teleconference must be received by
November 2, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–246256–96),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM: CORP:T:R
(REG–246256–96), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.us
treas.gov/prod/tax _regs/comments.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Phyl-
lis D. Haney of the Office of Associate
Chief Counsel (Employee Benefits and
Exempt Organizations), (202) 622-4290;
concerning submissions, LaNita
VanDyke, (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed rule-
making have been submitted to the Of-
fice of Management and Budget for
review in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collections
of information should be sent to the Of-
fice of Management and Budget, Attn:
Desk Officer for the Department of Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503,
with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance
Officer, OP:FS:FP, Washington, DC
20224. Comments on the collection of
information should be received by Octo-
ber 5, 1998. Comments are specifically
requested concerning:
Whether the proposed collections of in-
formation are necessary for the proper
performance of the functions of the In-
ternal Revenue Service, including
whether the information will have practi-
cal utility;
The accuracy of the estimated burden as-
sociated with the proposed collections of
information (see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the
proposed collections of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of service to provide information.
The collections of information in this pro-
posed regulation are in 26 CFR
§§53.4958–6(a)(2), 53.4958–6(a)(3),
53.4958–6(d)(2), and 53.4958–6(d)(3).
This information is required for an applic-
able tax-exempt organization to avail it-
self of a rebuttable presumption that pay-
ments under a compensation arrangement
between the organization and a disquali-
fied person are reasonable, or a transfer of
property, right to use property, or any
other benefit or privilege between the or-
ganization and a disqualified person is at
fair market value. This information will
be used by the organization’s governing
body, or committee thereof, to document
the basis for its determination that com-
pensation was reasonable or any other
benefit was at fair market value. The col-
lections of information are required to ob-
tain the benefit of this rebuttable pre-
sumption of reasonableness. The likely
recordkeepers are nonprofit institutions.
Estimated total annual recordkeeping bur-
den: 910,083 hours.
The estimated annual burden per record-
keeper varies from 3 hours to 308 hours,
depending on individual circumstances,
with an estimated weighted average of 6
hours, 3 minutes.
Estimated number of recordkeepers:
150,427
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collection
of information must be retained as long as
their contents may become material in the
administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document provides rules regard-
ing section 4958 excise taxes on excess
benefit transactions. Section 4958 was
added to the Code by the Taxpayer Bill of
Rights 2, Public Law 104–168 (110 Stat.
1452), enacted July 30, 1996. The section
4958 excise taxes generally apply to ex-
cess 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.
An excess benefit transaction subject to
tax under section 4958 is any transaction
in which an economic benefit provided by
an applicable tax-exempt organization to,
or for the use of, any disqualified person
1998–34 I.R.B.9August 24, 1998
Part IV. Items of General Interest
IRB 1998-34 8/19/98 1:34 PM Page 9

exceeds the value of consideration re-
ceived by the organization in exchange
for the benefit. An excess benefit transac-
tion also includes certain revenue-sharing
transactions. An applicable tax-exempt
organization is any organization de-
scribed in section 501(c)(3) (except pri-
vate foundations) or section 501(c)(4) at
the time of the excess benefit transaction
or at any time during the five-year period
ending on the date of the transaction. The
excess benefit is generally the excess of
the value of the benefit provided to a dis-
qualified person over the value of the con-
sideration received by the organization.
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 exer-
cise substantial influence over the affairs
of the organization. A disqualified person
also includes any family member of a per-
son described in the preceding sentence or
any entity in which at least 35 percent of
the control or beneficial interest is held by
such a person.
There are three taxes under section
4958. Disqualified persons are liable for
the first two taxes, which are imposed as
follows: Pursuant to section 4958(a)(1), a
tax of 25 percent of the excess benefit
must be paid by any disqualified person
who benefits from an excess benefit trans-
action with an applicable tax-exempt or-
ganization. Pursuant to section 4958(b), a
tax of 200 percent of the excess benefit
must be paid by any disqualified person
who benefits from an excess benefit trans-
action if that transaction is not corrected
before the earlier of either the date a defi-
ciency notice is mailed with respect to the
25 percent tax or the date the 25 percent
tax is assessed. Certain organization
managers are liable for the third tax,
which is imposed as follows: Pursuant to
section 4958(a)(2), a tax of 10 percent of
the excess benefit must be paid by any or-
ganization manager who participates in an
excess benefit transaction knowingly,
willfully, and without reasonable cause.
An organization manager is an officer, di-
rector, or trustee of the organization, or
any individual having powers or responsi-
bilities similar to those of an officer, di-
rector, or trustee. The tax that must be
paid by participating organization man-
agers for any one excess benefit transac-
tion cannot exceed $10,000.
The IRS notified the general public of
the new section 4958 excise taxes in No-
tice 96–46 (1996–2 C.B. 112). Notice
96–46 also solicited comments to be used
in drafting these proposed regulations.
Comments Received Pursuant to
Notice 96–46
In response to its request for comments
in Notice 96–46, the IRS received 28
comment letters addressing a variety of
topics pertaining to section 4958. Some
general comments requested that in ap-
plying the section 4958 excise taxes the
IRS avoid creating administrative burdens
on the vast majority of charities and only
scrutinize a narrowly targeted group of
charities prone to abuse the inurement
prohibition. Most comments, however,
focused on specific definitions or other
statutory language in section 4958. A
brief summary of the most frequently
made suggestions follows. All of the
comments were given consideration in
preparing these proposed regulations.
Commentators made suggestions re-
garding the definition of disqualified per-
son, including applying a facts and cir-
cumstances test that annunciates only
general principles; using a test that does
not treat all of an organization’s officers
as necessarily being disqualified persons;
deferring to an organization’s own inter-
nal good-faith identification of disquali-
fied persons; treating certain donors as
disqualified persons under standards simi-
lar to those for private foundation sub-
stantial contributors; clarifying that a
donor is not in a position to exercise sub-
stantial influence over the affairs of an or-
ganization solely by reason of having
made a large donation; including as dis-
qualified persons those persons who pro-
vide advice and consultation to organiza-
tions regarding potential excess benefit
transactions; providing that a person does
not become a disqualified person with re-
spect to a transaction as a result of the
transaction (thus a person who negotiated
a compensation arrangement in good faith
before entering into an employment rela-
tionship would not become a disqualified
person by virtue of the negotiation); and
excluding certain independent contractors
from disqualified person status.
Commentators on the tax to be paid by
organization managers who participate in
an excess benefit transaction knowingly,
willfully, and without reasonable cause
suggested the following: defining organi-
zation manager narrowly; using the prin-
ciples of the regulations under sections
4946 and 4955 in defining organization
manager;excluding in-house counsel and
independent contractors (attorneys, ac-
countants, etc.) from the definition; using
an organization’s bylaws as the source of
determining whether an individual is an
officer, director, or trustee; excluding
managers who voted against an excess
benefit transaction from joint and several
liability for any 10% tax associated with
the transaction; using the definitions in
current section 4946 private foundation
regulations for knowing, willful, and rea-
sonable cause;allowing managers to rely
on advice of legal counsel to prove their
participation in a transaction was due to
reasonable cause, and expanding the cate-
gory of persons qualified to render opin-
ions with this effect. Although the pro-
posed regulations provide that only
advice of counsel in a reasoned written
legal opinion protects organization man-
agers in this regard, the IRS invites fur-
ther comments on this topic. The IRS
also requests that such comments address
whether, to be consistent on this point,
other regulations (e.g., §53.4941 and
§53.4945) should be amended as well.
Numerous comments were received on
determining reasonable compensation for
services and fair market value in sale or
exchange transactions. Commentators
asked the IRS to use existing law stan-
dards under section 162 for determining
reasonable compensation and to provide
special standards for new organizations in
the start-up phase of operations. With re-
spect to compensation, some commenta-
tors also requested objective standards or
charts of reasonable compensation
amounts; others requested that the regula-
tions not impose strict dollar limitations
on what would constitute reasonable com-
pensation.
Several commentators made sugges-
tions regarding the requirement that an or-
ganization must demonstrate its intent to
treat economic benefits as compensation
in order to treat the benefit as being pro-
vided in exchange for services. These
suggestions included using a facts and cir-
cumstances test to determine whether an
organization clearly indicated its intent to
treat a benefit as compensation; consider-
August 24, 1998101998–34 I.R.B.
IRB 1998-34 8/19/98 1:34 PM Page 10

ing certain small amounts inadvertently
not included in a disqualified person’s re-
ported compensation as de minimisand
not triggering section 4958 taxes; and al-
lowing a reasonable cause exception
under which items that were not reported
as compensation could still be treated as
provided in exchange for services.
A number of commentators requested
that the definition of an excess benefit
transaction exclude the provision of cer-
tain types of benefits to a disqualified per-
son. These benefits included economic
benefits made available to the general
public on at least as favorable a basis;
economic benefits that are de minimis
fringe benefits under section 132; reim-
bursements for expenses of administra-
tion of an organization; and incidental
benefits.
Commentators provided a wide range
of suggestions on the subject of which
revenue-sharing arrangements should
constitute excess benefit transactions.
Suggestions included incorporating exist-
ing IRS unpublished guidance in a safe
harbor rule; using the principles of Rev.
Rul. 69–383 (1969–2 C.B. 113), to deter-
mine whether a particular plan of com-
pensation results in prohibited inurement
or private benefit; limiting the category of
revenue-sharing arrangements that consti-
tute excess benefit transactions to
arrangements based on the organization’s
revenues only; and applying regulations
on revenue-sharing arrangements
prospectively, with transition rules for ex-
isting arrangements.
Many comments were received on the
rebuttable presumption of reasonableness
that is described in the legislative history
as arising when a board of directors ap-
proves certain compensation arrange-
ments or other transactions. The follow-
ing suggestions were submitted in
multiple comments: that the presumption
apply when an applicable organization’s
board approves general guidelines for en-
tering into transactions with disqualified
persons rather than voting on each indi-
vidual transaction; that the regulations re-
quire a determination of reasonableness at
the time the organization makes a pay-
ment to a disqualified person; that the pre-
sumption apply when approval is given
by a compensation committee that is not
composed exclusively of directors or
trustees; that the board or committee be
considered independent if members re-
cuse themselves when they have conflicts
of interest; that the regulations clarify
whether a joint compensation committee
composed of representatives from several
affiliated organizations would be a com-
mittee of each of the respective boards;
that the regulations allow an organiza-
tion’s board to delegate the responsibility
for setting compensation to an indepen-
dent committee; that the regulations use
examples to define what is an indepen-
dent firm that can produce salary surveys
that will serve as appropriate data on
comparability; that the regulations clarify
that the rebuttable presumption is a safe
harbor and no negative inference should
be drawn if an organization does not avail
itself of that safe harbor; and that the reg-
ulations clarify that compensation outside
the range of comparables is not per seun-
reasonable. Some church representatives
submitted comments noting that the reli-
gious beliefs of some churches and some
state laws regarding churches prevent
churches from benefitting from the rebut-
table presumption of reasonableness be-
cause of the identity of the parties re-
quired to approve compensation
arrangements or other transactions.
While these proposed regulations do not
provide a special exception for churches
from the requirements that must be met to
give rise to the rebuttable presumption,
they do provide churches with a special
rule stating that the procedures of section
7611 will be used in initiating and con-
ducting any inquiry or examination into
whether an excess benefit transaction has
occurred between a church and a disquali-
fied person. For purposes of this rule, the
reasonable belief required to initiate a
church tax inquiry is satisfied if there is a
reasonable belief that a section 4958 tax is
due from a disqualified person with re-
spect to a transaction involving a church.
Several comments were received on the
relationship between revocation of tax-
exempt status and the taxes imposed
under section 4958, recommending that
the regulations follow the legislative his-
tory on this question. The IRS intends to
exercise its administrative discretion in
enforcing the requirements of sections
4958, 501(c)(3) and 501(c)(4) in accor-
dance with the direction given in the leg-
islative history. The legislative history
specifically provides that the IRS may
still revoke the tax-exempt status of an or-
ganization for violating the inurement
proscription, with or without imposition
of section 4958 excise taxes. It further
provides that, in practice, the excise taxes
imposed by section 4958 will be the sole
sanction imposed in those cases in which
the excess benefit does not rise to a level
where it calls into question whether, on
the whole, the organization functions as a
charitable or other tax-exempt organiza-
tion. In determining whether an excess
benefit transaction rises to such a level,
factors relating to the organization’s gen-
eral pattern of compliance with the re-
quirements of section 501(c)(3) or (4) and
other applicable Federal and State laws
will be taken into account. These factors
would include whether the organization
has been involved in repeated excess ben-
efit transactions; the size and scope of the
excess benefit transaction; whether, after
concluding that it has been party to an ex-
cess benefit transaction, the organization
has implemented safeguards to prevent
future recurrences; and whether there was
compliance with other applicable laws.
The IRS intends to publish the factors that
it will consider in exercising its adminis-
trative discretion in guidance issued in
conjunction with the issuance of final reg-
ulations under section 4958.
Explanation of Provisions
Overview
This document contains proposed regu-
lations that add new regulations under
section 4958, and that amend and add to
existing Income Tax and Excise Tax Reg-
ulations under sections 4963, 6213, 6501,
7422, and 7611. The explanation of these
proposed regulations is grouped into two
parts: the substantive section 4958 regula-
tions, and regulations under the provi-
sions amended to reflect various effects of
the enactment of section 4958 on abate-
ment, Tax Court petitions, statute of limi-
tations, refund actions, and church tax in-
quiries and examinations. The proposed
§53.4958 regulations are described in
more detail in this preamble under Sec-
tion I, Taxes on excess benefit transac-
tions, immediately below. The proposed
amendments and additions to regulations
under various procedural and administra-
tive provisions affected by the enactment
of section 4958 are described in Section
1998–34 I.R.B.11August 24, 1998
IRB 1998-34 8/19/98 1:34 PM Page 11

