Td 8920

Wednesday,
January 10, 2001

Part IV

Department of the
Treasury
Internal Revenue Service
26 CFR Parts 53, 301 and 602
Excise Taxes on Excess Benefit
Transactions; Final Rule and Proposed
Rule

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Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 53, 301, and 602
[TD 8920]
RIN 1545–AY64

Excise Taxes on Excess Benefit
Transactions
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations relating to the
excise taxes on excess benefit
transactions under section 4958 of the
Internal Revenue Code, as well as
certain amendments 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
imposes excise taxes on transactions
that provide excess economic benefits to
disqualified persons of public charities
and social welfare organizations
(referred to as applicable tax-exempt
organizations). Disqualified persons
who benefit from an excess benefit
transaction with an applicable taxexempt organization are liable for a tax
of 25 percent of the excess benefit. Such
persons are also liable for a tax of 200
percent of the excess benefit if the
excess benefit is not corrected by a
certain date. Additionally, organization
managers who participate in an excess
benefit transaction knowingly, willfully,
and without reasonable cause, are liable
for a tax of 10 percent of the excess
benefit. The tax for which participating
organization managers are liable cannot
exceed $10,000 for any one excess
benefit transaction.
DATES: Effective Date: These regulations
are effective January 10, 2001.
Applicability Date: These regulations
apply as of January 10, 2001 and will
cease to apply January 9, 2004.
FOR FURTHER INFORMATION CONTACT:
Phyllis D. Haney, (202) 622–4290 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collections of information
contained in these temporary
regulations have been reviewed and
approved by the Office of Management
and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1623,
in conjunction with the notice of
proposed rulemaking published August
4, 1998, 63 FR 41486, REG–246256–96,

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Failure by Certain Charitable
Organizations to Meet Certain
Qualification Requirements; Taxes on
Excess Benefit Transactions.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books and records relating to the
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
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 excess benefit
transactions occurring on or after
September 14, 1995. The IRS notified
the general public of the new section
4958 excise taxes in Notice 96–46
(1996–2 C.B. 112), which also solicited
comments on the new law.
On August 4, 1998, a notice of
proposed rulemaking (REG–246256–96)
clarifying certain definitions and rules
contained in section 4958 was
published in the Federal Register (63
FR 41486). The IRS received numerous
written comments responding to this
notice, including a comment from the
public on the collections of information
estimates contained therein.
That commentator expressed concern
that the purchase of independent
compensation surveys is required to
certify the reasonableness of certain
outside and personnel contracts; and
that the proposed regulations place a
burden on governing bodies of
applicable tax-exempt organizations,
increasing the personal risk of members
of those governing bodies. The
collections of information in the
proposed regulations are voluntary on
the part of the governing bodies of
applicable tax-exempt organizations.
Although the collections of information
allow the organization to rely on a
presumption that a transaction is
reasonable or at fair market value, the
failure to obtain the collections of
information in no way implies that a
transaction is unreasonable.
Further, as discussed under
Explanation of Provisions of this
preamble (under the heading Rebuttable
presumption that a transaction is not an
excess benefit transaction), the IRS and
the Treasury Department believe that
any applicable tax-exempt organization

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may compile its own comparability data
rather than obtain an independent
survey to satisfy the requirement to
obtain appropriate data as to
comparability. Therefore, although the
comment on Paperwork Reduction Act
requirements was considered in the new
estimates of the annual burden per
recordkeeper and per respondent, these
temporary regulations continue to
conclude that the estimated annual
burden per recordkeeper varies from 3
hours to 308 hours, depending on
individual circumstances, with an
estimated weighted average of 6 hours,
3 minutes.
A public hearing was held on March
16 and 17, 1999. After consideration of
all the comments, the proposed
regulations under section 4958 were
revised as follows. The major areas of
the comments and revisions are
discussed below.
Explanation of Provisions
Additional Taxes on Disqualified Person
A disqualified person benefitting from
an excess benefit transaction must
correct the excess benefit within the
taxable period to avoid liability for the
200-percent tax under section 4958(b).
The taxable period is defined by section
4958 as the period beginning on the date
the transaction occurred and ending on
the earlier of the date of mailing a notice
of deficiency, or the date on which the
25-percent tax is assessed.
A commentator questioned whether
the disqualified person would receive
any notice that the IRS was examining
a possible excess benefit transaction
before either of the events ending the
taxable period occur. In fact, a
disqualified person would be notified if
an examination of that person were
opened pursuant to an examination of
an applicable tax-exempt organization.
The IRS has an obligation under Internal
Revenue Code (Code) section 7602(c) to
notify taxpayers at the beginning of the
examination and collection process that
the IRS might contact third parties (such
as the organization) about the taxpayer’s
tax liabilities. Additionally, the IRS
follows the procedure of issuing a ‘‘first
letter of proposed deficiency’’ allowing
the taxpayer an opportunity for
administrative review in the IRS Office
of Appeals. This first letter is issued 30
days before the notice of deficiency is
issued. Consequently, a disqualified
person would be aware of any
examination of a potential excess
benefit transaction before the end of the
taxable period.
Although it is also IRS practice to
issue a single notice of deficiency for
both the 25-percent and 200-percent

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Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations
section 4958 taxes for which the
disqualified person is liable, the
abatement rules under section 4961
provide that the 200-percent tax under
section 4958(b) is not to be assessed
(and if assessed, is to be abated) if the
excess benefit is corrected within 90
days after the mailing of the notice of
deficiency for that tax.
Correction
Section 4958(f)(6) defines correction
as ‘‘undoing the excess benefit to the
extent possible, and taking any
additional measures necessary to place
the organization in a financial position
not worse than that in which it would
be if the disqualified person were
dealing under the highest fiduciary
standards.’’ The proposed regulations
provide a short, general description of
correction, referring to the statutory
language. The proposed regulations
define correction as repaying an amount
of money equal to the excess benefit,
plus ‘‘any additional amount needed to
compensate the organization for the loss
of the use of the money or other
property’’ from the date of the excess
benefit transaction to the date the excess
benefit is corrected. The proposed
regulations further allow correction ‘‘in
certain circumstances’’ by permitting
the disqualified person to return
property to the organization and ‘‘taking
any additional steps necessary to make
the organization whole.’’ Where there is
an ongoing contract for services, the
proposed regulations provide that the
parties need not terminate the contract
in order to correct, but the contract
‘‘may need to be modified’’ to avoid
future excess benefit transactions.
The IRS received numerous
comments and requests for additional
guidance relating to correction as
defined in the proposed regulations. A
number of commentators requested that
final regulations state explicitly that
correction requires a disqualified person
to pay interest on the excess benefit
amount, and to specify the rate of
interest.
The temporary regulations state that
the disqualified person must pay the
applicable tax-exempt organization a
correction amount in order to correct an
excess benefit transaction and prevent
imposition of the 200-percent tax. The
correction amount equals the sum of the
excess benefit and interest on the excess
benefit. The amount of the interest
charge is determined by multiplying the
excess benefit by an interest rate,
compounded annually, for the period
from the date the excess benefit
transaction occurred to the date of
correction. The interest rate used for
this purpose must be a rate that equals

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or exceeds the applicable Federal rate
(AFR), compounded annually, for the
month in which the transaction
occurred. The period from the date the
excess benefit transaction occurred to
the date of correction is used to
determine whether the appropriate AFR
is the Federal short-term rate, the
Federal mid-term rate, or the Federal
long-term rate.
Commentators requested that an
applicable tax-exempt organization have
discretion to determine the appropriate
form of correction; for example,
payment of money, return of property,
or some combination. Alternatively, one
commentator requested an explicit rule
that monetary payment is always
sufficient and that a buy-back or return
of property is not required. Another
requested clarification that rescission
could constitute an appropriate form of
correction.
The temporary regulations provide, in
general, that a disqualified person
corrects an excess benefit only by
making a payment in cash or cash
equivalents to the applicable tax-exempt
organization equal to the correction
amount. The disqualified person may,
however, with the agreement of the
applicable tax-exempt organization,
make a payment by returning specific
property previously transferred in the
excess benefit transaction. In the latter
case, the amount of the payment equals
the lesser of the fair market value of the
property determined on the date the
property is returned to the organization,
or the fair market value of the property
on the date the excess benefit
transaction occurred.
Under the temporary regulations, if
the payment made by returning the
property is less than the correction
amount, the disqualified person must
make an additional cash payment to the
organization of the difference.
Conversely, if the payment made by
returning the property exceeds the
correction amount, the organization may
make a cash payment to the disqualified
person of the difference. The
disqualified person who engaged in the
excess benefit transaction with the
applicable tax-exempt organization may
not participate in the applicable taxexempt organization’s decision whether
to accept as a correction payment the
return of specific property previously
transferred in the excess benefit
transaction. An organization may
always refuse the return of that property
as payment, and require instead that the
disqualified person make a payment in
cash (or cash equivalents) of the full
correction amount.
The temporary regulations provide a
special rule relating to the correction of

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an excess benefit transaction resulting
from the vesting of benefits provided
under a nonqualified deferred
compensation plan. To the extent that
such benefits have not been distributed
to the disqualified person, the
disqualified person may correct the
portion of the excess benefit attributable
to such undistributed deferred
compensation by relinquishing any right
to receive such benefits (including any
earnings thereon).
The temporary regulations provide
five new examples that illustrate
acceptable forms of correction. The
temporary regulations also clarify that,
if the disqualified person makes a
payment of less than the full correction
amount, the 200-percent tax is imposed
only on the unpaid portion of the
correction amount.
Another commentator suggested that
where an organization failed to establish
its intent to treat an economic benefit as
consideration for the performance of
services, amending an information
return, rather than requiring the
disqualified person to repay the benefit,
should be sufficient to correct the excess
benefit transaction, assuming that the
total amount of compensation was
reasonable. In this regard, the proposed
regulations specifically allow the
reporting of an economic benefit by an
organization on an original or amended
Federal tax information return to
establish that a benefit was intended as
compensation. The proposed
regulations and these temporary
regulations permit an organization to
establish its intent by amending an
information return at any time prior to
when the IRS commences an
examination. Additionally, the
temporary regulations explicitly allow
the disqualified person to amend the
person’s Federal tax return to report a
benefit as income at any time prior to
when the IRS commences an
examination of the disqualified person
or the applicable tax-exempt
organization for the taxable year in
which the transaction occurs.
In addition, under the proposed
regulations and these temporary
regulations, if an organization can show
reasonable cause (using existing
standards under section 6724) for failing
to report an economic benefit as
compensation as required under the
Code or regulations, then the
organization will be treated as clearly
indicating its intent to provide an
economic benefit as compensation for
services. The section 6724 standards
include acting in a responsible manner
before and after the failure to report
occurred, along with either significant

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mitigating factors or events beyond the
organization’s control.
Where the applicable tax-exempt
organization provides taxable benefits to
a disqualified person, section 4958(c)(1)
requires a clear indication that the
organization intended to provide the
benefits as consideration for the
performance of services. Where there is
no such clear indication, the value of
those benefits generally is an excess
benefit, regardless of any claim of
reasonableness of the total
compensation package. In this case, the
regular correction rules apply.
The temporary regulations provide
that failure of the organization or the
disqualified person to report nontaxable
economic benefits (or otherwise
document a clear intent) does not result
automatically in an excess benefit
transaction. This rule is consistent with
the legislative history. (H. REP. NO. 506,
104th Congress, 2d SESS. (1996), 53, 57,
note 8). These nontaxable benefits must
still be taken into account (unless
specifically excluded elsewhere in the
regulations) when determining whether
the total amount of compensation paid
to a disqualified person is reasonable.
Therefore, only to the extent that total
compensation exceeds what is
reasonable could a section 4958 excise
tax be imposed and correction be
required with respect to nontaxable
economic benefits.
The temporary regulations provide
additional guidance regarding
correction where an applicable taxexempt organization has ceased to exist
or is no longer tax-exempt under section
501(a) as an organization described in
section 501(c)(3) or (4). The temporary
regulations make clear that a
disqualified person must correct the
excess benefit transaction in either
event. In the case of section 501(c)(3)
organizations, the disqualified person
must pay the correction amount to
another organization described in
section 501(c)(3) in accordance with the
dissolution clause of the applicable taxexempt organization involved in the
excess benefit transaction, provided the
other organization is not related to the
disqualified person. In the case of
section 501(c)(4) organizations, the
disqualified person must pay the
correction amount to the successor
section 501(c)(4) organization or, if there
is no tax-exempt successor, to any
section 501(c)(3) or section 501(c)(4)
organization not related to the
disqualified person.
Several commentators requested
clarification that a disqualified person is
allowed to deduct the payment of a
correction amount as a business
expense. The issue is beyond the scope

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of these regulations. The provisions of
Subtitle A of the Code govern the
deductibility of any part of a correction
payment.
Tax Paid by Organization Managers:
Reliance on Advice of Counsel
The proposed regulations provide a
safe harbor under which a manager’s
participation in a transaction will
ordinarily not be subject to tax under
section 4958(a)(2), even though the
transaction is subsequently held to be
an excess benefit transaction, if the
manager fully discloses the factual
situation to legal counsel, then relies on
the advice of such counsel expressed in
a reasoned written legal opinion that a
transaction is not an excess benefit
transaction. This safe harbor parallels
the rules for foundation manager taxes
contained in the regulations under
section 4941 (taxes on self-dealing) and
section 4945 (taxes on taxable
expenditures).
A number of commentators suggested
that the final regulations expand the
advice-of-counsel safe harbor to allow
reliance on the advice of other
professionals. Specifically mentioned
were section 7525 practitioners
(Federally authorized tax practitioners),
professional tax advisors, and
compensation consultants and
appraisers with respect to valuation
issues. Commentators likewise
suggested that parallel revisions should
be made to the section 4941 and 4945
regulations.
The temporary regulations expand the
safe harbor contained in the proposed
regulations. The temporary regulations
provide that an organization manager’s
participation in an excess benefit
transaction will ordinarily not be
considered knowing to the extent that,
after full disclosure of the factual
situation to an appropriate professional,
the organization manager relies on a
reasoned written opinion of that
professional with respect to elements of
the transaction within the professional’s
expertise. For this purpose, appropriate
professionals are legal counsel
(including in-house counsel), certified
public accountants or accounting firms
with expertise regarding the relevant tax
law matters, and independent valuation
experts who meet specified
requirements. The requirements for
appropriate valuation experts are
modeled after the section 170
regulations that define qualified
appraisers for charitable deduction
purposes. Under the section 4958
temporary regulations, the valuation
experts must hold themselves out to the
public as appraisers or compensation
consultants; perform the relevant

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valuations on a regular basis; be
qualified to make valuations of the type
of property or services being valued;
and include in the written opinion a
certification that they meet the
preceding requirements. This section
4958 regulations project did not
undertake any revisions to the adviceof-counsel safe harbor or the definition
of knowing in the section 4941 and 4945
regulations.
The temporary regulations contain an
additional safe harbor, providing that an
organization manager’s participation in
a transaction will ordinarily not be
considered knowing if the manager
relies on the fact that the requirements
giving rise to the rebuttable
presumption of reasonableness are
satisfied with respect to the transaction
(for the requirements, see discussion
under the heading Rebuttable
presumption that a transaction is not an
excess benefit transaction of this
preamble).
Date of Occurrence
Section 4958 does not specify when
an excess benefit transaction occurs.
The proposed regulations provide that
an excess benefit transaction occurs on
the date on which the disqualified
person receives the economic benefit
from the applicable tax-exempt
organization for Federal income tax
purposes. The proposed regulations also
provide that a transaction consisting of
the payment of deferred compensation
occurs on the date the deferred
compensation is earned and vested.
Several comments were received
requesting additional guidance about
the timing of an excess benefit
transaction. Specifically, one
commentator requested clarification in
the case of multiple payments.
The temporary regulations continue to
provide as a general rule that an excess
benefit transaction occurs on the date
the disqualified person receives the
economic benefit for Federal income tax
purposes. The temporary regulations
contain additional rules for a series of
compensation payments or other
payments arising pursuant to a single
contractual arrangement provided to a
disqualified person over the course of
the disqualified person’s taxable year (or
part of a taxable year). In such a case,
any excess benefit transaction with
respect to these aggregate payments is
deemed to occur on the last day of the
taxable year (or, if the payments
continue for part of the year, the date of
the last payment in the series).
The temporary regulations also
contain special rules for deferred,
contingent, and certain noncash
compensation. The temporary

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regulations state that in the case of
benefits provided pursuant to a
qualified pension, profit-sharing, or
stock bonus plan, the transaction occurs
on the date the benefit is vested. In the
case of a transfer of property that is
subject to a substantial risk of forfeiture,
or in the case of rights to future
compensation or property (including
benefits under a nonqualified deferred
compensation plan), the transaction
occurs on the date the property, or the
rights to future compensation or
property, is not subject to a substantial
risk of forfeiture. However, where the
disqualified person elects to include an
amount in gross income in the taxable
year of transfer pursuant to section
83(b), the general rule applies, such that
the transaction occurs on the date the
disqualified person receives the
economic benefit from the applicable
tax-exempt organization for Federal
income tax purposes. Any excess benefit
transaction with respect to benefits
under a deferred compensation plan
which vest during any taxable year of
the disqualified person is deemed to
occur on the last day of the disqualified
person’s taxable year.
The temporary regulations continue to
reference the relevant Code sections for
statute of limitations rules as they apply
to section 4958 excise taxes. Generally,
the statute of limitations for section
4958 taxes begins with the filing of the
applicable tax-exempt organization’s
return for the year in which the excess
benefit transaction occurred. If the
organization discloses an item on its
return or on an attached schedule or
statement in a manner sufficient to
apprise the IRS of the existence and
nature of an excess benefit transaction,
the three-year limitation on assessment
and collection applies. If the transaction
is not so disclosed, a six-year limitation
on assessment and collection applies,
unless an exception listed in section
6501(c) applies.
Definition of Applicable Tax-Exempt
Organization
Section 4958(e) defines an applicable
tax-exempt organization as ‘‘any
organization which (without regard to
any excess benefit) would be described
in paragraph (3) or (4) of section 501(c)
and exempt from tax under section
501(a) * * *’’ (except private
foundations). An applicable tax-exempt
organization also includes any
organization that was described in
section 501(c)(3) or (4) and exempt from
tax under section 501(a) at any time
during a five-year period ending on the
date of an excess benefit transaction (the
lookback period).

