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1040 now 5. 1040 now   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Prohibited Tax Shelter TransactionsEntity Level Tax Excess Benefit TransactionsTax on Disqualified Persons Tax on Organization Managers Excess Benefit Transaction Excess Business Holdings Taxable Distributions of Sponsoring Organizations Exception. 1040 now A donor advised fund does not include: Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Excise Taxes on Private Foundations Excise Taxes on Black Lung Benefit Trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements Introduction An excise tax may be imposed on certain tax-exempt organizations. 1040 now Topics - This chapter discusses: Prohibited tax shelter transactions Excess benefit transactions Excess business holdings Taxable distributions of sponsoring organizations Taxes on prohibited benefits distributed from donor advised funds Excise taxes on private foundations Excise taxes on 501(c)(21) black lung benefit trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements of Hospitals Useful Items - You may want to see: Forms (and Instructions) 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code See chapter 6 for more information about getting Form 4720. 1040 now Prohibited Tax Shelter Transactions Section 4965 imposes an excise tax on: Certain tax-exempt entities that are party to prohibited tax shelter transactions, and Any entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. 1040 now  Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction. 1040 now Tax-exempt entities. 1040 now   Tax-exempt entities that are subject to section 4965 include: Entities described in section 501(c), including but not limited to the following common types of entities: Instrumentalities of the United States described in section 501(c)(1); Churches, hospitals, museums, schools, scientific research organizations, and other charities described in section 501(c)(3); Civic leagues, social welfare organizations, and local associations of employees described in section 501(c)(4); Labor, agricultural, or horticultural organizations described in section 501(c)(5); Business leagues, chambers of commerce, trade associations, and other organizations described in section 501(c)(6); Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9); Credit unions described in section 501(c)(14); Insurance companies described in section 501(c)(15); and Veterans' organizations described in section 501(c)(19). 1040 now Religious or apostolic associations or corporations described in section 501(d). 1040 now Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States). 1040 now Indian tribal governments within the meaning of section 7701(a)(40). 1040 now Entity manager. 1040 now    An entity manager is any person with authority or responsibility similar to that exercised by an officer, director, or trustee, and, for any act, the person that has authority or responsibility with respect to the prohibited transaction. 1040 now Prohibited tax shelter transaction. 1040 now   A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. 1040 now A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1. 1040 now 6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1. 1040 now 6011-4(b)(4). 1040 now See the Instructions for Form 8886 for more information on listed transactions and prohibited reportable transactions. 1040 now Subsequently listed transaction. 1040 now   Any transaction to which the tax-exempt entity is a party and is later determined to be a listed transaction after the entity has become a party to it, is a subsequently listed transaction. 1040 now Entity Level Tax Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). 1040 now The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. 1040 now The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction. 1040 now To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720. 1040 now For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720. 1040 now Manager Level Tax Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. 1040 now The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. 1040 now To report this tax, file Form 4720. 1040 now Excess Benefit Transactions Excise tax on excess benefit transactions. 1040 now   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. 1040 now A manager of the organization may also have to pay an excise tax under section 4958. 1040 now These taxes are reported on Form 4720. 1040 now   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. 1040 now   There are three taxes under section 4958. 1040 now Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax. 1040 now    Taxes imposed on excess benefit transactions do not apply to a transaction under a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred. 1040 now Tax on Disqualified Persons 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. 1040 now The disqualified person who benefited from the transaction is liable for the tax. 1040 now See definition of Disqualified person, later at Disqualified person. 1040 now Additional tax on the disqualified person. 1040 now   If the 25% tax is imposed and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200% of the excess benefit is imposed on any disqualified person involved. 1040 now   If a disqualified person makes a payment of less than the full correction amount, the 200% tax is imposed only on the unpaid portion of the correction amount. 1040 now If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes. 1040 now   To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. 1040 now The 200% tax is abated (refunded if collected) if the excess benefit transaction is corrected within a 90-day correction period beginning on the date a statutory notice of deficiency is issued. 1040 now Taxable period. 1040 now   The taxable period means the period beginning with the date on which the excess benefit transaction occurs and ending on the earlier of: The date a notice of deficiency was mailed to the disqualified person for the initial tax on the excess benefit transaction, or The date on which the initial tax on the excess benefit transaction for the disqualified person is assessed. 