II, Amendment of regulations under vari-
ous procedural and administrative provi-
sions, below.
I. Taxes on excess benefit transactions
The proposed regulations describe the
three taxes imposed under section 4958
on excess benefit transactions between an
applicable tax-exempt organization and a
disqualified person. Two of the taxes are
paid by certain disqualified persons who
benefit economically from a transaction,
and the other tax is paid by certain organi-
zation managers who participate in the
transaction knowingly, willfully, and
without reasonable cause.
A disqualified person who receives an
excess benefit from a transaction is liable
for a tax equal to 25 percent of the excess
benefit. If the excess benefit is not cor-
rected within the taxable period, that dis-
qualified person is then liable for a tax of
200 percent of the excess benefit. Tax-
able periodis defined as the period begin-
ning on the date the transaction occurs
and ending on the earlier of the date of
mailing a notice of deficiency for the 25
percent tax or the date on which the 25
percent tax is assessed.
Correction is defined in the proposed
regulations as undoing the excess benefit
to the extent possible, and taking any ad-
ditional measures necessary to place the
organization in a financial position not
worse than that in which it would be if the
disqualified person had been dealing
under the highest fiduciary standards.
Correction of the excess benefit occurs if
the disqualified person repays the applica-
ble tax-exempt organization an amount of
money equal to the excess benefit, plus
any additional amount needed to compen-
sate the organization for the loss of the
use of the money or other property during
the period commencing on the date the
excess benefit transaction occurs and end-
ing on the date the excess benefit is cor-
rected. Correction may also be accom-
plished, in certain circumstances, by
returning property to the organization and
taking any additional steps necessary to
make the organization whole. If the ex-
cess benefit transaction consists of the
payment of compensation for services
under a contract that has not been com-
pleted, termination of the employment or
independent contractor relationship be-
tween the organization and the disquali-
fied person is not required in order to cor-
rect. However, the terms of any ongoing
compensation arrangement may need to
be modified to avoid future excess benefit
transactions. If the excess benefit is cor-
rected within the correction period, then
under the rules of section 4961 the 200
percent tax under section 4958(b) is not
assessed. If the excess benefit is cor-
rected within the correction period and it
is established to the satisfaction of the
Secretary that the excess benefit transac-
tion was due to reasonable cause and not
to willful neglect, then under the rules of
section 4962 the 25 percent tax under sec-
tion 4958(a)(1) will be abated.
Each organization manager who partic-
ipated in the excess benefit transaction,
knowing that it was such a transaction,
unless such participation was not willful
and was due to reasonable cause, is liable
for a tax equal to 10 percent of the excess
benefit, not to exceed an aggregate
amount of $10,000 with respect to any
one excess benefit transaction. An orga-
nization manageris, with respect to any
applicable tax-exempt organization, any
officer, director, or trustee of such organi-
zation, or any individual having powers
or responsibilities similar to those of offi-
cers, directors, or trustees of the organiza-
tion. Independent contractors, acting in a
capacity as attorneys, accountants, and in-
vestment managers and advisors, are not
officers. Any person who has authority
merely to recommend particular adminis-
trative or policy decisions, but not to im-
plement them without approval of a supe-
rior, is not an officer. An individual who is
not an officer, director, or trustee, yet
serves on a committee of the governing
body of an applicable tax-exempt organi-
zation that is invoking the rebuttable pre-
sumption of reasonableness (described
later in this section) based on the commit-
tee’s action, however, is an organization
manager for purposes of the 10 percent
tax.
The definitions provided in the pro-
posed regulations for the termsparticipa-
tion, knowing, willful, anddue to reason-
able cause with respect to organization
managers for section 4958 purposes par-
allel the definitions of those terms used
with respect to foundation managers in
the section 4941 regulations. If an orga-
nization manager, after full disclosure of
the factual situation to legal counsel (in-
cluding in-house counsel) relies on the
advice of such counsel expressed in a rea-
soned written legal opinion that a transac-
tion is not an excess benefit transaction
under section 4958, that manager’s partic-
ipation in such transaction will ordinarily
not be considered knowing or willful, and
will ordinarily be considered due to rea-
sonable cause,even if the transaction is
subsequently held to be an excess benefit
transaction.
With respect to any specific excess
benefit transaction, if more than one per-
son is liable for any of the taxes imposed
by section 4958, all persons with respect
to whom a particular tax is imposed are
jointly and severally liable for that tax.
For instance, if more than one disquali-
fied person benefits from the same trans-
action, all the benefitting disqualified per-
sons are jointly and severally liable for
the respective section 4958(a)(1) or (b)
taxes on that transaction. Where an orga-
nization manager also receives an excess
benefit from an excess benefit transac-
tion, the manager may be liable for both
taxes imposed by section 4958(a).
Except as otherwise provided in the
proposed regulations, a transaction occurs
on the date on which a disqualified person
receives an economic benefit from the ap-
plicable tax-exempt organization for fed-
eral income tax purposes. In the case of
payment of deferred compensation, the
transaction occurs on the date the deferred
compensation is earned and vested.
The proposed regulations cross-refer-
ence sections 6501(e)(3) and 6501(l) and
the regulations thereunder, as amended,
for statute of limitations rules for section
4958 excise taxes. Thus, the statute of
limitations for imposition of tax under
section 4958 generally begins to run as of
the date the applicable tax-exempt organi-
zation files its return (Form 990) for the
year in which the excess benefit transac-
tion occurred.
The proposed regulations provide that
the taxes imposed on excess benefit trans-
actions apply to transactions occurring on
or after September 14, 1995. However,
these taxes do not apply to a transaction
pursuant to a written contract that was
binding on September 13, 1995, and at all
times thereafter before the transaction oc-
curred. A written binding contract that is
terminable or subject to cancellation by
the applicable tax-exempt organization
August 24, 1998121998–34 I.R.B.
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without the disqualified person’s consent
is treated as a new contract as of the date
that any such termination or cancellation,
if made, would be effective. If a binding
written contract is materially modified
(including situations in which the contract
is amended to extend its term or to in-
crease the amount of compensation
payable to the disqualified person), it is
treated as a new contract entered into as
of the date of the material modification.
Definition of applicable tax-exempt
organization
The proposed regulations generally de-
fine an applicable tax-exempt organiza-
tion as any organization that, without re-
gard to any excess benefit, is or would
have been described in sections 501(c)(3)
or (4) and exempt from tax under section
501(a) at any time during a five-year pe-
riod ending on the date of an excess bene-
fit transaction (the lookback period). In
the specific case of any transaction occur-
ring before September 14, 2000, the look-
back period begins on September 14,
1995, and ends on the date of the transac-
tion.
To be described in section 501(c)(3) for
purposes of section 4958, an organization
must meet the requirements of section
508 (subject to any applicable exceptions
provided by that section). A private
foundation as defined in section 509(a) is
not an applicable tax-exempt organization
for section 4958 purposes. An organiza-
tion that has applied for and received
recognition of exemption as an organiza-
tion described in section 501(c)(4) is an
applicable tax-exempt organization for
section 4958 purposes. In addition, an or-
ganization that has sought to take advan-
tage of section 501(c)(4) status by filing
an application for recognition of exemp-
tion under section 501(c)(4) with the IRS,
filing an information return as a section
501(c)(4) organization under the Code or
regulations promulgated thereunder, or
otherwise holding itself out as being de-
scribed in section 501(c)(4), is an applica-
ble tax-exempt organization for section
4958 purposes.
A foreign organization that receives
substantially all of its support from
sources outside of the United States is not
an applicable tax-exempt organization for
section 4958 purposes. Section 4948(b)
generally states that chapter 42 taxes, in-
cluding section 4958 taxes on excess ben-
efit transactions, do not apply to any for-
eign organization that has received sub-
stantially all of its support from sources
outside the United States.
Definition of disqualified person
The proposed regulations define a dis-
qualified person as a person who, with re-
spect to any transaction with an applica-
ble tax-exempt organization, at any time
during a five-year period beginning after
September 13, 1995, and ending on the
date of such transaction, was in a position
to exercise substantial influence over the
affairs of the organization. Certain per-
sons are statutorily defined to be disquali-
fied persons under section 4958(f), in-
cluding certain family members of
disqualified persons (spouse, brothers or
sisters (by whole or half blood), spouses
of brothers or sisters (by whole or half
blood), ancestors, children, grandchil-
dren, great grandchildren, and spouses of
children, grandchildren, and great grand-
children), and 35 percent controlled enti-
ties (a corporation in which a disqualified
person owns more than 35 percent of the
combined voting power; a partnership in
which a disqualified person owns more
than 35 percent of the profits interest; or a
trust or estate in which a disqualified per-
son owns more than 35 percent of the
beneficial interest).
The proposed regulations specifically
identify certain persons as having sub-
stantial influence over the affairs of an ap-
plicable tax-exempt organization. These
specified persons include any individual
who serves as a voting member on the
governing body of the organization; any
individual or individuals who have the
power or responsibilities of the president,
chief executive officer or chief operating
officer of an organization; any individual
or individuals who have the power or re-
sponsibilities of treasurer or chief finan-
cial officer of an organization; and any
person who has a material financial inter-
est in certain provider-sponsored organi-
zations in which a hospital that is an ap-
plicable tax-exempt organization
participates.
The proposed regulations deem two
categories of persons not to have substan-
tial influence over the affairs of an applic-
able tax-exempt organization. The first
category comprises other applicable tax-
exempt organizations described in section
501(c)(3). The second category com-
prises any employee who, for the taxable
year in which the benefits are provided,
receives economic benefits, directly or in-
directly from the organization, of less
than the amount of compensation refer-
enced for a highly compensated employee
in section 414(q)(1)(B)(i), who is not a
statutorily-defined disqualified person
and not specifically identified by the reg-
ulations as having substantial influence,
and is not a substantial contributor to the
organization within the meaning of sec-
tion 507(d)(2).
The proposed regulations provide that
except as specified in the categories set
forth in the statute or the preceding parts
of the regulation, the determination of
whether a person has substantial influence
over the affairs of an organization is
based on all relevant facts and circum-
stances. A person who has managerial
control over a discrete segment of an or-
ganization may nonetheless be in a posi-
tion to exercise substantial influence over
the affairs of the entire organization.
Facts and circumstances tending to show
that a person has substantial influence
over the affairs of an organization in-
clude, but are not limited to, the follow-
ing: that the person founded the organiza-
tion; that the person is a substantial
contributor (within the meaning of section
507(d)(2)) to the organization; that the
person’s compensation is based on rev-
enues derived from activities of the orga-
nization that the person controls; that the
person has authority to control or deter-
mine a significant portion of the organiza-
tion’s capital expenditures, operating bud-
get, or compensation for employees; that
the person has managerial authority or
serves as a key advisor to a person with
managerial authority; or that the person
owns a controlling interest in a corpora-
tion, partnership, or trust that is a disqual-
ified person.
Facts and circumstances tending to
show that a person does not have substan-
tial influence over the affairs of an organi-
zation include but are not limited to, the
following: that the person has taken a
bona fidevow of poverty as an employee,
agent, or on behalf of a religious organi-
zation; that the person is an independent
contractor, such as an attorney, accoun-
tant, or investment manager or advisor,
1998–34 I.R.B.13August 24, 1998
IRB 1998-34 8/19/98 1:34 PM Page 13

acting in that capacity, unless the person
is acting in that capacity with respect to a
transaction from which the person might
economically benefit either directly or in-
directly (aside from fees received for the
professional services rendered); and that
any preferential treatment a person re-
ceives based on the size of that person’s
donation is also offered to any other
donor making a comparable contribution
as part of a solicitation intended to attract
a substantial number of contributions.
In the case of multiple organizations af-
filiated by common control or governing
documents, the determination of whether
a person does or does not have substantial
influence will be made separately for each
applicable tax-exempt organization.
Excess benefit transaction
The proposed regulations state that an
excess benefit transaction is any transac-
tion in which an economic benefit is pro-
vided by an applicable tax-exempt organi-
zation 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 (in-
cluding the performance of services) re-
ceived for providing such benefit. An ex-
cess benefit transaction also includes
certain revenue-sharing transactions (de-
scribed later in this section). A benefit
can be provided indirectly if it is provided
through one or more entities controlled by
or affiliated with the applicable tax-ex-
empt organization.
Certain economic benefits provided by
an applicable tax-exempt organization to
a disqualified person are disregarded for
purposes of section 4958. These include
paying reasonable expenses for members
of the governing body of an applicable
tax-exempt organization to attend meet-
ings of the governing body of the organi-
zation, not including expenses for luxury
travel or spousal travel; an economic ben-
efit provided to a disqualified person that
the disqualified person receives solely as
a member of, or volunteer for, the organi-
zation, if the benefit is provided to mem-
bers of the public in exchange for a mem-
bership fee of $75 or less per year; and an
economic benefit provided to a disquali-
fied person that the disqualified person re-
ceives solely as a member of a charitable
class the applicable tax-exempt organiza-
tion intends to benefit.
The proposed regulations provide that
the payment of a premium for an insur-
ance policy providing liability insurance
to a disqualified person to cover any taxes
imposed under this section or indemnifi-
cation of a disqualified person for such
taxes by an applicable tax-exempt organi-
zation is not an excess benefit transaction
if the premium or the indemnification is
treated as compensation to the disquali-
fied person when paid, and the total com-
pensation paid to the disqualified person
is reasonable.
The proposed regulations provide that
if the amount of the economic benefit pro-
vided by the applicable tax-exempt orga-
nization exceeds the fair market value of
the consideration, the excess is the excess
benefit on which tax is imposed by sec-
tion 4958. Rules concerning the excess
benefit in certain revenue-sharing transac-
tions are described later in this section.
The fair market value of property is the
price at which property or the right to use
property would change hands between a
willing buyer and a willing seller, neither
being under any compulsion to buy, sell,
or transfer property or the right to use
property, and both having reasonable
knowledge of relevant facts.
Compensation
Compensation for the performance of
services is reasonable only if it is an
amount that would ordinarily be paid for
like services by like enterprises under like
circumstances. Generally, the circum-
stances to be taken into consideration are
those existing at the date when the con-
tract for services was made. However,
where reasonableness of compensation
cannot be determined based on circum-
stances existing at the date when the con-
tract for services was made, then that de-
termination is made based on all facts and
circumstances, up to and including cir-
cumstances as of the date of payment. In
no event shall circumstances existing at
the date when the contract is questioned
be considered in making a determination
of the reasonableness of compensation. A
written binding contract that is terminable
or subject to cancellation by the applica-
ble tax-exempt organization without the
disqualified person’s consent is treated as
a new contract as of the date that any such
termination or cancellation, if made,
would be effective. If a binding written
contract is materially modified (which in-
cludes amending the contract to extend its
term or increase the amount of compensa-
tion payable to the disqualified person), it
is treated as a new contract entered into as
of the date of the material modification.
Examples illustrate whether the reason-
ableness of compensation can be deter-
mined based on circumstances existing at
the time a contract for the performance of
services was made. In accordance with
the legislative history, the fact that a State
or local legislative or agency body has au-
thorized or approved a particular compen-
sation package paid to a disqualified per-
son is not determinative of the
reasonableness of compensation paid for
purposes of section 4958 excise taxes.
Under the proposed regulations, the fact
that a particular compensation package is
authorized or approved by a court also is
not determinative of the reasonableness of
compensation paid to a disqualified per-
son.
Compensation for purposes of section
4958 includes all items of compensation
provided by an applicable tax-exempt or-
ganization in exchange for the perfor-
mance of services by a disqualified per-
son. These items of compensation
include, but are not limited to, all forms of
cash and noncash compensation, includ-
ing salary, fees, bonuses, and severance
payments paid, and all forms of deferred
compensation that is earned and vested,
whether or not funded, and whether or not
paid under a deferred compensation plan
that is a qualified plan under section
401(a). If deferred compensation for ser-
vices performed in multiple prior years
vests in a later year, then that compensa-
tion is attributed to the years in which the
services were performed. Compensation
also includes the amount of premiums
paid for liability or any other insurance
coverage, as well as any payment or reim-
bursement by the organization of charges,
expenses, fees, or taxes not covered ulti-
mately by the insurance coverage; all
other benefits, whether or not included in
income for tax purposes, including pay-
ments to welfare benefit plans on behalf
of the disqualified persons, such as plans
providing medical, dental, life insurance,
severance pay, and disability benefits, and
both taxable and nontaxable fringe bene-
fits (other than working condition fringe
benefits described in section 132(d) and
de minimisfringe benefits described in
August 24, 1998141998–34 I.R.B.
IRB 1998-34 8/19/98 1:34 PM Page 14

