A. Background / History

(1) Section 4958 was added to the Internal Revenue Code (Code) by Section 1311 of

the Taxpayer Bill of Rights 2, P. L. 104-168 (110 Stat. 1452), enacted July 30, 1996. It generally applies to excess benefit transactions occurring on or after September 14, 1995. See P.L. 104-168, Section 1311(d)(1) and Treasury Regulation (Treas. Reg.) 53.4958-1(f)(1).

a. Prior to the enactment of Section 4958, the Code generally didn’t provide for

the imposition of excise taxes in cases where a Section 501(c)(3) public charity or 501(c)(4) social welfare organization engaged in a transaction that resulted in inurement. In such cases, the only sanction specifically authorized under the Code was revocation of the organization’s tax-exempt status.

b. P.L. 104-168 added intermediate sanctions (excise taxes on excess benefit

transactions under Section 4958) that may be imposed when applicable taxexempt organizations described in section 501(c)(3) or 501(c)(4) engage in transactions with certain insiders that result in private inurement.

c. The intermediate sanctions for "excess benefit transactions" may be imposed

by the IRS in lieu of (or in addition to) revocation of an organization’s taxexempt status. See H.R. Rep. No. 506, 104th Cong., 2d Sess. 53, 59 (1996).

d. In general, the intermediate sanctions are the sole sanction imposed in those

cases where the excess benefit doesn’t rise to a level that calls into question whether, overall, 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 only occur when the organization no longer meets the substantive requirements for tax exemption under Section 501(c)(3). See Ibid, note 15.

(2) Notice 96-46, published September 23, 1996, summarizes Section 4958 enacted

by P.L. 104-168 and specifies the tax form required to report and pay the excise tax.

(3) Treasury Regulations were published and effective as of January 23, 2002. They

were partially amended by final regulations that were published in the Federal Register March 28, 2008, 73 F.R. 16519.

(4) Section 4958 was amended with regard to transactions involving Donor-Advised

Funds (DAFs) and supporting organizations under Sections 1232 and 1242 of the Pension Protection Act of 2006, P.L. 109–280 (120 Stat. 780), enacted August 17, 2006.

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(5) Section 4958 was amended by Section 3 of the Tax Technical Corrections Act of

2007, P.L. 110-172 (121 Stat. 2473), enacted December 29, 2007. Sections 4958(c)(3)(A)(i)(II) and 4958(c)(3)(C)(ii) were amended to clarify the exclusions to disqualified persons in relation to the special rules for supporting organizations.

(6) Section 4958 was amended by Section 1322 of the Patient Protection and

Affordable Care Act of 2010, P.L. 111-148, enacted March 23, 2010. In Section 4958(e)(1), the amendment added Section 501(c)(29) as an ATEO in addition to Sections 501(c)(3) & (4).

Note: The Treasury Regulations have not yet been updated to reflect the changes made under the Pension Protection Act of 2006, Tax Technical Corrections Act of 2007 or the Patient Protection and Affordable Care Act of 2010.