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The temporary regulations revise the
section defining applicable tax-exempt
organizations to clarify that an
organization is not described in section
501(c)(3) or (4) for purposes of section
4958 during any period covered by a
final determination or adjudication that
the organization is not exempt from tax
under section 501(a) as an organization
described in section 501(c)(3) or (4), so
long as that determination or
adjudication is not based upon
participation in inurement or one or
more excess benefit transactions.
A number of commentators requested
that the final regulations clarify the
status of section 115 governmental
entities that voluntarily applied for a
determination of their section 501(c)(3)
status. Others requested that those
governmental entities that applied for
section 501(c)(3) exemption before the
enactment of section 4958 be exempt
from section 4958. In response to these
comments, the temporary regulations
provide that any governmental entity
that is exempt from (or not subject to)
taxation without regard to section 501(a)
is not an applicable tax-exempt
organization for purposes of section
4958.
Definition of Disqualified Person
Section 4958(f)(1) defines a
disqualified person with respect to any
transaction as ‘‘any person who was, at
any time during the 5-year period
ending on the date of such transaction,
in a position to exercise substantial
influence over the affairs of the
organization * * *’’ (and several other
categories of related persons). The
proposed regulations list the statutory
categories of related persons (i.e.,
certain family members and 35-percent
controlled entities) that are treated as
disqualified persons for section 4958
purposes. The proposed regulations also
list several categories of persons who
are treated as disqualified persons by
virtue of the functions they perform for,
or the interests they hold in, the
organization. The proposed regulations
further provide that other persons may
be treated as disqualified persons
depending on all relevant facts and
circumstances and list some of the
factors to be considered.
Some commentators questioned
certain categories of persons who are
deemed to have substantial influence
under the proposed regulations (e.g.,
presidents, chief executive officers,
treasurers), arguing that these per se
categories conflict with a statement in
the legislative history that ‘‘[a] person
having the title of ‘officer, director, or
trustee’ does not automatically have the
status of a disqualified person.’’ These

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commentators requested that final
regulations adopt an alternative
approach of listing these categories as
facts and circumstances tending to show
that a person has substantial influence
over the affairs of an organization. In
response to these comments, the
temporary regulations clarify that the
per se categories of persons who are in
a position to exercise substantial
influence for section 4958 purposes are
defined by reference to the actual
powers and responsibilities held by the
person and not merely by the person’s
title or formal position. Thus, for
example, it is possible that a person
with the mere title of ‘‘president’’ could
be treated as not having substantial
influence if it is demonstrated that the
person, in fact, does not have ultimate
responsibility for implementing the
decisions of the governing body or for
supervising the management,
administration, or operation of the
organization.
A number of commentators objected
to a provision in the proposed
regulations under which a person who
has or shares authority to sign drafts or
to authorize electronic transfer of the
organization’s funds is treated as a
treasurer or chief financial officer who
is in a position to exercise substantial
influence over the affairs of the
organization. Other commentators
requested that the final regulations
recognize that a person who may
authorize transfer of only minimal
amounts of the organization’s funds
should not be treated as a disqualified
person solely by reason of that
authority.
The temporary regulations clarify that
a person who has the powers and
responsibilities of a treasurer or chief
financial officer is in a position to
exercise substantial influence, provided
that the person has ultimate
responsibility for managing the finances
of the organization. As requested by
commentators, the temporary
regulations delete the provision from
the proposed regulations that refers to
having, or sharing, authority to sign
drafts or to authorize electronic transfer
of funds.
The IRS and the Treasury Department
considered, but declined to adopt at
present, a special rule with respect to
so-called ‘‘donor advised funds’’
maintained by an applicable tax-exempt
organization. Unlike other segments of
an applicable tax-exempt organization,
such as an operating department (or
division) of the organization, a donor
advised fund consists of a segregated
fund maintained for the specific
purpose of allowing certain persons to
provide ongoing advice regarding the

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organization’s use of amounts
contributed by a particular donor (or
donors). Although these persons cannot
properly have legal control over the
segregated fund, they nonetheless are in
a position to exercise substantial
influence over the amount, timing, or
recipients of distributions from the
fund. Accordingly, the IRS and the
Treasury Department request comments
regarding potential issues raised by
applying the fair market value standard
of section 4958 to distributions from a
donor advised fund to (or for the use of)
the donor or advisor.
The proposed regulations deem
certain persons not to have substantial
influence, including any applicable taxexempt organization described in
section 501(c)(3) (i.e., public charities
subject to section 4958). Various
commentators requested that section
501(c)(4) applicable tax-exempt
organizations, section 115 governmental
entities, corporations or associations
organized as non-profits under the laws
of any State, or entities 100-percent
controlled by and for the benefit of
section 501(c)(3) applicable tax-exempt
organizations, be deemed not to exercise
substantial influence over the affairs of
applicable tax-exempt organizations.
The temporary regulations provide
that any organization described in
section 501(c)(3) and exempt from tax
under section 501(a) (including a
private foundation), is not a disqualified
person. The temporary regulations do
not specifically exclude from
disqualified person status section 115
and section 501(c)(4) organizations
generally, as requested in comments.
However, the temporary regulations
state that an organization described in
section 501(c)(4) is deemed not to have
substantial influence with respect to
another applicable tax-exempt
organization described in section
501(c)(4). Additionally, the temporary
regulations provide that the transfer of
economic benefits to a government
entity for exclusively public purposes is
disregarded for purposes of section
4958.
A number of comments were received
on the section of the proposed
regulations providing that facts and
circumstances govern in all cases where
disqualified person status is not
explicitly described. Commentators
variously requested revision or deletion
of the statement that a person with
managerial control over a discrete
segment of an organization could be in
a position to exercise substantial
influence over the affairs of the entire
organization. Instead of considering this
factor in an overall evaluation of the
facts and circumstances, the temporary

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regulations provide that the fact that a
‘‘person manages a discrete segment or
activity of the organization that
represents a substantial portion of the
activities, assets, income, or expenses of
the organization’’ is a separate factor
tending to show substantial influence.
The IRS and the Treasury Department
believe that, in some circumstances, a
person managing a discrete segment or
activity of an organization is, in fact, in
a position to exercise substantial
influence over the organization as a
whole.
With respect to the factor that a
person is a substantial contributor
within the meaning of section 507(d)(2),
requests were made to define a
substantial contributor as a person
contributing more than two percent of
the organization’s total support; to use
a higher threshold, such as the greater
of $50,000 or 10 percent of total
contributions received; to limit the
treatment of substantial contributor
status as a factor to a reasonable time
(e.g., four years); and to tie substantial
contributor status to persons required to
be disclosed as such on Form 990 or
Schedule A of that form. Additionally,
a request was made to specify how the
five-year lookback period applies to
substantial contributors.
The temporary regulations continue to
include as a factor tending to show
substantial influence the fact that a
person is a substantial contributor,
generally as defined in section
507(d)(2)(A). However, the temporary
regulations clarify that, to determine
whether a person is a substantial
contributor for section 4958 purposes,
only contributions received by the
organization during its current taxable
year and the four preceding taxable
years are taken into account.
With respect to the factor that a
person’s compensation is based on
revenues derived from activities of the
organization that the person controls, a
number of commentators requested that
a determination of disqualified person
status not be based solely on this factor.
Several commentators specifically
requested clarification of this factor
with respect to physicians in particular,
and others requested that the factor be
deleted altogether. Other commentators
requested that the factor be narrowed to
situations where the person’s
compensation is based on revenues from
activities that provide over half of the
organization’s annual revenue, or that
the factor be modified to apply only if
a person’s compensation is based to a
significant extent on revenues derived
from activities of the organization that
the person controls. In response to these
comments, the temporary regulations

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modify the factor to require that the
person’s compensation is primarily
based on revenues derived from
activities of the organization that the
person controls.
A number of commentators argued
that it is inappropriate to include all
persons with managerial authority, or
persons serving as key advisors to a
person with managerial authority, as
potential disqualified persons.
Additional comments on this issue
requested that the final regulations
clarify the meaning of managerial
authority or delete that factor from the
regulations. Others suggested that the
term key advisor be limited to those
with real, substantial authority, or
deleted altogether and replaced by a
standard that a person can have
managerial authority by virtue of his or
her actual impact on the organization’s
affairs without regard to title or
position. In response to these
comments, the temporary regulations
delete as a factor tending to show
substantial influence the fact that a
person serves as a key advisor to a
manager. Moreover, with respect to
managerial authority, the temporary
regulations list revised factors tending
to show substantial influence, including
whether: (1) The person has or shares
authority to control or determine a
substantial portion of the organization’s
capital expenditures, operating budget,
or compensation for employees; and (2)
the person manages a discrete segment
or activity of the organization that
represents a substantial portion of the
activities, assets, income, or expenses of
the organization, as compared to the
organization as a whole.
With respect to factors tending to
show that a person does not have
substantial influence, one commentator
requested that the fact that the person
has had no prior involvement or
relationship with the organization be
added as a factor. Another commentator
requested that the independent
contractor factor be modified so that all
‘‘outside, independent professionals
performing services on a strictly fee-forservice arrangement’’ are presumed not
to be disqualified persons. Other
commentators requested that additional
factors tending to show no substantial
influence be added for employees. In
this regard, suggested factors included
that the person reports to a disqualified
person, does not participate in major
policy or financial decisions affecting
the organization as a whole, or holds a
position three or more levels below the
governing body. In response to these
comments, the temporary regulations
provide as a factor tending to show no
substantial influence the fact that a

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person is an independent contractor
(such as an attorney, accountant, or
investment manager or advisor) whose
sole relationship to the organization is
providing professional advice, but who
does not have decision-making
authority, with respect to transactions
from which the independent contractor
will not economically benefit either
directly or indirectly (aside from
customary fees received for the
professional advice rendered). In
addition, the temporary regulations add
as factors tending to show no substantial
influence the fact that the direct
supervisor of the individual is not a
disqualified person, and that the person
does not participate in any management
decisions affecting the organization as a
whole or a substantial, discrete segment
or activity of the organization. The
temporary regulations also address the
issue of persons with no prior
involvement with the organization by
providing a special exception for initial
contracts (see the discussion under the
heading Initial Contract Exception in
this preamble).
Definition of Excess Benefit Transaction
Section 4958(c)(1) defines the phrase
excess benefit transaction as ‘‘any
transaction in which an economic
benefit is provided by an applicable taxexempt organization directly or
indirectly to or for the use of any
disqualified person if the value of the
economic benefit provided exceeds the
value of the consideration (including
the performance of services) received for
providing such benefit.’’ The excess
benefit is the amount by which the
value of the economic benefits provided
to (or for the use of) the disqualified
person exceeds the value of the
consideration received. The proposed
regulations further define certain terms
in the statutory definition of excess
benefit transaction and delineate
specific items that either are disregarded
or must be taken into account in
determining the value of a
compensation package. The proposed
regulations also prescribe standards for
determining fair market value for
section 4958 purposes. In response to
comments received on these topics, the
temporary regulations make numerous
changes to the provisions of the
proposed regulations that define the
phrase excess benefit transaction (as
summarized under the next six topic
headings).
The IRS and the Treasury Department
considered whether embezzled amounts
should be viewed as provided by the
organization for section 4958 purposes.
In this regard, the IRS and the Treasury
Department believe that any economic

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benefit received by a disqualified person
(who by definition has substantial
influence) from the assets of the
organization is provided by the
organization even if the transfer of the
benefit was not authorized under the
regular procedures of the organization.
Economic Benefit Provided Directly or
Indirectly
Section 4958(c)(1)(A) provides that an
excess benefit transaction may arise
when economic benefits are provided by
an applicable tax-exempt organization
directly or indirectly to or for the use of
any disqualified person. In this regard,
the proposed regulations provide that
‘‘[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
organization 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.’’ This
example is based on similar language
contained in the legislative history to
section 4958 (See H. REP. NO. 506,
104th Congress, 2d SESS. (1996), 53, 56,
note 3).
A number of commentators requested
further clarification of the definition of
indirect excess benefit transactions.
Some commentators requested that the
final regulations clarify that any
compensation disqualified persons
receive from unrelated third parties
through the acquiescence of the
employing applicable tax-exempt
organization not be considered in
determining reasonable compensation.
Another commentator suggested that, as
a general rule, an excess benefit may be
found to be provided indirectly through
an entity controlled by an applicable
tax-exempt organization only when the
funds or other benefits at issue can
clearly be traced to the parent
organization. Additionally, a request
was received to specify that payment by
a subsidiary of excessive compensation
does not, by itself, justify the conclusion
that the parent organization caused the
subsidiary to engage in an excess benefit
transaction. Other requests were made
to clarify that services received by the
applicable tax-exempt organization may
include services provided by the
disqualified person to one or more other
entities controlled by or affiliated with
the organization.
Commentators also suggested several
clarifications to the phrase ‘‘controlled
by or affiliated with’’ for purposes of

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determining whether an indirect excess
benefit transaction has occurred. One
commentator suggested that control or
affiliation must exist at the time the
benefit is authorized or approved, rather
than when the benefit is received by the
disqualified person. Others suggested
that the definition of ‘‘controlled by or
affiliated with’’ follow more closely the
definition of control under the section
4941 self-dealing regulations or under
section 512(b)(13) (including
constructive ownership rules contained
in section 318). Another commentator
suggested defining the term affiliated to
mean that organizations share a majority
of governing body members or principal
officers. Other commentators requested
that the final regulations state that
approval of a benefit by a board
independent of the applicable taxexempt organization would prevent
finding that the organization indirectly
provided an excess benefit to a
disqualified person. Commentators also
requested that the final regulations
include examples demonstrating that
the mere existence of a relationship
between two entities, including a
control relationship, is insufficient to
justify a conclusion that a benefit has
been indirectly provided to a
disqualified person unless a purposeful
avoidance of section 4958 by
conducting a transaction indirectly is
shown.
In response to these comments, the
temporary regulations clarify that an
applicable tax-exempt organization may
provide an economic benefit indirectly
to a disqualified person either through
a controlled entity or through an
intermediary. In this regard, the
temporary regulations parallel the
section 4941 self-dealing regulations,
except that the temporary regulations
generally adopt the section 512(b)(13)
standard for control. (The section
512(b)(13) standard for control
considers only the tax-exempt
organization’s interest in the controlled
entity, or the tax-exempt organization’s
control of a nonstock corporation’s
directors or trustees. In contrast, the
section 4941 regulations’ definition of
control also considers interests held
individually by the directors or trustees
of the foundation). The temporary
regulations provide that all
consideration and benefits exchanged
between a disqualified person and an
applicable tax-exempt organization, and
all entities the organization controls, are
taken into account to determine whether
there has been an excess benefit
transaction.
The temporary regulations provide
that an applicable tax-exempt
organization provides an economic

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benefit indirectly through an
intermediary when: (1) An applicable
tax-exempt organization provides an
economic benefit to a third party (the
intermediary); (2) the intermediary
provides economic benefits to a
disqualified person of the applicable
tax-exempt organization; and (3) either
(a) there is evidence of an oral or written
agreement or understanding that the
intermediary will transfer property to a
disqualified person; or (b) the
intermediary lacks a significant business
purpose or exempt purpose of its own
for engaging in such a transfer. The
temporary regulations also include four
new examples illustrating different fact
patterns under which economic benefits
are provided indirectly to a disqualified
person through a controlled entity or
through an intermediary.
Initial Contract Exception
The proposed regulations do not
provide any special rules for
transactions conducted pursuant to the
first contract that a previously unrelated
person enters into with the applicable
tax-exempt organization. Several
comments received during the regular
comment period requested that a person
having no prior relationship with an
organization not be considered a
disqualified person with respect to the
first contractual arrangement with the
organization.
After the close of the written
comment period for the proposed
regulations (November 2, 1998), but
before the public hearing (March 16 and
17, 1999), the United States Court of
Appeals for the Seventh Circuit issued
its decision in United Cancer Council,
Inc. v. Commissioner of Internal
Revenue, 165 F.3d 1173 (7th Cir. 1999),
rev’ing and remanding 109 T.C. 326
(1997). In this case, the Seventh Circuit
reversed the Tax Court’s finding that a
contract between a charity and a
previously unrelated fundraising
company resulted in private inurement
in violation of the charity’s tax-exempt
status. The Seventh Circuit remanded
the case back to the Tax Court to
address the question whether the
fundraising contract resulted in private
benefit in violation of section 501(c)(3).
In United Cancer Council, the
Seventh Circuit concluded that
prohibited inurement under section
501(c)(3) cannot result from a
contractual relationship negotiated at
arm’s length with a party having no
prior relationship with the organization,
regardless of the relative bargaining
strength of the parties or resultant
control over the tax-exempt organization
created by the terms of the contract. The
transactions at issue in United Cancer

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Council were conducted prior to the
effective date of section 4958.
Consequently, United Cancer Council
involved interpretations of the general
requirements for tax-exempt status
under section 501(c)(3), and not
questions of disqualified person status
or the existence of an excess benefit
transaction under section 4958.
Nevertheless, at the public hearing and
in supplemental comments received
after the hearing, commentators
referenced the Seventh Circuit decision
and requested that the proposed
regulations be modified so that section
4958 excise taxes will not be imposed
on the first transaction or contract
between an applicable tax-exempt
organization and a previously unrelated
person.
The temporary regulations address the
issue raised by United Cancer Council
by providing that section 4958 does not
apply to any fixed payment made to a
person pursuant to an initial contract,
regardless of whether the payment
would otherwise constitute an excess
benefit transaction. For this purpose, an
initial contract is defined as a binding
written contract between an applicable
tax-exempt organization and a person
who was not a disqualified person
immediately prior to entering into the
contract. A fixed payment means an
amount of cash or other property
specified in the contract, or determined
by a fixed formula specified in the
contract, which is paid or transferred in
exchange for the provision of specified
services or property. A fixed formula
may incorporate an amount that
depends upon future specified events or
contingencies (e.g., revenues generated
by activities of the organization),
provided that no person exercises
discretion when calculating the amount
of a payment or deciding whether to
make a payment. As suggested by some
commentators, however, the initial
contract rule does not apply if the
contract is materially modified or if a
person fails to substantially perform his
or her obligations under the contract.
Thus, under the temporary
regulations, to the extent that an
applicable tax-exempt organization and
a person who is not yet a disqualified
person conduct negotiations and specify
the amounts to be paid to the person (or
specify an objective formula for paying
that person), then these fixed payments
are not subject to scrutiny under section
4958, even if paid after the person
becomes a disqualified person. An
initial contract may provide for both
fixed and non-fixed (i.e., discretionary)
payments. In this case, the fixed
payments are not subject to section
4958, while the non-fixed payments will

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be subject to scrutiny under section
4958 (taking into account all
consideration exchanged between the
parties). In effect, the initial contract
rule contained in the temporary
regulations protects from section 4958
liability those payments made pursuant
to fixed, objective terms specified in a
contract entered into before the person
was in a position to exercise substantial
influence, yet allows for scrutiny under
section 4958 to the extent the contract
allows for subsequent discretion to be
exercised (which may be subject to
influence by the disqualified person)
when calculating the amount of a
payment or deciding whether to make a
payment. The temporary regulations
include eleven examples to illustrate the
application of the initial contract rule.
Certain Economic Benefits Disregarded
for Purposes of Section 4958
For ease of administration, the
proposed regulations list several
economic benefits that are disregarded
for purposes of section 4958. These
disregarded items include
reimbursements for reasonable expenses
of attending meetings of the governing
body (but not luxury or spousal travel);
certain economic benefits provided to a
disqualified person solely as a member
of, or volunteer for, the organization;
and economic benefits provided to a
disqualified person solely as a member
of a charitable class. A number of
comments recommended modifying
these provisions.
With respect to reimbursements for
expenses of attending meetings of the
governing body (but not luxury travel or
spousal travel), suggestions were made
to clarify or delete these terms; to
provide as an alternative that all travel
expenses that are not lavish or
extravagant within the meaning of
section 162 may be disregarded; to
disregard spousal travel expenses in
circumstances where the spousal
attendance furthers the exempt
purposes of the organization or meets
the section 274 bona fide business
purpose test; and to address the issue of
travel expenses by generally
disregarding working condition fringe
benefits and de minimis fringe benefits
described in sections 132(d) and (e).
Other commentators requested that any
benefits received by a disqualified
person should be disregarded if
incidental to the organization’s
achievement of its exempt purposes,
such as when disqualified persons
attend fundraising dinners or
conferences on behalf of the
organization.
In response to these comments, the
temporary regulations delete the