section 132(e)), including expense al-
lowances or reimbursements or foregone
interest on loans that the recipient must
report as income on his separate income
tax return; and any economic benefit pro-
vided by the applicable tax-exempt orga-
nization directly or indirectly through an-
other entity, owned, controlled by or
affiliated with the applicable tax-exempt
organization, whether such other entity is
taxable or tax-exempt.
An economic benefit that an applicable
tax-exempt organization provides to, or
for the use, of a disqualified person is not
treated as consideration for the perfor-
mance of services unless the organization
clearly indicates its intent to treat the ben-
efit as compensation when the benefit is
paid. An applicable tax-exempt organiza-
tion will be treated as having intended to
provide an economic benefit as compen-
sation for services only if it provides clear
and convincing evidence of having that
intent when the benefit was paid. An ap-
plicable tax-exempt organization can pro-
vide clear and convincing evidence of
such intent by reporting the economic
benefit as compensation on original or
amended federal tax information returns
with respect to the payment (e.g., Form
W–2 or 1099) or with respect to the orga-
nization (e.g., Form 990), filed before the
commencement of an IRS examination in
which the reporting of the benefit is ques-
tioned. For purposes of section 4958 and
these proposed regulations, an IRS exam-
ination of an applicable tax-exempt orga-
nization has commenced if the organiza-
tion has received written notification from
the Exempt Organizations Division of an
impending Exempt Organizations exami-
nation, or written notification of an im-
pending referral for an Exempt Organiza-
tions examination, and also includes
having been under an Exempt Organiza-
tions examination that is now in Appeals
or in litigation for issues raised in an Ex-
empt Organizations examination of the
period in which the excess benefit trans-
action occurred. Reporting of an eco-
nomic benefit to provide clear and con-
vincing evidence of intent is also
accomplished if the recipient disqualified
person reports the benefit as income on
the person’s Form 1040 for the year in
which the benefit is received. If the
amount of an economic benefit paid to a
disqualified person is not reported and
should have been reported on any infor-
mation return issued by the applicable
tax-exempt organization, and the failure
to report was due to reasonable cause as
defined under section 6724 regulations,
then the organization is deemed to satisfy
the clear and convincing evidence re-
quirement. To show that its failure to re-
port an economic benefit that should have
been reported on an information return
was due to reasonable cause, the applica-
ble tax-exempt organization must estab-
lish that there are significant mitigating
factors with respect to its failure to report,
or the failure arose from events beyond
the organization’s control, and the organi-
zation acted in a responsible manner both
before and after the failure occurred. If
an organization fails to provide clear and
convincing evidence that it intended to
provide an economic benefit as compen-
sation for services when paid, any ser-
vices provided by the disqualified person
will not be treated as provided in consid-
eration for the economic benefit.
Transaction in which amount of
economic benefit determined in whole or
in part by the revenues of one or more
activities of the organization
The proposed regulations apply a facts
and circumstances test to assess whether a
transaction in which the amount of an
economic benefit provided by an applica-
ble tax-exempt organization to or for the
use of a disqualified person is determined
in whole or in part by the revenues of one
or more activities of the applicable tax-
exempt organization (revenue-sharing
transaction) results in inurement, and
therefore constitutes an excess benefit
transaction. A revenue-sharing transac-
tion may constitute an excess benefit
transaction regardless of whether the eco-
nomic benefit provided to the disqualified
person exceeds the fair market value of
the consideration provided in return if, at
any point, it permits a disqualified person
to receive additional compensation with-
out providing proportional benefits that
contribute to the organization’s accom-
plishment of its exempt purpose. If the
economic benefit is provided as compen-
sation for services, relevant facts and cir-
cumstances include, but are not limited to,
the relationship between the size of the
benefit provided and the quality and
quantity of the services provided, as well
as the ability of the party receiving the
compensation to control the activities
generating the revenues on which the
compensation is based.
The type of revenue-sharing transac-
tion described in the proposed regulations
constitutes an excess benefit transaction if
it occurs on or after the date of publica-
tion of final regulations. The excess ben-
efit in such a transaction consists of the
entire economic benefit provided. Any
revenue-sharing transaction occurring
after September 13, 1995, may still con-
stitute an excess benefit transaction if the
economic benefit provided to the disqual-
ified person exceeds the fair market value
of the consideration provided in return.
Before the date of publication of final reg-
ulations, however, the excess benefit shall
consist only of that portion of the eco-
nomic benefit that exceeds the fair market
value of the consideration provided in re-
turn. Examples are provided of revenue-
sharing transactions that do and do not
constitute excess benefit transactions.
Rebuttable presumption that transaction
is not an excess benefit transaction
The proposed regulations provide that a
compensation arrangement between an
applicable tax-exempt organization and a
disqualified person is presumed to be rea-
sonable, and a transfer of property, a right
to use property, or any other benefit or
privilege between an applicable tax-ex-
empt organization and a disqualified per-
son is presumed to be at fair market value,
if three conditions are satisfied. The three
conditions are as follows: (1) the compen-
sation arrangement or terms of transfer
are approved by the organization’s gov-
erning body or a committee of the govern-
ing body composed entirely of individuals
who do not have a conflict of interest with
respect to the arrangement or transaction;
(2) the governing body, or committee
thereof, obtained and relied upon appro-
priate data as to comparability prior to
making its determination; and (3) the gov-
erning body or committee adequately
documented the basis for its determina-
tion concurrently with making that deter-
mination. The presumption established
by satisfying these three requirements
may be rebutted by additional information
showing that the compensation was not
reasonable or that the transfer was not at
fair market value.
1998–34 I.R.B.15August 24, 1998
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To the extent permitted under local law,
the governing body of an applicable tax-
exempt organization may authorize other
parties to act on its behalf by following
specified procedures that satisfy the three
requirements for invoking the rebuttable
presumption of reasonableness. An
arrangement or transaction that is subse-
quently approved by the board’s designee
or designees in accordance with those
procedures shall be subject to the rebut-
table presumption even though the gov-
erning body does not vote separately on
the specific arrangement or transaction.
With respect to the first requirement,
the proposed regulations provide that the
governing body is the board of directors,
board of trustees, or equivalent control-
ling body of the applicable tax-exempt or-
ganization. A committee of the governing
body may be composed of any individuals
permitted under state law to serve on such
a committee, and may act on behalf of the
governing body to the extent permitted by
state law. However, any members of such
a committee who are not members of the
governing body are deemed to be organi-
zation managers for purposes of the tax
imposed by section 4958(a)(2) if the orga-
nization is invoking the rebuttable pre-
sumption based on the actions of the com-
mittee. A person is not included on an
organization’s governing body or com-
mittee thereof when the governing body
or committee is reviewing a transaction if
that person meets with the other members
only to answer questions, and otherwise
recuses himself from the meeting and is
not present during debate and voting on
the transaction or compensation arrange-
ment.
The proposed regulations provide that a
member of the governing body, or com-
mittee thereof, does not have a conflict of
interest with respect to a compensation
arrangement or transaction if the member
is not the disqualified person and is not
related to any disqualified person partici-
pating in or economically benefitting
from the compensation arrangement or
transaction; is not in an employment rela-
tionship subject to the direction or control
of any disqualified person participating in
or economically benefitting from the
compensation arrangement or transaction;
is not receiving compensation or other
payments subject to approval by any dis-
qualified person participating in or eco-
nomically benefitting from the compensa-
tion arrangement or transaction; has no
material financial interest affected by the
compensation arrangement or transac-
tion; and, as prescribed in the legislative
history, does not approve a transaction
providing economic benefits to any dis-
qualified person participating in the com-
pensation arrangement or transaction,
who in turn has approved or will approve
a transaction providing economic benefits
to the member. An arrangement or trans-
action has not been approved by a com-
mittee of a governing body if, under the
governing documents of the organization
or state law, the committee’s decision
must be ratified by the full governing
body in order to become effective.
With respect to the second requirement
for the rebuttable presumption of reason-
ableness, the proposed regulations pro-
vide that a governing body or committee
has appropriate data on comparability if,
given the knowledge and expertise of its
members, it has information sufficient to
determine whether a compensation
arrangement will result in the payment of
reasonable compensation or a transaction
will be for fair market value. Relevant in-
formation includes, but is not limited to,
compensation levels paid by similarly sit-
uated organizations, both taxable and tax-
exempt, for functionally comparable posi-
tions; the availability of similar services
in the geographic area of the applicable
tax-exempt organization; independent
compensation surveys compiled by inde-
pendent firms; actual written offers from
similar institutions competing for the ser-
vices of the disqualified person; and inde-
pendent appraisals of the value of prop-
erty that the applicable tax-exempt
organization intends to purchase from, or
sell or provide to the disqualified person.
A special rule is provided for organiza-
tions with annual gross receipts of less
than $1 million. Under this rule, when the
governing body reviews compensation
arrangements, it will be considered to
have appropriate data as to comparability
if it has data on compensation paid by five
comparable organizations in the same or
similar communities for similar services.
No inference is intended with respect to
whether circumstances falling outside this
safe harbor will meet the requirements
with respect to the collection of appropri-
ate data.
For purposes of the third requirement
of the rebuttable presumption of reason-
ableness under the proposed regulations,
to be documented adequately, the written
or electronic records of the governing
body or committee must note the terms of
the transaction that was approved and the
date it was approved; the members of the
governing body or committee who were
present during debate on the transaction
or arrangement that was approved and
those who voted on it; the comparability
data obtained and relied upon by the com-
mittee and how the data was obtained;
and the actions taken with respect to con-
sideration of the transaction by anyone
who is otherwise a member of the govern-
ing body or committee but who had a con-
flict of interest with respect to the transac-
tion or arrangement. If the governing
body or committee determines that rea-
sonable compensation for a specific
arrangement or fair market value in a spe-
cific transaction is higher or lower than
the range of comparable data obtained,
the governing body or committee must
record the basis for its determination. For
a decision to be documented concurrently,
records must be prepared by the next
meeting of the governing body or com-
mittee occurring after the final action or
actions of the governing body or commit-
tee are taken. Records must be reviewed
and approved by the governing body or
committee as reasonable, accurate and
complete within a reasonable time period
thereafter.
If reasonableness of the compensation
cannot be determined based on circum-
stances existing at the date when a con-
tract for services was made, then the re-
buttable presumption cannot arise until
circumstances exist so that reasonable-
ness of compensation can be determined,
and the three requirements for the pre-
sumption subsequently are satisfied .
The fact that a transaction between an
applicable tax-exempt organization and a
disqualified person is not subject to the
presumption described in this section
shall not create any inference that the
transaction is an excess benefit transac-
tion. Neither shall the fact that a transac-
tion qualifies for the presumption exempt
or relieve any person from compliance
with any federal or state law imposing
any obligation, duty, responsibility, or
other standard of conduct with respect to
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the operation or administration of any ap-
plicable tax-exempt organization. The re-
buttable presumption applies to all pay-
ments made or transactions completed in
accordance with a contract provided that
the three requirements of the rebuttable
presumption were met at the time the con-
tract was agreed upon.
Special rules
The proposed regulations provide that
the excise taxes imposed by section 4958
do not affect the substantive statutory
standards for tax exemption under sec-
tions 501(c)(3) or (4). Organizations are
described in those sections only if no part
of their net earnings inure to the benefit of
any private shareholder or individual.
The proposed regulations provide that
the procedures of section 7611 will be
used in initiating and conducting any in-
quiry or examination into whether an ex-
cess benefit transaction has occurred be-
tween a church and a disqualified person.
For purposes of this rule, the reasonable
belief required to initiate a church tax in-
quiry is satisfied if there is a reasonable
belief that a section 4958 tax is due from a
disqualified person with respect to a
transaction involving a church. Any addi-
tional procedures that apply when deter-
mining whether disqualified persons are
liable for taxes as a result of transactions
with organizations other than churches
will apply when determining whether dis-
qualified persons are liable for taxes as a
result of transactions with churches.
II. Amendment of regulations under
various procedural and administrative
provisions
The proposed regulations amend the
section 4963 regulations to include sec-
tion 4958 taxes in the list of taxes subject
to abatement under sections 4961 and
4962; amend the section 6213 regulations
to suspend the time period for filing a Tax
Court petition for the time allowed by the
Commissioner to correct a section 4958
transaction; amend the section 6501 regu-
lations to allow the filing of an informa-
tion return by an applicable tax-exempt
organization to begin the three-year limi-
tation on assessment and collection for
section 4958 taxes (or six years if an orga-
nization failed to disclose an item);
amend the section 7422 regulations to
apply existing rules for refund proceed-
ings to section 4958 taxes; and amend
section 7611 regulations to cross-refer-
ence the rules governing the interaction
between section 4958 and section 7611 in
these proposed regulations.
Except as otherwise specified in the
text of the final regulations, these regula-
tions will be effective upon publication of
the final regulations in the Federal Regis-
ter. Taxpayers may rely on these pro-
posed regulations for guidance pending
the issuance of final regulations. If, and
to the extent, future guidance is more re-
strictive than the guidance in these pro-
posed regulations, the future guidance
will be applied without retroactive effect.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required.
An initial regulatory flexibility analysis
has been prepared as required for the col-
lection of information in this notice of
proposed rulemaking under 5 U.S.C. 603.
The analysis follows:
Initial Regulatory Flexibility Analysis
These proposed regulations clarifying
section 4958 of the Code (Taxes on ex-
cess benefit transactions) may have an
impact on small organizations if those or-
ganizations avail themselves of the rebut-
table presumption of reasonableness de-
scribed in the regulations (26 C.F.R.
§§ 53.4958–6(a)(2), 53.4958–6(a)(3),
53.4958–6(d)(2), and 53.4958–6(d)(3)).
The rebuttable presumption is being con-
sidered because the legislative history of
section 4958 (H. REP. 104–506 at 56–7,
March 28, 1996) stated that parties to a
transaction should be entitled to rely on
such a rebuttable presumption that a
compensation arrangement or a property
transaction between certain organizations
and disqualified persons of the organiza-
tions is reasonable or at fair market value.
The legislative history further instructed
the Secretary of the Treasury and the IRS
to issue guidance in connection with the
standard for establishing reasonable com-
pensation or fair market value that incor-
porates this presumption.
The objective for the rebuttable pre-
sumption is to allow organizations that
satisfy the three requirements to presume
that compensation arrangements and
property transactions entered into with
disqualified persons pursuant to satisfac-
tion of those requirements are reasonable
or at fair market value. In such cases, the
section 4958 excise taxes can be imposed
only if the IRS develops sufficient con-
trary evidence to rebut the probative value
of the evidence put forth by the parties to
the transaction. The legal basis for the
proposed rule is Code sections 4958 and
7805.
The proposed rule affects organizations
described in sections 501(c)(3) and (4)
(applicable tax-exempt organizations).
Some applicable tax-exempt organiza-
tions may be small organizations, defined
in 5 U.S.C. 601(4) as any not-for-profit
enterprise which is independently owned
and operated and is not dominant in its
field.
The proposed recordkeeping burden
entails obtaining and relying on appropri-
ate comparability data and documenting
the basis of an organization’s determina-
tion that compensation is reasonable, or a
property transfer (or transfer of the right
to use property) is at fair market value.
These actions are necessary to meet two
of the requirements specified in the leg-
islative history for obtaining the rebut-
table presumption of reasonableness. The
skills necessary for these actions are of
the type required for obtaining and con-
sidering comparability data, and for docu-
menting the membership and actions of
the governing board or relevant commit-
tee of the organization. Applicable tax-
exempt organizations that are small enti-
ties of the class that files Form 990–EZ
(i.e., those with gross receipts of less than
$100,000 and assets of less than
$250,000) are unlikely to undertake ful-
filling the requirements of the rebuttable
presumption of reasonableness, and there-
fore will not be affected by the record-
keeping burden. All other classes of ap-
plicable tax-exempt organizations that file
Form 990, up to organizations with assets
of $50 million, are likely to be small orga-
nizations that avail themselves of the re-
buttable presumption of reasonableness.
These classes range from organizations
with assets of $100,000 to $50 million.
The proposed rule currently contains a
less burdensome safe harbor for one of
the requirements (obtaining comparability
data on compensation) for organizations
1998–34 I.R.B.17August 24, 1998
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with annual gross receipts of less than $1
million. The IRS is not aware of any
other relevant federal rules which may
duplicate, overlap, or conflict with the
proposed rule. A less burdensome alter-
native for small organizations would be to
exempt those entities from the require-
ments for establishing the rebuttable pre-
sumption of reasonableness. However, it
is not consistent with the statute to allow
organizations to rely on this presumption
without satisfying some conditions. Sat-
isfaction of the requirements as outlined
in the legislative history leads to a benefit,
but failure to satisfy them does not neces-
sarily lead to a penalty. A more burden-
some alternative would be to requireall
applicable tax- exempt organizations
under Code section 4958 to satisfy the
three requirements of the rebuttable pre-
sumption of reasonableness under all cir-
cumstances.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying. A telecon-
ference public hearing may be scheduled
if requested in writing by a person wish-
ing to testify outside the Washington, DC
area who timely submits written com-
ments. A request for a hearing by video
conference was made on April 7, 1998, by
the Taxation Section of the Los Angeles
County Bar Association. If a teleconfer-
ence public hearing is scheduled, notice
of the date, time, place, and remote tele-
conference sites for the hearing will be
published in the Federal Register.
In addition to several areas mentioned
earlier in this preamble, specific com-
ments are requested with respect to cer-
tain issues raised by these proposed regu-
lations. Concerning the relationship
between revocation of tax-exempt status
and the taxes imposed under section
4958, comments are invited to be consid-
ered in preparing guidance outlining the
factors the IRS will consider in exercising
its administrative discretion in accordance
with the legislative history. Comments
are also requested with regard to the rule
under which an economic benefit pro-
vided to, or for the use of, a disqualified
person will not be treated as consideration
for the performance of services absent the
clear indication of the organization’s in-
tent to treat the benefit as compensation
when the benefit is paid. Specifically,
comments are requested on appropriate
ways of applying this rule that will not
create an unnecessary burden on affected
organizations. Additionally, comments
are requested with respect to the effect of
the proposed regulations on different
compensation arrangements, including
revenue-based compensation, deferred
compensation, and the use of options as
compensation.
Drafting Information
The principal author of these regulations
is Phyllis D. Haney, Office of Associate
Chief Counsel (Employee Benefits and
Exempt Organizations). However, other
personnel from the IRS and Treasury De-
partment participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR Parts 53 and 301
are proposed to be amended as follows:
PART 53—FOUNDATION AND
SIMILAR EXCISE TAXES
Paragraph 1. The authority citation for
part 53 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 2. Sections 53.4958–0 through
53.4958–7 are added to read as follows:
§53.4958–0 Table of contents.
This section lists the captions contained in
§§53.4958–1 through 53.4958–7.
§53.4958–1 Taxes on excess benefit
transactions.
(a) In general.
(b) Excess benefit defined.
(c) Taxes paid by disqualified person.
(1) Initial tax.
(2) Additional tax on disqualified per-
son.
(i) In general.
(ii) Correction.
(iii) Taxable period.
(iv) 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) Special rule.
(5) Willful.
(6) Due to reasonable cause.
(7) Advice of counsel.
(8) Limits on liability for management.
(9) Joint and several liability.
(e) Date of occurrence.
(f) Statute of limitations.
(g) Effective date for imposition of
taxes.
(1) In general.
(2) Existing binding contracts.
§53.4958–2 Definition of applicable tax-
exempt organization.
(a) In general.
(b) Section 501(c)(3) organizations.
(c) Section 501(c)(4) organizations.
§53.4958–3 Definition of disqualified
person.
(a) In general.
(b) Statutory categories of disqualified
persons.
(1) Family members.
(2) Thirty-five percent controlled enti-
ties.
(i) In general.
(ii) Combined voting power.
(iii) Constructive ownership rules.
(A) Stockholdings.
(B) Profits or beneficial interest.
(c) Persons having substantial influ-
ence.
(1) Individuals serving on the govern-
ing body who are entitled to vote.
(2) Presidents, chief executive officers,
or chief operating officers.
(3) Treasurers and chief financial offi-
cers.
(4) Persons with a material financial in-
terest in a provider-sponsored organiza-
tion.
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(d) Persons deemed not to have sub-
stantial influence.
(1) Applicable tax-exempt organiza-
tions described in section 501(c)(3).
(2) Employees receiving economic
benefits of less than specified amount in a
taxable year.
(i) In general.
(ii) Examples.
(e) Facts and circumstances govern in
all other cases.
(1) In general.
(2) Facts and circumstances tending to
show substantial influence.
(3) Facts and circumstances tending to
show no substantial influence.
(f) Examples.
(g) Affiliated organizations.
§53.4958–4 Excess benefit transaction.
(a) Definition of excess benefit transac-
tion.
(1) In general.
(2) Economic benefit provided directly
or indirectly.
(3) Certain economic benefits disre-
garded for purposes of section 4958.
(i) Reimbursements for reasonable ex-
penses of attending meetings of govern-
ing body.
(ii) Economic benefits provided to a
disqualified person solely as a member of,
or volunteer for, the organization.
(iii) Economic benefits provided to a
disqualified person solely as a member of
a charitable class.
(4) Insurance or indemnification of ex-
cise taxes.
(b) Standards for identifying excess
benefits.
(1) In general.
(2) Fair market value for transfer of
property.
(3) Reasonable compensation.
(i) In general.
(ii) Items included in determining the
value of compensation for purposes of
section 4958.
(iii) Examples.
(c) Establishing intent to treat eco-
nomic benefit as consideration for the
performance of services.
(1) In general.
(2) Clear and convincing evidence of
intent.
(i) In general.
(ii) Reporting of benefit.
(iii) Failure to report due to reasonable
cause.
(3) Effect of failing to establish intent.
(4) Examples.
§53.4958–5 Transaction in which amount
of economic benefit determined in whole
or in part by the revenues of one or more
activities of the organization.
(a) In general.
(b) Special rule for allocation or return
of net margins or capital to members of
certain cooperatives.
(c) Rules effective prospectively.
(d) Examples.
§53.4958–6 Rebuttable presumption that
transaction is not an excess benefit
transaction.
(a) In general.
(b) Delegation pursuant to procedures.
(c) Rebutting the presumption.
(d) Requirements for invoking rebut-
table presumption.
(1) Disinterested governing body or
committee.
(i) In general.
(ii) Persons not included on governing
body or committee.
(iii) Absence of conflict of interest.
(iv) Rule where ratification of full gov-
erning body required.
(2) Appropriate data as to comparabil-
ity.
(i) In general.
(ii) Special rule for compensation paid
by small organizations.
(iii) Additional rules for special rule for
small organizations.
(iv) Examples.
(3) Documentation.
(e) No presumption until circumstances
exist to determine reasonableness of com-
pensation.
(f) No inference from absence of pre-
sumption.
(g) Period of reliance on rebuttable pre-
sumption.
§53.4958–7 Special rules.
(a) Substantive requirements for ex-
emption still apply.
(b) Interaction between section 4958
and section 7611 rules for church tax in-
quiries and examinations.
§53.4958–1 Taxes on excess benefit
transactions.
(a) In general. Section 4958 imposes
excise taxes on each excess benefit trans-
action (as defined in section 4958(c) and
§53.4958–4 and §53.4958–5) between an
applicable tax-exempt organization (as
defined 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 who
receives an excess benefit from an excess
benefit transaction is liable for payment
of a section 4958(a)(1) excise tax equal to
25 percent of the excess benefit. If an ini-
tial tax is imposed by section 4958(a)(1)
on an excess benefit transaction and the
transaction is not corrected within the tax-
able period, then any disqualified person
who received an excess benefit from the
excess benefit transaction on which the
initial tax was imposed is liable for an ad-
ditional tax of 200 percent of the excess
benefit. An organization manager (as de-
fined in section 4958(f)(2) and paragraph
(d) of this section) who participates in an
excess benefit transaction, knowing that it
was such a transaction, is liable for pay-
ment of a section 4958(a)(2) excise tax
equal to 10 percent of the excess benefit,
unless the participation was not willful
and was due to reasonable cause. If an or-
ganization manager also receives an ex-
cess benefit from an excess benefit trans-
action, the manager may be liable for both
taxes imposed by section 4958(a).
(b) Excess benefit defined. Except as
provided in §53.4958–5 with respect to
certain revenue-sharing transactions, an
excess benefit is the value of the eco-
nomic benefit provided by an applicable
tax-exempt organization directly or indi-
rectly to or for the use of any disqualified
person that exceeds the value of the con-
sideration (including the performance of
services) received by the organization for
providing such benefit.
(c) Taxes paid by disqualified person—
(1) Initial tax. Section 4958(a)(1) imposes
a tax equal to 25 percent of the excess ben-
efit on each excess benefit transaction. The
section 4958(a)(1) tax shall be paid by any
disqualified person who received an excess
benefit from that excess benefit transaction.
With respect to any excess benefit transac-
tion, if more than one disqualified person is
liable for the tax imposed by section
4958(a)(1), all such persons are jointly and
severally liable for that tax.
(2) Additional tax on disqualified per-
son—(i) In general. Section 4958(b) im-
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poses a tax equal to 200 percent of the ex-
cess benefit in any case in which a section
4958(a)(1) tax is imposed on an excess
benefit transaction and the transaction is
not corrected (as defined in section
4958(f)(6) and paragraph (c)(2)(ii) of this
section) within the taxable period (as de-
fined in section 4958(f)(5) and paragraph
(c)(2)(iii) of this section). The tax im-
posed by section 4958(b) is payable by
any disqualified person who received an
excess benefit from the excess benefit
transaction on which the initial tax was
imposed by section 4958(a)(1). With re-
spect to any excess benefit transaction, if
more than one disqualified person is li-
able for the tax imposed by section
4958(b), all such persons are jointly and
severally liable for that tax.
(ii) Correction. Correction means,
with respect to any excess benefit transac-
tion, undoing the excess benefit to the ex-
tent possible, and taking any additional
measures necessary to place the organiza-
tion in a financial position not worse than
that in which it would be if the disquali-
fied person had been dealing under the
highest fiduciary standards. Correction of
the excess benefit occurs if the disquali-
fied person repays the applicable tax-ex-
empt organization an amount of money
equal to the excess benefit, plus any addi-
tional amount needed to compensate the
organization for the loss of the use of the
money or other property during the period
commencing on the date of the excess
benefit transaction and ending on the date
the excess benefit is corrected. Correc-
tion may also be accomplished, in certain
circumstances, by returning property to
the organization and taking any additional
steps necessary to make the organization
whole. If the excess benefit transaction
consists of the payment of compensation
for services under a contract that has not
been completed, termination of the em-
ployment or independent contractor rela-
tionship between the organization and the
disqualified person is not required in
order to correct. However, the terms of
any ongoing compensation arrangement
may need to be modified to avoid future
excess benefit transactions.
(iii) Taxable period. Taxable period
means, with respect to any excess benefit
transaction, the period beginning with the
date on which the transaction occurs and
ending on the earlier of–
(A) The date of mailing a notice of de-
ficiency under section 6212 with respect
to the section 4958(a)(1) tax; or
(B) The date on which the tax imposed
by section 4958(a)(1) is assessed.
(iv) Abatement if correction during the
correction period. For rules relating to
abatement of taxes on excess benefit
transactions that are corrected within the
correction period, as defined in section
4963(e), see sections 4961(a), 4962(a),
and the regulations thereunder.
(d) Tax paid by organization
managers—(1) In general. In any case in
which section 4958(a)(1) imposes a tax,
section 4958(a)(2) imposes a tax equal to
10 percent of the excess benefit on the
participation of any organization manager
who knowingly participated in the excess
benefit transaction, unless such participa-
tion was not willful and was due to rea-
sonable cause. The tax is to be paid by
any organization manager who so partici-
pated.
(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 indi-
vidual having powers or responsibilities
similar to those of officers, directors, or
trustees of the organization, regardless of
title. A person shall be considered an offi-
cer of an organization if–
(A) That person is specifically so des-
ignated under the certificate of incorpora-
tion, by-laws, or other constitutive docu-
ments of the organization; or
(B) That person regularly exercises
general authority to make administrative
or policy decisions on behalf of the orga-
nization. Independent contractors, acting
in a capacity as attorneys, accountants,
and investment managers and advisors,
are not officers. Any person who has au-
thority merely to recommend particular
administrative or policy decisions, but not
to implement them without approval of a
superior, is not an officer.
(ii) Special rule for certain committee
members. An individual who is not an of-
ficer, director, or trustee, yet serves on a
committee of the governing body of an
applicable tax-exempt organization that is
invoking the rebuttable presumption of
reasonableness described in §53.4958–6
based on the committee’s actions, is an
organization manager for purposes of the
tax imposed by section 4958(a)(2).
(3) Participation. For purposes of sec-
tion 4958(a)(2) and this paragraph (d),
participation includes silence or inaction
on the part of an organization manager
where the manager is under a duty to
speak or act, as well as any affirmative ac-
tion by such manager. However, an orga-
nization manager will not be considered
to have participated in an excess benefit
transaction where the manager has op-
posed such transaction in a manner con-
sistent with the fulfillment of the man-
ager’s responsibilities to the applicable
tax-exempt organization.
(4)Knowing—(i) In general. For pur-
poses of section 4958(a)(2) and this para-
graph (d), a person participates in a trans-
action knowing that it is an excess benefit
transaction only if the person—
(A) Has actual knowledge of sufficient
facts so that, based solely upon such facts,
such transaction would be an excess bene-
fit transaction;
(B) Is aware that such an act under
these circumstances may violate the pro-
visions of federal tax law governing ex-
cess benefit transactions; and
(C) Negligently fails to make reason-
able attempts to ascertain whether the
transaction is an excess benefit transac-
tion, or the person is in fact aware that it
is such a transaction.
(ii) Special rule. Knowing does not
mean having reason to know. However,
evidence tending to show that a person
has reason to know of a particular fact or
particular rule is relevant in determining
whether the person had actual knowledge
of such a fact or rule. Thus, for example,
evidence tending to show that a person
has reason to know of sufficient facts so
that, based solely upon such facts, a trans-
action would be an excess benefit transac-
tion is relevant in determining whether
the person has actual knowledge of such
facts.
(5) Willful. For purposes of section
4958(a)(2) and this paragraph (d), partici-
pation by an organization manager is will-
ful if it is voluntary, conscious, and inten-
tional. No motive to avoid the restrictions
of the law or the incurrence of any tax is
necessary to make the participation will-
ful. However, participation by an organi-
zation manager is not willful if the man-
ager does not know that the transaction in
which the manager is participating is an
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excess benefit transaction.
(6) Due to reasonable cause. An orga-
nization manager’s participation is due to
reasonable cause if the manager has exer-
cised his responsibility on behalf of the
organization with ordinary business care
and prudence.
(7) Advice of counsel. If a person, after
full disclosure of the factual situation to
legal counsel (including in-house coun-
sel) relies on the advice of such counsel
expressed in a reasoned written legal
opinion that a transaction is not an excess
benefit transaction, the person’s participa-
tion in such transaction will ordinarily not
be considered knowing or willful and will
ordinarily be considered due to reason-
able cause within the meaning of section
4958(a)(2), even if such transaction is
subsequently held to be an excess benefit
transaction. For purposes of satisfying
the requirements of section 4958(a)(2), a
written legal opinion is reasoned so long
as the opinion addresses itself to the facts
and applicable law. However, a written
legal opinion is not reasoned if it does
nothing more than recite the facts and ex-
press a conclusion. The absence of advice
of counsel with respect to an act shall not,
by itself, however, give rise to any infer-
ence that a person participated in such act
knowingly, willfully, or without reason-
able cause.
(8) Limits on liability for management.
The maximum aggregate amount of tax
collectible under section 4958(a)(2) and
this paragraph (d) from organization man-
agers with respect to any one excess bene-
fit transaction is $10,000.
(9) Joint and several liability. In any
case where more than one person is liable
for a tax imposed by section 4958(a)(2),
all such persons shall be jointly and sever-
ally liable for the taxes imposed under
section 4958(a)(2) with respect to that ex-
cess benefit transaction.
(e) Date of occurrence. Except as oth-
erwise provided, an excess benefit trans-
action occurs on the date on which the
disqualified person receives the economic
benefit from the applicable tax-exempt
organization for federal income tax pur-
poses. In the case of a transaction con-
sisting of payment of deferred compensa-
tion, the transaction occurs on the date the
deferred compensation is earned and
vested.
(f) Statute of limitations. See sections
6501(e)(3) and 6501(l) and the regula-
tions thereunder, as amended, for statute
of limitations rules as they apply to sec-
tion 4958 excise taxes.
(g)Effective date for imposition of
taxes—(1) In general. The section 4958
taxes imposed on excess benefit transac-
tions or on participation in excess benefit
transactions apply to transactions occur-
ring on or after September 14, 1995.
(2) Existing binding contracts. The
section 4958 taxes do not apply to any
transaction occurring pursuant to a writ-
ten contract that was binding on Septem-
ber 13, 1995, and at all times thereafter
before the transaction occurs. A written
binding contract that is terminable or sub-
ject to cancellation by the applicable tax-
exempt organization without the disquali-
fied person’s consent is treated as a new
contract as of the date that any such termi-
nation or cancellation, if made, would be
effective. If a binding written contract is
materially modified (a material modifica-
tion includes amending the contract to ex-
tend its term or to increase the amount of
compensation payable to the disqualified
person), it is treated as a new contract en-
tered into as of the date of the material
modification.
§53.4958–2 Definition of applicable tax-
exempt organization.
(a) In general—(1) An applicable tax-
exempt organization is any organization
that, without regard to any excess benefit,
would be described in section 501(c)(3)
or (4) and exempt from tax under section
501(a). An applicable tax-exempt organi-
zation also includes any organization that
was described in section 501(c)(3) or (4)
and was exempt from tax under section
501(a) at any time during a five-year pe-
riod ending on the date of an excess bene-
fit transaction (the lookback period).
(2) In the case of any transaction occur-
ring before September 14, 2000, the look-
back period begins on September 14,
1995, and ends on the date of the transac-
tion.
(b) Section 501(c)(3) organizations.To
be described in section 501(c)(3) for pur-
poses of section 4958, an organization
must meet the requirements of section
508 (subject to any applicable exceptions
provided by that section). A foreign orga-
nization that receives substantially all of
its support from sources outside of the
United States is not subject to the require-
ments of section 508 and is not an organi-
zation described in section 501(c)(3) for
purposes of section 4958. A private foun-
dation as defined in section 509(a) is not
an applicable tax-exempt organization for
section 4958 purposes.
(c) Section 501(c)(4) organizations.
An organization that has applied for and
received recognition of exemption as an
organization described in section
501(c)(4) is an applicable tax-exempt or-
ganization for section 4958 purposes. In
addition, an organization that has sought
to take advantage of section 501(c)(4) sta-
tus by filing an application for recognition
of exemption under section 501(c)(4)
with the Internal Revenue Service, filing
an information return as a section
501(c)(4) organization under the Internal
Revenue Code or regulations promul-
gated thereunder, or otherwise holding it-
self out as being described in section
501(c)(4), is an applicable tax-exempt or-
ganization for section 4958 purposes. A
foreign organization that receives sub-
stantially all of its support from sources
outside of the United States is not an ap-
plicable tax-exempt organization for sec-
tion 4958 purposes.
§53.4958–3 Definition of disqualified
person.
(a) In general. Section 4958(f)(1) de-
fines disqualified person, with respect to
any transaction, as any person who was in
a position to exercise substantial influ-
ence over the affairs of the organization at
any time during the five-year period end-
ing on the date of the transaction. If the
five-year period ending on the date of the
transaction would have begun on or be-
fore September 13, 1995, then the preced-
ing sentence shall be applied to the period
beginning September 14, 1995, and end-
ing on the date of the transaction. Para-
graph (b) of this section further describes
other persons who are defined to be dis-
qualified persons under the statute, in-
cluding certain family members of an in-
dividual in a position to exercise
substantial influence, and certain 35 per-
cent controlled entities. Paragraph (c) of
this section describes persons in a posi-
tion to exercise substantial influence over
the affairs of an applicable tax-exempt or-
ganization by virtue of their powers and
responsibilities or certain interests they
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hold. Paragraph (d) of this section de-
scribes persons deemed not to be in a po-
sition to exercise substantial influence.
Whether any person not described in
paragraph (b), (c) or (d) of this section is a
disqualified person with respect to the
transaction for purposes of section 4958 is
based on all relevant facts and circum-
stances, as described in paragraph (e) of
this section. Examples in paragraphs
(d)(2)(ii) and (f) of this section illustrate
these categories of persons.
(b) Statutory categories of disqualified
persons—(1) Family members. A person
is a disqualified person with respect to
any transaction with an applicable tax-ex-
empt organization if the person is a mem-
ber of the family of another disqualified
person described in paragraph (a) of this
section with respect to any transaction
with the same organization. A person’s
family includes–
(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, grandchil-
dren, and great grandchildren.
(2) Thirty-five percent controlled enti-
ties—(i) In general. A person is a dis-
qualified person with respect to any trans-
action with an applicable tax-exempt
organization if the person is a 35 percent
controlled entity. A 35 percent controlled
entity is–
(A) A corporation in which persons de-
scribed in this section (except in this para-
graph (b)(2) and paragraph (d) of this sec-
tion) own more than 35 percent of the
combined voting power;
(B) A partnership in which persons de-
scribed in this section (except in this para-
graph (b)(2) and paragraph (d) of this sec-
tion) own more than 35 percent of the
profits interest; or
(C) A trust or estate in which persons
described in this section (except in this
paragraph (b)(2) and paragraph (d) of this
section) own more than 35 percent of the
beneficial interest.
(ii) Combined voting power. For pur-
poses of this paragraph (b)(2), combined
voting power includes voting power rep-
resented by holdings of voting stock, di-
rect or indirect, but does not include vot-
ing rights held only as a director or
trustee.
(iii) Constructive ownership rules—(A)
Stockholdings. For purposes of section
4958(f)(3) and this paragraph (b)(2), indi-
rect stockholdings are taken into account
as under section 267(c), except that in ap-
plying section 267(c)(4), the family of an
individual shall include the members of
the family specified in section 4958(f)(4)
and paragraph (b)(1) of this section.
(B) Profits or beneficial interest. For
purposes of section 4958(f)(3) and this
paragraph (b)(2), the ownership of profits
or beneficial interests shall be determined
in accordance with the rules for construc-
tive ownership of stock provided in sec-
tion 267(c) (other than section 267(c)(3)),
except that in applying section 267(c)(4),
the family of an individual shall include
the members of the family specified in
section 4958(f)(4) and paragraph (b)(1) of
this section.
(c) Persons having substantial influ-
ence. A person is in a position to exercise
substantial influence over the affairs of an
applicable tax-exempt organization if that
person has the powers or responsibilities,
or holds the type of interests, described in
one of the following categories:
(1) Individuals serving on the govern-
ing body who are entitled to vote.This
category includes any individual serving
on the governing body of the organization
who is entitled to vote on matters over
which the governing body has authority.
(2) Presidents, chief executive officers,
or chief operating officers. This category
includes any individual who, individually
or with others, serves as the president,
chief executive officer, or chief operating
officer of the organization. An individual
serves as a president, chief executive offi-
cer, or chief operating officer, regardless
of title, if that individual has or shares ul-
timate responsibility for implementing the
decisions of the governing body or super-
vising the management, administration, or
operation of the applicable organization.
(3) Treasurers and chief financial offi-
cers. This category includes any individ-
ual who, independently or with others,
serves as treasurer or chief financial offi-
cer of the organization. An individual
serves as a treasurer or chief financial of-
ficer, regardless of title, if that individual
has or shares ultimate responsibility for
managing the organization’s financial as-
sets and has or shares authority to sign
drafts or direct the signing of drafts, or
authorize electronic transfer of funds,
from organization bank accounts.
(4) Persons with a material financial
interest in a provider-sponsored organiza-
tion. Pursuant to section 501(o), this cate-
gory includes any person with a material
financial interest in a provider-sponsored
organization (as defined in section
1853(e) of the Social Security Act (42
U.S.C. 1395w–23)) if a hospital that par-
ticipates in the provider-sponsored orga-
nization is an applicable tax-exempt orga-
nization.
(d)Persons deemed not to have sub-
stantial influence. A person is deemed not
to be in a position to exercise substantial
influence over the affairs of an applicable
tax-exempt organization if that person is
described in one of the following cate-
gories:
(1) Applicable tax-exempt organiza-
tions described in section 501(c)(3). This
category includes any other applicable
tax-exempt organization described in sec-
tion 501(c)(3).
(2) Employees receiving economic ben-
efits of less than specified amount in a
taxable year—(i) In general. This cate-
gory includes, for the taxable year in
which benefits are provided, any em-
ployee of the applicable tax-exempt orga-
nization who–
(A) Receives economic benefits, di-
rectly or indirectly from the organization,
of less than the amount of compensation
referenced for a highly compensated em-
ployee in section 414(q)(1)(B)(i);
(B) Is not described in § 53.4958–3(b)
or (c) with respect to the organization;
and
(C) Is not a substantial contributor to
the organization within the meaning of
section 507(d)(2).
(ii) Examples. The following examples
illustrate the category of persons de-
scribed in this paragraph (d)(2):
Example 1. N, an artist by profession, works
part-time at R, a local museum. In the first taxable
year in which R employs N, R pays N a modest
salary and provides no additional benefits to N ex-
cept for free admission to the museum, a benefit R
provides to all of its employees and volunteers. The
total economic benefits N receives from R during
the taxable year are less than the amount of compen-
sation referenced for a highly compensated em-
ployee in section 414(q)(1)(B)(i). The part-time job
constitutes N’s only relationship with R. N is not re-
lated to any other disqualified person with respect to
R. N is deemed not to be in a position to exercise
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substantial influence over the affairs of R. There-
fore N is not a disqualified person with respect to
any transaction involving N and R in that year.
Example 2. The facts are the same as in Example
1,except that in addition to the modest salary that R
pays N in exchange for N’s provision of services to
R during the taxable year, R also purchases one of
N’s paintings for $90,000. The total economic bene-
fits provided by R to N in that year exceed the
amount of compensation referenced for highly com-
pensated employees in section 414(q)(1)(B)(i).
Consequently, whether N is in a position to exercise
substantial influence over the affairs of R for that
taxable year depends upon all relevant facts and cir-
cumstances.
(e) Facts and circumstances govern in
all other cases—(1) In general. Whether
a person who is not described in para-
graph (b), (c) or (d) of this section is a dis-
qualified person depends upon all rele-
vant facts and circumstances. A person
who has managerial control over a dis-
crete segment of an organization may
nonetheless be in a position to exercise
substantial influence over the affairs of
the entire organization.
(2) Facts and circumstances tending to
show substantial influence.Facts and cir-
cumstances tending to show that a person
has substantial influence over the affairs
of an organization include, but are not
limited to, the following—
(i) The person founded the organiza-
tion;
(ii) The person is a substantial contrib-
utor (within the meaning of section
507(d)(2)) to the organization;
(iii) The person’s compensation is
based on revenues derived from activities
of the organization that the person con-
trols;
(iv) The person has authority to control
or determine a significant portion of the
organization’s capital expenditures, oper-
ating budget, or compensation for em-
ployees;
(v) The person has managerial author-
ity or serves as a key advisor to a person
with managerial authority; or
(vi) The person owns a controlling in-
terest in a corporation, partnership, or
trust that is a disqualified person.
(3) Facts and circumstances tending to
show no substantial influence. Facts and
circumstances tending to show that a per-
son does not have substantial influence
over the affairs of an organization in-
clude, but are not limited to–
(i) The person has taken a bona fide
vow of poverty as an employee, agent, or
on behalf of a religious organization;
(ii) The person is an independent con-
tractor, such as an attorney, accountant, or
investment manager or advisor, acting in
that capacity, unless the person is acting
in that capacity with respect to a transac-
tion from which the person might eco-
nomically benefit either directly or indi-
rectly (aside from fees received for the
professional services rendered); and
(iii) Any preferential treatment a person
receives based on the size of that person’s
donation is also offered to any other
donor making a comparable contribution
as part of a solicitation intended to attract
a substantial number of contributions.
(f) Examples. The following examples
illustrate the principles of this section.
Finding a person to be a disqualified per-
son in the following examples does not
indicate that an excess benefit transaction
has occurred, but only that any transac-
tion with the applicable tax-exempt orga-
nization that provides benefits to the dis-
qualified person directly or indirectly may
be scrutinized to determine whether it is
an excess benefit transaction:
Example 1. E is the headmaster of Z, a school
that is an applicable tax-exempt organization for
purposes of section 4958. E reports to Z’s board of
trustees and is the principal employee responsible
for implementing the board’s decisions. E also has
ultimate responsibility for supervising Z’s day-to-
day operations. For example, E can hire faculty
members and staff, make changes to the school’s
curriculum and discipline students without specific
board approval. Because E serves as the chief exec-
utive officer of Z, E is in a position to exercise sub-
stantial influence over the affairs of Z. Therefore E
is a disqualified person with respect to any transac-
tion involving Z that provides economic benefits to
E directly or indirectly.
Example 2. G is a program officer at community
organization C, an applicable tax-exempt organiza-
tion for purposes of section 4958. G’s total compen-
sation for the taxable year, including benefits, is less
than the amount of compensation referenced for a
highly compensated employee in section
414(q)(1)(B)(i). G is not related to any other dis-
qualified person with respect to C. G does not serve
on C’s governing body and or as an officer of C. G
makes a modest annual contribution to C, but is not
a substantial contributor to C (within the meaning of
section 507(d)(2)). G is deemed not to be in a posi-
tion to exercise substantial influence over the affairs
of C for this year because G is an employee who re-
ceives economic benefits for the year of less than the
amount of compensation referenced for a highly
compensated employee in section 414(q)(1)(B)(i).
Therefore, for this year, G is not a disqualified per-
son with respect to any transaction involving C that
provides economic benefits to G directly or indi-
rectly.
Example 3. Y, an applicable tax-exempt organi-
zation for purposes of section 4958, enters into a
contract with B, a company that manages bingo
games. Under the contract, B agrees to provide all
of the staff and equipment necessary to carry out a
bingo operation one night per week, and to pay Y q
percent of the revenue from this activity. B retains
the balance of the proceeds. Y provides no goods or
services in connection with the bingo operation
other than the use of its hall for the bingo game. The
annual gross revenue earned from the bingo game
represents more than half of Y’s total annual rev-
enue. B’s status as a disqualified person is deter-
mined by all relevant facts and circumstances. B’s
compensation is based on revenues from an activity
B controls. B also has full managerial authority over
Y’s principal source of income. Under these facts
and circumstances, B is in a position to exercise sub-
stantial influence over the affairs of Y. Therefore B
is a disqualified person with respect to any transac-
tion involving Y that provides economic benefits to
B directly or indirectly.
Example 4. The facts are the same as in Example
3,with the additional fact that the stock of B is 100
percent owned by P, an individual who is actively in-
volved in managing B. Because P owns a control-
ling interest (measured by either vote or value) in
and actively manages B, the facts and circumstances
establish that P is also in a position to exercise sub-
stantial influence over the affairs of Y. Therefore P
is a disqualified person with respect to any transac-
tion involving Y that provides economic benefits to
P directly or indirectly.
Example 5. A, an applicable tax-exempt organi-
zation for purposes of section 4958, owns and oper-
ates one acute care hospital. B is a for-profit corpo-
ration that owns and operates a number of hospitals.
A and B form C, a limited liability company. In ex-
change for proportional ownership interests, A con-
tributes its hospital, and B contributes other finan-
cial assets, to C. All of A’s assets then consist of its
membership interest in C. A continues to be oper-
ated for exempt purposes based almost exclusively
on the activities it conducts through C. C enters into
a management agreement with a management com-
pany, M, to provide day-to-day management ser-
vices to C. M is generally subject to supervision by
C’s board, but M is given broad discretion to man-
age C’s day-to-day operation. Under these facts and
circumstances, M is in a position to exercise sub-
stantial influence over the affairs of A because it has
day to day control over the hospital operated by C,
A’s ownership interest in C is its primary asset, and
C’s activities form the basis for A’s continued ex-
emption as an organization described in section
501(c)(3). Therefore, M is a disqualified person
with respect to any transaction involving A, includ-
ing any transaction that A conducts through C, that
provides economic benefits to M directly or indi-
rectly.
Example 6. T is a large university and an applic-
able tax-exempt organization for purposes of section
4958. L is the dean of the College of Law of T, a
major source of revenue for T. The College of Law
is important to T’s reputation for excellent teaching
and high quality faculty scholarship. T relies on this
reputation to attract students and contributions from
alumni and foundations. L plays a key role in fac-
ulty hiring and has authority to control or determine
a significant portion of T’s capital expenditures and
operating budget because of L’s position in the Col-
lege of Law. L’s compensation is greater than the
amount of compensation referenced for a highly
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compensated employee in section 414(q)(1)(B)(i) in
the year benefits are provided. Because of the im-
portance of the College of Law to T and L’s manage-
rial control over that segment of T, L is in a position
to exercise substantial influence over the affairs of T.
Therefore L is a disqualified person with respect to
any transaction involving T that provides economic
benefits to L directly or indirectly.
Example 7. X is a radiologist employed by U, a
large acute-care hospital that is an applicable tax-ex-
empt organization for purposes of section 4958. X
has no managerial authority over any part of U or its
operations. X gives instructions to staff with respect
to the radiology work X conducts, but X does not
serve as supervisor to other U employees. X’s total
compensation package includes nontaxable retire-
ment and welfare benefits and a specified amount of
salary. X’s compensation is greater than the amount
of compensation referenced for a highly compen-
sated employee in section 414(q)(1)(B)(i) in the year
benefits are provided. X is not related to any other
disqualified person of U. X does not serve on U’s
governing body or as an officer of U. Although U
participates in a provider-sponsored organization (as
defined in section 1853(e) of the Social Security
Act), X does not have a material financial interest in
that organization. Whether X is a disqualified per-
son is determined by all relevant facts and circum-
stances. X did not found U, and although X makes a
modest annual financial contribution to U, the
amount of the contribution does not make X a sub-
stantial contributor within the meaning of section
507(d)(2). X does not receive compensation based
on revenues derived from activities of U that X con-
trols, and has no authority to control or determine a
significant portion of U’s capital expenditures, oper-
ating budget, or compensation for employees.
Under these facts and circumstances, X does not
have substantial influence over the affairs of U, and
therefore X is not a disqualified person with respect
to any transaction involving U that provides eco-
nomic benefits to X directly or indirectly.
Example 8. W is a cardiologist and head of the
cardiology department of the same hospital U de-
scribed in Example 7. W does not serve on U’s
board and does not serve as an officer of U. W does
not have a material financial interest in the provider-
sponsored organization (as defined in section
1853(e) of the Social Security Act) in which U par-
ticipates. W is compensated personally with a salary
and retirement and welfare benefits fixed by a three-
year renewable employment contract with U. W’s
annual amount of compensation exceeds the amount
referenced for a highly compensated employee in
section 414(q)(1)(B)(i). Whether W is a disqualified
person is determined by all relevant facts and cir-
cumstances. W has managerial authority for the car-
diology department. The cardiology department is a
principal source of patients admitted to U and conse-
quently a major source of revenue for U. W also has
authority to allocate the budget for that department,
which includes authority to distribute incentive
bonuses among cardiologists according to criteria
that he has authority to set. The pool for the bonuses
is funded by a portion of U’s revenues attributable to
the cardiology department. Because of the impor-
tance of the cardiology department to U and W’s
managerial control over that segment of U, W is in a
position to exercise substantial influence over the af-
fairs of U. Therefore W is a disqualified person with
respect to any transaction involving U that provides
economic benefits to W directly or indirectly.
Example 9. D is an accountant who periodically
provides accounting and tax advisory services as an
independent contractor in return for a fee to M, a
museum that is an applicable tax-exempt organiza-
tion for purposes of section 4958. For several years,
D has advised M’s officers and members of M’s
governing body with respect to accounting and tax
matters. D’s firm also prepares tax returns on behalf
of M. D has no relationship with M other than as a
professional accounting and tax advisor. D is not re-
lated to any other disqualified person of M. D’s firm
has a policy prohibiting employees from providing
professional advice with respect to a transaction
from which they might economically benefit either
directly or indirectly (aside from fees received for
the professional services rendered). D abides by the
firm’s policy in all activities, including the work for
M. Whether D is a disqualified person is determined
by all relevant facts and circumstances. Because D
acts only in D’s capacity as an independent contrac-
tor providing occasional professional services to M
and abides by the firm’s conflict of interest policy,
under these facts and circumstances, D is not a dis-
qualified person with respect to any transaction with
M.
Example 10. F, a repertory theater company that
is an applicable tax-exempt organization for pur-
poses of section 4958, holds a fund-raising cam-
paign to pay for the construction of a new theater. J
is a regular subscriber to F’s productions who has
made modest gifts to F in the past. J has no relation-
ship to F other than as a subscriber and contributor.
F solicits contributions as part of a broad public
campaign intended to attract a large number of
donors, including a substantial number of donors
making large gifts. In its solicitations for contribu-
tions, F promises to invite all contributors giving $z
or more to a special opening production and party
held at the new theater. These contributors are also
given a special number to call in F’s office to reserve
tickets for performances, make ticket exchanges,
and make other special arrangements for their con-
venience. J makes a contribution of $zto F, which
makes J a substantial contributor within the meaning
of section 507(d)(2). F provides J with the preferen-
tial treatment described in its solicitation. Whether J
is a disqualified person is determined by all relevant
facts and circumstances. Under these facts and cir-
cumstances, any influence that may arise from the
size of J’s donation is limited by F’s commitment to
provide similar treatment to any other member of
the public making a similar contribution and by the
nature of the benefits being offered. Accordingly,
the preferential treatment that J receives does not in-
dicate that J is in a position to exercise substantial
influence over the affairs of the organization. There-
fore, barring a change in J’s relationship with F, J is
not a disqualified person with respect to any transac-
tion involving F that provides economical benefits
to J directly or indirectly.
(g) Affiliated organizations. In the case
of multiple organizations affiliated by
common control or governing documents,
the determination of whether a person
does or does not have substantial influ-
ence shall be made separately for each ap-
plicable tax-exempt organization.
§53.4958–4 Excess benefit transaction.
(a) Definition of excess benefit transac-
tion—(1)In general. An excess benefit
transaction means any transaction in
which an economic benefit is provided by
an applicable tax-exempt organization di-
rectly or indirectly, to or for the use of,
any disqualified person, and the value of
the economic benefit provided exceeds
the value of the consideration (including
the performance of services) received by
the organization for providing such bene-
fit. An excess benefit transaction also in-
cludes certain revenue-sharing transac-
tions described in §53.4958–5. An
economic benefit shall not be treated as
consideration for the performance of ser-
vices unless the organization providing
the benefit clearly indicates its intent to
treat the benefit as compensation when
the benefit is paid.
(2) Economic benefit provided directly
or indirectly. An excess benefit transac-
tion occurs when an applicable tax-ex-
empt organization provides an excess
benefit directly or indirectly to a disquali-
fied person. A benefit may be provided
indirectly through the use of one or more
entities controlled by or affiliated with the
applicable tax-exempt organization. For
example, if an applicable tax-exempt or-
ganization causes its taxable subsidiary to
pay excessive compensation to, or engage
in a transaction at other than fair market
value with, a disqualified person of the
parent organization, the payment of the
compensation or the transfer of property
is an excess benefit transaction.
(3) Certain economic benefits disre-
garded for purposes of section 4958. The
following economic benefits are disre-
garded for purposes of section 4958:
(i) Reimbursements for reasonable ex-
penses of attending meetings of governing
body.Paying reasonable expenses for
members of the governing body of an ap-
plicable tax-exempt organization to attend
meetings of the governing body of the or-
ganization will be disregarded for pur-
poses of section 4958. For purposes of
the preceding sentence, reasonable ex-
penses do not include luxury travel or
spousal travel.
(ii)Economic benefits provided to a
disqualified person solely as a member of,
or volunteer for, the organization.An
economic benefit provided to a disquali-
fied person that the disqualified person re-
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ceives solely as a member of, or volunteer
for, the organization is disregarded for
purposes of section 4958 if the benefit is
provided to members of the public in ex-
change for a membership fee of $75 or
less per year. Thus, for example, if a dis-
qualified person is also a member of the
organization and receives membership
benefits such as advance ticket purchases
and a discount at the organization’s gift
shop that would normally be provided in
exchange for a membership fee of $75 or
less per year, then the membership benefit
is disregarded for purposes of section
4958.
(iii) Economic benefits provided to a
disqualified person solely as a member of
a charitable class.An economic benefit
provided to a disqualified person that the
disqualified person receives solely as a
member of a charitable class that the ap-
plicable tax-exempt organization intends
to benefit as part of the accomplishment
of the organization’s exempt purpose is
generally disregarded for purposes of sec-
tion 4958.
(4) Insurance or indemnification of ex-
cise taxes. The payment of a premium for
an insurance policy providing liability in-
surance to a disqualified person for the
taxes imposed under this section or in-
demnification of a disqualified person for
such taxes by an applicable tax-exempt
organization will not constitute an excess
benefit transaction for purposes of section
4958 if the premium or the indemnifica-
tion is treated as compensation to the dis-
qualified person when paid, and the total
compensation paid to the disqualified per-
son is reasonable.
(b) Standards for identifying excess
benefits—(1) In general.If an economic
benefit provided by the applicable tax-ex-
empt organization to or for the use of any
disqualified person exceeds the fair mar-
ket value of the consideration, the excess
is the excess benefit on which tax is im-
posed by section 4958. See
§53.4958–5(c) for rules concerning the
excess benefit in certain revenue-sharing
transactions.
(2) Fair market value for transfer of
property. The fair market value of prop-
erty, including the right to use property, is
the price at which property or the right to
use property would change hands be-
tween a willing buyer and a willing seller,
neither being under any compulsion to
buy, sell or transfer property or the right
to use property, and both having reason-
able knowledge of relevant facts.
(3) Reasonable compensation—(i) In
general. Compensation paid may not ex-
ceed what is reasonable under all the cir-
cumstances. Compensation for the per-
formance of services is reasonable if it is
only such amount as would ordinarily be
paid for like services by like enterprises
under like circumstances. Generally, the
circumstances to be taken into considera-
tion are those existing at the date when
the contract for services was made. How-
ever, where reasonableness of compensa-
tion cannot be determined based on cir-
cumstances existing at the date when the
contract for services was made, then that
determination is made based on all facts
and circumstances, up to and including
circumstances as of the date of payment.
In no event shall circumstances existing at
the date when the contract is questioned
be considered in making a determination
of the reasonableness of compensation. A
written binding contract that is terminable
or subject to cancellation by the applica-
ble tax-exempt organization without the
disqualified person’s consent is treated as
a new contract as of the date that any such
termination or cancellation, if made,
would be effective. If a binding written
contract is materially modified, it is
treated as a new contract entered into as
of the date of the material modification.
A material modification includes, but is
not limited to, amending the contract to
extend its term or to increase the amount
of compensation payable to the disquali-
fied person. The fact that a State or local
legislative or agency body or court has
authorized or approved a particular com-
pensation package paid to a disqualified
person is not determinative of the reason-
ableness of compensation paid for pur-
poses of section 4958 excise taxes.
(ii) Items included in determining the
value of compensation for purposes of
section 4958.Compensation for purposes
of section 4958 includes all items of com-
pensation provided by an applicable tax-
exempt organization in exchange for the
performance of services. These items of
compensation include, but are not limited
to–
(A) All forms of cash and noncash
compensation, including salary, fees,
bonuses, and severance payments paid;
(B) All forms of deferred compensation
that is earned and vested, whether or not
funded, and whether or not paid under a
deferred compensation plan that is a qual-
ified plan under section 401(a), but if de-
ferred compensation for services per-
formed in multiple prior years vests in a
later year, then that compensation is at-
tributed to the years in which the services
were performed;
(C) The amount of premiums paid for
liability or any other insurance coverage,
as well as any payment or reimbursement
by the organization of charges, expenses,
fees, or taxes not covered ultimately by
the insurance coverage;
(D) All other benefits, whether or not
included in income for tax purposes, in-
cluding payments to welfare benefit plans
on behalf of the persons being compen-
sated, such as plans providing medical,
dental, life insurance, severance pay, and
disability benefits, and both taxable and
nontaxable fringe benefits (other than
working condition fringe benefits de-
scribed in section 132(d) and de minimis
fringe benefits described in section
132(e)), including expense allowances or
reimbursements or foregone interest on
loans that the recipient must report as in-
come on his separate income tax return;
and
(E) Any economic benefit provided by
an applicable tax-exempt organization,
whether provided directly or through an-
other entity owned, controlled by or affili-
ated with the applicable tax-exempt orga-
nization, whether such other entity is
taxable or tax-exempt.
(iii) Examples. The following exam-
ples illustrate whether the reasonableness
of compensation can be determined based
on circumstances existing at the time a
contract for the performance of services
was made under the rules of this para-
graph (b)(3):
Example 1. G is an applicable tax-exempt orga-
nization for purposes of section 4958. H is an em-
ployee of G and a disqualified person with respect to
any transaction involving G that provides economic
benefits to H directly or indirectly. H’s multi-year
employment contract provides for payment of a
salary and provision of specific amounts of health
and retirement benefits. The contract provides for
an annual increase in H’s salary equal to the percent-
age increase, if any, over the preceding year in the
Consumer Price Index (CPI). The CPI for a year is
determined using an average of the monthly CPI as
determined for each month in that calendar year.
The health benefits consist of insurance coverage
under a plan that is available to all of G’s employees.
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The retirement benefits are equal to the maximum
amount G is permitted to contribute under the rules
applicable to qualified retirement plans. Under
these facts, the reasonableness of H’s compensation
can be determined based on the circumstances exist-
ing at the time G and H enter into the employment
contract.
Example 2. N is an applicable tax-exempt orga-
nization for purposes of section 4958. N uses the
cash method of accounting and a calendar year as its
taxable year. On January 2, N’s governing body en-
ters into a one-year employment contract for K, its
new executive director, who is a disqualified person
with respect to any transaction involving N and K.
In addition to providing that K will receive a speci-
fied amount of salary, deferred compensation, and
other health and retirement benefits from N in return
for K’s services, the terms of the contract permit N’s
governing body to declare a bonus to be paid to K at
any time during the year covered by the contract.
Declaration and payment of any bonus is within the
governing body’s discretion, with no specified limi-
tations or guidelines. The reasonableness of K’s
compensation cannot be determined based on the
circumstances existing as of the date the contract
was made because there were no guidelines in the
contract for the bonus that N may potentially pay.
Therefore, the determination of whether N’s com-
pensation is reasonable must be made based on all
circumstances, up to and including circumstances as
of the date of payment of any bonus actually paid
under the contract. If N pays K a bonus on Decem-
ber 31, the reasonableness of K’s compensation
must be based on all circumstances from January 2
through December 31.
(c) Establishing intent to treat eco-
nomic benefit as consideration for the
performance of services—(1) In general.
An applicable tax-exempt organization
will be treated as having intended to pro-
vide an economic benefit as compensa-
tion for services only if the organization
provides clear and convincing evidence
that it intended to so treat the economic
benefit when the benefit was paid.
(2) Clear and convincing evidence of
intent—(i) In general. If an applicable
tax- exempt organization or a disqualified
person reports an economic benefit as de-
scribed in paragraph (c)(2)(ii) of this sec-
tion then the organization will have pro-
vided clear and convincing evidence that
it intended to provide an economic benefit
as compensation for services when the
benefit was paid. If an applicable tax-ex-
empt organization’s failure to report an
economic benefit as required under the
Internal Revenue Code is due to reason-
able cause (within the meaning
§301.6724–1 of this chapter and para-
graph (c)(2)(iii) of this section), then the
organization will be treated as having pro-
vided clear and convincing evidence of
the requisite intent. An organization may
use methods other than those described in
paragraphs (c)(2)(ii) and (iii) of this sec-
tion to provide clear and convincing evi-
dence of its intent.
(ii) Reporting of benefit. The organiza-
tion reports the economic benefit as com-
pensation on original or amended federal
tax information returns with respect to the
payment (e.g., Form W–2 or 1099) or
with respect to the organization (e.g.,
Form 990), filed before the commence-
ment of an Internal Revenue Service ex-
amination in which the reporting of the
benefit is questioned. For purposes of
section 4958 and this section, an Internal
Revenue Service examination of an ap-
plicable tax-exempt organization has
commenced if the organization has
received written notification from the Ex-
empt Organizations Division of an im-
pending Exempt Organizations examina-
tion, or written notification of an
impending referral for an Exempt Organi-
zations examination, and also includes
having been under an Exempt Organiza-
tions examination that is now in Appeals
or in litigation for issues raised in an Ex-
empt Organizations examination of the
period in which the excess benefit trans-
action occurred. Reporting of an eco-
nomic benefit to provide clear and con-
vincing evidence of intent is also
accomplished if the recipient disqualified
person reports the benefit as income on
the person’s Form 1040 for the year in
which the benefit is received.
(iii) Failure to report due to reasonable
cause. To show that its failure to report
an economic benefit that should have
been reported on an information return
was due to reasonable cause, an applica-
ble tax-exempt organization must estab-
lish that there were significant mitigating
factors with respect to its failure to report
(as described in §301.6724–1(b) of this
chapter), or the failure arose from events
beyond the organization’s control (as de-
scribed in §301.6724–1(c) of this chap-
ter), and that the organization acted in a
responsible manner both before and after
the failure occurred (as described in
§301.6724–1(d) of this chapter).
(3)Effect of failing to establish intent.
If an organization fails to provide clear
and convincing evidence that it intended
to provide an economic benefit as com-
pensation for services when paid, any ser-
vices provided by the disqualified person
will not be treated as provided in consid-
eration for the economic benefit.
(4) Examples. The following examples
illustrate the rules for an organization to
establish its intent to treat an economic
benefit as consideration for the perfor-
mance of services as defined in this para-
graph (c):
Example 1. G is an applicable tax-exempt orga-
nization for purposes of section 4958. G hires an in-
dividual contractor, P, to design a computer program
for it, executes a contract for that purpose, and pays
P $1,000 in a timely manner pursuant to the contract.
Before January 31 of the next year, G reports the full
amount paid to P under the contract on a Form 1099
filed with the Internal Revenue Service. G has pro-
vided clear and convincing evidence of its intent to
provide the $1,000 paid to P as compensation for the
services P performed under the contract.
Example 2. The facts are the same as in Example
1, except that the services are provided by Corpora-
tion V. The contract executed by Corporation V and
G and placed in G’s files indicates that the payment
made to Corporation V is in return for computer pro-
gramming services provided by employees of Cor-
poration V. G does not issue an information return
to Corporation V because Corporation V is not an
individual taxpayer. The contract constitutes clear
and convincing evidence of G’s intent to provide the
payment as compensation for Corporation V’s ser-
vices.
Example 3. G is an applicable tax-exempt orga-
nization for purposes of section 4958. D is the chief
operating officer of G, and a disqualified person
with respect to any transaction involving G that pro-
vides economic benefits to D directly or indirectly.
D receives a bonus at the end of the year. A copy of
the letter from G to D describing the amount and the
basis for D’s bonus is placed in D’s personnel file.
Information provided to all employees in the person-
nel handbook clearly states that bonuses are treated
as taxable income, and included in the total wages
figure reported on each employee’s Form W–2. G’s
accounting department determines that the bonus is
to be reported on D’s Form W–2. Due to a computer
malfunction after data was entered incorrectly by
personnel of G’s accounting department, the bonus
is not reflected on D’s Form W–2. As a result, D
fails to report the bonus on his individual income tax
return. G acts to amend Forms W–2 affected as
soon as G becomes aware of the data entry error and
consequent computer malfunction. G’s failure to re-
port the bonus on an information return issued to D
arose from events beyond G’s control, and G acted
in a responsible manner both before and after the
failure occurred. Thus, because G had reasonable
cause for failing to report D’s bonus, G will be
treated as having clear and convincing evidence of
its intent to provide the bonus as compensation for
services when paid.
§53.4958–5 Transaction in which amount
of economic benefit determined in whole
or in part by the revenues of one or more
activities of the organization.
(a) In general. Whether a transaction
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in which the amount of an economic ben-
efit provided by an applicable tax-exempt
organization to or for the use of a disqual-
ified person is determined in whole or in
part by the revenues of one or more activ-
ities of the applicable tax-exempt organi-
zation (revenue-sharing transaction) re-
sults in inurement and therefore
constitutes an excess benefit transaction,
depends upon all relevant facts and cir-
cumstances. A revenue-sharing transac-
tion may constitute an excess benefit
transaction regardless of whether the eco-
nomic benefit provided to the disqualified
person exceeds the fair market value of
the consideration provided in return if, at
any point, it permits a disqualified person
to receive additional compensation with-
out providing proportional benefits that
contribute to the organization’s accom-
plishment of its exempt purpose. If the
economic benefit is provided as compen-
sation for services, relevant facts and cir-
cumstances include, but are not limited to,
the relationship between the size of the
benefit provided and the quality and
quantity of the services provided, as well
as the ability of the party receiving the
compensation to control the activities
generating the revenues on which the
compensation is based.
(b) Special rule for allocation or return
of net margins or capital to members of
certain cooperatives. The allocation or
return of net margins or capital to the
members of certain cooperatives in accor-
dance with their incorporating statute and
bylaws does not result in inurement of the
net earnings to the benefit of any private
shareholder or individual, and therefore
does not constitute an excess benefit
transaction for section 4958 purposes.
The preceding sentence applies to cooper-
atives that were determined by the Secre-
tary of the Treasury or his delegate to be
described in section 501(c)(4) and exempt
from tax under section 501(a) before July
30, 1996, and have substantially the same
incorporating statute and bylaws as ex-
isted on July 30, 1996.
(c) Rules effective prospectively. The
rules in this section apply to any revenue-
sharing transaction described in this sec-
tion that occurs on or after the date of
publication of final regulations. The ex-
cess benefit shall consist of the entire eco-
nomic benefit provided in any transaction
described in this section. Any revenue-
sharing transaction occurring after Sep-
tember 13, 1995, may still constitute an
excess benefit transaction if the economic
benefit provided to the disqualified per-
son exceeds the fair market value of the
consideration provided in return. Before
the date of publication of final regula-
tions, however, the excess benefit shall
consist only of that portion of the eco-
nomic benefit that exceeds the fair market
value of the consideration provided in re-
turn.
(d) Examples.The following examples
illustrate the principles used in determin-
ing whether a revenue-sharing transaction
constitutes an excess benefit transaction
under the rules of this section:
Example 1. A is the manager of the investment
portfolio of M, an applicable tax- exempt organiza-
tion for purposes of section 4958. A and several
other professional investment managers work exclu-
sively for M in an office in M’s building. A’s com-
pensation consists of a flat base annual salary, health
insurance, eligibility to participate in a retirement
plan, and a bonus that is equal to a percentage of any
increase in the value of M’s portfolio over the year
(net of expenses for investment management other
than the in-house managers’ compensation). The
revenue-based portion of A’s compensation gives A
an incentive to provide the highest quality service in
order to maximize benefits and minimize expenses
to M. A has a measure of control over the activities
generating the revenues on which his bonus is based,
but A can increase his own compensation only if M
also receives a proportional benefit. Under these
facts and circumstances, the payment to A of the
bonus described above does not constitute an excess
benefit transaction under the rules of this section.
Example 2. L, an applicable tax-exempt organi-
zation for purposes of section 4958, enters into a
contract with H, a company who manages charitable
gaming activities for public charities. As a result of
the contractual relationship, H becomes a disquali-
fied person with respect to any transaction involving
L that provides economic benefits to H directly or
indirectly. Under the contract, H agrees to provide
all of the staff and equipment necessary to carry out
charitable gaming operations on behalf of L, and to
pay L z percent of the net profits, which are calcu-
lated as the gross revenue less rental for the equip-
ment, wages for the staff, prizes for the winners, and
other specified operating expenses. H retains the
balance of the proceeds after expenses and after pay-
ing L its z percent of the net profits. As manager, H
controls the activities generating the revenue on
which its compensation is based. In addition, be-
cause H owns the equipment and employs the staff
needed to operate the charitable gaming activities, H
controls what L is charged, including the profit H
makes above the cost of these items. Therefore, H
can also control the net revenues relative to the gross
revenues from the gaming activity. The structure of
the compensation H receives for its services does
not provide H with an appropriate incentive to maxi-
mize benefits and minimize costs to L. H benefits
whether expenses are high and net revenues are low
or expenses are low and net revenues are high. By
contrast, L suffers if expenses for the charitable
gaming operation are high and net revenues are low.
All of the gross revenues generated by the charitable
gaming operation belong to L. The arrangement be-
tween H and L allows a portion of those revenues to
inure to H. Therefore, this arrangement results in
the inurement of L’s net earnings to the benefit of H,
and the entire amount paid to H under this arrange-
ment constitutes an excess benefit under the rules of
this section.
Example 3. R, a professor and faculty member at
S, a university that is an applicable tax-exempt orga-
nization for purposes of section 4958, is the princi-
pal investigator in charge of certain scientific re-
search at S. The research produces an invention. In
accordance with S’s agreement with its faculty, S
owns the invention. R assists S in preparing a patent
application. S receives a patent for R’s invention,
which S owns. Also in accordance with S’s agree-
ment with its faculty, S grants R the right to receive
v percent of S’s royalties on the patent, payable
semi-annually. R also receives an annual compensa-
tion package of salary and benefits. The availability
of revenue-based compensation under these circum-
stances does not give R any incentive or opportunity
to act contrary to S’s interests in accomplishing its
exempt purpose. R receives the revenue-based com-
pensation, i.e., the percentage of royalties, as an in-
centive and a reward for producing work of espe-
cially high quality. In addition, any time R benefits
by receiving royalties, S benefits as well and to a
proportionate degree. Finally, because the patent
belongs to S, R has no control over how the patent is
used nor the stream of revenue it generates. Under
these facts and circumstances, S’s payment of rev-
enue-based compensation to R does not constitute
an excess benefit transaction under the rules of this
section.
§53.4958–6 Rebuttable presumption that
transaction is not an excess benefit
transaction.
(a) In general. Payments under a com-
pensation arrangement between an applic-
able tax-exempt organization and a dis-
qualified person shall be presumed to be
reasonable, and a transfer of property,
right to use property, or any other benefit
or privilege between an applicable tax-ex-
empt organization and a disqualified per-
son shall be presumed to be at fair market
value, if the following conditions are sat-
isfied–
(1) The compensation arrangement or
terms of transfer are approved by the or-
ganization’s governing body or a commit-
tee of the governing body composed en-
tirely of individuals who do not have a
conflict of interest with respect to the
arrangement or transaction;
(2) The governing body, or committee
thereof, obtained and relied upon appro-
priate data as to comparability prior to
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making its determination; and
(3) The governing body or committee
adequately documented the basis for its
determination concurrently with making
that determination.
(b) Delegation pursuant to procedures.
To the extent permitted under local law,
the governing body of an applicable tax-
exempt organization may authorize other
parties to act on its behalf by following
specified procedures that satisfy the three
requirements for invoking the rebuttable
presumption of reasonableness. An
arrangement or transaction that is subse-
quently approved by the board’s designee
or designees in accordance with those
procedures shall be subject to the rebut-
table presumption even though the gov-
erning body does not vote separately on
the specific arrangement or transaction.
(c) Rebutting the presumption. The
presumption established by satisfying the
three requirements of paragraph (a) of this
section may be rebutted by additional in-
formation showing that the compensation
was not reasonable or that the transfer
was not at fair market value.
(d) Requirements for invoking rebut-
table presumption—(1)Disinterested
governing body or committee—(i) In gen-
eral.The governing body is the board of
directors, board of trustees, or equivalent
controlling body of the applicable tax-ex-
empt organization. A committee of the
governing body may be composed of any
individuals permitted under state law to
serve on such a committee, and may act
on behalf of the governing body to the ex-
tent permitted by state law. However, if
the rebuttable presumption arises as the
result of actions taken by a committee,
any members of such a committee who
are not members of the governing body
are deemed to be organization managers
for purposes of the tax imposed by section
4958(a)(2), subject to the rules of
§53.4958–1(d)
(ii) Persons not included on governing
body or committee. For purposes of de-
termining whether the requirements of
paragraph (a) of this section have been
met with respect to a specific transaction
or compensation arrangement, a person is
not included on the governing body or
committee when it is reviewing a transac-
tion if that person meets with other mem-
bers only to answer questions, and other-
wise recuses himself from the meeting
and is not present during debate and vot-
ing on the transaction or compensation
arrangement.
(iii)Absence of conflict of interest.A
member of the governing body, or com-
mittee thereof, does not have a conflict of
interest with respect to a compensation
arrangement or transaction if the mem-
ber–
(A) Is not the disqualified person and is
not related to any disqualified person par-
ticipating in or economically benefitting
from the compensation arrangement or
transaction by a relationship described in
section 4958(f)(4) or §53.4958–3(b)(1);
(B) Is not in an employment relation-
ship subject to the direction or control of
any disqualified person participating in or
economically benefitting from the com-
pensation arrangement or transaction;
(C) Is not receiving compensation or
other payments subject to approval by any
disqualified person participating in or
economically benefitting from the com-
pensation arrangement or transaction;
(D) Has no material financial interest
affected by the compensation arrange-
ment or transaction; and
(E) Does not approve a transaction pro-
viding economic benefits to any disquali-
fied person participating in the compensa-
tion arrangement or transaction, who in
turn has approved or will approve a trans-
action providing economic benefits to the
member.
(iv) Rule where ratification by full
governing body required. An arrange-
ment or transaction has not been approved
by a committee of a governing body if,
under the governing documents of the or-
ganization or state law, the committee’s
decision must be ratified by the full gov-
erning body in order to become effective.
(2) Appropriate data as to comparabil-
ity—(i) In general. A governing body or
committee has appropriate data as to com-
parability if, given the knowledge and ex-
pertise of its members, it has information
sufficient to determine whether, under the
standards set forth in § 53.4958–4(b), a
compensation arrangement will result in
the payment of reasonable compensation
or a transaction will be for fair market
value. Relevant information would in-
clude, but not be limited to, compensation
levels paid by similarly situated organiza-
tions, both taxable and tax-exempt, for
functionally comparable positions; the
availability of similar services in the geo-
graphic area of the applicable tax-exempt
organization; independent compensation
surveys compiled by independent firms;
actual written offers from similar institu-
tions competing for the services of the
disqualified person; and independent ap-
praisals of the value of property that the
applicable organization intends to pur-
chase from, or sell or provide to, the dis-
qualified person.
(ii) Special rule for compensation paid
by small organizations.For organizations
with annual gross receipts of less than $1
million reviewing compensation arrange-
ments, the governing body or committee
will be considered to have appropriate
data as to comparability if it has data on
compensation paid by five comparable or-
ganizations in the same or similar com-
munities for similar services. No infer-
ence is intended with respect to whether
circumstances falling outside this safe
harbor will meet the requirement with re-
spect to the collection of appropriate data.
(iii) Additional rules for special rule
for small organizations. For purposes of
determining applicability of the special
rule for small organizations described in
paragraph (d)(2)(ii) of this section, a
rolling average based on the three prior
taxable years may be used to calculate an-
nual gross receipts of an organization. If
any applicable tax-exempt organization is
affiliated with another entity by common
control or governing documents, the an-
nual gross receipts of all such related or-
ganizations must be aggregated to deter-
mine applicability of the special rule
stated in paragraph (d)(2)(ii) of this sec-
tion.
(iv) Examples. The following exam-
ples illustrate the rules for appropriate
data as to comparability for purposes of
invoking the rebuttable presumption of
reasonableness described in this section:
Example 1. Z is a large university that is an ap-
plicable tax-exempt organization for purposes of
section 4958. Z has had gross receipts of $200 mil-
lion for the preceding three taxable years. Z is nego-
tiating a new contract with its president because the
old contract will expire at the end of the year. In de-
termining the compensation for its president, the ex-
ecutive committee of the Board of Trustees relies on
a national survey of compensation for university
presidents; this survey does not divide its data by
any measure of university size or any other criteria.
None of the members of the executive committee
has any particular expertise in higher education
compensation matters, although many members
have significant business experience. Given the lack
of specificity in the data collected and the lack of
relevant expertise and experience of the executive
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committee members, the data relied on by the execu-
tive committee does not constitute appropriate data
as to comparability.
Example 2. X, a tax-exempt hospital that is an
applicable tax-exempt organization for purposes of
section 4958, has average annual gross receipts of
$250 million. Before renewing the contracts of X’s
chief executive officer and chief financial officer,
X’s governing board commissioned a customized
compensation survey from an independent firm that
specializes in consulting on issues related to execu-
tive placement and compensation. The survey cov-
ered executives with comparable responsibilities at a
significant number of hospitals. The survey data are
sorted by a number of different variables, including
the size of the hospitals and the nature of the ser-
vices they provide, the level of experience and spe-
cific responsibilities of the executives, and the com-
position of the compensation packages. The board
members were provided with the survey results, a
detailed written analysis comparing the hospital’s
executives to those covered by the survey and an op-
portunity to ask questions of a member of the firm
that prepared the survey. The survey, as prepared
and presented to X’s board, constitutes appropriate
data as to comparability.
Example 3. W is a local repertory theater and an
applicable tax-exempt organization for purposes of
section 4958. W has had annual gross receipts rang-
ing from $400,000 to $800,000 over its past three
taxable years. In determining the next year’s com-
pensation for W’s artistic director, the board relies
on data compiled from a telephone survey of six
other unrelated repertory theaters of similar size in
various communities throughout the same geo-
graphic region. A member of the board drafts a brief
written summary of the salary information obtained
from this informal survey. This information is later
included in a written report that also includes infor-
mation about the membership of the board of direc-
tors, and an evaluation of the artistic director’s prior
salary and performance that is discussed and voted
on by the board. The salary information obtained in
the telephone survey is appropriate data as to com-
parability.
(3) Documentation—(i) For a decision
to be documented adequately, the written
or electronic records of the governing
body or committee must note–
(A) The terms of the transaction that
was approved and the date it was ap-
proved;
(B) The members of the governing
body or committee who were present dur-
ing debate on the transaction or arrange-
ment that was approved and those who
voted on it;
(C) The comparability data obtained
and relied upon by the committee and
how the data was obtained; and
(D) The actions taken with respect to
consideration of the transaction by any-
one who is otherwise a member of the
governing body or committee but who
had a conflict of interest with respect to
the transaction or arrangement.
(ii) If the governing body or committee
determines that reasonable compensation
for a specific arrangement or fair market
value in a specific transaction is higher or
lower than the range of comparable data
obtained, the governing body or commit-
tee must record the basis for its determi-
nation. For a decision to be documented
concurrently, records must be prepared by
the next meeting of the governing body or
committee occurring after the final action
or actions of the governing body or com-
mittee are taken. Records must be re-
viewed and approved by the governing
body or committee as reasonable, accu-
rate and complete within a reasonable
time period thereafter.
(e)No presumption until circumstances
exist to determine reasonableness of
compensation. If reasonableness of the
compensation cannot be determined
based on circumstances existing at the
date when a contract for services was
made, then the rebuttable presumption of
this section cannot arise until circum-
stances exist so that reasonableness of
compensation can be determined, and the
three requirements for the presumption
under paragraph (d) of this section subse-
quently are satisfied . See §53.4958–4
(b)(3)(i).
(f) No inference from absence of pre-
sumption.The fact that a transaction be-
tween an applicable tax-exempt organiza-
tion and a disqualified person is not
subject to the presumption described in
this section shall not create any inference
that the transaction is an excess benefit
transaction. Neither shall the fact that a
transaction qualifies for the presumption
exempt or relieve any person from com-
pliance with any federal or state law im-
posing any obligation, duty, responsibil-
ity, or other standard of conduct with
respect to the operation or administration
of any applicable tax-exempt organiza-
tion.
(g)Period of reliance on rebuttable
presumption. The rebuttable presump-
tion applies to all payments made or
transactions completed in accordance
with a contract provided that the three re-
quirements of the rebuttable presumption
were met at the time the contract was
agreed upon.
§53.4958–7 Special rules.
(a) Substantive requirements for ex-
emption still apply. The excise taxes im-
posed by section 4958 do not affect the
substantive statutory standards for tax ex-
emption under sections 501(c)(3) or (4).
Organizations are described in those sec-
tions only if no part of their net earnings
inure to the benefit of any private share-
holder or individual.
(b) Interaction between section 4958
and section 7611 rules for church tax in-
quiries and examinations.The proce-
dures of section 7611 will be used in initi-
ating and conducting any inquiry or
examination into whether an excess bene-
fit transaction has occurred between a
church and a disqualified person. For
purposes of this rule, the reasonable belief
required to initiate a church tax inquiry is
satisfied if there is a reasonable belief that
a section 4958 tax is due from a disquali-
fied person with respect to a transaction
involving a church. See §301.7611–1
Q&A 19 of this chapter.
§53.4963–1 [Amended]
Par. 3. In §53.4963–1, paragraphs (a),
(b), and (c) are amended by adding the
reference “4958,” immediately after the
reference “4955,” in each place it appears.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 4. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§301.6213–1 [Amended]
Par. 5. Section 301.6213–1, paragraph
(e) is amended by adding the reference
“4958,” immediately after the reference
“4955,” in the first sentence.
§301.6501(e)–1 [Amended]
Par. 6. Section 301.6501(e)–1 is
amended as follows:
1. Paragraph (c)(3)(ii), first and second
sentences are amended by removing the
language “or trust” and adding “trust, or
other organization” in its place.
2. Paragraph (c)(3)(ii), the first sen-
tence is amended by removing the lan-
guage “and 4953” and adding “4953, and
4958” in its place.
§301.6501(n)–1 [Amended]
Par. 7. Section 301.6501(n)–1 is
amended as follows:
1998–34 I.R.B.29August 24, 1998
IRB 1998-34 8/19/98 1:34 PM Page 29