1040 now Tax on Organization Managers If tax is imposed on a disqualified person for any excess benefit transaction, an excise tax equal to 10% of the excess benefit is imposed on an organization manager who knowingly participated in an excess benefit transaction, unless such participation was not willful and was due to reasonable cause. 1040 now This tax cannot exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. 1040 now There is also joint and several liability for this tax. 1040 now A person can be liable for both the tax paid by the disqualified person and the organization manager tax for a particular excess benefit transaction. 1040 now Organization Manager. 1040 now   An organization manager is any officer, director, or trustee of an applicable tax-exempt organization, or any individual having powers or responsibilities similar to officers, directors, or trustees of the organization, regardless of title. 1040 now An organization manager is not considered to have participated in an excess benefit transaction where the manager has opposed the transaction in a manner consistent with the fulfillment of the manager's responsibilities to the organization. 1040 now For example, a director who votes against giving an excess benefit would ordinarily not be subject to the 10% tax. 1040 now A person participates in a transaction knowingly if the person: Has actual knowledge of sufficient facts so that, based solely upon those facts, such transaction would be an excess benefit transaction; Is aware that such a transaction under these circumstances may violate the provisions of federal tax law governing excess benefit transactions; and Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction. 1040 now Knowing does not mean having reason to know. 1040 now The organization manager ordinarily will not be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relied on the professional's reasoned written opinion on matters within the professional's expertise or if the manager relied on the fact that the requirements for the rebuttable presumption of reasonableness have been satisfied. 1040 now Participation by an organization manager is willful if it is voluntary, conscious, and intentional. 1040 now An organization manager's participation is due to reasonable cause if the manager has exercised responsibility on behalf of the organization with ordinary business care and prudence. 1040 now Excess Benefit Transaction An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. 1040 now The excess benefit transaction rules apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined in whole or in part by the revenues of one or more activities of the organization. 1040 now To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. 1040 now For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. 1040 now Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. 1040 now Donor advised fund transactions occurring after August 17, 2006. 1040 now   For a donor advised fund, an excess benefit transaction includes a grant, loan, compensation, or other similar payment from the fund to a: Donor or donor advisor, Family member of a donor, or donor advisor, 35% controlled entity of a donor, or donor advisor, or 35% controlled entity of a family member of a donor, or donor advisor. 1040 now   The excess benefit in this transaction is the amount of the grant, loan, compensation, or other similar payment. 1040 now For additional information, see the Instructions for Form 4720. 1040 now Supporting organization transactions occurring after July 25, 2006. 1040 now   For any supporting organization, defined in section 509(a)(3), an excess benefit transaction includes grants, loans, compensation, or other similar payment provided by the supporting organization to a: Substantial contributor, Family member of a substantial contributor, 35% controlled entity of a substantial contributor, or 35% controlled entity of a family member of a substantial contributor. 1040 now   Additionally, an excess benefit transaction includes any loans provided by the supporting organization to a disqualified person (other than an organization described in section 509(a)(1), (2), or (4)). 1040 now   The excess benefit for substantial contributors and parties related to those contributors includes the amount of the grant, loan, compensation, or other similar payment. 1040 now For additional information, see the Instructions for Form 4720. 1040 now   Excess benefit transaction rules generally do not apply to transactions between a supporting organization and its supported organization described in section 501(c)(4), (5), or (6) in furtherance of charitable purposes. 1040 now Date of Occurrence An excess benefit transaction occurs on the date the disqualified person receives the economic benefit from the organization for federal income tax purposes. 1040 now However, when a single contractual arrangement provides for a series of compensation or other payments to or for the use of a disqualified person during the disqualified person's tax year, any excess benefit transaction with respect to these payments occurs on the last day of the taxpayer's tax year. 1040 now In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. 1040 now In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property, the transaction occurs on the date the property, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. 1040 now Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the disqualified person receives the economic benefit for federal income tax purposes. 1040 now Correcting the excess benefit. 1040 now   An excess benefit transaction is corrected by undoing the excess benefit to the extent possible, and by taking any additional measures necessary to place the organization in a financial position not worse than what it would have been if the disqualified person were dealing under the highest fiduciary standards. 1040 now   A disqualified person corrects an excess benefit by making a payment in cash or cash equivalents, excluding payment by a promissory note, equal to the correction amount to the applicable tax-exempt organization. 1040 now The correction amount equals the excess benefit plus the interest on the excess benefit. 1040 now The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred. 1040 now   A disqualified person can, with the agreement of the applicable tax-exempt organization, make a payment by returning the specific property previously transferred in the excess transaction. 