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separate provision that provides that
reasonable expenses of attending
meetings of the governing body may be
disregarded. In place of this provision,
the temporary regulations substitute a
more general rule providing that all
fringe benefits excluded from income
under section 132 (except for certain
liability insurance premiums, payments
or reimbursements, discussed below)
are disregarded for section 4958
purposes. This change addresses
comments received on the limitation in
the proposed regulations with respect to
luxury and spousal travel. By referring
to fringe benefits excluded from income
under section 132, the temporary
regulations adopt existing standards
under section 162 and section 274
(which are incorporated into section
132) to determine whether payments or
reimbursements of travel expenses of an
employee or— any other expenses—
should be disregarded for section 4958
purposes or, instead, treated as part of
the disqualified person’s compensation.
With respect to economic benefits
provided to a disqualified person solely
as a member of, or volunteer for, the
organization, the proposed regulations
disregard such benefits for section 4958
purposes only if the organization
provides the same benefits to members
of the general public in exchange for a
membership fee of $75 or less per year.
Commentators suggested that this
provision be expanded in the final
regulations to apply to any benefit
(without a dollar limitation) provided to
a disqualified person solely by virtue of
that person being a donor, volunteer, or
member, provided that any member of
the general public making a comparable
contribution receives a similar benefit.
Another commentator requested a
similar modification, with the
additional requirement that a significant
number of non-disqualified persons
(e.g., 10 or more) actually make a
comparable payment to the organization
and are given the option of receiving
substantially the same benefit.
The temporary regulations continue to
disregard for section 4958 purposes
economic benefits provided to a
volunteer (who is also a disqualified
person) if that benefit is provided by the
organization to the general public in
exchange for a membership fee or
contribution of $75 or less per year. In
contrast, economic benefits provided to
a disqualified person as a member of, or
a donor to, an applicable tax-exempt
organization are no longer limited by a
specific dollar cap. The temporary
regulations disregard economic benefits
provided to a member of an organization
solely on account of the payment of a
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account of a contribution deductible
under section 170 if: (1) Any nondisqualified person paying a
membership fee or making a
contribution above a specified amount
to the organization is given the option
of receiving substantially the same
economic benefit; and (2) the
disqualified person and a significant
number of non-disqualified persons in
fact make a payment or contribution of
at least the specified amount.
The temporary regulations clarify that
section 162 standards apply in
determining reasonableness of
compensation for section 4958
purposes, taking into account all
benefits provided to a person (other
than benefits that are specifically
disregarded for section 4958 purposes)
and the rate at which any deferred
compensation accrues. The temporary
regulations also provide that the fact
that a bonus or revenue-sharing
arrangement is subject to a cap is a
relevant factor in determining the
reasonableness of compensation.
Insurance or Indemnification of Excise
Taxes
The legislative history to section 4958
indicates that reimbursements of excise
tax liability, or payment of premiums
for liability insurance for excess benefit
taxes, by an applicable tax-exempt
organization constitute an excess benefit
unless they are included in the
disqualified person’s compensation
during the year paid and the total
compensation package for that person is
reasonable. See H. REP. NO. 506, 104th
Congress, 2d SESS. (1996), 53, 58.
Following this legislative history, the
proposed regulations specifically
provide that payment of a premium for
insurance for section 4958 taxes or
indemnification of a disqualified person
for these taxes is not an excess benefit
transaction if the premium or the
indemnification is treated as
compensation to the disqualified person
when paid, and the total compensation
paid to the person is reasonable.
However, some commentators read the
special rule in conjunction with another
section of the proposed regulations—
which listed ‘‘[t]he 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’’ as an item included in
compensation for purposes of section
4958—as potentially mandating that
such insurance premium or
indemnification payments be treated as
taxable income to the disqualified
person in order to avoid being

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2151

characterized as an excess benefit
transaction.
Several commentators requested that
premiums for liability insurance be
disregarded entirely for section 4958
purposes, along with non-compensatory
indemnification of members of the
governing body and officers against
liability in civil proceedings (as
described in the private foundation selfdealing regulations under section 4941),
or that de minimis costs (e.g., $200)
associated with such insurance coverage
be disregarded.
Other commentators suggested that a
portion of the premium payment be
allocated to section 4958 tax coverage,
and that only that portion be included
in compensation of the disqualified
person. Others requested that the
portion of a premium allocable to
liability insurance coverage for an
organization manager who is also a
disqualified person to cover the person’s
potential liability for the manager-level
tax under section 4958(a)(2) be
considered a working condition fringe
under section 132(d). Others requested
that benefits under indemnification
plans be taken into account for section
4958 purposes only if and when paid.
To clarify the treatment of insurance
premiums and reimbursements of excise
tax liability, the temporary regulations
include a special rule, which includes
in a disqualified person’s compensation
for section 4958 purposes the payment
of liability insurance premiums for, or
the payment or reimbursement by the
organization of: (1) Any penalty, tax, or
expense of correction owed under
section 4958; (2) any expense not
reasonably incurred by the person in
connection with a civil judicial or civil
administrative proceeding arising out of
the person’s performance of services on
behalf of the applicable tax-exempt
organization; and (3) any expense
resulting from an act or failure to act
with respect to which the person has
acted willfully and without reasonable
cause. This rule parallels the section
4941 regulations governing the
treatment of directors and officers
liability insurance and indemnification.
As under the section 4941 regulations,
however, the temporary regulations
provide that insurance premiums and
reimbursements may be disregarded if
they qualify as de minimis fringe
benefits excludable from income under
section 132(a)(4).
In addition, the temporary regulations
clarify that the inclusion of an item in
compensation for section 4958 purposes
does not govern its income tax
treatment. Thus, the mere fact that a
premium or reimbursement payment, or
any other benefit, provided to a

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disqualified person must be taken into
account in determining the
reasonableness of that person’s total
compensation package for section 4958
purposes is not determinative of
whether or not that benefit is included
in the disqualified person’s gross
income for income tax purposes.
Timing Rules for Determining
Reasonableness
Section 4958(c)(1) defines an excess
benefit transaction as a transaction in
which the value of an economic benefit
provided to a disqualified person
exceeds the value of the consideration
received (including the performance of
services), but the statutory provisions do
not directly address the issue of when
to value the benefits and consideration
exchanged. In this regard, the proposed
regulations provide that whether
compensation is reasonable is generally
determined when the parties enter into
the contract for services. The proposed
regulations further provide, however,
that ‘‘where reasonableness of
compensation cannot be determined
based on circumstances 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.’’ Many commentators
objected to the uncertainty created by
this additional sentence.
To clarify the issue of the timing of
the reasonableness determination, the
temporary regulations provide that
reasonableness is determined with
respect to any fixed payment (as defined
for purposes of the initial contract rule
discussed above) at the time the parties
enter into the contract. However, the
temporary regulations provide that the
reasonableness of any amounts not fixed
in the contract itself or paid pursuant to
an objective formula is determined
based on all facts and circumstances, up
to and including circumstances as of the
date of the payment at issue, because
determining the amount of such a
payment (or whether a payment is
made) requires the exercise of discretion
after the contract is entered into.
Establishing Intent To Treat Economic
Benefit as Consideration for the
Performance of Services
The second sentence of section
4958(c)(1)(A) defining excess benefit
transaction states that an economic
benefit will not be treated as
consideration for the performance of
services unless the applicable taxexempt organization clearly indicated
its intent to so treat the benefit. The
proposed regulations generally require
the organization to provide clear and

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convincing evidence of its intent to treat
the benefit as compensation for services
when the benefit is paid. Under the
proposed regulations, this requirement
is satisfied if the organization reports
the economic benefit on a federal tax
information return filed before the
commencement of an IRS examination
in which the reporting of the benefit is
questioned, or 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. In addition, an organization is
deemed to satisfy the clear and
convincing evidence requirement if the
organization’s failure to report a
payment is due to reasonable cause as
defined in the section 6724 regulations.
The proposed regulations also provide
that an organization may use other
methods to provide clear and
convincing evidence of its intent. The
preamble of the proposed regulations
explicitly solicited comments on
appropriate ways of applying this rule
that would not create an unnecessary
burden on affected organizations.
A number of comments were received
with regard to establishing an
organization’s intent to treat a benefit as
compensation for services. Several
commentators suggested that the clear
and convincing standard is higher than
appropriate. Others requested that
organizations not be required to
demonstrate intent with respect to
specific benefits, such as:
reimbursement arrangements that are
clearly part of the employment
arrangement; de minimis amounts (for
example, taxable benefits of up to $500
per year provided to a disqualified
person); and certain nontaxable benefits.
Other commentators requested that final
regulations clarify the appropriate
method for substantiating an
organization’s intent in the case of
certain nontaxable benefits and transfers
of property subject to section 83. Others
requested guidance on how to report
compensation paid to a disqualified
person on Form 990 if that person is not
an officer or director or one of the five
highest paid employees. Some
commentators suggested that the final
regulations allow other methods to
establish an intention to treat benefits as
compensation, such as a written
contract of employment. Commentators
also suggested that an organization’s
reasonable belief that a benefit is
nontaxable should constitute reasonable
cause for failure to report, or that the
reasonable cause standard be expanded
to ordinary business care and prudence.
In response to these comments, the
temporary regulations modify the
requirement that an organization

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provide clear and convincing evidence
of its intent to treat benefits provided to
a disqualified person as compensation
for services. Consistent with the
legislative history, the temporary
regulations provide instead that an
organization must provide ‘‘written
substantiation that is contemporaneous
with the transfer of benefits at issue.’’ H.
REP. NO. 506, 104th Congress, 2d SESS.
(1996), 53, 57, note 8.
The temporary regulations also
provide a safe harbor for nontaxable
benefits. Under this safe harbor, an
applicable tax-exempt organization is
not required to indicate its intent to
provide an economic benefit as
compensation for services if the
economic benefit is excluded from the
disqualified person’s gross income for
income tax purposes under chapter 1 of
the Internal Revenue Code. Examples of
such benefits include: employerprovided health benefits, contributions
to a qualified pension, profit-sharing, or
stock bonus plan under Internal
Revenue Code section 401(a), and
benefits described in sections 127
(educational assistance programs) and
137 (adoption assistance programs). The
safe harbor is consistent with the
legislative history, which indicates that
Congress intended to except nontaxable
benefits from this contemporaneous
substantiation requirement. H. REP. NO.
506, 104th Congress, 2d SESS. (1996),
53, 57, note 8. However, the benefits
must still be taken into account (unless
specifically disregarded under the
regulations) in determining the
reasonableness of the disqualified
person’s compensation for purposes of
section 4958.
Consistent with the legislative history,
the temporary regulations also clarify
that, if a benefit is not reported on a
return filed with the IRS, other written
contemporaneous evidence (such as an
approved written employment contract
executed on or before the date of the
transfer) may be used to demonstrate
that the appropriate decision-making
body or an authorized officer approved
a transfer as compensation for services
in accordance with established
procedures.
Transaction in Which the Amount of the
Economic Benefit Is Determined in
Whole or in Part by the Revenues of One
or More Activities of the Organization
Section 4958(c)(2) describes a second
type of excess benefit transaction: ‘‘any
transaction in which the amount of any
economic benefit provided to or for the
use of a disqualified person is
determined in whole or in part by the
revenues of 1 or more activities of the
organization * * *’’, if the transaction

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results in inurement under section
501(c)(3) or (4). However, a revenuesharing transaction is treated as an
excess benefit transaction under this
special statutory rule only ‘‘[t]o the
extent provided in regulations
prescribed by the Secretary * * *. ’’
The proposed regulations provide that
whether a revenue-sharing transaction
results in inurement, and therefore
constitutes an excess benefit
transaction, depends upon all relevant
facts and circumstances. The proposed
regulations provide that, in general, a
revenue-sharing transaction may
constitute an excess benefit transaction
regardless of whether the economic
benefit provided to the disqualified
person exceeds the fair market value of
services (or other consideration)
rendered, if a disqualified person is
permitted to receive additional
compensation without providing
proportional benefits that contribute to
the organization’s accomplishment of its
exempt purpose.
The proposed regulations consider an
improper revenue-sharing transaction,
in its entirety, to be an excess benefit
subject to section 4958. Special rules
governing revenue-sharing transactions,
however, will be effective only for
transactions occurring on or after the
date of publication of final regulations
containing such rules. Until special
rules for revenue-sharing transactions
are adopted in final regulations, these
transactions are potentially subject to
section 4958 liability under the general
rules governing excess benefit
transactions, but only to the extent that
the value of the economic benefits
provided to the disqualified person is
shown to exceed the value of the
services (or other consideration)
received in return.
Numerous comments were received
with respect to revenue-sharing
transactions. Some commentators did
not believe a different standard from
that applied to all other transactions
(fair market value) should apply, and
that the value of consideration provided
by a disqualified person in a revenuesharing transaction should be taken into
account in determining the excess
benefit in these transactions.
Others objected to the revenuesharing transaction standard of the
proposed regulations, and requested
that it be replaced by a standard based
on approaches the IRS has taken in prior
unpublished rulings. Some
commentators requested guidance as to
the meaning of proportional benefits or
other concepts incorporated in the
proposed regulations standard. Others
requested that existing contractual
arrangements not be subject to this

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section of the final regulations, or that
the effect of the final rules for existing
arrangements be phased in. In addition,
several commentators requested that the
final regulations clarify whether the
rebuttable presumption of
reasonableness is available for revenuesharing transactions. In sum,
commentators offered multiple, often
conflicting, suggestions and
recommendations to address the many
issues raised with respect to revenuesharing transactions.
The temporary regulations reserve the
separate section governing revenuesharing transactions. Accordingly, the
IRS and the Treasury Department will
continue to consider the many
comments received on this issue. Any
revised regulations that may, in the
future, be issued governing revenuesharing transactions in particular will be
issued in proposed form. This will
provide an additional opportunity for
public comment, and any special rules
governing revenue-sharing transactions
will become effective only after being
published in final form. In the
meantime, revenue sharing transactions
will be evaluated under the general
rules (contained in § 53.4958–4T of the
temporary regulations) defining excess
benefit transactions, which apply to all
transactions with disqualified persons
regardless of whether the person’s
compensation is computed by reference
to revenues of the organization.
Rebuttable Presumption That a
Transaction is not an Excess Benefit
Transaction
Although the statute is silent on this
point, the legislative history
accompanying section 4958 indicated
Congress’ intent that the parties to a
transaction are entitled to rely on a
rebuttable presumption of
reasonableness with respect to any
transaction with a disqualified person
that is approved by a board of directors
or trustees (or committee thereof) that:
(1) Is composed entirely of individuals
unrelated to and not subject to the
control of the disqualified person(s)
involved in the transaction; (2) obtained
and relied upon appropriate data as to
comparability; and (3) adequately
documented the basis for its
determination. If these three
requirements are satisfied, the IRS can
impose section 4958 taxes only if it
develops sufficient contrary evidence to
rebut the probative value of the
evidence put forth by the parties to the
transaction. H. REP. NO. 506, 104th
Congress, 2d SESS. (1996), 53, 56–7.
The proposed regulations incorporate
this rebuttable presumption and provide
guidance regarding the three

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2153

requirements for invoking the rebuttable
presumption. The proposed regulations
provide that the presumption
established by satisfying the 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. Additionally, the proposed
regulations provide that, if the
reasonableness of compensation cannot
be determined based on circumstances
existing at the date when a contract for
services was made, then the
presumption cannot arise until
reasonableness of compensation can be
determined and the three requirements
subsequently are satisfied.
Comments were received on various
aspects of the rebuttable presumption of
reasonableness. With regard to the
requirement that the compensation
arrangement or property transfer must
be approved by a governing body (or
committee) composed entirely of
individuals who do not have a conflict
of interest with respect to the
transaction, one commentator suggested
that the final regulations adopt
standards consistent with the model
conflicts of interest policy published by
the IRS. The IRS and the Treasury
Department believe that the standards
contained in the proposed regulations
for determining the absence of a conflict
of interest are consistent with the
legislative history of section 4958,
which requires that the governing body
(or committee) be composed entirely of
individuals who are free of any conflict
of interest, and not merely that its
members disclose the existence of any
conflict of interest. Accordingly, the
temporary regulations retain these
standards.
With regard to the requirement that
the governing body (or a committee
thereof) obtain appropriate data as to
comparability, numerous commentators
requested that the final regulations
expand the acceptable types of
comparability data and authorize
additional methods for determining fair
market value or reasonable
compensation. For example, some
commentators requested clarification
that an organization need not obtain an
independent, customized survey, but
may rely on an independent salary
survey prepared for general publication
if that survey contains information
specific enough to provide meaningful
data for comparison purposes. Other
commentators requested that the
governing body (or committee) be
permitted to rely on compensation
surveys compiled by staff members
(other than disqualified persons) under
the supervision of an independent

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director or committee member, rather
than incurring the additional cost of
obtaining compensation surveys
compiled by independent firms. Some
commentators requested that the final
regulations provide that comparability
data is viable for some period of time
(e.g., three years).
The temporary regulations continue to
require only that the authorized body
have sufficient information to determine
whether, consistent with the valuation
standards in other sections of the
regulations, the compensation
arrangement is reasonable, or the
property transfer is at fair market value.
The temporary regulations clarify that a
compensation arrangement in its
entirety must be evaluated and also
provide examples of relevant
comparability data. In the case of a
compensation arrangement, the
temporary regulations provide that
relevant information may include a
current compensation survey compiled
by an independent firm. As in the
proposed regulations, this list of
relevant comparability data is not
exclusive, and the authorized body may
rely on other appropriate data. For
clarity, the temporary regulations list
separately examples of the types of
relevant information for compensation
arrangements and property transfers.
The temporary regulations add
competitive bids received from
unrelated third parties as another
example of relevant information in the
case of a property transfer. In response
to comments, the temporary regulations
revise examples from the proposed
regulations and add several examples
illustrating appropriate comparability
data.
Comments were also received
regarding the special rule for
compensation paid by small
organizations. The proposed regulations
allow small organizations (those with
annual gross receipts of less than $1
million) to satisfy the requirement of
appropriate data as to comparability by
obtaining data on compensation paid by
five comparable organizations in the
same or similar communities for similar
services. Some commentators indicated
that the $1 million threshold is too low,
because organizations having gross
receipts above that amount may lack the
resources to hire an independent
compensation firm. These
commentators requested that the ceiling
for small organizations be increased
from $1 million to $5 million in gross
receipts. Others suggested allowing
small organizations to obtain data from
fewer than five comparable
organizations.

