[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 239 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 239

To amend the Internal Revenue Code of 1986 to impose penalties on self-
   dealing between certain tax-exempt organizations and disqualified 
                    persons, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            January 7, 1997

 Mr. Menendez 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 penalties on self-
   dealing between certain tax-exempt organizations and disqualified 
                    persons, and for other purposes.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Tax Exemption Accountability Act''.

SEC. 2. PENALTIES ON SELF-DEALING BY CHARITIES AND CERTAIN OTHER TAX-
              EXEMPT ORGANIZATIONS.

    (a) In General.--Part I of subchapter B of chapter 68 of the 
Internal Revenue Code of 1986 (relating to general provisions) is 
amended by adding at the end the following new section:

``SEC. 6716. SELF-DEALING BY CHARITIES AND CERTAIN OTHER TAX-EXEMPT 
              ORGANIZATIONS.

    ``(a) Initial Penalties.--In the case of an act of self-dealing 
between a disqualified person and an applicable tax-exempt 
organization--
            ``(1) On the organization.--There is hereby imposed a 
        penalty equal to the product of--
                    ``(A) the amount involved in the act of self-
                dealing, and
                    ``(B) the highest rate of tax specified in section 
                11.
        The penalty imposed by this paragraph shall be paid by the 
        organization with respect to which such act occurred.
            ``(2) On the management.--There is hereby imposed on the 
        participation of any organization manager of an organization in 
        any act of self-dealing which occurs with respect to such 
        organization, knowing that it is such an act, a penalty equal 
        to 2\1/2\ percent of the amount involved with respect to such 
        act for each year (or part thereof) in the taxable period, 
        unless such participation is not willful and is due to 
        reasonable cause. The penalty imposed by this paragraph shall 
        be paid by the organization manager who participated in the act 
        of self-dealing.
            ``(3) On the beneficiary.--There is hereby imposed on any 
        self-dealing a penalty equal to 5 percent of the amount 
        involved with respect to such act for each year (or part 
        thereof) in the taxable period. The penalty imposed by this 
        paragraph shall be paid by the beneficiary (other than an 
        organization manager acting only as such) of such act.
    ``(b) Exception.--If--
            ``(1) it is established to the satisfaction of the 
        Secretary that a person otherwise required to pay a penalty 
        under subsection (a) with respect to any act of self-dealing 
        did not know that the act was an act of self-dealing,
            ``(2) the applicable tax-exempt organization submits to the 
        Secretary, for each of the 3 calendar years following the 
        calendar year in which the act occurred, a statement by a 
        qualified independent auditor that such organization was 
        described in paragraph (3) or (4) of section 501(c) (as the 
        case may be) and exempt from tax under section 501(a) for each 
        such year, and
            ``(3) such act is corrected within the taxable period,
then such penalty shall not be imposed on such person.
    ``(c) Additional Penalties if Act Not Corrected.--
            ``(1) On the management.--In any case in which an 
        additional penalty is imposed by paragraph (1), if an 
        organization manager refused to agree to part or all of the 
        correction, there is hereby imposed a penalty equal to 50 
        percent of the amount involved with respect to such act. The 
        penalty imposed by this paragraph shall be paid by any 
        organization manager who refused to agree to part or all of the 
        correction.
            ``(2) On the beneficiary.--In any case in which an 
        additional penalty is imposed by paragraph (1), there is hereby 
        imposed a penalty equal to 200 percent of the amount involved 
        with respect to such act. The penalty imposed by this paragraph 
        shall be paid by the beneficiary (other than an organization 
        manager acting only as such) of such act.
    ``(d) Self-Dealing.--For purposes of this section--
            ``(1) In general.--The term `self-dealing' means any direct 
        or indirect--
                    ``(A) sale or exchange, or leasing, of property 
                between an applicable tax-exempt organization and a 
                disqualified person;
                    ``(B) lending of money or other extension of credit 
                between an applicable tax-exempt organization and a 
                disqualified person;
                    ``(C) furnishing of goods, services, or facilities 
                between an applicable tax-exempt organization and a 
                disqualified person;
                    ``(D) payment of compensation (or payment or 
                reimbursement of expenses) by an applicable tax-exempt 
                organization to a disqualified person;
                    ``(E) transfer to, or use by or for the benefit of, 
                a disqualified person of the income or assets of an 
                applicable tax-exempt organization; and
                    ``(F) agreement to make any payment of money or 
                other property to a government official (as defined in 
                section 4946(c)), other than an agreement to employ 
                such individual for any period after the termination of 
                his government service if such individual is 
                terminating his government service within a 90-day 
                period.
            ``(2) Special rules.--For purposes of paragraph (1)--
                    ``(A) the transfer of real or personal property by 
                a disqualified person to an applicable tax-exempt 
                organization shall be treated as a sale or exchange if 
                the property is subject to a mortgage or similar lien 
                which the organization assumes or if it is subject to a 
                mortgage or similar lien which a disqualified person 
                placed on the property within the 10-year period ending 
                on the date of the transfer;
                    ``(B) the lending of money by a disqualified person 
                to an applicable tax-exempt organization shall not be 
                an act of self-dealing 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 the exempt purposes of the 
                organization;
                    ``(C) the furnishing of goods, services, or 
                facilities by a disqualified person to an applicable 
                tax-exempt organization shall not be an act of self-
                dealing if the furnishing is without charge and if the 
                goods, services, or facilities so furnished are used 
                exclusively for the exempt purposes of the 
                organization;
                    ``(D) the furnishing of goods, services, or 
                facilities by an applicable tax-exempt organization to 