1040 now In this case, the disqualified person is treated as making a payment equal to the lesser of: The fair market value of the property on the date the property is returned to the organization, or The fair market value of the property on the date the excess benefit transaction occurred. 1040 now   If the payment resulting from the return of property is less than the correction amount, the disqualified person must make an additional cash payment to the organization equal to the difference. 1040 now   If the payment resulting from the return of the property exceeds the correction amount described above, the organization can make a cash payment to the disqualified person equal to the difference. 1040 now Exception. 1040 now   For a correction of an excess benefit transaction (discussed earlier), no amount repaid in a manner prescribed by the Secretary can be held in a donor advised fund. 1040 now Applicable Tax-Exempt Organization An applicable tax-exempt organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) organization that is tax-exempt under section 501(a), or was such an organization at any time during a 5-year period ending on the day of the excess benefit transaction. 1040 now An applicable tax-exempt organization does not include: A private foundation as defined in section 509(a), A governmental entity that is: Exempt from (or not subject to) taxation without regard to section 501(a), or Not required to file an annual return, or A foreign organization, recognized by the IRS or by treaty, that receives substantially all of its support (other than gross investment income) from sources outside the United States. 1040 now An organization is not treated as a section 501(c)(3), 501(c)(4), or 501(c)(29) organization for any period covered by a final determination that the organization was not tax-exempt under section 501(a), but only if the determination was not based on private inurement or one or more excess benefit transactions. 1040 now Disqualified Person 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. 1040 now For donor advised funds, sponsoring organizations, and certain supporting organizations occurring after August 17, 2006. 1040 now   The following persons will be considered disqualified persons along with certain family members and 35% controlled entities associated with them. 1040 now Donors of donor advised funds, Investment advisors of sponsoring organizations, and Disqualified persons of a section 509(a)(3) supporting organization that supports the applicable tax-exempt organization. 1040 now For certain supporting organization transactions occurring after July 25, 2006. 1040 now   Substantial contributors to supporting organizations will also be considered disqualified persons with respect to the supporting organizations, along with their family members and 35% controlled entities. 1040 now Investment advisor. 1040 now   Investment advisor means for any sponsoring organization, any person compensated by such organization (but not an employee of such organization) for managing the investment of, or providing investment advice for, assets maintained in donor advised funds owned by such sponsoring organization. 1040 now Substantial contributor. 1040 now   In general, a substantial contributor means any person who contributed or bequeathed an aggregate of more than $5,000 to the organization, if that amount is more than 2% of the total contributions and bequests received by the end of the organization's tax year in which the contribution or bequest is received. 1040 now A substantial contributor includes the grantor of a trust. 1040 now Family members. 1040 now   Family members of a disqualified person include a disqualified person's spouse, brothers or sisters (whether by whole or half-blood), spouses of brothers or sisters (whether by whole or half-blood), ancestors, children (including a legally adopted child), grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren (whether by whole or half-blood). 1040 now 35% controlled entity. 1040 now   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. 1040 now   In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply. 1040 now Persons having substantial influence. 1040 now   Among those who are in a position to exercise substantial influence over the affairs of the organization are, for example, voting members of the governing body, and persons holding the power of: Presidents, chief executives, or chief operating officers. 1040 now Treasurers and chief financial officers. 1040 now Persons with a material financial interest in a provider-sponsored organization. 1040 now Persons not considered to have substantial influence. 1040 now   Persons who are not considered to be in a position to exercise substantial influence over the affairs of an organization include: An employee who receives benefits that total less than the highly compensated amount in section 414(q)(1)(B)(i) and who does not hold the executive or voting powers mentioned earlier in the discussion on Disqualified Person, is not a family member of a disqualified person, and is not a substantial contributor, Tax-exempt organizations described in section 501(c)(3), and Section 501(c)(4) organizations with respect to transactions engaged in with other section 501(c)(4) organizations. 1040 now Facts and circumstances. 1040 now   The determination of whether a person has substantial influence over the affairs of an organization is based on all the facts and circumstances. 1040 now Facts and circumstances that tend to show a person has substantial influence over the affairs of an organization include, but are not limited to, the following. 1040 now The person founded the organization. 1040 now The person is a substantial contributor to the organization under the section 507(d)(2)(A) definition, only taking into account contributions to the organization for the past 5 years. 1040 now The person's compensation is primarily based on revenues derived from activities of the organization that the person controls. 1040 now The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees. 1040 now The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. 1040 now The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person. 1040 now The person is a nonstock organization controlled directly or indirectly by one or more disqualified persons. 