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The IRS and the Treasury Department
believe the general rule regarding
appropriate comparability data is
flexible enough to permit any
organization (not just small
organizations) to compile its own
comparability data. Therefore, the IRS
and the Treasury Department did not
believe it was necessary to extend the
special safe-harbor rule to organizations
with annual gross receipts over $1
million. As requested by commentators,
however, the temporary regulations
reduce the number of comparables small
organizations must obtain for that safe
harbor from five to three.
Certain commentators requested that
the final regulations provide a
mechanism for an applicable tax-exempt
organization to satisfy the requirements
of the rebuttable presumption of
reasonableness with respect to large
groups of employees, such as mid-level
managers, rather than requiring the
governing body to approve the
compensation paid to each individual.
The IRS and the Treasury Department
believe that changes to the definition of
disqualified person in the temporary
regulations, including eliminating as a
factor tending to show substantial
influence the fact that a person has any
managerial authority, or serves as a key
advisor to a manager, reduce the
potential burden on the governing body.
Moreover, the temporary regulations
continue to allow the governing body to
delegate responsibility for approving
compensation arrangements and
property transfers, to the extent
permitted under State law. Consistent
with the legislative history, the
temporary regulations continue to
require that the rebuttable presumption
requirements be satisfied on an
individual basis.
With respect to the requirement that
the governing body (or committee)
adequately document the basis for its
determination, comments were received
requesting that the final regulations
allow additional time for records to be
prepared. In response to these
comments, the temporary regulations
provide that the records must be
prepared by the later of the next meeting
of the authorized body or 60 days after
final approval of the particular
arrangement or transfer. Although one
commentator objected to the
requirement in the proposed regulations
that the governing body (or committee)
review and approve the records within
a reasonable period of time thereafter,
the temporary regulations retain this
requirement in order to ensure that the
records are accurate and complete.
Several commentators requested that
the final regulations permit

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organizations to establish a rebuttable
presumption of reasonableness with
respect to deferred or contingent
compensation arrangements when the
contract for services is entered into if
the terms of the arrangement are
sufficiently certain (even if the exact
dollar amounts are not known) and the
governing body (or committee) obtains
appropriate data as to comparability.
Other commentators simply requested
that the final regulations indicate when
the board should take the necessary
steps to put the presumption in place in
the event that reasonableness cannot be
determined as of the date the contract is
entered into. Consistent with the general
rule contained in the temporary
regulations regarding the timing of the
reasonableness determination, the
temporary regulations provide that, with
respect to fixed payments (including
payments made pursuant to a fixed
formula, although the exact dollar
amount is not known at the time the
contract is entered into), the rebuttable
presumption can arise at the time the
parties enter into the contract giving rise
to the payments. Under a special rule in
the temporary regulations, payments
pursuant to a qualified pension, profitsharing, or stock bonus plan under
section 401(a) are treated as fixed
payments for purposes of section 4958,
even if the employer exercises
discretion with respect to the plan or
program. Therefore, a rebuttable
presumption can arise with respect to
such payments at the time the parties
enter into the contract for services.
In contrast, the temporary regulations
provide that the rebuttable presumption
generally can arise with respect to a
payment that is not a fixed payment (as
defined for purposes of the initial
contract exception) only after discretion
is exercised, the exact amount of the
payment is determined (or a fixed
formula for calculating the payment is
specified), and the three requirements
for the presumption subsequently are
satisfied. The temporary regulations
contain a limited exception to this
general rule for certain non-fixed
payments which are subject to a cap.
Under this exception, an applicable taxexempt organization may establish the
rebuttable presumption, even with
respect to non-fixed payments, at the
time the contract is entered into if: (1)
Prior to approving the contract, the
governing body (or committee) obtains
appropriate comparability data
indicating that a fixed payment of up to
a certain amount to a particular
disqualified person would represent
reasonable compensation; (2) the
maximum amount payable under the

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contract (including both fixed and nonfixed payment amounts) does not
exceed the reasonable compensation
figure; and (3) the other requirements
for establishing the rebuttable
presumption are satisfied. However, the
general rules for the timing of the
reasonableness determination apply,
such that the IRS may rebut the
presumption of reasonableness with
respect to a non-fixed payment subject
to a cap based on all facts and
circumstances, up to and including
circumstances as of the date of payment.
Some commentators suggested that
the final regulations provide specific
standards the IRS must meet in order to
rebut any presumption established by
satisfying the three requirements
described above. For example, one
commentator suggested that the IRS
should be allowed to overcome the
presumption only if it is able to produce
clear and convincing evidence that the
transaction was, in fact, an excess
benefit transaction. Another
commentator suggested that the IRS
should be required to establish that one
of the requirements for invoking the
presumption has not been met in order
to rebut the presumption. Consistent
with the legislative history, the
temporary regulations provide that, if
the rebuttable presumption of
reasonableness is established, the IRS
may rebut the presumption only if it
develops sufficient contrary evidence to
rebut the probative value of the
comparability data relied upon by the
authorized body.
Finally, some commentators
requested clarification whether entities
controlled by or affiliated with an
applicable tax-exempt organization that
provide economic benefits to a
disqualified person can establish the
presumption, even if those entities are
not themselves applicable tax-exempt
organizations. Consistent with the rules
relating to indirect excess benefit
transactions, the temporary regulations
clarify that an authorized body of an
entity controlled by an applicable taxexempt organization (as defined for
purposes of describing indirect transfers
of economic benefits) may establish the
rebuttable presumption.
Special Rules
The proposed regulations provided
several special rules, one of which
stated that the procedures of section
7611 will be used in initiating and
conducting any inquiry or examination
into whether an excess benefit
transaction has occurred between a
church and a disqualified person.
Several comments were received on this
rule, including one stating that there is

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no statutory authority to extend section
7611 protection to churches for section
4958 tax inquiries. Other comments
requested that final regulations specify
when information from an informant
alone is sufficient to form the basis for
a reasonable belief on the part of the IRS
for purposes of applying this rule, and
clarify how section 4958 interacts with
the section 7611 exception for records
related to the income tax of an
individual employed by the church. The
temporary regulations do not modify the
special rules for churches.
Additional Issues
Section 4958 does not contain
provisions governing the relationship of
the taxes imposed under that section to
revocation of the organization’s taxexempt status under sections 501(c)(3)
and (4). With respect to this issue, the
legislative history to section 4958
indicates as follows: ‘‘In general, the
intermediate sanctions are 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 taxexempt organization. In practice,
revocation of tax-exempt status, with or
without the imposition of excise taxes,
would occur only when the organization
no longer operates as a charitable
organization.’’ H. REP. NO. 506, 104th
Congress, 2d SESS. (1996), 53, 59, note
15. However, the same legislative
history also indicates that ‘‘[t]he
intermediate sanctions for ‘excess
benefit transactions’ may be imposed by
the IRS in lieu of (or in addition to)
revocation of the organization’s taxexempt status.’’ Id. at 59 (emphasis
added)
In the Comments and Requests for a
Public Hearing section of the preamble
of the proposed regulations, the IRS and
the Treasury Department specifically
requested comments concerning the
relationship between revocation of taxexempt status and imposition of section
4958 taxes. Additionally, the preamble
of the proposed regulations lists four
factors that the IRS will consider in
determining whether to revoke an
applicable tax-exempt organization’s
status: (1) Whether the organization has
been involved in repeated excess benefit
transactions; (2) the size and scope of
the excess benefit transaction; (3)
whether, after concluding that it has
been party to an excess benefit
transaction, the organization has
implemented safeguards to prevent
future recurrences; and (4) whether
there was compliance with other
applicable laws. The preamble also
states that the IRS intends to publish the

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factors that it will consider in exercising
its administrative discretion in guidance
issued in conjunction with the issuance
of final regulations under section 4958.
A number of commentators requested
that the final regulations expressly
provide that section 4958 taxes are the
principal sanction with respect to
excess benefit transactions, in lieu of
revocation of the organization’s taxexempt status. Other commentators
suggested that the final regulations
incorporate factors to be considered by
the IRS in deciding whether to impose
section 4958 excise taxes or revoke taxexempt status, or both.
The temporary regulations do not
foreclose revocation of tax-exempt
status in appropriate cases. The IRS and
the Treasury Department believe that to
do so would effectively change the
substantive standard for tax-exempt
status under sections 501(c)(3) and (4).
Accordingly, the IRS intends to exercise
its administrative discretion in
enforcing the requirements of sections
4958, 501(c)(3) and 501(c)(4) in
accordance with the direction given in
the legislative history. The IRS will
publish guidance concerning the factors
that it will consider in exercising its
discretion as it gains more experience
administering the section 4958 regime.
The temporary regulations reiterate
that section 4958 does not affect the
substantive standards for tax exemption
under section 501(c)(3) or (4), including
the requirements that the organization
be organized and operated exclusively
for exempt purposes, and that no part of
its earnings inure to the benefit of any
private shareholder or individual. Thus,
regardless of whether a particular
transaction is subject to excise taxes
under section 4958, existing principles
and rules may be implicated, such as
the limitation on private benefit. For
example, transactions that are not
subject to section 4958 because of the
initial contract exception may, under
certain circumstances, jeopardize an
organizations’s tax-exempt status.
Some comments regarding revenuesharing transactions included requests
to address gainsharing arrangements in
the final regulations; or to provide that
certain transactions are not revenuesharing arrangements because they do
not involve a payment that is contingent
on the revenues of (but rather the cost
savings to) the organization. As noted
earlier, these temporary regulations
reserve the separate section governing
revenue-sharing transactions. However,
because the Office of Inspector General,
Department of Health and Human
Services, believes the methodology
involved in calculating payments under
gainsharing arrangements may violate

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sections 1128A(b)(1) and (2) of the
Social Security Act in situations where
patient care may be affected by the cost
savings, the IRS will not issue private
letter rulings under section 4958 on
these arrangements. The Office of
Inspector General issued a Special
Advisory Bulletin on July 8, 1999,
addressing the application of sections
1128A(b)(1) and (2) of the Social
Security Act to gainsharing
arrangements, entitled ‘‘Gainsharing
Arrangements and CMPs [Civil Money
Penalties] for Hospital Payments to
Physicians to Reduce or Limit Services
to Beneficiaries’’.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required.
Because no preceding notice of
proposed rulemaking is required for this
temporary regulation, the provisions of
the Regulatory Flexibility Act do not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this temporary
regulation will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on business.
Drafting Information
The principal author of these
regulations is Phyllis D. Haney, Office of
Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel
from the IRS and The Treasury
Department participated in their
development.
List of Subjects
26 CFR Part 53
Excise taxes, Foundations,
Investments, Lobbying, Reporting and
recordkeeping requirements, Trusts and
trustees.
26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements
Amendments to the Regulations
Accordingly, 26 CFR parts 53, 301,
and 602 are amended as follows:

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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 53.4958–0T through
53.4958–8T are added to read as
follows:
§ 53.4958–0T
(temporary).

Table of contents

This section lists the major captions
contained in §§ 53.4958–1T through
53.4958–8T.
§ 53.4958–1T Taxes on excess benefit
transactions (temporary).

(a) In general.
(b) Excess benefit defined.
(c) Taxes paid by disqualified person.
(1) Initial tax.
(2) Additional tax on disqualified
person.
(i) In general.
(ii) Taxable period.
(iii) 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) Amplification of general rule.
(iii) Reliance on professional advice.
(iv) Reliance on rebuttable
presumption of reasonableness.
(5) Willful.
(6) Due to reasonable cause.
(7) Limits on liability for
management.
(8) Joint and several liability.
(9) Burden of proof.
(e) Date of occurrence.
(1) In general.
(2) Special rules.
(3) Statute of limitations rules.
(f) Effective date for imposition of
taxes.
(1) In general.
(2) Existing binding contracts.
§ 53.4958–2T Definition of applicable taxexempt organization (temporary).

(a) Organizations described in section
501(c)(3) or (4) and exempt from tax
under section 501(a).
(1) In general.
(2) Organizations described in section
501(c)(3).
(3) Organizations described in section
501(c)(4).
(4) Effect of non-recognition or
revocation of exempt status.

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(b) Special rules.
(1) Transition rule for lookback
period.
(2) Certain foreign organizations.
§ 53.4958–3T Definition of disqualified
person (temporary).

(a) In general.
(1) Scope of definition.
(2) Transition rule for lookback
period.
(b) Statutory categories of disqualified
persons.
(1) Family members.
(2) Thirty-five percent controlled
entities.
(i) In general.
(ii) Combined voting power.
(iii) Constructive ownership rules.
(A) Stockholdings.
(B) Profits or beneficial interest.
(c) Persons having substantial
influence.
(1) Voting members of the governing
body.
(2) Presidents, chief executive
officers, or chief operating officers.
(3) Treasurers and chief financial
officers.
(4) Persons with a material financial
interest in a provider-sponsored
organization.
(d) Persons deemed not to have
substantial influence.
(1) Tax-exempt organizations
described in section 501(c)(3).
(2) Certain section 501(c)(4)
organizations.
(3) Employees receiving economic
benefits of less than a specified amount
in a taxable year.
(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) Affiliated organizations.
(g) Examples.
§ 53.4958–4T
(temporary).

Excess benefit transaction

(a) Definition of excess benefit
transaction.
(1) In general.
(2) Economic benefit provided
indirectly.
(i) In general.
(ii) Through a controlled entity.
(A) In general.
(B) Definition of control.
(1) In general.
(2) Constructive ownership.
(iii) Through an intermediary.
(iv) Examples.
(3) Exception for fixed payments
made pursuant to an initial contract.
(i) In general.

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(ii) Fixed payment.
(A) In general.
(B) Special rules.
(iii) Initial contract.
(iv) Substantial performance required.
(v) Treatment as a new contract.
(vi) Evaluation of non-fixed payments.
(vii) Examples.
(4) Certain economic benefits
disregarded for purposes of section
4958.
(i) Nontaxable fringe benefits.
(ii) Certain economic benefits
provided to a volunteer for the
organization.
(iii) Certain economic benefits
provided to a member of, or donor to,
the organization.
(iv) Economic benefits provided to a
charitable beneficiary.
(v) Certain economic benefits
provided to a governmental unit.
(b) Valuation standards.
(1) In general.
(i) Fair market value of property.
(ii) Reasonable compensation.
(A) In general.
(B) Items included in determining the
value of compensation for purposes of
determining reasonableness under
section 4958.
(C) Inclusion in compensation for
reasonableness determination does not
govern income tax treatment.
(2) Timing of reasonableness
determination.
(i) In general.
(ii) Treatment as a new contract.
(iii) Examples.
(c) Establishing intent to treat
economic benefit as consideration for
the performance of services.
(1) In general.
(2) Nontaxable benefits.
(3) Contemporaneous substantiation.
(i) Reporting of benefit.
(ii) Other evidence of
contemporaneous substantiation.
(iii) Failure to report due to
reasonable cause.
(4) Examples.
§ 53.4958–5T Transaction in which the
amount of the economic benefit is
determined in whole or in part by the
revenues of one or more activities of the
organization (temporary). [Reserved]

(a) In general.
(b) Rebutting the presumption.
(c) Requirements for invoking
rebuttable presumption.
(1) Approval by an authorized body.
(i) In general.
(ii) Individuals not included on
authorized body.
(iii) Absence of conflict of interest.

18:18 Jan 09, 2001

§ 53.4958–7T

Correction (temporary).

(a) In general.
(b) Form of correction.
(1) Cash or cash equivalents.
(2) Anti-abuse rule.
(3) Special rule relating to
nonqualified deferred compensation.
(4) Return of specific property.
(i) In general.
(ii) Payment not equal to correction
amount.
(iii) Disqualified person may not
participate in decision.
(c) Correction amount.
(d) Correction where contract has
been partially performed.
(e) Correction in the case of an
applicable tax-exempt organization that
has ceased to exist, or is no longer taxexempt.
(1) In general.
(2) Section 501(c)(3) organizations.
(3) Section 501(c)(4) organizations.
(f) Examples.
§ 53.4958–8T

Special rules (temporary).

(a) Substantive requirements for
exemption still apply.
(b) Interaction between section 4958
and section 7611 rules for church tax
inquiries and examinations.
(c) Three year duration of these
temporary regulations.
§ 53.4958–1T Taxes on excess benefit
transactions (temporary).

§ 53.4958–6T Rebuttable presumption that
a transaction is not an excess benefit
transaction (temporary).

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(2) Appropriate data as to
comparability.
(i) In general.
(ii) Special rule for compensation
paid by small organizations.
(iii) Application of special rule for
small organizations.
(iv) Examples.
(3) Documentation.
(d) No presumption with respect to
non-fixed payments until amounts are
determined.
(1) In general.
(2) Special rule for certain non-fixed
payments subject to a cap.
(e) No inference from absence of
presumption.
(f) Period of reliance on rebuttable
presumption.

(a) In general. Section 4958 imposes
excise taxes on each excess benefit
transaction (as defined in section
4958(c) and § 53.4958–4T) between an
applicable tax-exempt organization (as
defined in section 4958(e) and
§ 53.4958–2T) and a disqualified person
(as defined in section 4958(f)(1) and
§ 53.4958–3T). 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

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benefit. If an initial tax is imposed by
section 4958(a)(1) on an excess benefit
transaction and the transaction is not
corrected (as defined in section
4958(f)(6) and § 53.4958–7T) within the
taxable period (as defined in section
4958(f)(5) and paragraph (c)(2)(ii) of this
section), 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
additional tax of 200 percent of the
excess benefit. An organization manager
(as defined 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 payment 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
organization manager also receives an
excess benefit from an excess benefit
transaction, the manager may be liable
for both taxes imposed by section
4958(a).
(b) Excess benefit defined. An excess
benefit is the amount by which the
value of the economic benefit provided
by an applicable tax-exempt
organization directly or indirectly to or
for the use of any disqualified person
exceeds the value of the consideration
(including the performance of services)
received 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 benefit 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 transaction, 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
person—(i) In general. Section 4958(b)
imposes a tax equal to 200 percent of
the excess benefit in any case in which
section 4958(a)(1) imposes a 25-percent
tax on an excess benefit transaction and
the transaction is not corrected (as
defined in section 4958(f)(6) and
§ 53.4958–7T) within the taxable period
(as defined in section 4958(f)(5) and
paragraph (c)(2)(ii) of this section). If a
disqualified person makes a payment of
less than the full correction amount
under the rules of § 53.4958–7T, the
200-percent tax is imposed only on the
unpaid portion of the correction amount
(as described in § 53.4958–7T(c)). The
tax imposed by section 4958(b) is
payable by any disqualified person who

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received an excess benefit from the
excess benefit transaction on which the
initial tax was imposed by section
4958(a)(1). With respect to any excess
benefit transaction, if more than one
disqualified person is liable for the tax
imposed by section 4958(b), all such
persons are jointly and severally liable
for that tax.
(ii) 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
deficiency 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.
(iii) 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.
The abatement rules of section 4961
specifically provide for a 90-day
correction period after the date of
mailing a notice of deficiency under
section 6212 with respect to the section
4958(b) 200-percent tax. If the excess
benefit is corrected during that
correction period, the 200-percent tax
imposed shall not be assessed, and if
assessed the assessment shall be abated,
and if collected shall be credited or
refunded as an overpayment. For special
rules relating to abatement of the 25percent tax, see section 4962.
(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 participation was not willful and
was due to reasonable cause. Any
organization manager who so
participated in the excess benefit
transaction must pay the tax.
(2) Organization manager defined—(i)
In general. An organization manager is,
with respect to any applicable taxexempt organization, any officer,
director, or trustee of such organization,
or any individual having powers or
responsibilities similar to those of
officers, directors, or trustees of the
organization, regardless of title. A
person is an officer of an organization if
that person—
(A) Is specifically so designated under
the certificate of incorporation, by-laws,
or other constitutive documents of the
organization; or

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(B) Regularly exercises general
authority to make administrative or
policy decisions on behalf of the
organization. An independent
contractor who acts solely in a capacity
as an attorney, accountant, or
investment manager or advisor, is not an
officer. For purposes of this paragraph
(d)(2)(i)(B), any person who has
authority 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
officer, director, or trustee, yet serves on
a committee of the governing body of an
applicable tax-exempt organization (or
as a designee of the governing body
described in § 53.4958–6T(c)(1)) that is
attempting to invoke the rebuttable
presumption of reasonableness
described in § 53.4958–6T based on the
committee’s (or designee’s) actions, is
an organization manager for purposes of
the tax imposed by section 4958(a)(2).
(3) Participation. For purposes of
section 4958(a)(2) and paragraph (d) of
this section, 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 action by such
manager. An organization manager is
not considered to have participated in
an excess benefit transaction, however,
where the manager has opposed the
transaction in a manner consistent with
the fulfillment of the manager’s
responsibilities to the applicable taxexempt organization.
(4) Knowing—(i) In general. For
purposes of section 4958(a)(2) and
paragraph (d) of this section, a manager
participates in a transaction knowingly
only if the person—
(A) Has actual knowledge of sufficient
facts so that, based solely upon those
facts, such transaction would be an
excess benefit transaction;
(B) Is aware that such a transaction
under these circumstances may violate
the provisions of federal tax law
governing excess benefit transactions;
and
(C) Negligently fails to make
reasonable attempts to ascertain
whether the transaction is an excess
benefit transaction, or the manager is in
fact aware that it is such a transaction.
(ii) Amplification of general rule.
Knowing does not mean having reason
to know. However, evidence tending to
show that a manager has reason to know
of a particular fact or particular rule is
relevant in determining whether the
manager had actual knowledge of such
a fact or rule. Thus, for example,

