Intermediate Sanctions

Q2: Who's Involved?

Intermediate sanctions can affect a wide range of people involved in a tax-exempt organization, including those who have a limited involvement. The groups for whom the code specifies liability are:

• disqualified persons
• organization managers

Disqualified persons

A disqualified person is an individual who is "in a position to exercise substantial influence over the affairs of the organization."² This definition is similar to that of an insider under private inurement.

Let's take a look at a more complete definition:

This definition has five important points:

1. The influence must be substantial; it should not be incidental or occasional.
2. The person does not have to have influenced the particular transaction. All that needs to be shown is that the person could be in a position to do so.
3. The influence must be with respect to all the affairs of the organization, not just some of the affairs.
4. The definition of a disqualified person is applied in the context of the transaction involved.
5. The definition has a 5-year look-back period.³

A person may be considered disqualified either by the statute, the IRS regulations, or by a Facts and Circumstances Test (described later).

Disqualified by statute. There are two groups of persons that are disqualified under the statute itself:

1. A family member of a disqualified person: This may include spouse, siblings, parents, grandparents, children, grandchildren, and spouses of these relatives.
2. An organization (i.e., corporation, partnership, trust, or estate) owned 35% or more (directly or indirectly) by a disqualified person or a family member as listed above: This does not include voting rights held only as a director, trustee, or other fiduciary, without any stock or other fiduciary interest.

Disqualified under the regulations. There are three groups that are considered disqualified persons under the regulations:

1. Members of the governing board or body of the organization: These may be called directors, elders, trustees, or other appropriate titles. This group sets the policies and makes decisions for the organization. In some cases, a person may be on such a board but not have any say or vote in the proceedings and may therefore not be considered a disqualified person.

2. Officers of the organization: This will certainly include the president, chief executive officer, vice president, and chief operating officer. These are representational titles, as each organization has its own particular title. The important point is that this is the person or group that's responsible for enacting the plans and policies of the governing board and supervising the management, administration, and operations of the organization.

3. The treasurer or chief financial officer: This category covers any and all persons who have the responsibility of managing the financial assets of the organization. Again, the title is not important, the function is the important thing.

In addition…

In a hospital that participates in a provider-sponsored organization, any person who has a material financial interest in the organization may be considered a disqualified person. (A provider-sponsored organization (PSO) is a managed care contracting and delivery organization consisting of a group of doctors, hospitals, and other health care providers.)