1040 now   Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following. 1040 now The person has taken a bona fide vow of poverty as an employee or agent of a religious organization or on its behalf. 1040 now The person is an independent contractor whose sole relationship to the organization is providing professional advice (without having decision-making authority) with respect to transactions from which the independent contractor will not economically benefit either directly or indirectly aside from customary fees received for the professional advice rendered. 1040 now Any preferential treatment the person receives based on the size of the person's donation is also offered to others making comparable widely solicited donations. 1040 now The direct supervisor of the person is not a disqualified person. 1040 now The person does not participate in any management decisions affecting the organization as a whole or a discrete segment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. 1040 now   In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence is made separately for each applicable tax-exempt organization. 1040 now A person may be a disqualified person with respect to transactions with more than one organization. 1040 now Reasonable Compensation. 1040 now    Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. 1040 now The section 162 standard will apply in determining the reasonableness of compensation. 1040 now The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonableness of compensation. 1040 now   To determine the reasonableness of compensation, all items of compensation provided by an applicable tax-exempt organization in exchange for performance of services are taken into account in determining the value of compensation (except for economic benefits that are disregarded under the discussion Disregarded benefits , later). 1040 now Items of compensation include: All forms of cash and noncash compensation, including salary, fees, bonuses, severance payments, and deferred noncash compensation, The payment of liability insurance premiums for, or the payment or reimbursement by the organization of penalties, taxes, or certain expenses under section 4958, unless excludable from income as a de minimis fringe benefit under section 132(a)(4), All other compensatory benefits, whether or not included in gross income for income tax purposes, Taxable and nontaxable fringe benefits, except fringe benefits described in section 132, and Foregone interest on loans. 1040 now    Intent to treat benefits as compensation. 1040 now An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. 1040 now   An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefits under consideration. 1040 now Ways to provide contemporaneous written substantiation of its intent to provide an economic benefit as compensation include: The organization produces a signed written employment contract, The organization reports the benefit as compensation on an original Form W-2, Form 1099, or Form 990, or on an amended form filed before starting an IRS examination, or The disqualified person reports the benefit as income on the person's original Form 1040, or on an amended form filed before starting an IRS examination. 1040 now Exception. 1040 now   If the economic benefit is excluded from the disqualified person's gross income for income tax purposes, the applicable tax-exempt organization is not required to indicate its intent to provide an economic benefit as compensation for services. 1040 now Rebuttable presumption that a transaction is not an excess benefit transaction. 1040 now   Payments under a compensation arrangement are presumed to be reasonable and the transfer of property (or right to use property) is presumed to be at fair market value, if the following three conditions are met. 1040 now The transaction is approved in advance by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. 1040 now Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. 1040 now (There is a special safe harbor for small organizations. 1040 now If the organization has gross receipts of less than $1 million, appropriate comparability data includes data on compensation paid by three comparable organizations in the same or similar communities for similar services. 1040 now ) The authorized body adequately documents the basis for its determination concurrently with making that determination. 1040 now The documentation should include: The terms of the approved transaction and the date approved, The members of the authorized body who were present during debate on the transaction that was approved and those who voted on it, The comparability data obtained and relied upon by the authorized body and how the data was obtained, Any actions by a member of the authorized body having conflict of interest, and Documentation of the basis of the determination before the later of the next meeting of the authorized body or 60 days after the final actions of the authorized body are taken, and approval of records as reasonable, accurate, and complete within a reasonable time thereafter. 1040 now Disregarded benefits. 1040 now   The following economic benefits are disregarded for section 4958 purposes. 1040 now Nontaxable fringe benefits that are excluded from income under section 132. 1040 now Benefits provided to a volunteer for the organization if the benefit is provided to the general public in exchange for a membership fee or contribution of $75 or less. 1040 now Benefits provided to a member of an organization due to the payment of a membership fee or to a donor as a result of a deductible contribution, if a significant number of disqualified persons make similar payments or contributions and are offered a similar economic benefit. 1040 now Benefits provided to a person solely as a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose. 1040 now A transfer of an economic benefit to or for the use of a governmental unit, as defined in section 170(c)(1), if exclusively for public purposes. 1040 now Special Exception for Initial Contracts      Section 4958 does not apply to any fixed payment made to a person under an initial contract. 1040 now   A fixed payment is an amount of cash or other property specified in the contract, or determined by a fixed formula that is specified in the contract, which is to be paid or transferred in exchange for the provision of specified services or property. 