                a disqualified person shall not be an act of self-
                dealing if--
                            ``(i) such furnishing is made on a basis no 
                        more favorable than that on which such goods, 
                        services, or facilities are made available to 
                        the general public, and
                            ``(ii) the value of the goods, services, or 
                        facilities so furnished in any transaction (or 
                        series of related transactions) does not exceed 
                        $100;
                    ``(E) except in the case of the payment of 
                compensation to (or the payment or reimbursement of 
                expenses of) a government official (as defined in 
                section 4946(c)), the payment of compensation (and the 
                payment or reimbursement of expenses) by an applicable 
                tax-exempt organization to a disqualified person for 
                personal services which are reasonable and necessary to 
                carrying out the exempt purpose of the organization 
                shall not be an act of self-dealing if the compensation 
                (or payment or reimbursement)--
                            ``(i) is not excessive, and
                            ``(ii) is at an annual rate not in excess 
                        of the rate in effect under section 5312 of 
                        title 5, United States Code (relating to Level 
                        I of the Executive Schedule);
                    ``(F) any transaction between an applicable tax-
                exempt organization and a corporation which is a 
                disqualified person, pursuant to any liquidation, 
                merger, redemption, recapitalization, or other 
                corporate adjustment, organization, or reorganization, 
                shall not be an act of self-dealing if--
                            ``(i) there is a market on an established 
                        securities market or otherwise for any stock in 
                        such corporation, and
                            ``(ii) all of the securities of the same 
                        class as that held by the organization are 
                        subject to the same terms and such terms 
                        provide for receipt by the organization of no 
                        less than fair market value;
                    ``(G) in the case of a government official (as 
                defined in section 4946(c)), paragraph (1) shall in 
                addition not apply to--
                            ``(i) prizes and awards which are subject 
                        to the provisions of section 74(b) (without 
                        regard to paragraph (3) thereof), if the 
                        recipients of such prizes and awards are 
                        selected from the general public,
                            ``(ii) scholarships and fellowship grants 
                        which would be subject to the provisions of 
                        section 117(a) (as in effect on the day before 
                        the date of the enactment of the Tax Reform Act 
                        of 1986) and are to be used for study at an 
                        educational organization described in section 
                        170(b)(1)(A)(ii),
                            ``(iii) any annuity or other payment 
                        (forming part of a stock-bonus, pension, or 
                        profit-sharing plan) by a trust which is a 
                        qualified trust under section 401,
                            ``(iv) any annuity or other payment under a 
                        plan which meets the requirements of section 
                        404(a)(2),
                            ``(v) any contribution or gift (other than 
                        a contribution or gift of money) to, or 
                        services of facilities made available to, any 
                        such individual, if the aggregate value of such 
                        contributions, gifts, services, and facilities 
                        to, or made available to, such individual 
                        during any calendar year does not exceed $25,
                            ``(vi) any payment made under chapter 41 of 
                        title 5, United States Code, or
                            ``(vii) any payment or reimbursement of 
                        traveling expenses for travel solely from one 
                        point in the United States to another point in 
                        the United States, but only if such payment or 
                        reimbursement does not exceed the actual cost 
                        of the transportation involved plus an amount 
                        for all other traveling expenses not in excess 
                        of 125 percent of the maximum amount payable 
                        under section 5702 of title 5, United States 
                        Code, for like travel by employees of the 
                        United States; and
                    ``(H) the leasing by a disqualified person to an 
                applicable tax-exempt organization of office space for 
                use by the organization in a building with other 
                tenants who are not disqualified persons shall not be 
                treated as an act of self-dealing if--
                            ``(i) such leasing of office space is 
                        pursuant to a binding lease which was in effect 
                        on October 9, 1969, or pursuant to renewals of 
                        such a lease;
                            ``(ii) the execution of such lease was not 
                        a prohibited transaction (within the meaning of 
                        section 503(b) or any corresponding provision 
                        of prior law) at the time of such execution; 
                        and
                            ``(iii) the terms of the lease (or any 
                        renewal) reflect an arm's-length transaction.
    ``(e) Other Definitions.--For purposes of this section--
            ``(1) Applicable tax-exempt organization.--The term 
        `applicable tax-exempt organization' means any organization 
        which (without regard to any act of self-dealing) would be 
        described in paragraph (3) or (4) of section 501(c) and exempt 
        from tax under section 501(a).
            ``(2) Disqualified person.--
                    ``(A) In general.--The term `disqualified person' 
                means, with respect to any transaction--
                            ``(i) any person who was an organization 
                        manager at any time during the 5-year period 
                        ending on the date of such transaction.
                            ``(ii) any member of a family (as defined 
                        in section 4946(d)) of any person described in 
                        clause (i),
                            ``(iii) any 5-percent controlled entity of 
                        persons described in clauses (i) and (ii), and
                            ``(iv) any government official (as defined 
                        in section 4946(c)).
