A. Applicable Tax-Exempt Organizations

(1) Before an examiner determines if they have an excess benefit transaction, they

must confirm if the organization involved is an ATEO.

(2) Section 4958(e) defines ATEO as:

a. Section 501(c)(3) organizations except those classified as private

foundations under Section 509(a),

b. Organizations described in Section 501(c)(4),

c. Qualified health insurance issuers described in Section 501(c)(29), and

d. Any organization that was described under the above-listed subsections at

any time during the 5-year period (also called the lookback period) ending on the date of the transaction. See Section 4958(e)(2).

Note: See section II.A.2 below for further discussion of the lookback period.

e. See also Treas. Reg. 53.4958-2

(3) A Section 501(c)(4) social welfare organization is an ATEO if it has

a. Applied for and received recognition as a tax-exempt organization described

in Section 501(c)(4),

b. Filed an application for recognition of exemption under Section 501(c)(4),

c. Filed an annual information return as a Section 501(c)(4) organization, or

d. Otherwise held itself out as a social welfare organization under Section

501(c)(4).

• One way an organization may hold itself out as an organization under

Section 501(c)(4) is by filing Form 8976, Notice of Intent to Operate Under Section 501(c)(4). See Section 506 for notification requirements.

See also Treas. Reg. 53.4958-2(a)(4).

(4) Since an organization can be treated as a Section 501(c)(4) organization even if it

hasn’t been recognized as exempt by the IRS, the organization “would be described” in Section 501(c)(4) for purposes of Section 4958(e) as an ATEO.

(5) Treas. Reg. 53.4958-2(a)(6) provides examples that illustrate the definition of

ATEO.

a. Example 1. O is a nonprofit corporation formed under state law. O filed its

application for recognition of exemption under Section 501(c)(3) within the time prescribed under Section 508(a). In its application, O described its plans

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for purchasing property from some of its directors at prices that would exceed fair market value. After reviewing the application, the IRS determined that because of the proposed property purchase transactions, O failed to establish that it met the requirements for an organization described in Section 501(c)(3). Accordingly, the IRS denied O's application. While O's application was pending, O engaged in the purchase transactions described in its application at prices that exceeded the fair market values of the properties. Although these transactions would constitute excess benefit transactions under Section 4958, because the IRS never recognized O as an organization described in Section 501(c)(3), O was never an applicable tax- exempt organization under Section 4958. Therefore, these transactions are not subject to the excise taxes provided in Section 4958.

b. Example 2. O is a nonprofit corporation formed under state law. O files its

application for recognition of exemption under Section 501(c)(3) within the time prescribed under Section 508(a). The IRS issues a favorable determination letter in Year 1 that recognizes O as an organization described in Section 501(c)(3). Subsequently, in Year 5 of O's operations, O engages in certain transactions that constitute excess benefit transactions under Section 4958 and violate the proscription against inurement under Section 501(c)(3) and Treas. Reg. 1.501(c)(3)–1(c)(2). The IRS examines the Form 990, “Return of Organization Exempt From Income Tax”, that O filed for Year 5. After considering all the relevant facts and circumstances in accordance with Treas. Reg. 1.501(c)(3)–1(f), the IRS concludes that O is no longer described in Section 501(c)(3) effective in Year 5. The IRS does not examine the Forms 990 that O filed for its first four years of operations and, accordingly, does not revoke O's exempt status for those years. Although O's tax-exempt status is revoked effective in Year 5, under the lookback rules in paragraph (a)(1) of this section and Treas. Reg. 53.4958–3(a)(1) of this chapter, during the five-year period prior to the excess benefit transactions that occurred in Year 5, O was an applicable tax-exempt organization and O's directors were disqualified persons as to O. Therefore, the transactions between O and its directors during Year 5 are subject to the applicable excise taxes provided in Section 4958.