I. Revocation and Section 4958 Special Rules

(1) Section 4958 doesn’t affect the substantive standards for exemption under Section

501(c)(3), Section 501(c)(4), or Section 501(c)(29). These include 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. See Treas. Reg. 53.4958-8(a).

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a. 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.

b. For example, transactions that are not subject to Section 4958 because of

the initial contract exception described in Treas. Reg. 53.4958-4(a)(3) may, under certain circumstances, jeopardize the organization’s exempt status.

(2) 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 tax-exempt status. See H. Rep. No. 506, 104th Cong., 2d Sess. 53, 59 (1996).

(3) In general, the intermediate sanctions are the sole sanction imposed where the

excess benefit doesn’t rise to a level that calls into question the exempt status of the 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.

(4) In determining whether to continue to recognize the tax-exempt status of an ATEO

that engages in one or more excess benefit transactions that violates Section 501(c)(3) prohibition on inurement, consider all relevant facts and circumstances (Treas. Reg. 1.501(c)(3)-1(f)(2)(ii)), including, but not limited to, the following:

a. The size and scope of the organization’s regular and ongoing activities that

further exempt purposes before and after the excess benefit transaction(s) occurred,

b. The size and scope of the excess benefit transaction or transactions

(collectively, if more than one) in relation to the size and scope of the organization’s regular and ongoing activities that further exempt purposes,

c. Whether the organization has been involved in multiple excess benefit

transactions with one or more persons,

d. Whether the organization has implemented safeguards that are reasonably

expected to prevent excess benefit transactions, and

e. Whether the excess benefit transaction has been corrected, or the

organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction. See Treas. Reg. 1.501(c)(3)-1(f)(2)(ii)(A)-(E).

(5) All factors should be considered in combination with each other. Depending on the

situation, greater or lesser weight may be assigned to some factors than to others. The safeguard and correction factors will weigh more heavily in favor of continuing to recognize exemption, where the organization discovers the excess benefit transaction(s) and acts before the IRS discovers the excess benefit transaction(s). Further, with respect to the correction factor, correction after the excess benefit transaction(s) are discovered by the IRS, by itself, is never a sufficient basis for continuing to recognize exemption. See Treas. Reg. 1.501(c)(3)-1(f)(2)(iii).

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(6) When an examiner proposes both intermediate sanctions under Section 4958 and

revocation of the ATEO's exemption based on the same transaction(s), the examiner should consult their manager. Based on the complexity of the case and relevant facts and circumstances involved, the examiner and manager should consider consulting with counsel.

(7) Two related court cases, Farr v. Commissioner, T. C. Memo 2018-2, (2018), aff’d

738 Fed. Appx. 969 (10th Cir. 2018), cert. denied 139 S.Ct. 1263 (2019) and Association for Honest Attorneys v. Commissioner, T.C. Memo 2018-41, (2018), appeal dismissed 2018 WL 4998123 (10th Cir. 2018), illustrate the imposition of Section 4958 excise taxes on disqualified persons (Farr) along with a related revocation of tax-exempt status (Association for Honest Attorneys).

a. In Farr v. Commissioner, the court confirmed that the taxpayer, who was

chief executive officer of an ATEO and member of the board of directors, was a “disqualified person” during the three taxable years. Additionally, the court determined that Farr was liable for initial taxes under Section 4958(a)(1) as well as the additional taxes under Section 4958(b) because the transactions were not corrected.

b. In Association for Honest Attorneys v. Commissioner, the court found that

during 2010, 2011, and 2012 petitioner did not, through Ms. Farr or anyone else, engage primarily in the activities described in its articles of incorporation and its bylaws. It also found that during 2010, 2011, and 2012 the net earnings of petitioner inured to the benefit of Ms. Farr, its CEO/board president; petitioner operated primarily for the benefit of private rather than public interests; and more than an insubstantial part of petitioner's activities furthered nonexempt, private purposes. Therefore, the court upheld the IRS’s decision to revoke petitioner’s tax-exempt status based on its finding that it no longer operated in accordance with Section 501(c)(3).