                    ``(B) Special rule for private foundations.--With 
                respect to any transaction involving a private 
                foundation--
                            ``(i) the term `disqualified person' 
                        includes a substantial contributor (as defined 
                        in section 4946(a)(2)) to such foundation and 
                        any person described in section 4946(a)(1)(C) 
                        with respect to such a contributor, and
                            ``(ii) such substantial contributor shall 
                        be treated as described in clause (i) of 
                        subparagraph (A) for purposes of applying this 
                        section with respect to such foundation.
            ``(3)  Organization manager.--The term `organization 
        manager' means, with respect to any applicable tax-exempt 
        organization--
                    ``(A) 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), and
                    ``(B) with respect to any act (or failure to act), 
                the employees of the organization having authority or 
                responsibility with respect to such act (or failure to 
                act).
            ``(4) 5-percent controlled entity.--
                    ``(A) 5-percent controlled entity.--The term `5-
                percent controlled entity' means--
                            ``(i) a corporation in which persons 
                        described in subparagraph (A) or (B) of 
                        paragraph (2) own more than 5 percent of the 
                        combined voting power,
                            ``(ii) a partnership in which such persons 
                        own more than 5 percent of the profits 
                        interest, and
                            ``(iii) a trust or estate in which such 
                        persons own more than 5 percent of the 
                        beneficial interest.
                    ``(B) Constructive ownership rules.--Rules similar 
                to the rules of paragraphs (3) and (4) of section 
                4946(a) shall apply for purposes of this paragraph.
            ``(5) 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 
                with respect to the penalty imposed by subsection 
                (a)(1) under section 6212,
                    ``(B) the date on which the penalty imposed by 
                subsection (a)(1) is assessed, or
                    ``(C) the date on which correction of the act of 
                self-dealing is completed.
            ``(6) Amount involved.--The term `amount involved' means, 
        with respect to any act of self-dealing, the greater of the 
        amount of money and the fair market value of the other property 
        given or the amount of money and the fair market value of the 
        other property received; except that, in the case of services 
        described in subsection (d)(2)(E), the amount involved shall be 
        only the excess compensation. For purposes of the preceding 
        sentence, the fair market value--
                    ``(A) in the case of the taxes imposed by 
                subsection (a), 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 (c), shall be the highest fair market value 
                during the taxable period.
            ``(7) Correction.--The terms `correction' and `correct' 
        mean, with respect to any act of self-dealing, undoing the 
        transaction to the extent possible, but in any case placing 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.
    ``(f) Special Rules.--
            ``(1) Joint and several liability.--If more than one person 
        is liable under any paragraph of subsection (a) or (c) 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) Ministers.--Clause (ii) of subsection (d)(2)(E) shall 
        not apply to compensation paid by a church to a duly ordained, 
        commissioned, or licensed minister thereof for the performance 
        of sacerdotal duties.''
    (b) Revocation of Exemption of Certain Charities for Acts of Self-
Dealing.--Section 501 of such Code is amended by redesignating 
subsection (o) as subsection (p) and by inserting after subsection (n) 
the following new subsection:
    ``(o) Revocation of Exemption of Certain Charities for Acts of 
Self-Dealing.--
            ``(1) In general.--Except as provided in paragraph (2), an 
        organization which would (without regard to any act of self-
        dealing) be described in paragraph (3) or (4) of subsection (c) 
        shall not be exempt from tax under subsection (a) if there is 
        any act of self-dealing between such organization and any 
        person who is a disqualified person (as defined in section 
        6716(e)) with respect to such organization.
            ``(2) Exception.--Paragraph (1) shall not apply to an 
        organization if--
                    ``(A) there has been no prior act of self-dealing 
                by such organization (or any predecessor), and
                    ``(B) the Secretary determines that revocation of 
                such exemption is inappropriate.
        In making the determination under subparagraph (B), the 
        Secretary shall take into account the extent and duration of 
        the self-dealing, the amount involved, and whether such self-
        dealing was corrected in a timely manner.
            ``(3) Self-dealing.--For purposes of this subsection, the 
        term `self-dealing' has the meaning given such term by section 
        6716(d).''
    (c) Application of Private Inurement Rule to Organizations 
Described in Section 501(c)(4).--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,
                    ``(ii) which is operated exclusively for 
                charitable, educational, or recreational purposes, and
                    ``(iii) no part of the net earnings of which inures 
                to the benefit of any private shareholder or 
                individual.''
    (d) Repeal of Excise Tax on Self-Dealing by Private Foundations.--
Section 4941 of such Code is hereby repealed.
    (e) Clerical Amendments.--
            (1) The table of sections of part I of subchapter B of 
        chapter 68 of such Code is amended by adding at the end the 
        following new item:
                              ``Sec. 6716. Self-dealing by charities 
                                        and certain other tax-exempt 
                                        organizations.''
            (2) The table of sections of subchapter A of chapter 42 of 
        such Code is amended by striking the item relating to section 
        4941.
    (f) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to transactions after the date of the enactment of this 
        Act.
            (2) Exception for certain compensation paid pursuant to 
        binding contracts.--Clause (ii) of section 6716(d)(2)(E) of the 
        Internal Revenue Code of 1986 (as added by this section) shall 
        not apply to compensation which is paid--
                    (A) before the date which is 2 years after the date 
                of the enactment of this Act, and
                    (B) pursuant to a contract which is binding on 
                January 1, 1995, and at all times thereafter before the 
                date such compensation is paid.