1. The paragraph heading for para-
graph (a) is amended by removing the
language “or trust” and adding “trust,
or other organization”in its place.
2. Paragraph (a)(1), the first sentence
is amended by removing the language
“or trust” and adding “trust, or other or-
ganization” in its place.
3. Paragraph (b), the heading and the
first sentence are amended by removing
the language “or trust” and adding “trust,
or other organization” in its place.
§301.7422–1 [Amended]
Par. 8. In section 301.7422–1, para-
graphs (a) introductory text, (c) introduc-
tory text and (d) are amended by adding
the reference “4958,” immediately after
the reference “4955,”.
§301.7611–1 [Amended]
Par. 9. In §301.7611–1, the Table of
Contents is amended by adding “Appli-
cation to Section 4958........19” immedi-
ately after “Effective Date........18”.
Par. 10. In §301.7611–1, an undesig-
nated centerheading and Q–19 and A–19
are added to read as follows:
§301.7611–1 Questions and answers relating to
church tax inquiries and examinations.
* * * * *
Application to Section 4958
Q–19: When do the church tax in-
quiry and examination procedures de-
scribed in section 7611 apply to a deter-
mination of whether there was an excess
benefit transaction described in section
4958?
A–19: See §53.4958–7(b) of this
chapter for rules governing the interac-
tion between section 4958 excise taxes
on excess benefit transactions and sec-
tion 7611 church tax inquiry and exami-
nation procedures.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on July
30, 1998, 9:26 a.m., and published in the issue of the
Federal Register for August 4, 1998, 63 F.R. 41486)
Announcement 98–77
The Internal Revenue Service issued
today for comment proposed training ma-
terials relating primarily to the application
of section 119 of the Internal Revenue
Code to meals provided to employees in
the hospitality industry. The hospitality
industry includes casinos, hotels, resorts,
and other similar establishments.
You may request a copy of the training
materials from Thomas Burger, Director,
Office of Employment Tax Administra-
tion and Compliance (OETAC), 1111
Constitution Avenue, N.W., Room 2404,
OP:EX:ST:ET, Washington, D.C. 20224,
or by calling (202) 622-3650 (not a toll-
free call). The training materials are also
available through the “Tax Professional’s
Corner” of the IRS Web site at
http://www.irs.ustreas.gov. The IRS also
issued a settlement initiative allowing
hospitality industry taxpayers to resolve
issues relating to the provision of em-
ployee meals (see Announcement 98–78).
Comments on the proposed training
materials are requested by September 30,
1998. Please submit all comments in
writing to Dan Bryant, Senior Analyst,
Office of Employment Tax Administra-
tion and Compliance (OETAC), 1111
Constitution Avenue, N.W., Room 2008,
OP:EX:ST:ET, Washington, D.C. 20224.
The principal author of this announce-
ment is Thomas Burger, Director, Office
of Employment Tax Administration and
Compliance (OETAC). For further infor-
mation regarding this announcement con-
tact Dan Bryant at (202) 622-3650 (not a
toll-free call).
Announcement 98–78
The Internal Revenue Service an-
nounces today a settlement initiative under
which hospitality industry taxpayers may
resolve certain income and employment
tax issues covering periods through De-
cember 31, 1998, relating to employee
meals provided in an employer-operated,
on-premises eating facility. The hospital-
ity industry includes casinos, hotels, re-
sorts, and other similar establishments.
Taxpayers who accept the terms of the
settlement initiative will resolve these is-
sues quickly and will eliminate the need
for further potentially costly controversies
for the periods covered by the settlement
initiative.
The IRS has decided to offer the settle-
ment initiative as a result of the recent
Tax Court decisions in Boyd Gaming
Corp. v. Commissioner,106 T.C. No. 19
(1996), and Boyd Gaming Corp. v. Com-
missioner, 72 T.C.M. (RIA) 2912 (Sep-
tember 30, 1997), appeal pending (9th
Cir.). Even though the Tax Court opin-
ions addressed some of the issues related
to employee meals, other important issues
may remain unresolved and thus create
uncertainty for taxpayers. The settlement
offer is intended to help taxpayers remove
that uncertainty for periods through De-
cember 31, 1998. The IRS also issued
draft training materials relating to em-
ployee meals (see Announcement 98–77).
For some taxpayers, a recent statutory
change may also resolve uncertainty that
has arisen in the wake of the Boyd Gam-
ing decisions. Section 5002 of the Inter-
nal Revenue Service Restructuring and
Reform Act of 1998, P.L. 105–206, added
section 119(b)(4) to the Internal Revenue
Code. Section 119(b)(4) provides that all
meals furnished on the business premises
of an employer to an employer’s employ-
ees are treated as furnished for the conve-
nience of the employer — and therefore
are excludable from the employee’s in-
come — if more than half of the employ-
ees to whom the meals are furnished on
the premises are furnished the meals for
the convenience of the employer.
The Service recognizes that new sec-
tion 119(b)(4) may resolve these issues
for some hospitality industry taxpayers;
however, industry taxpayers whose issues
are not resolved by the amendment to sec-
tion 119 may wish to take advantage of
the settlement initiative.
The settlement initiative resolves the
following issues:
(1) for the taxpayer, the deductibility of
expenses for employee meals provided in
an employer-operated, on-premises eating
facility;
(2) for the taxpayer, any employment
tax liability relating to the provision of
employee meals in an employer-operated,
on-premises eating facility; and
(3) for the employee, any income tax or
employment tax liability relating to the re-
ceipt of employee meals in an employer-
operated, on-premises eating facility.
If a taxpayer accepts the offer to re-
solve these issues through this settlement
initiative, the following terms will apply
with respect to meals provided on or be-
fore December 31, 1998:
August 24, 1998301998–34 I.R.B.
IRB 1998-34 8/19/98 1:34 PM Page 30

