Haynes and Boone, LLP
  January 30, 2002 - Dallas, Texas

ALERT: IRS Publishes Final Intermediate Sanction Rule
  by Karen Williams Altaras

On January 23, the Internal Revenue Service published its long-awaited final rule on intermediate sanctions in the Federal Register. Proposed regulations were published in 1998, followed by temporary and proposed regulations in January 2001. The rule implements the excise taxes on excess benefit transactions under Section 4958 of the Internal Revenue Code, which was enacted by the Taxpayer Bill of Rights. Section 4958 imposes excise taxes on any transaction that provides excess economic benefits to a “disqualified person” (i.e., one in a position to exercise substantial influence over the affairs of a 501(c)(3) or (c)(4) tax-exempt entity. One of the most significant changes in the final rule is the treatment of exempt entities’ management companies, which are now deemed to be per se disqualified persons. Under the temporary rule, the status of management companies was subject to a facts-and-circumstances test. With respect to organization managers, the final rule retains one safe harbor and expands another. The rule provides 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. The IRS and the Treasury Department believe that an organization manager who has sought and relied upon an appropriate professional opinion has not &&fail[ed] to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction'," which is a required element of knowing for this purpose. The final rule also provides that the organization manager's participation in a transaction will ordinarily not be considered knowing if the appropriate authorized body has met the requirements of the rebuttable presumption with respect to the transaction. This is an expansion of the same safe harbor in the temporary regulations, which additionally required that the manager must have relied on the fact that the requirements giving rise to the rebuttable presumption of reasonableness were satisfied with respect to the transaction. The final rule is available in both text and PDF formats by clicking on the respective links below. If you have any questions regarding this issue, please feel free to contact the health care attorneys listed as authors at the top of this page.


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