July 30 marked the 20th anniversary of the enactment of the Intermediate Sanctions provisions of the Internal Revenue Code (Section 4958). This anniversary provides the nonprofit health system general counsel with a unique opportunity to remind senior leadership of the provision's continuing relevance--and enforcement risks as well as review the current procedures in place to protect against Intermediate Sanctions to make certain such procedures are best practice.
The purpose of the new provision was to provide the Internal Revenue Service (IRS) with an alternative enforcement option (i.e., other than revocation) to incidents of private inurement or other forms of "excess benefit" arrangements that do not call into question the continued tax-exempt status of the nonprofit entity. As most general counsel are aware, Section 4958 authorizes the Service to impose penalty excise taxes on "excess benefit transactions" involving "disqualified persons" and their respective Section 501(c)(3) or 501(c)(4) organization. While the organization itself is not subject to penalty, organizational managers (including, board members, officers and persons having similar powers or responsibilities to board members and officers) may be subject to excise tax penalties.
Section 4958 is a highly complex statute not only with respect to determining what constitutes an excess benefit transaction and the circumstances under which excise tax penalty exposure is created, but also the circumstances under which the "Rebuttable Presumption of Reasonableness," which presumption provides meaningful protection against the imposition of Intermediate Sanctions (and, more generally, helps demonstrate that the board member of officer is adhering to their fiduciary duties), are satisfied. Unlike some other state and regulatory agencies, the IRS does not generally publicize incidents of Section 4958 enforcement. Nonetheless, violations of the Intermediate Sanctions rules must be self-reported by the organization on its annual Form 990, which filing is a publicly available document. For these and other reasons, the "Anniversary" may provide a welcome opening for the general counsel to review with key board committees the law's application to nonprofit health system leaders.
Intermediate Sanctions Anniversary
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