I. For taxable years beginning before
January 1, 1995, the limitation set forth
in I.R.C. section 274(n)(1), as in effect
for each year at issue, shall apply, with-
out exception, to the expense of provid-
ing meals to taxpayer’s employees.
II. For taxable years beginning on or
after January 1, 1995 and on or before
January 1, 1998, the taxpayer may
deduct 70% of the otherwise allowable
expense (prior to the application of sec-
tion 274(n)(1)) of providing meals to
taxpayer’s employees.
III. For taxable years beginning after
January 1, 1998 and before December
31, 1998, the taxpayer may deduct 70%
of the otherwise allowable expense
(prior to the application of section
274(n)(1)) of providing meals to tax-
payer’s employees for meals provided
during the months in such tax year that
precede January, 1999. For example, a
taxpayer with a tax year beginning Oc-
tober 1, 1998, may deduct 70% of the
expense of such meals provided during
three months (October 1998 through De-
cember 1998).
IV. The taxpayer will not be liable for
income tax withholding, FICA taxes, or
FUTA taxes on meals provided to tax-
payer’s employees in the taxpayer’s em-
ployer-operated, on-premises, eating fa-
cility for any tax period ending on or
before December 31, 1998.
The settlement initiative is available
only to taxpayers in the hospitality in-
dustry who have (1) provided free or re-
duced charge meals to employees on
their business premises on a regular
basis for more than a mere compen-
satory purpose, and (2) indicated in
writing their interest in accepting the
offer no later than 30 days after the draft
training materials are finalized. The
training materials are expected to be fi-
nalized by October 31, 1998.
An eligible taxpayer, whether or not
currently under examination or in litiga-
tion, indicates in writing its interest in
accepting the offer under this settlement
initiative by mailing the following infor-
mation to the Southwest District Office,
Employee Meals Settlement Agent:
Mail the above completed request to
the following address no later than 30
days after the finalization of the training
materials:
Employee Meals Settlement Agent
Internal Revenue Service
4750 West Oakey Blvd.
Las Vegas, NV 89102
The above completed request can also
be faxed to (702) 455-1175. For addi-
tional information, contact the Southwest
District Office by calling the Employee
Meals Settlement Agent at (702) 455-
1403.
Upon indication of interest, a taxpayer
will receive a letter of instructions regard-
ing how to accept the settlement offer.
Each taxpayer who accepts the offer will
execute a closing agreement (Form 906)
to document the resolution of these is-
sues. Employees of a taxpayer who exe-
cutes a closing agreement will not be li-
able for income taxes or FICA taxes on
the fair market value of meals received in
the taxpayer’s employer-operated, on-
premises, eating facility for any tax pe-
riod ending on or before December 31,
1998. No agreements other than that with
the taxpayer are necessary in order for the
employee of such taxpayer to receive the
benefit of the settlement initiative.
Taxpayers, including those currently
under examination or in litigation, will
not be required to accept the terms of the
settlement initiative. If a taxpayer does
not believe that the offer is appropriate for
its case, the taxpayer may decline to par-
ticipate in the settlement initiative, and
the case will be handled under normal
procedures. If participation is declined,
the final result in a case could be either
more or less favorable than the settlement
offer, depending on the merits of the tax-
payer’s position.
The settlement initiative is also de-
scribed at the “Tax Professional’s Corner”
of the IRS Web site at http://www.irs.us-
treas.gov.
The principal author of this announce-
ment is Thomas Burger, Director, Office
of Employment Tax Administration and
Compliance (OETAC). For further infor-
mation regarding this announcement con-
tact Bob Patrick at (702) 455-1403 (not a
toll-free call).
Adjustments Following Sales of
Partnership Interests; Change of
Public Hearing
Announcement 98–79
AGENCY: Internal Revenue Service,
Treasury.
1998–34 I.R.B.31August 24, 1998
“Taxpayer’s Name
Taxpayer’s Address
Employer Identification Number
On behalf of the above-named taxpayer, I am interested in accepting the settlement offer described in Announcement 98-78, I.R.B.
1998-34 (August 24, 1998), relating to the provision of employee meals in an employer-operated, on-premises eating facility. Please
send me the appropriate materials.
By Date
Title ”
IRB 1998-34 8/19/98 1:34 PM Page 31