1040 now   A fixed formula can, generally, incorporate an amount that depends upon future specified events or contingencies, as long as no one has discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus). 1040 now   An initial contract is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately before entering into the contract. 1040 now   A binding written contract, providing it can be terminated or canceled by the applicable tax-exempt organization without the other party's consent (except as a result of substantial nonperformance) and without substantial penalty, is treated as a new contract, as of the earliest date any termination or cancellation would be effective. 1040 now Also, if the parties make a material change to a contract, which includes an extension or renewal of the contract (except for an extension or renewal resulting from the exercise of an option by the disqualified person), or a more than incidental change to the amount payable under the contract, it is treated as a new contract as of the effective date of the material change. 1040 now More information. 1040 now   For more information, see the Instructions to Forms 990 and 4720. 1040 now Excess Business Holdings Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. 1040 now They may be subject to an excise tax on the amount of any excess business holdings. 1040 now For purposes of section 4943, for tax years beginning after August 17, 2006, donor advised funds and certain supporting organizations are considered private foundations. 1040 now Donor advised fund. 1040 now   In general, a donor advised fund is a fund or account separately identified by reference to contributions of a donor or donors that is owned and controlled by a sponsoring organization and for which the donor has or expects to have advisory privileges concerning the distribution or investment of the funds. 1040 now Supporting organizations. 1040 now   Only certain supporting organizations are subject to the excess business holdings tax under section 4943. 1040 now These include (1) Type III supporting organizations that are not functionally integrated and (2) Type II supporting organizations that accept any gift or contribution from a person who by himself or in connection with a related party controls the supported organization that the Type II supporting organization supports. 1040 now Taxes. 1040 now   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. 1040 now The initial tax is 10% (5% for tax years beginning before August 18, 2006) of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. 1040 now The excess holdings are determined on the day during the tax year when they were the largest. 1040 now   A foundation that fails to correct the excess business holdings becomes liable for an additional tax of 200% of the remaining excess business holdings as of the earlier of tax assessment or mailing of a notice of deficiency. 1040 now   For more information on the tax on excess business holdings, see the Instructions for Form 4720. 1040 now Taxable Distributions of Sponsoring Organizations An excise tax is imposed on a sponsoring organization for each taxable distribution it makes from a donor advised fund. 1040 now An excise tax is also imposed on any fund manager of the sponsoring organization who agreed to the making of a distribution, knowing that it is a taxable distribution. 1040 now Taxable distribution. 1040 now   A taxable distribution is any distribution from a donor advised fund to any natural person or to any other person if: The distribution is for any purpose other than one specified in section 170(c)(2)(B), or The sponsoring organization maintaining the donor advised fund does not exercise expenditure responsibility with respect to the distribution in accordance with section 4945(h). 1040 now    However, a taxable distribution does not include a distribution from a donor advised fund to: Any organization described in section 170(b)(1)(A) (other than a disqualified supporting organization), The sponsoring organization of the donor advised fund, or Any other donor advised fund. 1040 now The tax on taxable distributions applies to distributions occurring in tax years beginning after August 17, 2006. 1040 now Sponsoring organization. 1040 now   A sponsoring organization is a section 170(c) organization that is neither a government organization (as referred to in section 170(c)(1) and (2)(A)) nor a private foundation. 1040 now Donor advised fund. 1040 now    A donor advised fund is a fund or account: Which is separately identified by reference to contributions of a donor or donors, Which is owned and controlled by a sponsoring organization, and For which the donor (or any person appointed or designated by the donor) has or expects to have advisory privileges concerning the distribution or investment of the funds held in the donor advised funds or accounts because of the donor's status as a donor. 1040 now Exception. 1040 now A donor advised fund does not include:    A fund or account that makes distributions only to a single identified organization or governmental entity, or Any fund or account for a person described in 3 above that gives advice about which individuals receive grants for travel, study, or similar purposes, if the following three requirements are met: The person's advisory privileges are performed exclusively by such person in their capacity as a committee member of which all the committee members are appointed by the sponsoring organization, No combination of persons with advisory privileges, described in 3 above, or persons related to those in 3 above directly or indirectly control the committee, and All grants from the fund or account are awarded on an objective and nondiscriminatory basis according to a procedure approved in advance by the board of directors of the sponsoring organization. 1040 now The procedure must be designed to ensure that all grants meet the requirements of section 4945(g)(1), (2), or (3). 1040 now Disqualified supporting organization. 1040 now   A disqualified supporting organization includes (1) a Type III supporting organization that is not functionally integrated and (2) any supporting organization where the donor or donor advisor (and any related parties) directly or indirectly controls a supported organization of the supporting organization. 