HealthLawProf Blog

Editor: Katharine Van Tassel
Case Western Reserve University School of Law

Saturday, December 17, 2005

Intermediate Sanctions: Comment Period on Proposed Rule Closed

A short commentary  in HealthLeaders News ("The Intersection of Intermediate Sanctions and Loss of Tax-Exempt Status for Nonprofits," by J. Leigh Griffith and Donald B. Stewart) reminded me of a proposed rule from the IRS on the always timely issue of intermediate sanctions.  Published on Sept. 9, the NPRM identifies the five factors to be taken into account when the IRS is trying to decide whether to revoke the exempt entity's tax-exempt status in addition to imposing intermediate sanctions.  As the authors point out, the factors omit any mention of good faith on the part of the entity's managers and emphasize the importance of self-discovery and self-correction (i.e., rectification of the excess-benefit transaction before the IRS brings it to the entity's attention).  The transaction may still enjoy a rebuttable presumption of reasonableness if it satisfies the requirements of 26 CFR § 53.4958-6, but good-faith reliance on those factors (including valuations and opinion letters) won't save the entity from loss of its exemption.  On the other hand, as the authors point out, the proposed rule introduces the five factors with this clause: "the Commissioner will consider all relevant facts and circumstances, including, but not limited to, the following—," so the good faith of the managers won't necessarily be irrelevant.  The comment period for this NPRM closed on Dec. 8.  The IRS has indicated this rule is a priority, so we should see a final rule sometime early in 2006. [tm]

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