ACTION: Change of time and location of
public hearing, and extension of time to
request to speak.
SUMMARY: This document changes the
time and location of the public hearing
and extends the date by which commenta-
tors should submit requests to speak on
proposed regulations relating to the op-
tional adjustments to the basis of partner-
ship property following certain transfers
of partnership interests under section 743,
the calculation of gain or loss under sec-
tion 751(a) following the sale or exchange
of a partnership interest, the allocation of
basis adjustments among partnership as-
sets under section 755, the allocation of a
partner’s basis in its partnership interest
to properties distributed to the partner by
the partnership under section 732(c), and
the computation of a partner’s proportion-
ate share of the adjusted basis of deprecia-
ble property (or depreciable real property)
under section 1017 of the Internal Rev-
enue Code. In addition, this document
announces that persons wishing to testify
who are outside the Washington, DC area
will be able to make their presentations
from a remote teleconference site in Los
Angeles, CA.
DATES: The public hearing is being held
on Thursday, September 10, 1998, begin-
ning at 1 p.m. (EDT). Requests to speak
and outlines of oral comments must be re-
ceived by Thursday, August 27, 1998.
ADDRESSES: The public hearing will
be held in room 3411, Internal Revenue
Building, 1111 Constitution Avenue, NW,
Washington, DC. The address of the re-
mote teleconference site is listed below
under Supplementary Information.
Requests to speak and outlines of oral
comments should be mailed to Room 5226,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered be-
tween the hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (REG–209682–94),
Courier’s Desk, 1111 Constitution Avenue,
NW., Washington, DC. Alternatively, tax-
payers may submit comments electroni-
cally via the Internet by selecting the “Tax
Regs” option on the IRS Home Page, or by
submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.
gov/prod/tax-reg/comments.html.
FOR FURTHER INFORMATION CON-
TACT: LaNita VanDyke of the Regula-
tions Unit, Assistant Chief Counsel (Cor-
porate), (202) 622-7180 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
A notice of proposed rulemaking and
notice of public hearing appearing in the
Federal Register on Thursday, January 29,
1998 (63 F.R. 4408 [REG– 209682–94,
1998–17 I.R.B. 20]), announced that a
public hearing with respect to proposed
regulations relating to adjustments to a
partner’s basis in its partnership interest
and a partnership’s basis in its assets
would be held on Wednesday, July 8,
1998, beginning at 10 a.m. in the IRS Au-
ditorium, Internal Revenue Building,
1111 Constitution Avenue, NW., Wash-
ington DC and that requests to speak and
outlines of oral comments should be re-
ceived by Wednesday, June 24, 1998.
The date and the time of the public
hearing have changed. The room number
of the Washington, DC location has
changed, and one remote teleconference
site has been added.
The hearing will be held in room 3411
of the Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC. The remote teleconference site is in
room 5003 of the Federal Building, 5th
Floor, 300 N. Los Angeles Street, Los
Angeles, California.
The public hearing will be begin at 1
p.m. (EDT); attendees will be admitted
beyond the lobby of the Internal Rev-
enue Building in Washington, DC after
12:30 p.m. The hearing time at the re-
mote teleconference site in Los Angeles
will be concurrent with the hearing in
Washington, DC. (10:00 a.m. PDT).
Requests to speak and outlines of oral
comments should be received by Thurs-
day, August 27, 1998. All persons who
have notified the Service by Thursday,
August 27, 1998, of their desire to tes-
tify will be given the opportunity to do
so. Requests should specify the site
from which the speaker wishes to tes-
tify; if no specific site is named, the
speaker will be scheduled to appear in
Washington, DC. Requests to testify in
Los Angeles should include a telephone
number in case the Service needs to con-
tact the speaker prior to the public hear-
ing.
Due to limited seating capacity at the
remote teleconference site, no more than
12 people may be accommodated at any
one time in the teleconference room.
Seating in the teleconference room will be
made available based on the order of pre-
sentations. IRS personnel will be avail-
able at the remote teleconference site to
assist speakers in using the teleconference
equipment.
The Service will prepare an agenda
showing the scheduling of speakers and
will make copies of the agenda available
free of charge at the hearing. Testimony
will begin with the speakers in Los An-
geles, and will conclude with presenta-
tions by the speakers in Washington,
DC.
Cynthia Grigsby,
Chief, Regulations Unit
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
August 4, 1998, 8:45 a.m., and published in the issue
of the Federal Register for August 5, 1998, 63 F.R.
41754)
Foundations Status of Certain
Organizations
Announcement 98–80
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of
notices under section 508(b) of the Code.
This listing does notindicate that the or-
ganizations have lost their status as orga-
nizations described in section 501(c)(3),
eligible to receive deductible contribu-
tions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
573 Warren Street HD FC, Brooklyn, NY
A Woman’s Place, Asheville, NC
American Bosnia Relief Association,
St. Louis, MO
American Friends of Bnos Yisroel Inc.,
Philadelphia, PA
August 24, 1998321998–34 I.R.B.
IRB 1998-34 8/19/98 1:34 PM Page 32