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evidence tending to show that a
manager has reason to know of
sufficient facts so that, based solely
upon such facts, a transaction would be
an excess benefit transaction is relevant
in determining whether the manager has
actual knowledge of such facts.
(iii) Reliance on professional advice.
An organization manager’s participation
in a transaction is ordinarily not
considered knowing within the meaning
of section 4958(a)(2), even though the
transaction is subsequently held to be
an excess benefit transaction to the
extent that, after full disclosure of the
factual situation to an appropriate
professional, the organization manager
relies on a reasoned written opinion of
that professional with respect to
elements of the transaction within the
professional’s expertise. For purposes of
section 4958(a)(2) and this paragraph
(d), a written opinion is reasoned even
though it reaches a conclusion that is
subsequently determined to be incorrect
so long as the opinion addresses itself
to the facts and the applicable
standards. However, a written opinion
is not reasoned if it does nothing more
than recite the facts and express a
conclusion. The absence of a written
opinion of an appropriate professional
with respect to a transaction shall not,
by itself, however, give rise to any
inference that an organization manager
participated in the transaction
knowingly. For purposes of this
paragraph, appropriate professionals on
whose written opinion an organization
manager may rely, are limited to—
(A) Legal counsel, including in-house
counsel;
(B) Certified public accountants or
accounting firms with expertise
regarding the relevant tax law matters;
and
(C) Independent valuation experts
who—
(1) Hold themselves out to the public
as appraisers or compensation
consultants;
(2) Perform the relevant valuations on
a regular basis;
(3) Are qualified to make valuations of
the type of property or services
involved; and
(4) Include in the written opinion a
certification that the requirements of
paragraphs (d)(4)(iii)(C)(1) through (3) of
this section are met.
(iv) Reliance on rebuttable
presumption of reasonableness. An
organization manager’s participation in
a transaction is ordinarily not
considered knowing within the meaning
of section 4958(a)(2), even though the
transaction is subsequently held to be
an excess benefit transaction, if the
organization manager relies on the fact

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that the requirements of § 53.4958–6T(a)
are satisfied with respect to the
transaction.
(5) Willful. For purposes of section
4958(a)(2) and this paragraph (d),
participation by an organization
manager is willful if it is voluntary,
conscious, and intentional. No motive to
avoid the restrictions of the law or the
incurrence of any tax is necessary to
make the participation willful.
However, participation by an
organization manager is not willful if
the manager does not know that the
transaction in which the manager is
participating is an excess benefit
transaction.
(6) Due to reasonable cause. An
organization manager’s participation is
due to reasonable cause if the manager
has exercised responsibility on behalf of
the organization with ordinary business
care and prudence.
(7) Limits on liability for management.
The maximum aggregate amount of tax
collectible under section 4958(a)(2) and
this paragraph (d) from organization
managers with respect to any one excess
benefit transaction is $10,000.
(8) 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 severally liable for the taxes
imposed under section 4958(a)(2) with
respect to that excess benefit
transaction.
(9) Burden of proof. For provisions
relating to the burden of proof in cases
involving the issue of whether an
organization manager has knowingly
participated in an excess benefit
transaction, see section 7454(b) and
§ 301.7454–2. In these cases, the
Commissioner bears the burden of
proof.
(e) Date of occurrence—(1) In general.
Except as otherwise provided, an excess
benefit transaction occurs on the date on
which the disqualified person receives
the economic benefit for Federal income
tax purposes. When a single contractual
arrangement provides for a series of
compensation or other payments to (or
for the use of) a disqualified person over
the course of the disqualified person’s
taxable year (or part of a taxable year),
any excess benefit transaction with
respect to these aggregate payments is
deemed to occur on the last day of the
taxable year (or if the payments
continue for part of the year, the date of
the last payment in the series).
(2) Special rules. In the case of
benefits provided pursuant to a
qualified pension, profit-sharing, or
stock bonus plan, the transaction occurs
on the date the benefit is vested. In the
case of a transfer of property that is

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subject to a substantial risk of forfeiture
or in the case of rights to future
compensation or property (including
benefits under a nonqualified deferred
compensation plan), the transaction
occurs on the date the property, or the
rights to future compensation or
property, is not subject to a substantial
risk of forfeiture. However, where the
disqualified person elects to include an
amount in gross income in the taxable
year of transfer pursuant to section
83(b), the general rule of paragraph
(e)(1) of this section applies to the
property with respect to which the
section 83(b) election is made. Any
excess benefit transaction with respect
to benefits under a deferred
compensation plan which vest during
any taxable year of the disqualified
person is deemed to occur on the last
day of such taxable year. For the rules
governing the timing of the
reasonableness determination for
deferred, contingent, and certain other
noncash compensation, see § 53.4958–
4T(b)(2).
(3) Statute of limitations rules. See
sections 6501(e)(3) and 6501(l) and the
regulations thereunder for statute of
limitations rules as they apply to section
4958 excise taxes.
(f) Effective date for imposition of
taxes—(1) In general. The section 4958
taxes imposed on excess benefit
transactions or on participation in
excess benefit transactions apply to
transactions occurring on or after
September 14, 1995.
(2) Existing binding contracts. The
section 4958 taxes do not apply to any
transaction occurring pursuant to a
written contract that was binding on
September 13, 1995, and at all times
thereafter before the transaction occurs.
A written binding contract that is
terminable or subject to cancellation by
the applicable tax-exempt organization
without the disqualified person’s
consent (including as the result of a
breach of contract by the disqualified
person) and without substantial penalty
to the organization, is no longer treated
as a binding contract as of the earliest
date that any such termination or
cancellation, if made, would be
effective. If a binding written contract is
materially changed, it is treated as a
new contract entered into as of the date
the material change is effective. A
material change includes an extension
or renewal of the contract (other than an
extension or renewal that results from
the person contracting with the
applicable tax-exempt organization
unilaterally exercising an option
expressly granted by the contract), or a
more than incidental change to any
payment under the contract.

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§ 53.4958–2T Definition of applicable taxexempt organization (temporary).

(a) Organizations described in section
501(c)(3) or (4) and exempt from tax
under section 501(a)—(1) In general. 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 organization 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
period ending on the date of an excess
benefit transaction (the lookback
period). A private foundation as defined
in section 509(a) is not an applicable
tax-exempt organization for section
4958 purposes. A governmental entity
that is exempt from (or not subject to)
taxation without regard to section 501(a)
is not an applicable tax-exempt
organization for section 4958 purposes.
(2) Organizations described in section
501(c)(3). An organization is described
in section 501(c)(3) for purposes of
section 4958 only if the organization
provides the notice described in section
508, unless the organization otherwise
is described in section 501(c)(3) and
specifically is excluded from the
requirements of section 508 by that
section.
(3) Organizations described in section
501(c)(4). An organization is described
in section 501(c)(4) for purposes of
section 4958 if the organization—
(i) Has applied for and received
recognition from the Internal Revenue
Service as an organization described in
section 501(c)(4); or
(ii) Has filed an application for
recognition under section 501(c)(4) with
the Internal Revenue Service, has filed
an annual information return as a
section 501(c)(4) organization under the
Internal Revenue Code or regulations
promulgated thereunder, or has
otherwise held itself out as being
described in section 501(c)(4) and
exempt from tax under section 501(a).
(4) Effect of non-recognition or
revocation of exempt status. An
organization is not described in
paragraph (a)(2) or (a)(3) of this section
during any period covered by a final
determination or adjudication that the
organization is not exempt from tax
under section 501(a) as an organization
described in section 501(c)(3) or (4), so
long as that determination or
adjudication is not based upon
participation in inurement or one or
more excess benefit transactions.
However, the organization may be an
applicable tax-exempt organization for
that period as a result of the five-year

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lookback rule described in paragraph
(a)(1) of this section.
(b) Special rules—(1) Transition rule
for lookback period. In the case of any
excess benefit transaction occurring
before September 14, 2000, the lookback
period described in paragraph (a)(1) of
this section begins on September 14,
1995, and ends on the date of the
transaction.
(2) Certain foreign organizations. A
foreign organization, recognized by the
Internal Revenue Service or by treaty,
that receives substantially all of its
support (other than gross investment
income) from sources outside of the
United States is not an organization
described in section 501(c)(3) or (4) for
purposes of section 4958.
§ 53.4958–3T Definition of disqualified
person (temporary).

(a) In general—(1) Scope of definition.
Section 4958(f)(1) defines disqualified
person, with respect to any transaction,
as any person who was in a position to
exercise substantial influence over the
affairs of an applicable tax-exempt
organization at any time during the fiveyear period ending on the date of the
transaction (the lookback period).
Paragraph (b) of this section describes
persons who are defined to be
disqualified persons under the statute,
including certain family members of an
individual in a position to exercise
substantial influence, and certain 35percent controlled entities. Paragraph
(c) of this section describes persons in
a position to exercise substantial
influence over the affairs of an
applicable tax-exempt organization by
virtue of their powers and
responsibilities or certain interests they
hold. Paragraph (d) of this section
describes persons deemed not to be in
a position to exercise substantial
influence. Whether any person who is
not described in paragraph (b), (c) or (d)
of this section is a disqualified person
with respect to a transaction for
purposes of section 4958 is based on all
relevant facts and circumstances, as
described in paragraph (e) of this
section. Paragraph (f) of this section
describes special rules for affiliated
organizations. Examples in paragraph
(g) of this section illustrate these
categories of persons.
(2) Transition rule for lookback
period. In the case of any excess benefit
transaction occurring before September
14, 2000, the lookback period described
in paragraph (a)(1) of this section begins
on September 14, 1995, and ends on the
date of the transaction.
(b) Statutory categories of disqualified
persons—(1) Family members. A person
is a disqualified person with respect to
any transaction with an applicable tax-

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18:18 Jan 09, 2001

exempt organization if the person is a
member of the family of a person who
is a disqualified person described in
paragraph (a) of this section (other than
as a result of this paragraph) with
respect to any transaction with the same
organization. For purposes of the
following sentence, a legally adopted
child of an individual is treated as a
child of such individual by blood. A
person’s family is limited to—
(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,
grandchildren, and great grandchildren.
(2) Thirty-five percent controlled
entities—(i) In general. A person is a
disqualified person with respect to any
transaction with an applicable taxexempt organization if the person is a
35-percent controlled entity. A 35percent controlled entity is—
(A) A corporation in which persons
described in this section (except in
paragraphs (b)(2) and (d) of this section)
own more than 35 percent of the
combined voting power;
(B) A partnership in which persons
described in this section (except in
paragraphs (b)(2) and (d) of this section)
own more than 35 percent of the profits
interest; or
(C) A trust or estate in which persons
described in this section (except in
paragraphs (b)(2) and (d) of this section)
own more than 35 percent of the
beneficial interest.
(ii) Combined voting power. For
purposes of this paragraph (b)(2),
combined voting power includes voting
power represented by holdings of voting
stock, direct or indirect, but does not
include voting rights held only as a
director, trustee, or other fiduciary.
(iii) Constructive ownership rules—
(A) Stockholdings. For purposes of
section 4958(f)(3) and this paragraph
(b)(2), indirect stockholdings are taken
into account as under section 267(c),
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.
(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 constructive ownership of stock
provided in section 267(c) (other than
section 267(c)(3)), except that in
applying section 267(c)(4), the family of

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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
influence. A person who holds any of
the following powers, responsibilities,
or interests is in a position to exercise
substantial influence over the affairs of
an applicable tax-exempt organization:
(1) Voting members of the governing
body. This category includes any
individual serving on the governing
body of the organization who is entitled
to vote on any matter over which the
governing body has authority.
(2) Presidents, chief executive officers,
or chief operating officers. This category
includes any person who, regardless of
title, has ultimate responsibility for
implementing the decisions of the
governing body or for supervising the
management, administration, or
operation of the organization. A person
who serves as president, chief executive
officer, or chief operating officer has this
ultimate responsibility unless the
person demonstrates otherwise. If this
ultimate responsibility resides with two
or more individuals (e.g., co-presidents),
who may exercise such responsibility in
concert or individually, then each
individual is in a position to exercise
substantial influence over the affairs of
the organization.
(3) Treasurers and chief financial
officers. This category includes any
person who, regardless of title, has
ultimate responsibility for managing the
finances of the organization. A person
who serves as treasurer or chief
financial officer has this ultimate
responsibility unless the person
demonstrates otherwise. If this ultimate
responsibility resides with two or more
individuals who may exercise the
responsibility in concert or
individually, then each individual is in
a position to exercise substantial
influence over the affairs of the
organization.
(4) Persons with a material financial
interest in a provider-sponsored
organization. For purposes of section
4958, if a hospital that participates in a
provider-sponsored organization (as
defined in section 1855(e) of the Social
Security Act, 42 U.S.C. 1395w–25) is an
applicable tax-exempt organization,
then any person with a material
financial interest (within the meaning of
section 501(o)) in the providersponsored organization has substantial
influence with respect to the hospital.
(d) Persons deemed not to have
substantial influence. A person is
deemed not to be in a position to
exercise substantial influence over the

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affairs of an applicable tax-exempt
organization if that person is described
in one of the following categories:
(1) Tax-exempt organizations
described in section 501(c)(3). This
category includes any organization
described in section 501(c)(3) and
exempt from tax under section 501(a).
(2) Certain section 501(c)(4)
organizations. Only with respect to an
applicable tax-exempt organization
described in section 501(c)(4) and
§ 53.4958–2T(a)(3), this category
includes any other organization so
described.
(3) Employees receiving economic
benefits of less than a specified amount
in a taxable year. This category
includes, for the taxable year in which
benefits are provided, any full-or parttime employee of the applicable taxexempt organization who—
(i) Receives economic benefits,
directly or indirectly from the
organization, of less than the amount
referenced for a highly compensated
employee in section 414(q)(1)(B)(i);
(ii) Is not described in § 53.4958–
3T(b) or (c) with respect to the
organization; and
(iii) Is not a substantial contributor to
the organization within the meaning of
section 507(d)(2)(A), taking into account
only contributions received by the
organization during its current taxable
year and the four preceding taxable
years.
(e) Facts and circumstances govern in
all other cases—(1) In general. Whether
a person who is not described in
paragraph (b), (c) or (d) of this section
is a disqualified person depends upon
all relevant facts and circumstances.
(2) Facts and circumstances tending
to show substantial influence. Facts and
circumstances 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
organization;
(ii) The person is a substantial
contributor to the organization (within
the meaning of section 507(d)(2)(A)),
taking into account only contributions
received by the organization during its
current taxable year and the four
preceding taxable years;
(iii) The person’s compensation is
primarily based on revenues derived
from activities of the organization that
the person controls;
(iv) The person has or shares
authority to control or determine a
substantial portion of the organization’s
capital expenditures, operating budget,
or compensation for employees;
(v) The person manages a discrete
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that represents a substantial portion of
the activities, assets, income, or
expenses of the organization, as
compared to the organization as a
whole;
(vi) The person owns a controlling
interest (measured by either vote or
value) in a corporation, partnership, or
trust that is a disqualified person; or
(vii) The person is a non-stock
organization controlled, directly or
indirectly, by one or more disqualified
persons.
(3) Facts and circumstances tending
to show no substantial influence. Facts
and circumstances tending to show that
a person does not have substantial
influence over the affairs of an
organization include, but are not limited
to, the following—
(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
contractor (such as an attorney,
accountant, or investment manager or
advisor) whose sole relationship to the
organization is providing professional
advice (without having decision-making
authority) with respect to transactions
from which the independent contractor
will not economically benefit either
directly or indirectly (aside from
customary fees received for the
professional advice rendered);
(iii) The direct supervisor of the
individual is not a disqualified person;
(iv) The person does not participate in
any management decisions affecting the
organization as a whole or a discrete
segment or activity of the organization
that represents a substantial portion of
the activities, assets, income, or
expenses of the organization, as
compared to the organization as a
whole; or
(v) Any preferential treatment a
person receives based on the size of that
person’s donation is also offered to all
other donors making a comparable
contribution as part of a solicitation
intended to attract a substantial number
of contributions.
(f) 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 influence shall be made
separately for each applicable taxexempt organization. A person may be
a disqualified person with respect to
transactions with more than one
applicable tax-exempt organization.
(g) Examples. The following examples
illustrate the principles of this section.
Finding a person to be a disqualified
person in the following examples does
not indicate that an excess benefit

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transaction has occurred. If a person is
a disqualified person, the rules of
section 4958(c) and § 53.4958–4T apply
to determine whether an excess benefit
transaction has occurred. The examples
are as follows:
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 salary and provides no additional
benefits to N except 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
referenced for a highly compensated
employee in section 414(q)(1)(B)(i). The parttime job constitutes N’s only relationship
with R. N is not related to any other
disqualified person with respect to R. N is
deemed not to be in a position to exercise
substantial influence over the affairs of R.
Therefore, N is not a disqualified person with
respect to R in that year.
Example 2. The facts are the same as in
Example 1, except that in addition to the
salary that R pays N for N’s services during
the taxable year, R also purchases one of N’s
paintings for $x. The total of N’s salary plus
$x exceeds the amount referenced for highly
compensated 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 of the relevant facts and
circumstances.
Example 3: Q is a member of K, a section
501(c)(3) organization with a broad-based
public membership. Members of K are
entitled to vote only with respect to the
annual election of directors and the approval
of major organizational transactions such as
a merger or dissolution. Q is not related to
any other disqualified person of K. Q has no
other relationship to K besides being a
member of K and occasionally making
modest donations to K. Whether Q is a
disqualified person is determined by all
relevant facts and circumstances. Q’s voting
rights, which are the same as granted to all
members of K, do not place Q in a position
to exercise substantial influence over K.
Under these facts and circumstances, Q is not
a disqualified person with respect K.
Example 4. 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 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 has ultimate responsibility for
supervising the operation of Z, E is in a
position to exercise substantial influence
over the affairs of Z. Therefore, E is a
disqualified person with respect to Z.
Example 5. Y is an applicable tax-exempt
organization for purposes of section 4958 that
decides to use bingo games as a method of
generating revenue. Y enters into a contract
with B, a company that operates bingo games.
Under the contract, B manages the promotion
and operation of the bingo activity, provides

