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History of Intermediate Sanctions
Intermediate sanctions is one of the most important regulations in nonprofit law.
What's the point?
Intermediate sanctions allows the IRS to assess penalties when certain employees or insiders of a 501(c)(3) of 501(c)(4) tax exempt organization obtain a benefit from the organization that is worth more than the personal service that the employee/insider provides.
Since 501(c)(3) organizations are either a public charity, private foundation, or private operating foundation with open membership, donations made to these organizations are deductible to the full extent of the law as charitable contributions. 501(c)(4) organizations are civic leagues or associations operated exclusively for the promotion of social welfare or local associations of employees with limited membership and donations to these kinds of organizations are not deductible, though some businesses who make these contributions often write them off as advertising or business expenses.
The intermediate sanctions rules were passed in July of 1996 as a part of the Taxpayer Bill of Rights. Additional regulations were issued in January of 2002 and intermediate sanctions were made part of the Internal Revenue Code (IRC § 4958).
Final regulations were passed in March of 2008, which emphasized that any reasonable attempts to enact safeguards against excess benefit transactions will be treated as a favorable factor if transactions are later deemed to be excess benefit transactions, and the implementation of corrective measures before the IRS becomes involved will also be factored into account when the IRS is deciding whether to revoke tax-exempt status due to excess benefit transactions.
Despite the length of time it took to obtain final regulations, the intermediate-sanctions law was passed retroactive to September 14, 1995.
Memory Jogger
Note: Memory Jogger questions are not scored. They serve only to help you remember some of the course material covered thus far. You must select the correct answer in order to proceed to the next section.
The IRS regulations regarding intermediate sanctions are contained in Section ______ of the IRS code.