Intermediate Sanctions

EXCESS BENEFIT TRANSACTIONS

Intermediate sanctions fit into the concept of private inurement by providing a set of rules pertaining to excess benefit transactions. This is much the same as private inurement.

In determining if the compensation of a nonprofit's management team would fall into the category of private inurement, you must consider these questions:

• What organization is involved?
• Who in the organization is involved?
• What transactions are involved?

Q1: What organization is involved?

We know intermediate sanctions cover tax-exempt or nonprofit organizations. However, the sanctions don't cover all these types of organizations.

Here are the tax-exempt organizations subject to intermediate sanctions:

• Public charities: Those exempt under Section 501(c)(3) and classified under Section 509(a), including Section 509(a)(3) supporting organizations.
• Social Welfare organizations: Those exempt under Section 501(c)(4).

Tax-exempt organizations under Section 501(c)(3) are required to establish their exempt status by filing with the IRS unless they're exempt under Section 509 (e.g., churches and any organization which is not a private foundation and the gross receipts of which in each taxable year are normally not more than $5,000). Similarly, to be classified as a tax-exempt organization under Section 501(c)(4), the organization must file an annual return (Form 990) with the IRS as a Section 501(c)(4) organization.

It should be noted that these types of tax-exempt organizations are only 2 of 9 categories of organizations subject to the rules of private inurement.

The following types of tax-exempt organizations are EXCLUDED from intermediate sanctions:

• Private foundations: Those exempt under Section 501(c)(3) and classified as private foundations under Section 509(a). Foundations are subject to other excise taxes on self-dealing under Section 4941.
• Certain foreign organizations: Those that receive their support from outside the United States.
• Quasi-government entities: Those exempt from taxation.