1040 now Tax on sponsoring organization. 1040 now   A tax of 20% of the amount of each taxable distribution is imposed on the sponsoring organization. 1040 now Tax on fund manager. 1040 now   If a tax is imposed on a taxable distribution of the sponsoring organization, a tax of 5% of the distribution will be imposed on any fund manager who agreed to the distribution knowing that it was a taxable distribution. 1040 now Any fund manager who took part in the distribution and is liable for the tax must pay the tax. 1040 now The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. 1040 now If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. 1040 now   For more information on the tax on taxable distributions of sponsoring organizations, see the Instructions for Form 4720. 1040 now Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Prohibited benefit. 1040 now   If any donor, donor advisor, or related party advises the sponsoring organization about making a distribution which results in a donor, donor advisor, or related party receiving (either directly or indirectly) a more than incidental benefit, then such benefit is a prohibited benefit. 1040 now The tax on prohibited benefits applies to distributions occurring in tax years beginning after August 17, 2006. 1040 now Donor advisor. 1040 now   A donor advisor is any person appointed or designated by a donor to advise a sponsoring organization on the distribution or investment of amounts held in the donor's fund or account. 1040 now Related party. 1040 now   A related party includes any family member or 35% controlled entity. 1040 now See the definition of those terms under Disqualified Person , earlier. 1040 now Tax on donor, donor advisor, or related person. 1040 now    A tax of 125% of the benefit resulting from the distribution is imposed on both the party who advised as to the distribution (which might be a donor, donor advisor, or related party) and the party who received such benefit (which might be a donor, donor advisor, or related party). 1040 now The advisor and the party who received the benefit are jointly and severally liable for the tax. 1040 now Tax on fund managers. 1040 now   If a tax is imposed on a prohibited benefit received by a donor, donor advisor, or related person, a tax of 10% of the amount of the prohibited benefit is imposed on any fund manager who agreed to the distribution knowing that it would confer a prohibited benefit. 1040 now Any fund manager who took part in the distribution and is liable for the tax must pay the tax. 1040 now The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. 1040 now If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. 1040 now Exception. 1040 now   If a person engaged in an excess benefit transaction and received a prohibited benefit for the same transaction, the person is taxed under section 4958, and no tax is imposed under section 4967 for a prohibited benefit. 1040 now   For more information on taxes on prohibited benefits distributed from donor advised funds, see the Instructions for Form 4720. 1040 now Excise Taxes on Private Foundations There is an excise tax on the net investment income of most domestic private foundations. 1040 now Capital gains from appreciation are included in the tax base on private foundation net investment income. 1040 now This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year (section 4940 tax minus credits) is $500 or more. 1040 now Form 990-W is used to calculate the estimated tax. 1040 now In addition, there are several other rules that apply to excise taxes on private foundations. 1040 now These include: Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons, Requirements that the foundation annually distribute income for charitable purposes, Limits on their holdings in any business enterprise (see Excess Business Holdings, earlier), Provisions that investments must not jeopardize the carrying out of exempt purposes, and Provisions to assure that expenditures further the organization's exempt purposes. 1040 now Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. 1040 now For more information on the excise taxes imposed on private foundations, see the Instructions for Form 4720 and the Instructions for Form 990-PF. 1040 now Excise Taxes on Black Lung Benefit Trusts A black lung benefit trust that makes any expenditures, payments, or investments other than those described in chapter 4 under 501(c)(21) - Black Lung Benefit Trusts must pay a tax equal to 10% of the amount of such expenditures. 1040 now If there are any acts of self-dealing between the trust and a disqualified person, a tax equal to 10% of the amount involved is imposed on the disqualified person. 1040 now Both of these excise taxes are reported on Schedule A (Form 990-BL). 1040 now See the Form 990-BL instructions for more information on these taxes and what has to be filed, even if the trust is excepted from filing. 1040 now Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements For tax years beginning after March 23, 2012, new section 4959 imposes an excise tax on hospital organizations which fail to meet certain section 501(r) requirements for each of their hospital facilities. 1040 now These entities must meet section 501(r)(3) requirements at all times during their tax year. 1040 now Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). 1040 now See Schedule H, Hospitals (Form 990), for details. 1040 now Prev  Up  Next   Home   More Online Publications
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Understanding Your CP279 Notice

CP279 is the notice of acceptance to the parent corporation of a Qualified Subchapter S Subsidiary (QSub) from Form 8869, Qualified Subchapter S Subsidiary Election.


What you need to do

  • Retain this notice in your permanent records.
  • Notify IRS of necessary changes via Form 8822-B, Change of Address or Responsible Party – Business.

You may want to

Supply your subsidiary corporation with a copy of this notice.


Answers to Common Questions

Q. How do I report the activity of my subsidiary?

A. Subsidiary information should be reported on Form 851, Affiliations Schedule, and other necessary schedules.

 

Page Last Reviewed or Updated: 12-Feb-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The 1040 Now

