Initial Tax on Organization Managers

(1) If the 25% initial tax is imposed on an excess benefit with a disqualified person,

Section 4958(a)(2) imposes a 10% tax on any organization manager who knowingly participated in the excess benefit transaction. The 10% tax won’t be imposed if participation was not willful and due to reasonable cause. See Treas. Reg. 53.4958-1(d)(1).

a. The 10% tax is payable by any organization manager who knowingly

participated in the excess benefit transaction. See Section 4958(a)(2) and Treas. Reg. 53.4958-1(d)(1).

b. If more than one organization manager is liable for the 10% tax, all

organization managers are jointly and severally liable for the tax. See Section 4958(d)(1) and Treas. Reg. 53.4958-1(d)(8).

c. Joint and several liability means that all or a portion of the 10% tax may be

assessed against and collected from one or more of the organization managers who are liable for the 10% tax.

d. However, the total tax collected can’t exceed 100% of the 10% tax.

e. Additionally, the maximum amount of the 10% tax that may be imposed on

an organization manager is $20,000 for each excess benefit transaction. See Section 4958(d)(2).

(2) If a disqualified person who receives an excess benefit from an excess benefit

transaction is also an organization manager who knowingly participated in the excess benefit transaction, and that participation was willful and not due to reasonable cause, this person may be liable for both the 25% tax and the 10% tax. See Treas. Reg. 53.4958-1(a).

(3) The IRS bears 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), Treas. Reg. 301.7454-2, and Treas. Reg. 53.4958-1(d)(9).

(4) Where the 25% initial tax imposed on the disqualified person is abated, the 10%

tax on the organization manger would also be abated because the assessment of the 10% tax is dependent on the imposition of the 25% tax. See Sections 4958(a)(1) and 4958(a)(2). The abatement of Section 4958(a) taxes is provided for in Section 4962(a) as defined in Section 4963(a).

Note: Also see section II.H.2 below for further discussion regarding abatement of Section 4958 taxes.

(5) Organizational Manager Defined - Section 4958(f)(2) defines an organization

manager to mean, with respect to any ATEO, any officer, director, or trustee of the organization (or any individual having powers or responsibilities like those of officers, directors, or trustees of the organization). See also Treas. Reg. 53.49581(d)(2).

(6) 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 organizational documents, or

b. Regularly exercises authority to make administrative or policy decisions on

behalf of the organization. See Treas. Reg. 53.4958-1(d)(2)(i).

Note: An individual who isn’t an officer, director, or trustee of an ATEO, but who serves on the committee of the governing body of an ATEO that attempts to invoke the rebuttable presumption of reasonableness (See section II.E above) based on the committee’s actions is an organization manager. See Treas. Reg. 53.4958-1(d)(2)(ii).

(7) The following persons aren’t officers:

a. An independent contractor who acts solely in a capacity as an attorney,

accountant, investment manager or advisor.

b. A person who has authority merely to recommend administrative or policy

decisions, but not to implement them without approval of a superior. See Treas. Reg. 53.4958-1(d)(2)(B).

(8) Knowingly Defined - An organization manager knowingly participates in an

excess benefit transaction if the organization manager:

a. Has actual knowledge of sufficient facts so that, based solely upon such

facts, the transaction would be an excess benefit transaction,

b. Is aware that the transaction may constitute an excess benefit transaction,

and

c. Negligently fails to make reasonable attempts to ascertain whether the

transaction is an excess benefit transaction, or the person is in fact aware that it’s such a transaction. See Treas. Reg. 53.4958-1(d)(4)(i).

(9) Knowing doesn’t mean having reason to know. However, evidence showing that

an organization manager had reason to know of a particular fact or rule is relevant in determining whether the organization manager had actual knowledge of such a fact or rule. See Treas. Reg. 53.4958-1(d)(4)(ii).

(10) Even though a transaction is subsequently determined to be an excess benefit

transaction, an organization manager’s participation in the transaction usually won’t be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relies on the professional’s reasoned written opinion regarding the elements of the transaction within the professional’s expertise. An organization manager may rely on the written opinion of:

a. Legal counsel, including in-house counsel,

b. Certified public accountants or accounting firms with expertise regarding the

relevant tax law matters, and

c. Certain independent valuation experts. See Treas. Reg. 53.4958-1(d)(4)(iii).

(11) A written opinion is reasoned, even though it reaches a conclusion that is later

determined to be incorrect, if the opinion addresses itself to the facts and the applicable standards. However, a written opinion isn’t reasoned if it does nothing more than recite the facts and express a conclusion. See Treas. Reg. 53.49581(d)(4)(iii).

a. The absence of a written opinion of an appropriate professional with respect

to a transaction doesn’t, by itself, give rise to any inference that an organization manager knowingly participated in the transaction. See Treas. Reg. 53.4958-1(d)(4)(iii).

(12) Even though a transaction is subsequently determined to be an excess benefit

transaction, an organization manager’s participation in the transaction won’t ordinarily be considered knowing if the appropriate authorized body of the ATEO has met the requirements to invoke rebuttable presumption under Treas. Reg. 53.4958-6(a) as to the transaction. See Treas. Reg. 53.4958-1(d)(4)(iv) on the Rebuttable Presumption.

Note: See section II.E above for further discussion regarding Rebuttable Presumption.

(13) Participation Defined - Participation includes an affirmative action taken by the

organization manager.

a. It also includes silence or inaction where the organization manager is under a

duty to speak or act.

b. An organization manager isn’t considered to have participated in an excess

benefit transaction where the organization manager has opposed the transaction in a manner consistent with fulfilling the organization manager’s responsibilities to the organization.

c. See Treas. Reg. 53.4958-1(d)(3).

(14) Willfully Defined - Participation by an organization manager is willful if it’s

voluntary, conscious, and intentional. See Treas. Reg. 53.4958-1(d)(5).

a. Participation may be willful even without a motive to avoid the restrictions of

the law or the incurrence of any tax.

b. Participation by an organization manager isn’t willful if the manager doesn’t

know that a transaction is an excess benefit transaction.

(15) Reasonable Cause Defined - Participation by an organization manager is due to

reasonable cause if the organization manager exercises responsibility on behalf of the ATEO with ordinary business care and prudence. See Treas. Reg. 53.49581(d)(6).