Excise Benefit Transaction Rules

A “disqualified person” who benefits from an “excess benefit transaction,” such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c)(29) organizations, must correct the transaction and may have to pay an excise tax under section 4958.   The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange.  An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. The disqualified person who benefited from the transaction is liable for the tax.

These rules have potential impact on a property purchase by a tax exempt organization if the sale is above fair market value and involves disqualified persons.

The Excess Benefit Rules only apply if the excess benefit is received by a disqualified person.  In this case, the purchasers are limited liability company entities and not the physician owners directly.  The entity is the appropriate party to analyze to determine whether the rules apply.

Disqualified Persons – Disqualified Individuals

A disqualified person is:

  • Any person (at any time during the 5-year period ending on the date of the transaction) in a position to exercise substantial influence over the affairs of the organization,
  • A family member of an individual described in (1), and
  • A 35% controlled entity.

The entities involved in the transaction would only be disqualified persons if they are 35% controlled entities.   A 35% controlled entity is:

  • A corporation in which disqualified persons own more than 35% of the total combined voting power,
  • A partnership in which such persons own more than 35% of the profits interest, or
  • A trust or estate in which such persons own more than 35% of the beneficial interest.

In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply.

One or more of the owning individuals in the entities are likely to be deemed to be “disqualified persons.”  If disqualified persons own 35% or more of the controlled entity, the Excess Benefit Rule have potential application.