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all necessary staff, equipment, and services,
and pays 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 games.
The annual gross revenue earned from the
bingo games represents more than half of Y’s
total annual revenue. B’s compensation is
primarily based on revenues from an activity
B controls. B also manages a discrete activity
of Y that represents a substantial portion of
Y’s income compared to the organization as
a whole. Under these facts and
circumstances, B is in a position to exercise
substantial influence over the affairs of Y.
Therefore, B is a disqualified person with
respect to Y.
Example 6. The facts are the same as in
Example 5, with the additional fact that P
owns a majority of the stock of B and is
actively involved in managing B. Because P
owns a controlling interest (measured by
either vote or value) in and actively manages
B, P is also in a position to exercise
substantial influence over the affairs of Y.
Therefore, under these facts and
circumstances, P is a disqualified person
with respect to Y.
Example 7. A, an applicable tax-exempt
organization for purposes of section 4958,
owns and operates one acute care hospital. B,
a for-profit corporation, owns and operates a
number of hospitals. A and B form C, a
limited liability company. In exchange for
proportional ownership interests, A
contributes its hospital, and B contributes
other assets, to C. All of A’s assets then
consist of its membership interest in C. A
continues to be operated for exempt purposes
based almost exclusively on the activities it
conducts through C. C enters into a
management agreement with a management
company, M, to provide day to day
management services to C. M is generally
subject to supervision by C’s board, but M is
given broad discretion to manage C’s day to
day operation. Under these facts and
circumstances, M is in a position to exercise
substantial 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
exemption as an organization described in
section 501(c)(3). Therefore, M is a
disqualified person with respect to A.
Example 8. T is a large university and an
applicable tax-exempt organization for
purposes of section 4958. L is the dean of the
College of Law of T, a substantial source of
revenue for T, including contributions from
alumni and foundations. L is not related to
any other disqualified person of T. L does not
serve on T’s governing body or have ultimate
responsibility for managing the university as
whole. However, as dean of the College of
Law, L plays a key role in faculty hiring and
determines a substantial portion of the
capital expenditures and operating budget of
the College of Law. L’s compensation is
greater than the amount referenced for a
highly compensated employee in section
414(q)(1)(B)(i) in the year benefits are
provided. L’s management of a discrete
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portion of the income of T (as compared to
T as a whole) places L in a position to
exercise substantial influence over the affairs
of T. Under these facts and circumstances L
is a disqualified person with respect to T.
Example 9. S chairs a small academic
department in the College of Arts and
Sciences of the same university T described
in Example 8. S is not related to any other
disqualified person of T. S does not serve on
T’s governing body or as an officer of T. As
department chair, S supervises faculty in the
department, approves the course curriculum,
and oversees the operating budget for the
department. S’s compensation is greater than
the amount referenced for a highly
compensated employee in section
414(q)(1)(B)(i) in the year benefits are
provided. Even though S manages the
department, that department does not
represent a substantial portion of T’s
activities, assets, income, expenses, or
operating budget. Therefore, S does not
participate in any management decisions
affecting either T as a whole, or a discrete
segment or activity of T that represents a
substantial portion of its activities, assets,
income, or expenses. Under these facts and
circumstances, S does not have substantial
influence over the affairs of T, and therefore
S is not a disqualified person with respect to
T.
Example 10. U is a large acute-care
hospital that is an applicable tax-exempt
organization for purposes of section 4958. U
employs X as a radiologist. X gives
instructions to staff with respect to the
radiology work X conducts, but X does not
supervise other U employees or manage any
substantial part of U’s operations. X’s
compensation is primarily in the form of a
fixed salary. In addition, X is eligible to
receive an incentive award based on
revenues of the radiology department. X’s
compensation is greater than the amount
referenced for a highly compensated
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 1855(e) of the Social Security Act),
X does not have a material financial interest
in that organization. X does not receive
compensation primarily based on revenues
derived from activities of U that X controls.
X does not participate in any management
decisions affecting either U as a whole or a
discrete segment of U that represents a
substantial portion of its activities, assets,
income, or expenses. 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
U.
Example 11. W is a cardiologist and head
of the cardiology department of the same
hospital U described in Example 10. The
cardiology department is a major source of
patients admitted to U and consequently
represents a substantial portion of U’s
income, as compared to U as a whole. W does
not serve on U’s governing board or as an
officer of U. W does not have a material
financial interest in the provider-sponsored

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organization (as defined in section 1855(e) of
the Social Security Act) in which U
participates. W receives a salary and
retirement and welfare benefits fixed by a
three-year renewable employment contract
with U. W’s compensation is greater than the
amount referenced for a highly compensated
employee in section 414(q)(1)(B)(i) in the
year benefits are provided. As department
head, W manages the cardiology department
and has authority to allocate the budget for
that department, which includes authority to
distribute incentive bonuses among
cardiologists according to criteria that W has
authority to set. W’s management of a
discrete segment of U that represents a
substantial portion of its income and
activities (as compared to U as a whole)
places W in a position to exercise substantial
influence over the affairs of U. Under these
facts and circumstances, W is a disqualified
person with respect to U.
Example 12. M is a museum that is an
applicable tax-exempt organization for
purposes of section 4958. D provides
accounting services and tax advice to M as
an independent contractor in return for a fee.
D has no other relationship with M and is not
related to any disqualified person of M. D
does not provide professional advice with
respect to any transaction from which D
might economically benefit either directly or
indirectly (aside from fees received for the
professional advice rendered). Because D’s
sole relationship to M is providing
professional advice (without having decisionmaking authority) with respect to
transactions from which D will not
economically benefit either directly or
indirectly (aside from customary fees
received for the professional advice
rendered), under these facts and
circumstances, D is not a disqualified person
with respect to M.
Example 13. F is a repertory theater
company that is an applicable tax-exempt
organization for purposes of section 4958. F
holds a fund-raising campaign 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
relationship 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 contributions, 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
convenience. J makes a contribution of $z to
F, which makes J a substantial contributor
within the meaning of section 507(d)(2)(A),
taking into account only contributions
received by F during its current and the four
preceding taxable years. J receives the
benefits described in F’s solicitation. Because
F offers the same benefit to all donors of $z
or more, the preferential treatment that J
receives does not indicate that J is in a
position to exercise substantial influence
over the affairs of the organization. Therefore,

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under these facts and circumstances, J is not
a disqualified person with respect to F.
§ 53.4958–4T
(temporary).

Excess benefit transaction

(a) Definition of excess benefit
transaction—(1) In general. An excess
benefit transaction means any
transaction in which an economic
benefit is provided by an applicable taxexempt organization directly 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 for
providing the benefit. Subject to the
limitations of paragraph (c) of this
section (relating to the treatment of
economic benefits as compensation for
the performance of services), to
determine whether an excess benefit
transaction has occurred, all
consideration and benefits (except
disregarded benefits described in
paragraph (a)(4) of this section)
exchanged between a disqualified
person and the applicable tax-exempt
organization and all entities the
organization controls (within the
meaning of paragraph (a)(2)(ii)(B) of this
section) are taken into account. For
example, in determining the
reasonableness of compensation that is
paid (or vests, or is no longer subject to
a substantial risk of forfeiture) in one
year, services performed in prior years
may be taken into account. For rules
regarding valuation standards, see
paragraph (b) of this section. For the
requirement that an applicable taxexempt organization clearly indicate its
intent to treat a benefit as compensation
for services when paid, see paragraph
(c) of this section.
(2) Economic benefit provided
indirectly—(i) In general. A transaction
that would be an excess benefit
transaction if the applicable tax-exempt
organization engaged in it directly with
a disqualified person is likewise an
excess benefit transaction when it is
accomplished indirectly. An applicable
tax-exempt organization may provide an
excess benefit indirectly to a
disqualified person through a controlled
entity or through an intermediary, as
described in paragraphs (a)(2)(ii) and
(iii) of this section, respectively.
(ii) Through a controlled entity—(A)
In general. An applicable tax-exempt
organization may provide an excess
benefit indirectly through the use of one
or more entities it controls. For
purposes of section 4958, economic
benefits provided by a controlled entity
will be treated as provided by the
applicable tax-exempt organization.

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(B) Definition of control—(1) In
general. For purposes of this paragraph,
control by an applicable tax-exempt
organization means—
(i) In the case of a stock corporation,
ownership (by vote or value) of more
than 50 percent of the stock in such
corporation;
(ii) In the case of a partnership,
ownership of more than 50 percent of
the profits interests or capital interests
in the partnership;
(iii) In the case of a nonstock
organization (i.e., an entity in which no
person holds a proprietary interest), that
at least 50 percent of the directors or
trustees of the organization are either
representatives (including trustees,
directors, agents, or employees) of, or
directly or indirectly controlled by, an
applicable tax-exempt organization; or
(iv) In the case of any other entity,
ownership of more than 50 percent of
the beneficial interest in the entity.
(2) Constructive ownership. Section
318 (relating to constructive ownership
of stock) shall apply for purposes of
determining ownership of stock in a
corporation. Similar principles shall
apply for purposes of determining
ownership of interests in any other
entity.
(iii) Through an intermediary. An
applicable tax-exempt organization may
provide an excess benefit indirectly
through an intermediary. An
intermediary is any person (including
an individual or a taxable or tax-exempt
entity) who participates in a transaction
with one or more disqualified persons of
an applicable tax-exempt organization.
For purposes of section 4958, economic
benefits provided by an intermediary
will be treated as provided by the
applicable tax-exempt organization
when—
(A) An applicable tax-exempt
organization provides an economic
benefit to an intermediary; and
(B) In connection with the receipt of
the benefit by the intermediary—
(1) There is evidence of an oral or
written agreement or understanding that
the intermediary will provide economic
benefits to or for the use of a
disqualified person; or
(2) The intermediary provides
economic benefits to or for the use of a
disqualified person without a significant
business purpose or exempt purpose of
its own.
(iv) Examples. The following
examples illustrate when economic
benefits are provided indirectly under
the rules of paragraph (a)(2) of this
section:
Example 1. K is an applicable tax-exempt
organization for purposes of section 4958. L

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is an entity controlled by K within the
meaning of paragraph (a)(2)(ii)(B) of this
section. J is employed by K, and is a
disqualified person with respect to K. K pays
J an annual salary of $12m, and reports that
amount as compensation during calendar
year 2001. Although J only performed
services for K for nine months of 2001, J
performed equivalent services for L during
the remaining three months of 2001. Taking
into account all of the economic benefits K
provided to J, and all of the services J
performed for K and L, $12m does not exceed
the fair market value of the services J
performed for K and L during 2001.
Therefore, under these facts, K does not
provide an excess benefit to J directly or
indirectly.
Example 2. F is an applicable tax-exempt
organization for purposes of section 4958. D
is an entity controlled by F within the
meaning of paragraph (a)(2)(ii)(B) of this
section. T is the chief executive officer (CEO)
of F. As CEO, T is responsible for overseeing
the activities of F. T’s duties as CEO make
him a disqualified person with respect to F.
T’s compensation package with F represents
the maximum reasonable compensation for
T’s services as CEO. Thus, any additional
economic benefits that F provides to T
without T providing additional consideration
constitute an excess benefit. D contracts with
T to provide enumerated ‘‘consulting
services’’ to D. However, the contract does
not require T to perform any additional
services for D that T is not already obligated
to perform as F’s chief executive officer.
Therefore, any payment to T pursuant to the
consulting contract with D represents an
indirect excess benefit that F provides
through a controlled entity, even if F, D, or
T treats the additional payment to T as
compensation.
Example 3. P is an applicable tax-exempt
organization for purposes of section 4958. S
is a taxable entity controlled by P within the
meaning of paragraph (a)(2)(ii)(B) of this
section. V is the chief executive officer of S,
for which S pays V $w in salary and benefits.
V also serves as a voting member of P’s
governing body. Consequently, V is a
disqualified person with respect to P. P
provides V with $x representing
compensation for the services V provides P
as a member of its governing body. Although
$x represents reasonable compensation for
the services V provides directly to P as a
member of its governing body, the total
compensation of $w + $x exceeds reasonable
compensation for the services V provides to
P and S collectively. Therefore, the portion
of total compensation that exceeds
reasonable compensation is an excess benefit
provided to V.
Example 4. G is an applicable tax-exempt
organization for section 4958 purposes. F is
a disqualified person who was last employed
by G in a position of substantial influence
three years ago. H is an entity engaged in
scientific research and is unrelated to either
F or G. G makes a grant to H to fund a
research position. H subsequently advertises
for qualified candidates for the research
position. F is among several highly qualified
candidates who apply for the research
position. H hires F. There was no evidence

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of an oral or written agreement or
understanding with G that H will use G’s
grant to provide economic benefits to or for
the use of F. Although G provided economic
benefits to H, and in connection with the
receipt of such benefits, H will provide
economic benefits to or for the use of F, H
acted with a significant business purpose or
exempt purpose of its own. Under these facts,
G did not provide an economic benefit to F
indirectly through the use of an intermediary.

(3) Exception for fixed payments
made pursuant to an initial contract—
(i) In general. Except as provided in
paragraph (iv), section 4958 does not
apply to any fixed payment made to a
person pursuant to an initial contract.
(ii) Fixed payment—(A) In general.
For purposes of paragraph (a)(3)(i) of
this section, fixed payment means an
amount of cash or other property
specified in the contract, or determined
by a fixed formula specified in the
contract, which is to be paid or
transferred in exchange for the
provision of specified services or
property. A fixed formula may
incorporate an amount that depends
upon future specified events or
contingencies, provided that no person
exercises discretion when calculating
the amount of a payment or deciding
whether to make a payment (such as a
bonus). A specified event or
contingency may include the amount of
revenues generated by (or other
objective measure of) one or more
activities of the applicable tax-exempt
organization. A fixed payment does not
include any amount paid to a person
under a reimbursement (or similar)
arrangement where discretion is
exercised by any person with respect to
the amount of expenses incurred or
reimbursed.
(B) Special rules. Amounts payable
pursuant to a qualified pension, profitsharing, or stock bonus plan under
Internal Revenue Code section 401(a), or
pursuant to an employee benefit
program that is subject to and satisfies
coverage and nondiscrimination rules
under the Code (e.g., sections 127 and
137), other than nondiscrimination rules
under section 9802, are treated as fixed
payments for purposes of this section,
regardless of the applicable tax-exempt
organization’s discretion with respect to
the plan or program. The fact that a
person contracting with an applicable
tax-exempt organization is expressly
granted the choice whether to accept or
reject any economic benefit is
disregarded in determining whether the
benefit constitutes a fixed payment for
purposes of this paragraph.
(iii) Initial contract. For purposes of
paragraph (a)(3)(i) of this section, initial
contract means a binding written

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contract between an applicable taxexempt organization and a person who
was not a disqualified person within the
meaning of section 4958(f)(1) and
§ 53.4958–3T immediately prior to
entering into the contract.
(iv) Substantial performance required.
Paragraph (a)(3)(i) of this section does
not apply to any fixed payment made
pursuant to the initial contract during
any taxable year of the person
contracting with the applicable taxexempt organization if the person fails
to perform substantially the person’s
obligations under the initial contract
during that year.
(v) Treatment as a new contract. A
written binding contract that provides
that the contract is terminable or subject
to cancellation by the applicable taxexempt organization (other than as a
result of a lack of substantial
performance by the disqualified person,
as described in paragraph (a)(3)(iv) of
this section) without the other party’s
consent and without substantial penalty
to the organization is treated as a new
contract as of the earliest date that any
such termination or cancellation, if
made, would be effective. Additionally,
if the parties make a material change to
a contract, it is treated as a new contract
as of the date the material change is
effective. A material change includes an
extension or renewal of the contract
(other than an extension or renewal that
results from the person contracting with
the applicable tax-exempt organization
unilaterally exercising an option
expressly granted by the contract), or a
more than incidental change to any
amount payable under the contract. The
new contract is tested under paragraph
(a)(3)(iii) of this section to determine
whether it is an initial contract for
purposes of this section.
(vi) Evaluation of non-fixed
payments. Any payment that is not a
fixed payment (within the meaning of
paragraph (a)(3)(ii) of this section) is
evaluated to determine whether it
constitutes an excess benefit transaction
under section 4958. In making this
determination, all payments and
consideration exchanged between the
parties are taken into account, including
any fixed payments made pursuant to
an initial contract with respect to which
section 4958 does not apply.
(vii) Examples. The following
examples illustrate the rules governing
fixed payments made pursuant to an
initial contract. Unless otherwise stated,
assume that the person contracting with
the applicable tax-exempt organization
has performed substantially the person’s
obligations under the contract with
respect to the payment.
The examples are as follows:

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Example 1. T is an applicable tax-exempt
organization for purposes of section 4958. On
January 1, 2000, T hires S as its chief
financial officer by entering into a five-year
written employment contract with S. S was
not a disqualified person within the meaning
of section 4958(f)(1) and § 53.4958–3T
immediately prior to entering into the
January 1, 2000, contract (initial contract). S’s
duties and responsibilities under the contract
make S a disqualified person with respect to
T (see § 53.4958–3T(a)). Under the initial
contract, T agrees to pay S an annual salary
of $200,000, payable in monthly
installments. The contract provides that,
beginning in 2001, S’s annual salary will be
adjusted by the increase in the Consumer
Price Index (CPI) for the prior year. Section
4958 does not apply because S’s
compensation under the contract is a fixed
payment pursuant to an initial contract
within the meaning of paragraph (a)(3) of this
section. Thus, for section 4958 purposes, it
is unnecessary to evaluate whether any
portion of the compensation paid to S
pursuant to the initial contract is an excess
benefit transaction.
Example 2. The facts are the same as in
Example 1, except that the initial contract
provides that, in addition to a base salary of
$200,000, T may pay S an annual
performance-based bonus. The contract
provides that T’s governing body will
determine the amount of the annual bonus as
of the end of each year during the term of the
contract, based on the board’s evaluation of
S’s performance, but the bonus cannot
exceed $100,000 per year. Unlike the base
salary portion of S’s compensation, the bonus
portion of S’s compensation is not a fixed
payment pursuant to an initial contract,
because the governing body has discretion
over the amount, if any, of the bonus
payment. Section 4958 does not apply to
payment of the $200,000 base salary (as
adjusted for inflation), because it is a fixed
payment pursuant to an initial contract
within the meaning of paragraph (a)(3) of this
section. By contrast, the annual bonuses that
may be paid to S under the initial contract
are not protected by the initial contract
exception. Therefore, each bonus payment
will be evaluated under section 4958, taking
into account all payments and consideration
exchanged between the parties.
Example 3. The facts are the same as in
Example 1, except that in 2001, T changes its
payroll system, such that T makes biweekly,
rather than monthly, salary payments to its
employees. Beginning in 2001, T also grants
its employees an additional two days of paid
vacation each year. Neither change is a
material change to S’s initial contract within
the meaning of paragraph (a)(3)(v) of this
section. Therefore, section 4958 does not
apply to the base salary payments to S due
to the initial contract exception.
Example 4. The facts are the same as in
Example 1, except that on January 1, 2001,
S becomes the chief executive officer of T
and a new chief financial officer is hired. At
the same time, T’s board of directors
approves an increase in S’s annual base
salary from $200,000 to $240,000, effective
on that day. These changes in S’s
employment relationship constitute material

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changes of the initial contract within the
meaning of paragraph (a)(3)(v) of this section.
As a result, S is treated as entering into a new
contract with T on January 1, 2001, at which
time S is a disqualified person within the
meaning of section 4958(f)(1) and § 53.4958–
3T. T’s payments to S made pursuant to the
new contract will be evaluated under section
4958, taking into account all payments and
consideration exchanged between the parties.
Example 5. J is a performing arts
organization and an applicable tax-exempt
organization for purposes of section 4958. J
hires W to become the chief executive officer
of J. W was not a disqualified person within
the meaning of section 4958(f)(1) and
§ 53.4958–3T immediately prior to entering
into the employment contract with J. As a
result of this employment contract, W’s
duties and responsibilities make W a
disqualified person with respect to J (see
§ 53.4958–3T(c)(2)). Under the contract, J will
pay W $x (a specified amount) plus a bonus
equal to 2 percent of the total season
subscription sales that exceed $100z. The $x
base salary is a fixed payment pursuant to an
initial contract within the meaning of
paragraph (a)(3) of this section. The bonus
payment is also a fixed payment pursuant to
an initial contract within the meaning of
paragraph (a)(3) of this section, because no
person exercises discretion when calculating
the amount of the bonus payment or deciding
whether the bonus will be paid. Therefore,
section 4958 does not apply to any of J’s
payments to W pursuant to the employment
contract due to the initial contract exception.
Example 6. Hospital B is an applicable taxexempt organization for purposes of section
4958. Hospital B hires E as its chief operating
officer. E was not a disqualified person
within the meaning of section 4958(f)(1) and
§ 53.4958–3T immediately prior to entering
into the employment contract with Hospital
B. As a result of this employment contract,
E’s duties and responsibilities make E a
disqualified person with respect to Hospital
B (see § 53.4958–3T(c)(2)). E’s initial
employment contract provides that E will
have authority to enter into hospital
management arrangements on behalf of
Hospital B. In E’s personal capacity, E owns
more than 35 percent of the combined voting
power of Company X. Consequently, at the
time E becomes a disqualified person with
respect to B, Company X also becomes a
disqualified person with respect to B (see
§ 53.4958–3T(b)(2)(A)). E, acting on behalf of
Hospital B as chief operating officer, enters
into a contract with Company X under which
Company X will provide billing and
collection services to Hospital B. The initial
contract exception of paragraph (a)(3)(i) of
this section does not apply to the billing and
collection services contract, because at the
time that this contractual arrangement was
entered into, Company X was a disqualified
person with respect to Hospital B. Although
E’s employment contract (which is an initial
contract) authorizes E to enter into hospital
management arrangements on behalf of
Hospital B, the payments made to Company
X are not made pursuant to E’s employment
contract, but rather are made by Hospital B
pursuant to a separate contractual
arrangement with Company X. Therefore,