1040 now Index , Hardest Hit Fund and Emergency Homeowners' Loan Programs. 1040 now , Form 1098. 1040 now , How To Report, Form 1098. 1040 now A Acquisition debt, Fully deductible interest. 1040 now , Home Acquisition Debt, Part of home not a qualified home. 1040 now Alimony, Divorced or separated individuals. 1040 now Amortization Points, General Rule Appraisal fees, Amounts charged for services. 1040 now Armed forces Housing allowance, Ministers' and military housing allowance. 1040 now Assistance (see Tax help) Average mortgage balance, Average Mortgage Balance B Borrowers More than one, More than one borrower. 1040 now Seller-paid points, treatment by buyer, Treatment by buyer. 1040 now Business Average mortgage balance, total amount of interest otherwise allowable to each activity, Line 13 Mortgage proceeds used for, Mortgage proceeds used for business or investment. 1040 now C Clergy Ministers' and military housing allowance, Ministers' and military housing allowance. 1040 now Cooperative housing, Cooperative apartment owner. 1040 now , Cooperative apartment owner. 1040 now , Special Rule for Tenant-Stockholders in Cooperative Housing Corporations, Form 1098. 1040 now Cost of home or improvements, Cost of home or improvements. 1040 now Credits, Mortgage interest credit. 1040 now D Date of mortgage, Date of the mortgage. 1040 now Debt Choice to treat as not secured by home, Choice to treat the debt as not secured by your home. 1040 now Grandfathered, Fully deductible interest. 1040 now , Grandfathered Debt, Line-of-credit mortgage. 1040 now Home acquisition, Fully deductible interest. 1040 now , Home Acquisition Debt Home equity, Fully deductible interest. 1040 now , Home Equity Debt Home equity only (Table 1), Home equity debt only. 1040 now Not secured by home, Debt not secured by home. 1040 now Secured, Secured Debt Deductions, Part I. 1040 now Home Mortgage Interest, Hardest Hit Fund and Emergency Homeowners' Loan Programs. 1040 now Home office, Office in home. 1040 now Mortgage insurance premiums, Claiming your deductible mortgage insurance premiums. 1040 now Points, General Rule, Claiming your deductible points. 1040 now Deed preparation costs, Amounts charged for services. 1040 now Divorced taxpayers, Divorced or separated individuals. 1040 now , Acquiring an interest in a home because of a divorce. 1040 now E Emergency Homeowners' Loan Program, Hardest Hit Fund and Emergency Homeowners' Loan Programs. 1040 now Equity debt, Fully deductible interest. 1040 now , Home Equity Debt, Fair market value (FMV). 1040 now Equity debt only (Table 1), Home equity debt only. 1040 now F Fair market value (FMV), Fair market value (FMV). 1040 now Fees Appraisal, Amounts charged for services. 1040 now Notaries, Amounts charged for services. 1040 now Points (see Points) Figures (see Tables and figures) Form 1040, Schedule A, How To Report, Table 2. 1040 now Where To Deduct Your Interest Expense Form 1040, Schedule C or C-EZ, Table 2. 1040 now Where To Deduct Your Interest Expense Form 1040, Schedule E, Table 2. 1040 now Where To Deduct Your Interest Expense Form 1040, Schedule F, Table 2. 1040 now Where To Deduct Your Interest Expense Form 1098, Form 1098, Mortgage Interest Statement Mortgage insurance premiums, Form 1098. 1040 now Form 8396, Mortgage interest credit. 1040 now Free tax services, Free help with your tax return. 1040 now G Grandfathered debt, Fully deductible interest. 1040 now , Grandfathered Debt, Line-of-credit mortgage. 1040 now Ground rents, Redeemable ground rents. 1040 now H Hardest Hit Fund Program, Hardest Hit Fund and Emergency Homeowners' Loan Programs. 1040 now Help (see Tax help) Home, Publication 936 - Introductory Material Acquisition debt, Fully deductible interest. 1040 now , Home Acquisition Debt Construction, Home under construction. 1040 now Cost of, Cost of home or improvements. 1040 now Destroyed, Home destroyed. 1040 now Divided use, Divided use of your home. 1040 now , Part of home not a qualified home. 1040 now , Part of home not a qualified home. 1040 now Equity debt, Fully deductible interest. 1040 now , Home Equity Debt Equity debt only (Table 1), Home equity debt only. 1040 now Fair market value, Fair market value (FMV). 1040 now Grandfathered debt, Fully deductible interest. 1040 now , Grandfathered Debt, Line-of-credit mortgage. 1040 now Improvement loan, points, Home improvement loan. 1040 now Main, Main home. 1040 now Office in, Office in home. 1040 now Qualified, Qualified Home Renting out part of, Renting out part of home. 1040 now Sale of, Sale of home. 1040 now Second, Second home. 1040 now Time-sharing arrangements, Time-sharing arrangements. 1040 now Housing allowance Ministers and military, Ministers' and military housing allowance. 1040 now I Improvements Cost of, Cost of home or improvements. 1040 now Home acquisition debt, Mortgage treated as used to buy, build, or improve home. 1040 now Points, Home improvement loan. 1040 now Substantial, Substantial improvement. 1040 now Interest, Part I. 1040 now Home Mortgage Interest (see also Mortgage interest) Interest rate method, Interest paid divided by interest rate method. 1040 now Refunded, Refunds of interest. 1040 now , Refunded interest. 1040 now Where to deduct, Table 2. 1040 now Where To Deduct Your Interest Expense Investments Average mortgage balance and total amount of interest allowable, Line 13 Mortgage proceeds used for, Mortgage proceeds invested in tax-exempt securities. 1040 now , Mortgage proceeds used for business or investment. 1040 now J Joint returns, Married taxpayers. 1040 now L Lender mortgage statements, Statements provided by your lender. 1040 now Limits Cooperative housing, mortgage interest deduction, Limits on deduction. 1040 now Deductibility of mortgage insurance premiums, Limit on deduction. 1040 now Deductibility of points, Limits on deduction. 1040 now Home acquisition debt, Home acquisition debt limit. 1040 now Home equity debt, Home equity debt limit. 1040 now Home mortgage interest deduction, Form 1098. 1040 now Qualified loan limit, Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now , Average Mortgage Balance Line-of-credit mortgage, Line-of-credit mortgage. 1040 now Loans, Mortgage proceeds used for business or investment. 