[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3697 Introduced in House (IH)]

103d CONGRESS
  1st Session
                                H. R. 3697

 To amend the Internal Revenue Code of 1986 to impose excise taxes on 
   acts of self-dealing and private inurement by certain tax-exempt 
                             organizations.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                           November 22, 1993

  Mr. Stark introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to impose excise taxes on 
   acts of self-dealing and private inurement by certain tax-exempt 
                             organizations.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. EXCISE TAXES ON ACTS OF SELF-DEALING AND PRIVATE INUREMENT 
              BY CERTAIN TAX-EXEMPT ORGANIZATIONS.

    (a) In General.--Chapter 42 of the Internal Revenue Code of 1986 
(relating to private foundations and certain other tax-exempt 
organizations) is amended by redesignating subchapter D as subchapter E 
and by inserting after subchapter C the following new subchapter:

 ``Subchapter D--Acts of Self-Dealing and Private Inurement by Certain 
                          Exempt Organizations

                              ``Sec. 4958. Taxes on certain acts of 
                                        self-dealing.
                              ``Sec. 4959. Taxes on private inurement.
                              ``Sec. 4960. Other definitions.

``SEC. 4958. TAXES ON CERTAIN ACTS OF SELF-DEALING.

    ``(a) Initial Taxes.--
            ``(1) On self-dealer.--There is hereby imposed a tax on 
        each act of self-dealing between a disqualified person and an 
        applicable tax-exempt organization. The amount of such tax 
        shall be 5 percent of the amount involved with respect to the 
        act of self-dealing for each year (or part thereof) in the 
        taxable period. The tax imposed by this paragraph shall be paid 
        by any disqualified person (other than an organization manager 
        acting only as such) who participates in the act of self-
        dealing.
            ``(2) On organization manager.--In any case in which a tax 
        is imposed by paragraph (1), there is hereby imposed on the 
        participation of any organization manager in any act of self-
        dealing between a disqualified person and an applicable tax-
        exempt organization, knowing that it is such an act, a tax 
        equal to 2.5 percent of the amount involved with respect to 
        such act of self-dealing for each year (or part thereof) in the 
        taxable period, unless such participation is not willful and is 
        due to reasonable cause. The tax imposed by this paragraph 
        shall be paid by any organization manager who participated in 
        the act of self-dealing.
    ``(b) Additional Taxes.--
            ``(1) On self-dealer.--In any case in which an initial tax 
        is imposed by subsection (a)(1) on any act of self-dealing 
        between a disqualified person and an applicable tax-exempt 
        organization and such act is not corrected within the taxable 
        period, there is hereby imposed a tax equal to 200 percent of 
        the amount involved. The tax imposed by this paragraph shall be 
        paid by any disqualified person (other than an organization 
        manager acting only as such) who participated in the act of 
        self-dealing.
            ``(2) On organization manager.--In any case in which an 
        additional tax is imposed by paragraph (1), if an organization 
        manager refused to agree to part or all of the correction, 
        there is hereby imposed a tax equal to 50 percent of the amount 
        involved. The tax imposed by this paragraph shall be paid by 
        any organization manager who refused to agree to part or all of 
        the correction.
    ``(c) Special Rules.--
            ``(1) Joint and several liability.--If more than one person 
        is liable under any paragraph of subsection (a) or (b) with 
        respect to any one act of self-dealing, all such persons shall 
        be jointly and severally liable under such paragraph with 
        respect to such act.
            ``(2) $10,0000 limit for management.--With respect to any 
        one act of self-dealing, the maximum amount of the tax imposed 
        by subsection (a)(2) shall not exceed $10,000, and the maximum 
        amount of the tax imposed by subsection (b)(2) shall not exceed 
        $10,000.
    ``(d) Self-Dealing.--For purposes of this section--
            ``(1) In general.--Except as provided by paragraph (2), the 
        term `self-dealing' means any direct or indirect--
                    ``(A) transfer, lease, or license of property 
                between an applicable tax-exempt organization and a 
                disqualified person, and
                    ``(B) lending of money or other extension of credit 
                between an applicable tax-exempt organization and a 
                disqualified person.
            ``(2) Exceptions.--The term `self-dealing' shall not 
        include--
                    ``(A) the lending of money by a disqualified person 
                to an applicable tax-exempt organization if the loan is 
                without interest or other charge (determined without 
                regard to section 7872) and if the proceeds of the loan 
                are used exclusively for exempt purposes,
                    ``(B) the furnishing of goods or facilities by a 
                disqualified person to an applicable tax-exempt 
                organization if the furnishing is without charge and if 
                the goods or facilities so furnished are used 
                exclusively for exempt purposes, and
                    ``(C) any transfer, lease, or license of property 
                if--
                            ``(i) such transfer, lease, or license (as 
                        the case may be) is by a disqualified person in 
                        the ordinary course of such disqualified 
                        person's trade or business and such transaction 
                        is on a basis comparable to the basis on which 
                        similar transactions are made in the ordinary 
                        course of such trade or business with other 
                        parties, or
                            ``(ii) such transfer, lease, or license (as 
                        the case may be) is by an applicable tax-exempt 
                        organization in the ordinary course of its 
                        activities and such transaction is made on a 
                        basis comparable to the basis on which similar 
                        transactions are made in the ordinary course of 
                        such activities with other parties.
            ``(3) Exempt purpose.--For purposes of paragraph (2), the 
        term `exempt purpose' means--
                    ``(A) in the case of an organization described in 
                section 501(c)(3), any purpose specified in section 
                501(c)(3), and
                    ``(B) in the case of an organization described in 
                section 501(c)(4), any purposes specified in section 
                501(c)(4).
    ``(e) Other Definitions.--For purposes of this section--
            ``(1) Taxable period.--The term `taxable period' means, 
        with respect to any act of self-dealing, the period beginning 
        with the date on which the act of self-dealing occurs and 
        ending on the earliest of--
                    ``(A) the date of mailing a notice of deficiency 
                under section 6212 with respect to the tax imposed by 
                subsection (a)(1),
                    ``(B) the date on which the tax imposed by 
                subsection (a)(1) is assessed, or
                    ``(C) the date on which correction of the act of 
                self-dealing is completed.
            ``(2) Amount involved.--The term `amount involved' means, 
        with respect to any act of self-dealing, the greater of the 
        amount of money and fair market value of other property given, 
        or the amount of money and fair market value of other property 
        received. In the case of a lease or license, the amount 
        involved is the fair market value of the leased or licensed 
        property. For purposes of this paragraph--
                    ``(A) in the case of the taxes imposed by 
                subsection (a), fair market value shall be determined 
                as of the date on which the act of self-dealing occurs, 
                and
                    ``(B) in the case of the taxes imposed by 
                subsection (b), fair market value shall be the highest 
                fair market value during the taxable period.
            ``(3) Correction.--The terms `correction' and `correct' 
        mean, with respect to any act of self-dealing transaction, 
        undoing the transaction to the extent possible, but in any case 
        place the applicable tax-exempt organization in a financial 
        position not worse than that in which it would be if the 
        disqualified person were dealing under the highest fiduciary 
        standards.

