[Code of Federal Regulations]
[Title 26, Volume 17]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR53.4958-3]

[Page 217-222]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 53_FOUNDATION AND SIMILAR EXCISE TAXES--Table of Contents
 
                   Subpart K_Second Tier Excise Taxes
 
Sec. 53.4958-3  Definition of disqualified person.

    (a) In general--(1) Scope of definition. Section 4958(f)(1) defines 
disqualified person, with respect to any transaction, as any person who 
was in a position to exercise substantial influence over the affairs of 
an applicable tax-exempt organization at any time during the five-year 
period ending on the date of the transaction (the lookback period). 
Paragraph (b) of this section describes persons who are defined to be 
disqualified persons under the statute, including certain family members 
of an individual in a position to exercise substantial influence, and 
certain 35-percent controlled entities. Paragraph (c) of this section 
describes persons in a position to exercise substantial influence over 
the affairs of an applicable tax-exempt organization by virtue of their 
powers and responsibilities or certain interests they hold. Paragraph 
(d) of this section describes persons deemed not to be in a position to 
exercise substantial influence. Whether any person who is not described 
in paragraph (b), (c) or (d) of this section is a disqualified person 
with respect to a transaction for purposes of section 4958 is based on 
all relevant facts and circumstances, as described in paragraph (e) of 
this section. Paragraph (f) of this section describes special rules for 
affiliated organizations. Examples in paragraph (g) of this section 
illustrate these categories of persons.
    (2) Transition rule for lookback period. In the case of any excess 
benefit transaction occurring before September 14, 2000, the lookback 
period described in paragraph (a)(1) of this section begins on September 
14, 1995, and ends on the date of the transaction.
    (b) Statutory categories of disqualified persons--(1) Family 
members. A person is a disqualified person with respect to

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any transaction with an applicable tax-exempt organization if the person 
is a member of the family of a person who is a disqualified person 
described in paragraph (a) of this section (other than as a result of 
this paragraph) with respect to any transaction with the same 
organization. For purposes of the following sentence, a legally adopted 
child of an individual is treated as a child of such individual by 
blood. A person's family is limited to--
    (i) Spouse;
    (ii) Brothers or sisters (by whole or half blood);
    (iii) Spouses of brothers or sisters (by whole or half blood);
    (iv) Ancestors;
    (v) Children;
    (vi) Grandchildren;
    (vii) Great grandchildren; and
    (viii) Spouses of children, grandchildren, and great grandchildren.
    (2) Thirty-five percent controlled entities--(i) In general. A 
person is a disqualified person with respect to any transaction with an 
applicable tax-exempt organization if the person is a 35-percent 
controlled entity. A 35-percent controlled entity is--
    (A) A corporation in which persons described in this section (except 
in paragraphs (b)(2) and (d) of this section) own more than 35 percent 
of the combined voting power;
    (B) A partnership in which persons described in this section (except 
in paragraphs (b)(2) and (d) of this section) own more than 35 percent 
of the profits interest; or
    (C) A trust or estate in which persons described in this section 
(except in paragraphs (b)(2) and (d) of this section) own more than 35 
percent of the beneficial interest.
    (ii) Combined voting power. For purposes of this paragraph (b)(2), 
combined voting power includes voting power represented by holdings of 
voting stock, direct or indirect, but does not include voting rights 
held only as a director, trustee, or other fiduciary.
    (iii) Constructive ownership rules--(A) Stockholdings. For purposes 
of section 4958(f)(3) and this paragraph (b)(2), indirect stockholdings 
are taken into account as under section 267(c), except that in applying 
section 267(c)(4), the family of an individual shall include the members 
of the family specified in section 4958(f)(4) and paragraph (b)(1) of 
this section.
    (B) Profits or beneficial interest. For purposes of section 
4958(f)(3) and this paragraph (b)(2), the ownership of profits or 
beneficial interests shall be determined in accordance with the rules 
for constructive ownership of stock provided in section 267(c) (other 
than section 267(c)(3)), except that in applying section 267(c)(4), the 
family of an individual shall include the members of the family 
specified in section 4958(f)(4) and paragraph (b)(1) of this section.
    (c) Persons having substantial influence. A person who holds any of 
the following powers, responsibilities, or interests is in a position to 
exercise substantial influence over the affairs of an applicable tax-
exempt organization:
    (1) Voting members of the governing body. This category includes any 
individual serving on the governing body of the organization who is 
entitled to vote on any matter over which the governing body has 
authority.
    (2) Presidents, chief executive officers, or chief operating 
officers. This category includes any person who, regardless of title, 
has ultimate responsibility for implementing the decisions of the 
governing body or for supervising the management, administration, or 
operation of the organization. A person who serves as president, chief 
executive officer, or chief operating officer has this ultimate 
responsibility unless the person demonstrates otherwise. If this 
ultimate responsibility resides with two or more individuals (e.g., co-
presidents), who may exercise such responsibility in concert or 
individually, then each individual is in a position to exercise 
substantial influence over the affairs of the organization.
    (3) Treasurers and chief financial officers. This category includes 
any person who, regardless of title, has ultimate responsibility for 
managing the finances of the organization. A person who serves as 
treasurer or chief financial officer has this ultimate responsibility 
unless the person demonstrates otherwise. If this ultimate 
responsibility resides with two or more individuals who may exercise the 
responsibility in concert or individually, then