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even if payments made to Company X under
the billing and collection services contract
are fixed payments (within the meaning of
paragraph (a)(3)(ii) of this section), section
4958 nonetheless applies to payments made
by Hospital B to Company X because the
billing and collection services contract itself
does not constitute an initial contract under
paragraph (a)(3)(iii) of this section.
Accordingly, all payments made to Company
X under the billing and collection services
contract will be evaluated under section
4958.
Example 7. Hospital C, an applicable taxexempt organization, enters into a contract
with Company Y, under which Company Y
will provide a wide range of hospital
management services to Hospital C. Upon
entering into this contractual arrangement,
Company Y becomes a disqualified person
with respect to Hospital C. The contract
provides that Hospital C will pay Company
Y a management fee of x percent of adjusted
gross revenue (i.e., gross revenue increased
by the cost of charity care provided to
indigents) annually for a five-year period.
The management services contract specifies
the cost accounting system and the standards
for indigents to be used in calculating the
cost of charity care. The cost accounting
system objectively defines the direct and
indirect costs of all health care goods and
services provided as charity care. Because
Company Y was not a disqualified person
with respect to Hospital C immediately
before entering into the management services
contract, that contract is an initial contract
within the meaning of paragraph (a)(3)(iii) of
this section. The annual management fee
paid to Company Y is determined by a fixed
formula specified in the contract, and is
therefore a fixed payment within the
meaning of paragraph (a)(3)(ii) of this section.
Accordingly, section 4958 does not apply to
the annual management fee due to the initial
contract exception.
Example 8. The facts are the same as in
Example 7, except that the management
services contract also provides that Hospital
C will reimburse Company Y on a monthly
basis for certain expenses incurred by
Company Y that are attributable to
management services provided to Hospital C
(e.g., legal fees and travel expenses). These
reimbursement payments that Hospital C
makes to Company Y for the various
expenses covered by the contract are not
fixed payments within the meaning of
paragraph (a)(3)(ii) of this section, because
Company Y exercises discretion with respect
to the amount of expenses incurred.
Therefore, any reimbursement payments that
Hospital C pays pursuant to the contract will
be evaluated under section 4958.
Example 9. X, an applicable tax-exempt
organization for purposes of section 4958,
hires C to conduct scientific research. On
January 1, 2000, C enters into a three-year
written employment contract with X (‘‘initial
contract’’). Under the terms of the contract,
C is required to work full-time at X’s
laboratory for a fixed annual salary of
$90,000. Immediately prior to entering into
the employment contract, C was not a
disqualified person within the meaning of
section 4958(f)(1) and § 53.4958–3T, nor did

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C become a disqualified person pursuant to
the initial contract. However, two years after
joining X, C marries D, who is the child of
X’s president. As D’s spouse, C is a
disqualified person within the meaning of
section 4958(f)(1) and § 53.4958–3T with
respect to X. Nonetheless, section 4958 does
not apply to X’s salary payments to C due to
the initial contract exception.
Example 10. The facts are the same as in
Example 9, except that the initial contract
included a below-market loan provision
under which C has the unilateral right to
borrow up to a specified dollar amount from
X at a specified interest rate for a specified
term. After C’s marriage to D, C borrows
money from X to purchase a home under the
terms of the initial contract. Section 4958
does not apply to X’s loan to C due to the
initial contract exception.
Example 11. The facts are the same as in
Example 9, except that after C’s marriage to
D, C works only sporadically at the
laboratory, and performs no other services for
X. Notwithstanding that C fails to perform
substantially C’s obligations under the initial
contract, X does not exercise its right to
terminate the initial contract for
nonperformance and continues to pay full
salary to C. Pursuant to paragraph (a)(3)(iv)
of this section, the initial contract exception
does not apply to any payments made
pursuant to the initial contract during any
taxable year of C in which C fails to perform
substantially C’s obligations under the initial
contract.

(4) Certain economic benefits
disregarded for purposes of section
4958. The following economic benefits
are disregarded for purposes of section
4958:
(i) Nontaxable fringe benefits. An
economic benefit that is excluded from
income under section 132, except any
liability insurance premium, payment,
or reimbursement that must be taken
into account under § 53.4958–
4T(b)(1)(ii)(B)(2);
(ii) Certain economic benefits
provided to a volunteer for the
organization. An economic benefit
provided to a volunteer for the
organization if the benefit is provided to
the general public in exchange for a
membership fee or contribution of $75
or less per year;
(iii) Certain economic benefits
provided to a member of, or donor to,
the organization. An economic benefit
provided to a member of an organization
solely on account of the payment of a
membership fee, or to a donor solely on
account of a contribution deductible
under section 170, if—
(A) Any non-disqualified person
paying a membership fee or making a
contribution above a specified amount
to the organization is given the option
of receiving substantially the same
economic benefit; and
(B) The disqualified person and a
significant number of non-disqualified

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persons make a payment or contribution
of at least the specified amount;
(iv) Economic benefits provided to a
charitable beneficiary. An economic
benefit provided to a person solely as a
member of a charitable class that the
applicable tax-exempt organization
intends to benefit as part of the
accomplishment of the organization’s
exempt purpose; and
(v) Certain economic benefits
provided to a governmental unit. Any
transfer of an economic benefit to or for
the use of a governmental unit defined
in section 170(c)(1), if the transfer is for
exclusively public purposes.
(b) Valuation standards—(1) In
general. This section provides rules for
determining the value of economic
benefits for purposes of section 4958.
(i) Fair market value of property. The
value of property, including the right to
use property, for purposes of section
4958 is the fair market value (i.e., 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).
(ii) Reasonable compensation—(A) In
general. The value of services is the
amount that would ordinarily be paid
for like services by like enterprises
under like circumstances (i.e.,
reasonable compensation). Section 162
standards apply in determining
reasonableness of compensation, taking
into account the aggregate benefits
(other than any benefits specifically
disregarded under paragraph (a)(4) of
this section) provided to a person and
the rate at which any deferred
compensation accrues. The fact that a
bonus or revenue-sharing arrangement
is subject to a cap is a relevant factor in
determining the reasonableness of
compensation. The fact that a State or
local legislative or agency body or court
has authorized or approved a particular
compensation package paid to a
disqualified person is not determinative
of the reasonableness of compensation
for purposes of section 4958.
(B) Items included in determining the
value of compensation for purposes of
determining reasonableness under
section 4958. Except for economic
benefits that are disregarded for
purposes of section 4958 under
paragraph (a)(4) of this section,
compensation for purposes of
determining reasonableness under
section 4958 includes all economic
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performance of services. These benefits
include, but are not limited to—
(1) All forms of cash and noncash
compensation, including salary, fees,
bonuses, severance payments, and
deferred and noncash compensation
described in § 53.4958–1T(e)(2);
(2) Unless excludable from income as
a de minimis fringe benefit pursuant to
section 132(a)(4), the payment of
liability insurance premiums for, or the
payment or reimbursement by the
organization of—
(i) Any penalty, tax, or expense of
correction owed under section 4958;
(ii) Any expense not reasonably
incurred by the person in connection
with a civil judicial or civil
administrative proceeding arising out of
the person’s performance of services on
behalf of the applicable tax-exempt
organization; or
(iii) Any expense resulting from an act
or failure to act with respect to which
the person has acted willfully and
without reasonable cause; and
(3) All other compensatory benefits,
whether or not included in gross income
for income tax purposes, including
payments to welfare benefit plans, such
as plans providing medical, dental, life
insurance, severance pay, and disability
benefits, and both taxable and
nontaxable fringe benefits (other than
fringe benefits described in section 132),
including expense allowances or
reimbursements, and foregone interest
on loans.
(C) Inclusion in compensation for
reasonableness determination does not
govern income tax treatment. The
determination of whether any item
listed in paragraph (b)(1)(ii)(B) of this
section is included in the disqualified
person’s gross income for income tax
purposes is made on the basis of the
provisions of chapter 1 of Subtitle A of
the Internal Revenue Code, without
regard to whether the item is taken into
account for purposes of determining
reasonableness of compensation under
section 4958.
(2) Timing of reasonableness
determination—(i) In general. The facts
and circumstances to be taken into
consideration in determining
reasonableness of a fixed payment
(within the meaning of paragraph
(a)(3)(ii) of this section) are those
existing on the date the parties enter
into the contract pursuant to which the
payment is made. However, in the event
of substantial non-performance,
reasonableness is determined based on
all facts and circumstances, up to and
including circumstances as of the date
of payment. In the case of a payment
that is not a fixed payment under a
contract, reasonableness is determined

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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 payment is questioned be
considered in making a determination of
the reasonableness of the payment.
(ii) Treatment as a new contract. For
purposes of paragraph (b)(2)(i) of this
section, a written binding contract that
provides that the contract is terminable
or subject to cancellation by the
applicable tax-exempt organization
without the other party’s consent and
without substantial penalty to the
organization is treated as a new contract
as of the earliest date that any such
termination or cancellation, if made,
would be effective. Additionally, if the
parties make a material change to a
contract (within the meaning of
paragraph (a)(3)(v) of this section), it is
treated as a new contract as of the date
the material change is effective.
(iii) Examples. The following
examples illustrate the timing of the
reasonableness determination under the
rules of this paragraph (b)(2):
Example 1. G is an applicable tax-exempt
organization for purposes of section 4958. H
is an employee of G and a disqualified person
with respect to G. H’s new multi-year
employment contract provides for payment
of a salary and provision of specific benefits
pursuant to a qualified pension plan under
Internal Revenue Code section 401(a) and an
accident and health plan that meets the
requirements of section 105(h)(2). The
contract provides that H’s salary will be
adjusted by the increase in the Consumer
Price Index (CPI) for the prior year. The
contributions G makes to the qualified
pension plan are equal to the maximum
amount G is permitted to contribute under
the rules applicable to qualified plans. Under
these facts, all items comprising H’s total
compensation are treated as fixed payments
within the meaning of paragraph (a)(3)(ii) of
this section. Therefore, the reasonableness of
H’s compensation is determined based on the
circumstances existing at the time G and H
enter into the employment contract.
Example 2. N is an applicable tax-exempt
organization for purposes of section 4958. On
January 2, N’s governing body enters into a
new one-year employment contract with K,
its executive director, who is a disqualified
person with respect to N. The contract
provides that K will receive a specified
amount of salary, contributions to a qualified
pension plan under Internal Revenue Code
section 401(a), and other benefits pursuant to
a section 125 cafeteria plan. In addition, the
contract provides that N’s governing body
may, in its discretion, declare a bonus to be
paid to K at any time during the year covered
by the contract. K’s salary and other specified
benefits constitute fixed payments within the
meaning of paragraph (a)(3)(ii) of this section.
Therefore, the reasonableness of those
economic benefits is determined on the date
when the contract was made. However,
because the bonus payment is not a fixed

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payment within the meaning of paragraph
(a)(3)(ii) of this section, the determination of
whether any bonus awarded to N is
reasonable must be made based on all facts
and circumstances (including all payments
and consideration exchanged between the
parties), up to and including circumstances
as of the date of payment of the bonus.

(c) Establishing intent to treat
economic benefit as consideration for
the performance of services—(1) In
general. An economic benefit is not
treated as consideration for the
performance of services unless the
organization providing the benefit
clearly indicates its intent to treat the
benefit as compensation when the
benefit is paid. Except as provided in
paragraph (c)(2) of this section, an
applicable tax-exempt organization (or
entity controlled by an applicable taxexempt organization, within the
meaning of paragraph (a)(2)(ii)(B) of this
section) is treated as clearly indicating
its intent to provide an economic benefit
as compensation for services only if the
organization provides written
substantiation that is contemporaneous
with the transfer of the economic benefit
at issue. If an organization fails to
provide this contemporaneous
substantiation, any services provided by
the disqualified person will not be
treated as provided in consideration for
the economic benefit for purposes of
determining the reasonableness of the
transaction.
(2) Nontaxable benefits. For purposes
of section 4958(c)(1)(A) and this section,
an applicable tax-exempt organization is
not required to indicate its intent to
provide an economic benefit as
compensation for services if the
economic benefit is excluded from the
disqualified person’s gross income for
income tax purposes on the basis of the
provisions of chapter 1 of Subtitle A of
the Internal Revenue Code. Examples of
these benefits include, but are not
limited to, employer-provided health
benefits and contributions to a qualified
pension, profit-sharing, or stock bonus
plan under Internal Revenue Code
section 401(a), and benefits described in
sections 127 and 137. However, except
for economic benefits that are
disregarded for purposes of section 4958
under paragraph (a)(4) of this section,
all compensatory benefits (regardless of
the federal income tax treatment)
provided by an organization in
exchange for the performance of
services are taken into account in
determining the reasonableness of a
person’s compensation for purposes of
section 4958.
(3) Contemporaneous
substantiation—(i) Reporting of benefit.
An applicable tax-exempt organization

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provides contemporaneous written
substantiation of its intent to provide an
economic benefit as compensation if—
(A) The organization reports the
economic benefit as compensation on an
original Federal tax information return
with respect to the payment (e.g., Form
W–2 or 1099) or with respect to the
organization (e.g., Form 990), or on an
amended Federal tax information return
filed prior to the commencement of an
Internal Revenue Service examination of
the applicable tax-exempt organization
or the disqualified person for the taxable
year in which the transaction occurred
(as determined under § 53.4958–1T(e));
or
(B) The recipient disqualified person
reports the benefit as income on the
person’s original Federal tax return (e.g.,
Form 1040), or on the person’s amended
Federal tax return filed prior to the
commencement of an Internal Revenue
Service examination described in
paragraph (b)(3)(i)(A) of this section.
(ii) Other evidence of
contemporaneous substantiation. In
addition, other written
contemporaneous evidence may be used
to demonstrate that the appropriate
decision-making body or an authorized
officer approved a transfer as
compensation for services in accordance
with established procedures, including
an approved written employment
contract executed on or before the date
of the transfer, or documentation
satisfying the requirements of
§ 53.4958–6T(a)(3) indicating that an
authorized body approved the transfer
as compensation for services on or
before the date of the transfer.
(iii) Failure to report due to
reasonable cause. If an applicable taxexempt organization’s failure to report
an economic benefit as required under
the Internal Revenue Code is due to
reasonable cause (within the meaning of
§ 301.6724–1 of this chapter), then the
organization will be treated as having
clearly indicated its intent to provide an
economic benefit as compensation for
services. 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
applicable tax-exempt organization
must establish 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
described in § 301.6724–1(c) of this
chapter), 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).

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(4) Examples. The following examples
illustrate the requirement that an
organization contemporaneously
substantiate its intent to provide an
economic benefit as compensation for
services, as defined in paragraph (c) of
this section:
Example 1. G is an applicable tax-exempt
organization for purposes of section 4958. G
hires an individual contractor, P, who is also
the child of a disqualified person of G, to
design a computer program for it. G executes
a contract with P for that purpose in
accordance with G’s established procedures,
and pays P $1,000 during the year 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 will be
treated as providing contemporaneous
written substantiation of its intent to provide
the $1,000 paid to P as compensation for the
services P performed under the contract by
virtue of either the Form 1099 filed with the
Internal Revenue Service reporting the
amount, or by virtue of the written contract
executed between G and P.
Example 2. G is an applicable tax-exempt
organization for purposes of section 4958. D
is the chief operating officer of G, and a
disqualified person with respect to G. D
receives a bonus at the end of the year. G’s
accounting department determines that the
bonus is to be reported on D’s Form W–2.
Due to events beyond G’s control, 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 is made aware of
the error during an Internal Revenue Service
examination. G’s failure to report 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 (within the meaning of
§ 301.6724–1 of this chapter) for failing to
report D’s bonus, G will be treated as
providing contemporaneous written
substantiation of its intent to provide the
bonus as compensation for services when
paid.
§ 53.4958–5T Transaction in which the
amount of the economic benefit is
determined in whole or in part by the
revenues of one or more activities of the
organization (temporary). [Reserved]
§ 53.4958–6T Rebuttable presumption that
a transaction is not an excess benefit
transaction (temporary).

(a) In general. Payments under a
compensation arrangement are
presumed to be reasonable, and a
transfer of property, or the right to use
property, is presumed to be at fair
market value, if the following
conditions are satisfied—
(1) The compensation arrangement or
the terms of the property transfer are
Approved in advance by an authorized
body of the applicable tax-exempt
organization (or an entity controlled by

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the organization with the meaning of
§ 53.4958–4T(a)(2)(ii)(B)) composed
entirely of individuals who do not have
a conflict of interest (within the
meaning of paragraph (c)(1)(iii) of this
section) with respect to the
compensation arrangement or property
transfer, as described in paragraph (c)(1)
of this section;
(2) The authorized body obtained and
relied upon appropriate data as to
comparability prior to making its
determination, as described in
paragraph (c)(2) of this section; and
(3) The authorized body adequately
documented the basis for its
determination concurrently with
making that determination, as described
in paragraph (c)(3) of this section.
(b) Rebutting the presumption. If the
three requirements of paragraph (a) of
this section are satisfied, then the
Internal Revenue Service may rebut the
presumption that arises under
paragraph (a) of this section only if it
develops sufficient contrary evidence to
rebut the probative value of the
comparability data relied upon by the
authorized body. With respect to any
fixed payment (within the meaning of
§ 53.4958–4T(a)(3)(ii)), rebuttal evidence
is limited to evidence relating to facts
and circumstances existing on the date
the parties enter into the contract
pursuant to which the payment is made
(except in the event of substantial
nonperformance). With respect to all
other payments (including non-fixed
payments subject to a cap, as described
in paragraph (d)(2) of this section),
rebuttal evidence may include facts and
circumstances up to and including the
date of payment. See § 53.4958–
4T(b)(2)(i).
(c) Requirements for invoking
rebuttable presumption—(1) Approval
by an authorized body—(i) In general.
An authorized body means—
(A) The governing body (i.e., the
board of directors, board of trustees, or
equivalent controlling body) of the
organization;
(B) A committee of the governing
body, which may be composed of any
individuals permitted under State law
to serve on such a committee, to the
extent that the committee is permitted
by State law to act on behalf of the
governing body; or
(C) To the extent permitted under
State law, other parties authorized by
the governing body of the organization
to act on its behalf by following
procedures specified by the governing
body in approving compensation
arrangements or property transfers.
(ii) Individuals not included on
authorized body. For purposes of
determining whether the requirements