``SEC. 4959. TAXES ON PRIVATE INUREMENT.

    ``(a) Initial Taxes.--
            ``(1) On the organization.--There is hereby imposed on any 
        taxable inurement a tax equal to 10 percent of the amount 
        thereof. The tax imposed by this paragraph shall be paid by the 
        organization with respect to which such inurement occurred.
            ``(2) On the management.--There is hereby imposed on the 
        participation of any organization manager of an organization in 
        any taxable inurement which occurs with respect to such 
        organization, knowing that it is taxable inurement, a tax equal 
        to 2\1/2\ percent of the amount thereof, unless such 
        participation is not willful and is due to reasonable cause. 
        The tax imposed by this paragraph shall be paid by the 
        organization manager who participated in the taxable inurement.
            ``(3) On the beneficiary.--There is hereby imposed on any 
        taxable inurement a tax equal to 5 percent of the amount 
        thereof. The tax imposed by this paragraph shall be paid by the 
        beneficiary of such inurement.
    ``(b) Additional Taxes.--
            ``(1) On the organization.--In any case in which an initial 
        tax is imposed by subsection (a)(1) on any taxable inurement 
        and such inurement is not corrected within the taxable period, 
        there is hereby imposed a tax equal to 100 percent of the 
        amount of the taxable inurement. The tax imposed by this 
        paragraph shall be paid by the organization with respect to 
        which such inurement occurred.
            ``(2) On the management.--In any case in which an 
        additional tax is imposed by paragraph (1), if an organization 
        manager refused to agree to part or all of the correction, 
        there is hereby imposed a tax equal to 50 percent of the amount 
        of the taxable inurement. The tax imposed by this paragraph 
        shall be paid by any organization manager who refused to agree 
        to part or all of the correction.
            ``(3) On the beneficiary.--In any case in which an 
        additional tax is imposed by paragraph (1), there is hereby 
        imposed a tax equal to 200 percent of the amount of the taxable 
        inurement. The tax imposed by this paragraph shall be paid by 
        the beneficiary of such inurement.
    ``(c) Taxable Inurement.--For purposes of this section, the term 
`taxable inurement' means any direct or indirect inurement of any part 
of the net earnings of an applicable tax-exempt organization to the 
benefit of any disqualified person. Such term shall not include any act 
of self-dealing on which tax is imposed under section 4958.
    ``(d) Special Rules.--For purposes of this section--
            ``(1) Joint and several liability.--If more than one person 
        is liable under any paragraph of subsection (a) or (b) with 
        respect to any one taxable inurement, all such persons shall be 
        jointly and severally liable under such paragraph with respect 
        to such inurement.
            ``(2) Limit for management.--With respect to any 1 taxable 
        inurement, the maximum amount of the tax imposed by subsection 
        (a)(2) shall not exceed $10,000, and the maximum amount of the 
        tax imposed by subsection (b)(2) shall not exceed $10,000.
    ``(e) Other Definitions.--For purposes of this section--
            ``(1) Taxable period.--The term `taxable period' means, 
        with respect to any taxable inurement, the period beginning 
        with the date on which the inurement occurs and ending on the 
        earliest of--
                    ``(A) the date of mailing a notice of deficiency 
                under section 6212 with respect to the tax imposed by 
                subsection (a)(1), or
                    ``(B) the date on which the tax imposed by 
                subsection (a)(1) is assessed.
            ``(2) Correction.--The terms `correction' and `correct' 
        mean, with respect to any taxable inurement, undoing the 
        inurement to the extent possible, establishing safeguards to 
        prevent future taxable inurement, and where fully undoing the 
        inurement is not possible, such additional corrective action as 
        is prescribed by the Secretary by regulations.

