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IRS Releases Final Excess Benefit Regulations

April 17, 2008

On April 2, 2008, the IRS released final regulations listing the factors it will consider in determining whether to revoke the tax-exemption of an organization involved in one or more excess benefit transactions. Generally, an excess benefit transaction is any transaction in which an economic benefit is provided by a tax-exempt organization directly or indirectly to or for the use of certain persons if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.

In addition to the particular facts and circumstances of each situation, the IRS will consider the following factors: 

  • The size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;
  • 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;
    Whether the organization has been involved in multiple excess benefit transactions with one or more persons;
  • Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and
  • 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.

The final regulations make clear that the IRS has the discretion to assign different weights to the forgoing factors based on the particular situation. The regulations note that factors d. and e. will be given greater weight if (i) the organization discovers the excess benefit transaction and (ii) takes action before the IRS itself discovers the excess benefit transaction.
   
The final regulations may be found at http://www.irs.gov/pub/irs-tege/td9390.pdf.

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