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of paragraph (a) of this section have
been met with respect to a specific
compensation arrangement or property
transfer, an individual is not included
on the authorized body when it is
reviewing a transaction if that
individual meets with other members
only to answer questions, and otherwise
recuses himself or herself from the
meeting and is not present during
debate and voting on the compensation
arrangement or property transfer.
(iii) Absence of conflict of interest. A
member of the authorized body does not
have a conflict of interest with respect
to a compensation arrangement or
property transfer only if the member—
(A) Is not a disqualified person
participating in or economically
benefitting from the compensation
arrangement or property transfer, and is
not a member of the family of any such
disqualified person, as described in
section 4958(f)(4) or § 53.4958–3T(b)(1);
(B) Is not in an employment
relationship subject to the direction or
control of any disqualified person
participating in or economically
benefitting from the compensation
arrangement or property transfer;
(C) Does not receive compensation or
other payments subject to approval by
any disqualified person participating in
or economically benefitting from the
compensation arrangement or property
transfer;
(D) Has no material financial interest
affected by the compensation
arrangement or property transfer; and
(E) Does not approve a transaction
providing economic benefits to any
disqualified person participating in the
compensation arrangement or property
transfer, who in turn has approved or
will approve a transaction providing
economic benefits to the member.
(2) Appropriate data as to
comparability—(i) In general. An
authorized body has appropriate data as
to comparability if, given the knowledge
and expertise of its members, it has
information sufficient to determine
whether, under the standards set forth
in § 53.4958–4T(b), the compensation
arrangement in its entirety is reasonable
or the property transfer is at fair market
value. In the case of compensation,
relevant information includes, but is not
limited to, compensation levels paid by
similarly situated organizations, both
taxable and tax-exempt, for functionally
comparable positions; the availability of
similar services in the geographic area
of the applicable tax-exempt
organization; current compensation
surveys compiled by independent firms;
and actual written offers from similar
institutions competing for the services
of the disqualified person. In the case of

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property, relevant information includes,
but is not limited to, current
independent appraisals of the value of
all property to be transferred; and offers
received as part of an open and
competitive bidding process.
(ii) Special rule for compensation
paid by small organizations. For
organizations with annual gross receipts
(including contributions) of less than $1
million reviewing compensation
arrangements, the authorized body will
be considered to have appropriate data
as to comparability if it has data on
compensation paid by three 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
requirement with respect to the
collection of appropriate data.
(iii) Application of special rule for
small organizations. For purposes of
determining whether the special rule for
small organizations described in
paragraph (c)(2)(ii) of this section
applies, an organization may calculate
its annual gross receipts based on an
average of its gross receipts during the
three prior taxable years. If any
applicable tax-exempt organization is
controlled by or controls another entity
(as defined in § 53.4958–4T(a)(2)(ii)(B)),
the annual gross receipts of such
organizations must be aggregated to
determine applicability of the special
rule stated in paragraph (c)(2)(ii) of this
section.
(iv) Examples. The following
examples illustrate the rules for
appropriate data as to comparability for
purposes of invoking the rebuttable
presumption of reasonableness
described in this section. In all
examples, compensation refers to the
aggregate value of all benefits provided
in exchange for services. The examples
are as follows:
Example 1. Z is a university that is an
applicable tax-exempt organization for
purposes of section 4958. Z is negotiating a
new contract with Q, its president, because
the old contract will expire at the end of the
year. In setting Q’s compensation for its
president at $600x per annum, the executive
committee of the Board of Trustees relies
solely on a national survey of compensation
for university presidents that indicates
university presidents receive annual
compensation in the range of $100x to $700x;
this survey does not divide its data by any
criteria, such as the number of students
served by the institution, annual revenues,
academic ranking, or geographic location.
Although many members of the executive
committee have significant business
experience, none of the members has any
particular expertise in higher education
compensation matters. Given the failure of

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the survey to provide information specific to
universities comparable to Z, and because no
other information was presented, the
executive committee’s decision with respect
to Q’s compensation was not based upon
appropriate data as to comparability.
Example 2. The facts are the same as
Example 1, except that the national
compensation survey divides the data
regarding compensation for university
presidents into categories based on various
university-specific factors, including the size
of the institution (in terms of the number of
students it serves and the amount of its
revenues) and geographic area. The survey
data shows that university presidents at
institutions comparable to and in the same
geographic area as Z receive annual
compensation in the range of $200x to $300x.
The executive committee of the Board of
Trustees of Z relies on the survey data and
its evaluation of Q’s many years of service as
a tenured professor and high-ranking
university official at Z in setting Q’s
compensation at $275x annually. The data
relied upon by the executive committee
constitutes appropriate data as to
comparability.
Example 3. X is a tax-exempt hospital that
is an applicable tax-exempt organization for
purposes of section 4958. 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 executive placement and
compensation. The survey covered
executives with comparable responsibilities
at a significant number of taxable and taxexempt hospitals. The survey data are sorted
by a number of different variables, including
the size of the hospitals and the nature of the
services they provide, the level of experience
and specific responsibilities of the
executives, and the composition of the
annual 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 opportunity 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 4. The facts are the same as
Example 3, except that one year later, X is
negotiating a new contract with its chief
executive officer. The governing board of X
has no information indicating that the
relevant market conditions have changed or
that the results of the prior year’s survey are
no longer valid. Therefore, X may continue
to rely on the independent compensation
survey prepared for the prior year in setting
annual compensation under the new
contract.
Example 5. W is a local repertory theater
and an applicable tax-exempt organization
for purposes of section 4958. W has had
annual gross receipts ranging from $400,000
to $800,000 over its past three taxable years.
In determining the next year’s compensation
for W’s artistic director, the board of directors
of W relies on data compiled from a
telephone survey of three other unrelated

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repertory theaters of similar size in similar
communities. A member of the board drafts
a brief written summary of the annual
compensation information obtained from this
informal survey. The annual compensation
information obtained in the telephone survey
is appropriate data as to comparability.

(3) Documentation—(i) For a decision
to be documented adequately, the
written or electronic records of the
authorized body must note—
(A) The terms of the transaction that
was approved and the date it was
approved;
(B) The members of the authorized
body who were present during debate
on the transaction that was approved
and those who voted on it;
(C) The comparability data obtained
and relied upon by the authorized body
and how the data was obtained; and
(D) Any actions taken with respect to
consideration of the transaction by
anyone who is otherwise a member of
the authorized body but who had a
conflict of interest with respect to the
transaction.
(ii) If the authorized body determines
that reasonable compensation for a
specific arrangement or fair market
value in a specific property transfer is
higher or lower than the range of
comparability data obtained, the
authorized body must record the basis
for its determination. For a decision to
be documented concurrently, records
must be prepared before the later of the
next meeting of the authorized body or
60 days after the final action or actions
of the authorized body are taken.
Records must be reviewed and approved
by the authorized body as reasonable,
accurate and complete within a
reasonable time period thereafter.
(d) No presumption with respect to
non-fixed payments until amounts are
determined—(1) In general. Except as
provided in paragraph (d)(2) of this
section, in the case of a payment that is
not a fixed payment (within the
meaning of § 53.4958–4T(a)(3)(ii)), the
rebuttable presumption of this section
arises only after the exact amount of the
payment is determined, or a fixed
formula for calculating the payment is
specified, and the three requirements for
the presumption under paragraph (a) of
this section subsequently are satisfied.
See § 53.4958–4T(b)(2)(i).
(2) Special rule for certain non-fixed
payments subject to a cap. If the
authorized body approves an
employment contract with a
disqualified person that includes a nonfixed payment (such as a discretionary
bonus) subject to a specified cap, the
authorized body may establish a
rebuttable presumption with respect to

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2169

the non-fixed payment at the time the
employment contract is entered into if—
(i) Prior to approving the contract, the
authorized body obtains appropriate
comparability data indicating that a
fixed payment of up to a certain amount
to the particular disqualified person
would represent reasonable
compensation;
(ii) The maximum amount payable
under the contract (taking into account
both fixed and non-fixed payments)
does not exceed the amount referred to
in paragraph (d)(2)(i) of this section; and
(iii) The other requirements for the
rebuttable presumption of
reasonableness under paragraph (a) of
this section are satisfied.
(e) No inference from absence of
presumption. 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 neither creates
any inference that the transaction is an
excess benefit transaction, nor exempts
or relieves any person from compliance
with any federal or state law imposing
any obligation, duty, responsibility, or
other standard of conduct with respect
to the operation or administration of any
applicable tax-exempt organization.
(f) Period of reliance on rebuttable
presumption. Except as provided in
paragraph (d) of this section with
respect to non-fixed payments, the
rebuttable presumption applies to all
payments made or transactions
completed in accordance with a
contract, provided that the provisions of
paragraph (a) of this section were met at
the time the parties entered into the
contract.
§ 53.4958–7T

Correction (temporary).

(a) In general. An excess benefit
transaction is corrected by undoing the
excess benefit to the extent possible,
and taking any additional measures
necessary to place the applicable taxexempt organization involved in the
excess benefit transaction in a financial
position not worse than that in which it
would be if the disqualified person were
dealing under the highest fiduciary
standards. Paragraph (b) of this section
describes the acceptable forms of
correction. Paragraph (c) of this section
defines the correction amount.
Paragraph (d) of this section describes
correction where a contract has been
partially performed. Paragraph (e) of
this section describes correction where
the applicable tax-exempt organization
involved in the transaction has ceased
to exist or is no longer tax-exempt.
Paragraph (f) of this section provides
examples illustrating correction.

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(b) Form of correction—(1) Cash or
cash equivalents. Except as provided in
paragraphs (b)(3) and (4) of this section,
a disqualified person corrects an excess
benefit only by making a payment in
cash or cash equivalents, excluding
payment by a promissory note, to the
applicable tax-exempt organization
equal to the correction amount, as
defined in paragraph (c) of this section.
(2) Anti-abuse rule. A disqualified
person will not satisfy the requirements
of paragraph (b)(1) of this section if the
Commissioner determines that the
disqualified person engaged in one or
more transactions with the applicable
tax-exempt organization to circumvent
the requirements of this correction
section, and as a result, the disqualified
person effectively transferred property
other than cash or cash equivalents.
(3) Special rule relating to
nonqualified deferred compensation. If
an excess benefit transaction results, in
whole or in part, from the vesting (as
described in § 53.4958–1T(e)(2)) of
benefits provided under a nonqualified
deferred compensation plan, then, to the
extent that such benefits have not yet
been distributed to the disqualified
person, the disqualified person may
correct the portion of the excess benefit
resulting from such undistributed
deferred compensation by relinquishing
any right to receive such benefits
(including any earnings thereon).
(4) Return of specific property—(i) In
general. A disqualified person may,
with the agreement of the applicable
tax-exempt organization, make a
payment by returning specific property
previously transferred in the excess
benefit transaction. In this case, the
disqualified person is treated as making
a payment equal to the lesser of—
(A) The fair market value of the
property determined on the date the
property is returned to the organization;
or
(B) The fair market value of the
property on the date the excess benefit
transaction occurred.
(ii) Payment not equal to correction
amount. If the payment described in
paragraph (b)(4)(i) of this section is less
than the correction amount (as
described in paragraph (c) of this
section), the disqualified person must
make an additional cash payment to the
organization equal to the difference.
Conversely, if the payment described in
paragraph (b)(4)(i) of this section
exceeds the correction amount (as
described in paragraph (c) of this
section), the organization may make a
cash payment to the disqualified person
equal to the difference.
(iii) Disqualified person may not
participate in decision. Any disqualified

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person who received an excess benefit
from the excess benefit transaction may
not participate in the applicable taxexempt organization’s decision whether
to accept the return of specific property
under paragraph (b)(4)(i) of this section.
(c) Correction amount. The correction
amount with respect to an excess benefit
transaction equals the sum of the excess
benefit (as defined in § 53.4958–1T(b))
and interest on the excess benefit. The
amount of the interest charge for
purposes of this section is determined
by multiplying the excess benefit by an
interest rate, compounded annually, for
the period from the date the excess
benefit transaction occurred (as defined
in § 53.4958–1T(e)) to the date of
correction. The interest rate used for
this purpose must be a rate that equals
or exceeds the applicable Federal rate
(AFR), compounded annually, for the
month in which the transaction
occurred. The period from the date the
excess benefit transaction occurred to
the date of correction is used to
determine whether the appropriate AFR
is the Federal short-term rate, the
Federal mid-term rate, or the Federal
long-term rate. See section
1274(d)(1)(A).
(d) Correction where contract has
been partially performed. If the excess
benefit transaction arises under a
contract that has been partially
performed, termination of the
contractual relationship between the
organization and the disqualified person
is not required in order to correct.
However, the parties may need to
modify the terms of any ongoing
contract to avoid future excess benefit
transactions.
(e) Correction in the case of an
applicable tax-exempt organization that
has ceased to exist, or is no longer taxexempt—(1) In general. A disqualified
person must correct an excess benefit
transaction in accordance with this
paragraph where the applicable taxexempt organization that engaged in the
transaction no longer exists or is no
longer described in section 501(c)(3) or
(4) and exempt from tax under section
501(a).
(2) Section 501(c)(3) organizations. In
the case of an excess benefit transaction
with a section 501(c)(3) applicable taxexempt organization, the disqualified
person must pay the correction amount,
as defined in paragraph (c) of this
section, to another organization
described in section 501(c)(3) and
exempt from tax under section 501(a) in
accordance with the dissolution clause
contained in the constitutive documents
of the applicable tax-exempt
organization involved in the excess
benefit transaction, provided that the

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other organization is not related to the
disqualified person.
(3) Section 501(c)(4) organizations. In
the case of an excess benefit transaction
with a section 501(c)(4) applicable taxexempt organization, the disqualified
person must pay the correction amount,
as defined in paragraph (c) of this
section, to a successor section 501(c)(4)
organization or, if no tax-exempt
successor, to any section 501(c)(3) or
other section 501(c)(4) organization not
related to the disqualified person.
(f) Examples. The following examples
illustrate the principles of this section
describing the requirements of
correction:
Example 1. W is an applicable tax-exempt
organization for purposes of section 4958. D
is a disqualified person with respect to W. W
employed D in 1999 and made payments
totaling $12t to D as compensation
throughout the taxable year. The fair market
value of D’s services in 1999 was $7t. Thus,
D received excess compensation in the
amount of $5t, the excess benefit for
purposes of section 4958. In accordance with
§ 53.4958–1T(e)(1), the excess benefit
transaction with respect to the series of
compensatory payments during 1999 is
deemed to occur on December 31, 1999, the
last day of D’s taxable year. In order to
correct the excess benefit transaction on June
30, 2002, D must pay W, in cash or cash
equivalents, excluding payment with a
promissory note, $5t (the excess benefit) plus
interest on $5t for the period from the date
the excess benefit transaction occurred to the
date of correction (i.e., December 31, 1999, to
June 30, 2002). Because this period is not
more than three years, the interest rate D
must use to determine the interest on the
excess benefit must equal or exceed the
short-term AFR, compounded annually, for
December, 1999 (5.74%, compounded
annually).
Example 2. X is an applicable tax-exempt
organization for purposes of section 4958. B
is a disqualified person with respect to X. On
January 1, 2000, B paid X $6v for Property
F. Property F had a fair market value of $10v
on January 1, 2000. Thus, the sales
transaction on that date provided an excess
benefit to B in the amount of $4v. In order
to correct the excess benefit on July 5, 2005,
B pays X, in cash or cash equivalents,
excluding payment with a promissory note,
$4v (the excess benefit) plus interest on $4v
for the period from the date the excess
benefit transaction occurred to the date of
correction (i.e., January 1, 2000, to July 5,
2005). Because this period is over three but
not over nine years, the interest rate B must
use to determine the interest on the excess
benefit must equal or exceed the mid-term
AFR, compounded annually, for January,
2000 (6.21%, compounded annually).
Example 3. The facts are the same as in
Example 2, except that B offers to return
Property F. X agrees to accept the return of
Property F, a decision in which B does not
participate. Property F has declined in value
since the date of the excess benefit
transaction. On July 5, 2005, the property has

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a fair market value of $9v. For purposes of
correction, B’s return of Property F to X is
treated as a payment of $9v, the fair market
value of the property determined on the date
the property is returned to the organization.
If $9v is greater than the correction amount
($4v plus interest on $4v at a rate that equals
or exceeds 6.21%, compounded annually, for
the period from January 1, 2000, to July 5,
2005), then X may make a cash payment to
B equal to the difference.
Example 4. The facts are the same as in
Example 3, except that Property F has
increased in value since January 1, 2000, the
date the excess benefit transaction occurred,
and on July 5, 2005, has a fair market value
of $13v. For purposes of correction, B’s
return of Property F to X is treated as a
payment of $10v, the fair market value of the
property on the date the excess benefit
transaction occurred. If $10v is greater than
the correction amount ($4v plus interest on
$4v at a rate that equals or exceeds 6.21%,
compounded annually, for the period from
January 1, 2000, to July 5, 2005), then X may
make a cash payment to B equal to the
difference.
Example 5. The facts are the same as in
Example 2. Assume that the correction
amount B paid X in cash on July 5, 2005, was
$5.58v. On July 4, 2005, X loaned $5.58v to
B, in exchange for a promissory note signed
by B in the amount of $5.58v, payable with
interest at a future date. These facts indicate
that B engaged in the loan transaction to
circumvent the requirement of this section
that (except as provided in paragraph (b)(3)
or (4) of this section), the correction amount
must be paid only in cash or cash
equivalents. As a result, the Commissioner
may determine that B effectively transferred
property other than cash or cash equivalents,
and therefore did not satisfy the correction
requirements of this section.
§ 53.4958–8T

Special rules (temporary).

(a) Substantive requirements for
exemption still apply. Section 4958 does
not affect the substantive standards for
tax exemption under section 501(c)(3) or
(4), including the requirements that the
organization be organized and operated
exclusively for exempt purposes, and
that no part of its net earnings inure to
the benefit of any private shareholder or
individual. Thus, regardless of whether
a particular transaction is subject to
excise taxes under section 4958, existing
principles and rules may be implicated,
such as the limitation on private benefit.
For example, transactions that are not
subject to section 4958 because of the
initial contract exception described in
§ 53.4958–4T(a)(3) may, under certain

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circumstances, jeopardize the
organization’s tax-exempt status.
(b) Interaction between section 4958
and section 7611 rules for church tax
inquiries and examinations. The
procedures of section 7611 will be used
in initiating and conducting any inquiry
or examination into whether an excess
benefit 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 disqualified person
with respect to a transaction involving
a church. See § 301.7611–1 Q&A 19 of
this chapter.
(c) Three year duration of these
temporary regulations. Sections
53.4958–1T through 53.4958–8T will
cease to apply on January 9, 2004.
§ 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

Authority: 26 U.S.C. 7805 * * *
§ 301.6213–1

[Amended]

Par. 5. In § 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
sentence is amended by removing the
language ‘‘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:
1. The paragraph heading for
paragraph (a) is amended by removing

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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
organization’’ 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 § 301.7422–1, paragraph (a)
introductory text, paragraph (c)
introductory text and paragraph (d) are
amended by adding the reference
‘‘4958,’’ immediately after the reference
‘‘4955,’’.
§ 301.7454–2

[Amended]

Par. 9. In § 301.7454–2, paragraph (a)
is amended by adding the language ‘‘or
whether an organization manager (as
defined in section 4958(f)(2) has
‘‘knowingly’’ participated in an excess
benefit transaction (as defined in section
4958(c),’’ immediately after ‘‘4945’’.
§ 301.7611–1

Par. 4. The authority citation for part
301 continues to read in part as follows:

2171

[Amended]

Par. 10. In § 301.7611–1, the Table of
contents is amended by:
1. Adding ‘‘Application to Section
4958. . . . . . . 19’’ immediately after
‘‘Effective Date. . . . . . . 18’’.
2. Adding an undesignated
centerheading and Q–19 and A–19 at
the end of the section 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
inquiry and examination procedures
described in section 7611 apply to a
determination 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
interaction between section 4958 excise
taxes on excess benefit transactions and
section 7611 church tax inquiry and
examination procedures.

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2172

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 11. The authority citation for part
602 continues to read as follows:

CFR part or section where
identified and described

*
*
*
53.4958–6T ...........................
*

Authority: 26 U.S.C. 7805.

Par. 12. In § 602.101, paragraph (b) is
amended by adding an entry to the table
in numerical order to read as follows:
§ 602.101

*

OMB control numbers.

*
*
(b) * * *

*

*

*

*

Current OMB
control No.

*

*

*
1545–1623
*

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 19, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01–256 Filed 1–9–01; 8:45 am]
BILLING CODE 4830–01–P

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