SEC. 3. INCREASE IN PENALTIES FOR FAILURE TO FILE TIMELY ANNUAL RETURNS 
              REQUIRED BY SECTION 6033 AND TO PERMIT TIMELY INSPECTION 
              OF SUCH RETURNS.

    (a) Increase in Penalty.--The material following clause (ii) of 
section 6652(c)(1)(A) of the Internal Revenue Code of 1986 (relating to 
returns by exempt organizations and certain trusts) is amended to read 
as follows: ``there shall be paid by the exempt organization an amount 
equal to 3 percent of its gross receipts (for the year for which such 
return is required to be filed) for each 30-day period (or portion 
thereof) that such failure continues.''
    (b) Increase in Penalty for Failure To Permit Public Inspection of 
Annual Returns.--Subparagraph (C) of section 6652(c)(1) of such Code is 
amended by striking ``$10'' and inserting ``$25''.
    (c) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to returns the due date for which (determined 
        without regard to any extension of time filing) is after the 
        date of the enactment of this Act.
            (2) Subsection (b).--The amendment made by subsection (b) 
        shall apply to requests made more than 180 days after the date 
        of the enactment of this Act.

SEC. 4. NATIONAL CLEARINGHOUSE FOR ACCESS TO ANNUAL RETURNS OF EXEMPT 
              ORGANIZATIONS, ETC.

    (a) In General.--The Secretary of the Treasury or his delegate 
shall establish a clearinghouse from which individuals may inspect or 
receive copies of annual returns filed under section 6033 of the 
Internal Revenue Code of 1986 by organizations to which subsection (d) 
or (e)(1) of section 6104 of such Code applies. Inspection shall be 
permitted without charge, and copies shall be provided without charge 
other than a reasonable fee for any reproduction and mailing costs.
    (b) Period of Availability.--Copies of a return shall be available 
under subsection (a) only during the 3-year period beginning on the 
last day prescribed for filing such return (determined with regard to 
any extension of time for filing).
    (c) No Inspection Required at Regional or District Offices After 
Clearinghouse Established.--After the date of the clearinghouse is 
established under subsection (a), no organization shall be required to 
permit inspections under section 6104(e)(1) of such Code at any 
regional or district office.
    (d) Authorization.--There are authorized to be appropriated such 
sums as may be necessary to carry out this section.
                                 <all>