1040 now , Mortgage treated as used to buy, build, or improve home. 1040 now (see also Mortgages) Home improvement, points, Home improvement loan. 1040 now Qualified loan limit, Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now M Main home, Main home. 1040 now Married taxpayers, Married taxpayers. 1040 now Military housing allowance, Ministers' and military housing allowance. 1040 now Ministers' housing allowance, Ministers' and military housing allowance. 1040 now Missing children, photographs of, Reminders Mixed-use mortgages, Mixed-use mortgages. 1040 now Mortgage insurance premiums Claiming deductible, Claiming your deductible mortgage insurance premiums. 1040 now Mortgage interest, Publication 936 - Introductory Material, Part I. 1040 now Home Mortgage Interest Cooperative housing, Figuring deductible home mortgage interest. 1040 now Credit, Mortgage interest credit. 1040 now Fully deductible interest, Fully deductible interest. 1040 now Home mortgage interest, Part I. 1040 now Home Mortgage Interest, Hardest Hit Fund and Emergency Homeowners' Loan Programs. 1040 now How to report, How To Report Late payment charges, Late payment charge on mortgage payment. 1040 now Limits on deduction, Part II. 1040 now Limits on Home Mortgage Interest Deduction Ministers' and military housing allowance, Ministers' and military housing allowance. 1040 now Prepaid interest, Prepaid interest. 1040 now , Prepaid interest on Form 1098. 1040 now Prepayment penalty, Mortgage prepayment penalty. 1040 now Refunds, Refunds of interest. 1040 now , Refunded interest. 1040 now Sale of home, Sale of home. 1040 now Special situations, Special Situations Statement, Form 1098, Mortgage Interest Statement Where to deduct, Table 2. 1040 now Where To Deduct Your Interest Expense Worksheet to figure (Table 1), Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now Mortgages Assistance payments (under sec. 1040 now 235 of National Housing Act), Mortgage assistance payments under section 235 of the National Housing Act. 1040 now Average balance, Average Mortgage Balance Date of, Date of the mortgage. 1040 now Ending early, Mortgage ending early. 1040 now Late qualifying, Mortgage that qualifies later. 1040 now Line-of-credit, Line-of-credit mortgage. 1040 now Mixed-use, Mixed-use mortgages. 1040 now Preparation costs for note or deed of trust, Amounts charged for services. 1040 now Proceeds invested in tax-exempt securities, Mortgage proceeds invested in tax-exempt securities. 1040 now Proceeds used for business, Mortgage proceeds used for business or investment. 1040 now Proceeds used for investment, Mortgage proceeds used for business or investment. 1040 now Qualified loan limit, Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now , Average Mortgage Balance Refinanced, Refinancing. 1040 now , Refinanced home acquisition debt. 1040 now , Refinanced grandfathered debt. 1040 now Reverse, Reverse mortgages. 1040 now Statements provided by lender, Statements provided by your lender. 1040 now To buy, build, or improve, Mortgage treated as used to buy, build, or improve home. 1040 now Wraparound, Wraparound mortgage. 1040 now N Nonredeemable ground rents, Nonredeemable ground rents. 1040 now Notary fees, Amounts charged for services. 1040 now O Office in home, Office in home. 1040 now P Penalties Mortgage prepayment, Mortgage prepayment penalty. 1040 now Points, Points, Deduction Allowed in Year Paid, Form 1098. 1040 now Claiming deductible, Claiming your deductible points. 1040 now Exception to general rule, Deduction Allowed in Year Paid Excess, Excess points. 1040 now Funds provided less than, Funds provided are less than points. 1040 now General rule, General Rule Home improvement loans, Home improvement loan. 1040 now Seller paid, Points paid by the seller. 1040 now Prepaid interest, Prepaid interest. 1040 now , Prepaid interest on Form 1098. 1040 now Prepayment penalties, Mortgage prepayment penalty. 1040 now Publications (see Tax help) Q Qualified homes, Qualified Home Qualified loan limit Average mortgage balance, Average Mortgage Balance Worksheet to figure (Table 1), Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now R Redeemable ground rents, Redeemable ground rents. 1040 now Refinancing, Refinancing. 1040 now Grandfathered debt, Refinanced grandfathered debt. 1040 now Home acquisition debt, Refinanced home acquisition debt. 1040 now Refunds, Refunds of interest. 1040 now , Refunded interest. 1040 now Rent Nonredeemable ground rents, Nonredeemable ground rents. 1040 now Redeemable ground rents, Redeemable ground rents. 1040 now Rental payments, Rental payments. 1040 now Renting of home Part of, Renting out part of home. 1040 now Time-sharing arrangements, Rental of time-share. 1040 now Repairs, Substantial improvement. 1040 now Reverse Mortgages, Reverse mortgages. 1040 now S Sale of home, Sale of home. 1040 now Second home, Second home. 1040 now , Deduction Allowed in Year Paid Secured debt, Secured Debt Seller-paid points, Points paid by the seller. 1040 now Separate returns, Separate returns. 1040 now Separated taxpayers, Divorced or separated individuals. 1040 now Spouses, Married taxpayers. 1040 now Statements provided by lender, Statements provided by your lender. 1040 now Stock Cooperative housing, Stock used to secure debt. 1040 now T Tables and figures Deductible home mortgage interest Fully deductible, determination of (Figure A), Fully deductible interest. 1040 now How to figure (Table 1), Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now Mortgage to buy, build, or improve home (Figure C), Mortgage treated as used to buy, build, or improve home. 1040 now Points (Figure B), Points Qualified loan limit worksheet (Table 1), Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now Tax credits, Mortgage interest credit. 1040 now Tax help, How To Get Tax Help Tax-exempt securities Mortgage proceeds invested in, Mortgage proceeds invested in tax-exempt securities. 1040 now Time-sharing arrangements, Time-sharing arrangements. 1040 now V Valuation Fair market value, Fair market value (FMV). 1040 now W Worksheets Deductible home mortgage interest, Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now Qualified loan limit, Table 1. 1040 now Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040 now Wraparound mortgages, Wraparound mortgage. 1040 now Prev  Up     Home   More Online Publications