Annalori Corporation, Colorado Springs,
CO
Arizona Quail Preservation Society,
Phoenix, AZ
Arts & Education Foundation of
Alabama Inc., Birmingham, AL
Asian Americans of Connecticut Inc.,
W. Hartford, CT
Association of Research Institutes in Art
History, Washington, DC
Bill Cobb Ministries Inc., Bethany, OK
Binghamton Outreach Center Inc.,
Binghamton, NY
Bond Memorial Trust, Vienna, VA
Boston Emerging Industries Center Inc.,
Worcester, MA
Bread of Life Christian Mission, Plant
City, FL
Carlisle Center for Violence Prevention
Inc., Carlisle, MA
Centipede Artists Cooperative, Danbury,
CT
Child Placement Professionals Inc.,
Ada, OH
Child Support Recovery Foundation,
Mesa, AZ
Clinton County Sheriffs Reserve,
Clinton, IA
Coastal Conservation Foundation,
Tucson, AZ
Cobb County District Attorneys Anti-
Drug Poster Contest Inc., Marietta, GA
College Community Little League
Soccer, Cedar Rapids, IA
Colorado Cuees Scholarship Foundation,
Denver, CO
Dominican Family Institute Inc.,
New York, NY
Dr. Jorge Prieto Community Clinic,
Chicago, IL
Ellicott City Kiwanis Foundation Inc.,
Ellicott City, MD
Extended Health Care Services Inc.,
Montclair, NJ
Faith With Works In Christ Ministries,
Hazel Park, MI
Fathers Against Violence Inc., Carlisle,
MA
Federation of Gujarati Associations in
North America, Spring Valley, OH
Fit for Success Inc., Cohasset, MA
Fourth Ward Freedmans Town
Neighborhood Association, Houston, TX
Freedom Today Not Tommorrow Inc.,
Olathe, KS
Galion Area Betterment Commission
Inc., Galion, OH
Gospel Evangelistic Ministries, St.
Joseph, MO
Hands on Memphis Inc., Memphis, TN
Helping Hands of America Association,
Winston Salem, NC
Historic Sites & Shipwrecks Restoration
& Preservation Society Inc.,
Fort Lauderdale, FL
Inside Out Productions, Houston, TX
Inspirit Counseling Center, San Anselmo,
CA
Institute for Research on Spoken
Languages Inc., New York, NY
Islandview Village Community Land
Trust, Detroit, MI
Jehova Rapha Ministries, Starr, SC
Knoxville Home Child Care Association,
Knoxville, TN
KS Nutritional-Neighborhood Services,
Houston, TX
Lets Clean It Up, Tasker Village, PA
M & M Community Development Inc.,
Columbus, OH
Malemte Football Booster Club,
Fairbanks, AK
Mayors Youth Center Inc., Granite City,
IL
Missoula Center for Responsible
Planning Inc., Missoula, MT
Mobile Elder Care, Mobile, AL
Mother Tierras Inc., Havre de Grace, MD
Naples Pop Warner Football Inc., Naples,
FL
New Hampshire Tennis Foundation,
Contoocook, NH
New Life Dimensions Ministries,
Scottsdale, AZ
Open Door Ministries, Seattle, WA
Pacific Pet Care, Redway, CA
Paducah/McCracken County Small
Business Center Inc., Paducah, KY
Parents in Need of Enforced Support,
Upper Arlington, OH
Peace Envoy International Inc., Bethesda,
MD
Project Life Foundation Inc., Goose
Creek, SC
Recovery Television Network Inc.,
Naples, FL
Residence One Corporation, Tampa, FL
Rosedale Historical Society Inc.,
Rosedale, MD
Salt Council Inc., Las Vegas, NV
Samoa Felagolagomai Inc., Moreno
Valley, CA
Seniors Foundation Inc., Boston, MA
Southwest Louisiana Economic
Development Inc., Lake Charles, LA
Southwest Wings Inc., Sierra Vista, AZ
St. Jude Day Care Center Incorporated,
Memphis, TN
Tabernacle of Testimony Sanctuary
Ministries, Suitland, MD
Tampa Bay Friends for Life Education
Fund Inc., Tampa, FL
Tewksbury Girls Softball Inc.,
Tewksbury, MA
Tiger Haven, Kingston, TN
Toppers Association Inc., Brooklyn, NY
Totus Tuus, Winnetka, IL
United Compassionate Artists Project,
Bend, OR
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as a
private operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classi-
fication as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
vided in section 1.509(a)–7 of the Income
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
1998–34 I.R.B.33August 24, 1998
IRB 1998-34 8/19/98 1:34 PM Page 33