[[Page 219]]

each individual is in a position to exercise substantial influence over 
the affairs of the organization.
    (4) Persons with a material financial interest in a provider-
sponsored organization. For purposes of section 4958, if a hospital that 
participates in a provider-sponsored organization (as defined in section 
1855(e) of the Social Security Act, 42 U.S.C. 1395w-25) is an applicable 
tax-exempt organization, then any person with a material financial 
interest (within the meaning of section 501(o)) in the provider-
sponsored organization has substantial influence with respect to the 
hospital.
    (d) Persons deemed not to have substantial influence. A person is 
deemed not to be in a position to exercise substantial influence over 
the affairs of an applicable tax-exempt organization if that person is 
described in one of the following categories:
    (1) Tax-exempt organizations described in section 501(c)(3). This 
category includes any organization described in section 501(c)(3) and 
exempt from tax under section 501(a).
    (2) Certain section 501(c)(4) organizations. Only with respect to an 
applicable tax-exempt organization described in section 501(c)(4) and 
Sec. 53.4958-2(a)(4), this category includes any other organization so 
described.
    (3) Employees receiving economic benefits of less than a specified 
amount in a taxable year. This category includes, for the taxable year 
in which benefits are provided, any full- or part-time employee of the 
applicable tax-exempt organization who--
    (i) Receives economic benefits, directly or indirectly from the 
organization, of less than the amount referenced for a highly 
compensated employee in section 414(q)(1)(B)(i);
    (ii) Is not described in paragraph (b) or (c) of this section with 
respect to the organization; and
    (iii) Is not a substantial contributor to the organization within 
the meaning of section 507(d)(2)(A), taking into account only 
contributions received by the organization during its current taxable 
year and the four preceding taxable years.
    (e) Facts and circumstances govern in all other cases--(1) In 
general. Whether a person who is not described in paragraph (b), (c) or 
(d) of this section is a disqualified person depends upon all relevant 
facts and circumstances.
    (2) Facts and circumstances tending to show substantial influence. 
Facts and circumstances tending to show that a person has substantial 
influence over the affairs of an organization include, but are not 
limited to, the following--
    (i) The person founded the organization;
    (ii) The person is a substantial contributor to the organization 
(within the meaning of section 507(d)(2)(A)), taking into account only 
contributions received by the organization during its current taxable 
year and the four preceding taxable years;
    (iii) The person's compensation is primarily based on revenues 
derived from activities of the organization, or of a particular 
department or function of the organization, that the person controls;
    (iv) 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;
    (v) 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;
    (vi) The person owns a controlling interest (measured by either vote 
or value) in a corporation, partnership, or trust that is a disqualified 
person; or
    (vii) The person is a non-stock organization controlled, directly or 
indirectly, by one or more disqualified persons.
    (3) Facts and circumstances tending to show no substantial 
influence. 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--
    (i) The person has taken a bona fide vow of poverty as an employee, 
agent, or on behalf, of a religious organization;
    (ii) The person is a contractor (such as an attorney, accountant, or 
investment manager or advisor) whose sole relationship to the 
organization is providing professional advice (without