``SEC. 4960. OTHER DEFINITIONS.

    ``(a) Applicable Tax-Exempt Organization.--For purposes of this 
subchapter, the term `applicable tax-exempt organization' means any 
organization which (without regard to any act of self-dealing or 
taxable inurement) would be described in paragraph (3) or (4) of 
section 501(c) and exempt from tax under section 501(a). Such term 
shall not include any private foundation.
    ``(b) Disqualified Person.--For purposes of this subchapter, the 
term `disqualified person' means, with respect to any transaction--
            ``(1) any person who was an organization manager at any 
        time during the 5-year period ending on the date of such 
        transaction,
            ``(2) any member of a family (as defined in section 
        4946(d)) of any person described in paragraph (1), and
            ``(3) any 35-percent controlled entity of persons described 
        in paragraph (1) or (2).
    ``(c) Organization Manager.--For purposes of this subchapter, the 
term `organization manager' means, with respect to any applicable tax-
exempt organization, any officer, director, or trustee of such 
organization (or any individual having powers or responsibilities 
similar to those of officers, directors, or trustees of the 
organization). Such term includes any person performing substantial 
medical services as a physician for the applicable tax-exempt 
organization pursuant to an employment or other contractual 
relationship.
    ``(d) 35-Percent Controlled Entity.--For purposes of this section--
            ``(1) 35-percent controlled entity.--The term `35-percent 
        controlled entity' means--
                    ``(A) a corporation in which persons described in 
                paragraph (1) or (2) of subsection (b) own more than 35 
                percent of the combined voting power,
                    ``(B) a partnership in which such persons own more 
                than 35 percent of the profits interest, and
                    ``(C) a trust or estate in which such persons own 
                more than 35 percent of the beneficial interest.
            ``(2) Constructive ownership rules.--Rules similar to the 
        rules of paragraphs (3) and (4) of section 4946(a) shall apply 
        for purposes of this subsection.''
    (b) Application of Private Inurement Rule to Tax-Exempt Civic 
Leagues.--Paragraph (4) of section 501(c) of such Code is amended to 
read as follows:
            ``(4)(A) Civic leagues or organizations not organized for 
        profit but operated exclusively for the promotion of social 
        welfare and no part of the net earnings of which inures to the 
        benefit of any private shareholder or individual.
            ``(B) Local associations of employees--
                    ``(i) the membership of which is limited to the 
                employees of a designated person or persons in a 
                particular municipality, and
                    ``(ii) which is operated exclusively for 
                charitable, educational, or recreational purposes.''
    (c) Technical and Conforming Amendments.--
            (1) Subsection (e) of section 4955 of such Code is 
        amended--
                    (A) by striking ``Section 4945'' in the heading and 
                inserting ``Sections 4945 and 4959'', and
                    (B) by inserting before the period ``or a taxable 
                inurement for purposes of section 4959''.
            (2) Subsections (a), (b), and (c) of section 4963 of such 
        Code are each amended by inserting ``4958, 4959,'' after 
        ``4955,''.
            (3) Subsection (e) of section 6213 of such Code is amended 
        by inserting ``4958 (relating to acts of self-dealing), 4959 
        (relating to private inurement),'' before ``4971''.
            (4) The table of subchapters for chapter 42 of such Code is 
        amended by striking the last item and inserting the following:

                              ``Subchapter D. Acts of self-dealing and 
                                        private inurement by certain 
                                        exempt organizations.
                              ``Subchapter E. Abatement of first and 
                                        second tier taxes in certain 
                                        cases.''
    (d) Effective Date.--The amendments made by this section shall 
apply to transactions occurring on or after January 1, 1994.

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