August 24, 1998341998–34 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms
IRB 1998-34 8/19/98 1:34 PM Page 34

1998–34 I.R.B.35August 24, 1998
Numerical Finding List
1
Bulletins 1998–29 through 33
Announcements:
98–62, 1998–29 I.R.B. 13
98–68, 1998–29 I.R.B. 14
98–69, 1998–30 I.R.B. 16
98–70, 1998–30 I.R.B. 17
98–71, 1998–30 I.R.B. 17
98–72, 1998–31 I.R.B.14
98–73, 1998–31 I.R.B.14
98–74, 1998–31 I.R.B.15
98–75, 1998–31 I.R.B.15
98–76, 1998–32 I.R.B.64
Notices:
98–36, 1998–29 I.R.B. 8
98–37, 1998–30 I.R.B.13
98–39, 1998–33 I.R.B.11
98–41, 1998–33 I.R.B.12
98–42, 1998–33 I.R.B.12
98–43, 1998–33 I.R.B.13
Railroad Retirement Quarterly Rate:
1998–31 I.R.B. 7
Proposed Regulations:
REG–104641–97, 1998–29 I.R.B. 9
REG–110332–98, 1998–33 I.R.B.18
REG–110403–98, 1998–29 I.R.B.11
REG–116608–97, 1998–29 I.R.B. 12
REG–119227–97, 1998–30 I.R.B. 13
Revenue Procedures:
98–40, 1998–32 I.R.B. 6
98–41, 1998–32 I.R.B. 7
98–42, 1998–28 I.R.B. 9
98–43, 1998–29 I.R.B. 8
98–44, 1998–32 I.R.B. 11
Revenue Rulings:
98–34, 1998–31 I.R.B. 12
98–35, 1998–30 I.R.B. 4
98–36, 1998–31 I.R.B.6
98–37, 1998–32 I.R.B.5
98–38, 1998–32 I.R.B.4
98–39, 1998–33 I.R.B.4
98–40, 1998–33 I.R.B.4
Treasury Decisions:
8771, 1998–29 I.R.B. 6
8772, 1998–31 I.R.B. 8
8773, 1998–29 I.R.B. 4
8774, 1998–30 I.R.B. 5
8775, 1998–31 I.R.B.4
8776, 1998–33 I.R.B.6
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1998–1 through 1998–28
will be found in Internal Revenue Bulletin 1998–29,
dated July 20, 1998.
IRB 1998-34 8/19/98 1:34 PM Page 35

August 24, 1998361998–34 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–29 through 33
*Denotes entry since last publication
Revenue Procedures:
83–58
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings:
57–271
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–277
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–434
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–574
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–75
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–120
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–121
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–122
Obsoleted by
98–37, 1998–32 I.R.B. 5
74–77
Obsoleted by
98–37, 1998–32 I.R.B. 5
75–19
Obsoleted by
98–37, 1998–32 I.R.B. 5
76–562
Obsoleted by
98–37, 1998–32 I.R.B. 5
77–214
Obsoleted by
98–37, 1998–32 I.R.B. 5
79–106
Obsoleted by
98–37, 1998–32 I.R.B. 5
83–113
Obsoleted by
98–37, 1998–32 I.R.B. 5
85–143
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–8
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–76
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
88–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–4
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–38
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–49
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–50
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–53
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–81
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–91
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–92
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–93
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–51
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
95–2
Obsoleted by
98–37, 1998–32 I.R.B. 5
95–9
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
97–37
Obsoleted by
98–39, 1998–33 I.R.B. 4
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1998–1 through 1998–28 will be found in Internal
Revenue Bulletin 1998–29, dated July 20, 1998.
IRB 1998-34 8/19/98 1:34 PM Page 36

Notes
1998–34 I.R.B.37August 24, 1998
IRB 1998-34 8/19/98 1:34 PM Page 37

Notes
August 24, 1998381998–34 I.R.B.
IRB 1998-34 8/19/98 1:34 PM Page 38

IRB 1998-34 8/19/98 1:35 PM Page 39

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please
allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC
20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.
IRB 1998-34 8/19/98 1:35 PM Page 40