[[Page 220]]

having decision-making authority) with respect to transactions from 
which the contractor will not economically benefit either directly or 
indirectly (aside from customary fees received for the professional 
advice rendered);
    (iii) The direct supervisor of the individual is not a disqualified 
person;
    (iv) The person does not participate in any management decisions 
affecting the organization as a whole or 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; or
    (v) Any preferential treatment a person receives based on the size 
of that person's contribution is also offered to all other donors making 
a comparable contribution as part of a solicitation intended to attract 
a substantial number of contributions.
    (f) Affiliated organizations. 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 shall be 
made separately for each applicable tax-exempt organization. A person 
may be a disqualified person with respect to transactions with more than 
one applicable tax-exempt organization.
    (g) Examples. The following examples illustrate the principles of 
this section. A finding that a person is a disqualified person in the 
following examples does not indicate that an excess benefit transaction 
has occurred. If a person is a disqualified person, the rules of section 
4958(c) and Sec. 53.4958-4 apply to determine whether an excess benefit 
transaction has occurred. The examples are as follows:

    Example 1. N, an artist by profession, works part-time at R, a local 
museum. In the first taxable year in which R employs N, R pays N a 
salary and provides no additional benefits to N except for free 
admission to the museum, a benefit R provides to all of its employees 
and volunteers. The total economic benefits N receives from R during the 
taxable year are less than the amount referenced for a highly 
compensated employee in section 414(q)(1)(B)(i). The part-time job 
constitutes N's only relationship with R. N is not related to any other 
disqualified person with respect to R. N is deemed not to be in a 
position to exercise substantial influence over the affairs of R. 
Therefore, N is not a disqualified person with respect to R in that 
year.
    Example 2. The facts are the same as in Example 1, except that in 
addition to the salary that R pays N for N's services during the taxable 
year, R also purchases one of N's paintings for $x. The total of N's 
salary plus $x exceeds the amount referenced for highly compensated 
employees in section 414(q)(1)(B)(i). Consequently, whether N is in a 
position to exercise substantial influence over the affairs of R for 
that taxable year depends upon all of the relevant facts and 
circumstances.
    Example 3. Q is a member of K, a section 501(c)(3) organization with 
a broad-based public membership. Members of K are entitled to vote only 
with respect to the annual election of directors and the approval of 
major organizational transactions such as a merger or dissolution. Q is 
not related to any other disqualified person of K. Q has no other 
relationship to K besides being a member of K and occasionally making 
modest donations to K. Whether Q is a disqualified person is determined 
by all relevant facts and circumstances. Q's voting rights, which are 
the same as granted to all members of K, do not place Q in a position to 
exercise substantial influence over K. Under these facts and 
circumstances, Q is not a disqualified person with respect to K.
    Example 4. E is the headmaster of Z, a school that is an applicable 
tax-exempt organization for purposes of section 4958. E reports to Z's 
board of trustees and has ultimate responsibility for supervising Z's 
day-to-day operations. For example, E can hire faculty members and 
staff, make changes to the school's curriculum and discipline students 
without specific board approval. Because E has ultimate responsibility 
for supervising the operation of Z, E is in a position to exercise 
substantial influence over the affairs of Z. Therefore, E is a 
disqualified person with respect to Z.
    Example 5. Y is an applicable tax-exempt organization for purposes 
of section 4958 that decides to use bingo games as a method of 
generating revenue. Y enters into a contract with B, a company that 
operates bingo games. Under the contract, B manages the promotion and 
operation of the bingo activity, provides all necessary staff, 
equipment, and services, and pays Y q percent of the revenue from this 
activity. B retains the balance of the proceeds. Y provides no goods or 
services in connection with the bingo operation other than the use of 
its hall for the bingo games. The annual gross revenue earned from the 
bingo games represents more than half of Y's total annual revenue. B's 
compensation is primarily based on revenues from an activity B controls. 
B also

[[Page 221]]

manages a discrete activity of Y that represents a substantial portion 
of Y's income compared to the organization as a whole. Under these facts 
and circumstances, B is in a position to exercise substantial influence 
over the affairs of Y. Therefore, B is a disqualified person with 
respect to Y.
    Example 6. The facts are the same as in Example 5, with the 
additional fact that P owns a majority of the stock of B and is actively 
involved in managing B. Because P owns a controlling interest (measured 
by either vote or value) in and actively manages B, P is also in a 
position to exercise substantial influence over the affairs of Y. 
Therefore, under these facts and circumstances, P is a disqualified 
person with respect to Y.
    Example 7. A, an applicable tax-exempt organization for purposes of 
section 4958, owns and operates one acute care hospital. B, a for-profit 
corporation, owns and operates a number of hospitals. A and B form C, a 
limited liability company. In exchange for proportional ownership 
interests, A contributes its hospital, and B contributes other assets, 
to C. All of A's assets then consist of its membership interest in C. A 
continues to be operated for exempt purposes based almost exclusively on 
the activities it conducts through C. C enters into a management 
agreement with a management company, M, to provide day to day management 
services to C. Subject to supervision by C's board, M is given broad 
discretion to manage C's day to day operation and has ultimate 
responsibility for supervising the management of the hospital. Because M 
has ultimate responsibility for supervising the management of the 
hospital operated by C, A's ownership interest in C is its primary 
asset, and C's activities form the basis for A's continued exemption as 
an organization described in section 501(c)(3), M is in a position to 
exercise substantial influence over the affairs of A. Therefore, M is a 
disqualified person with respect to A.
    Example 8. T is a large university and an applicable tax-exempt 
organization for purposes of section 4958. L is the dean of the College 
of Law of T, a substantial source of revenue for T, including 
contributions from alumni and foundations. L is not related to any other 
disqualified person of T. L does not serve on T's governing body or have 
ultimate responsibility for managing the university as whole. However, 
as dean of the College of Law, L plays a key role in faculty hiring and 
determines a substantial portion of the capital expenditures and 
operating budget of the College of Law. L's compensation is greater than 
the amount referenced for a highly compensated employee in section 
414(q)(1)(B)(i) in the year benefits are provided. L's management of a 
discrete segment of T that represents a substantial portion of the 
income of T (as compared to T as a whole) places L in a position to 
exercise substantial influence over the affairs of T. Under these facts 
and circumstances L is a disqualified person with respect to T.

    Example 9. S chairs a small academic department in the College of 
Arts and Sciences of the same university T described in Example 8. S is 
not related to any other disqualified person of T. S does not serve on 
T's governing body or as an officer of T. As department chair, S 
supervises faculty in the department, approves the course curriculum, 
and oversees the operating budget for the department. S's compensation 
is greater than the amount referenced for a highly compensated employee 
in section 414(q)(1)(B)(i) in the year benefits are provided. Even 
though S manages the department, that department does not represent a 
substantial portion of T's activities, assets, income, expenses, or 
operating budget. Therefore, S does not participate in any management 
decisions affecting either T as a whole, or a discrete segment or 
activity of T that represents a substantial portion of its activities, 
assets, income, or expenses. Under these facts and circumstances, S does 
not have substantial influence over the affairs of T, and therefore S is 
not a disqualified person with respect to T.

    Example 10. U is a large acute-care hospital that is an applicable 
tax-exempt organization for purposes of section 4958. U employs X as a 
radiologist. X gives instructions to staff with respect to the radiology 
work X conducts, but X does not supervise other U employees or manage 
any substantial part of U's operations. X's compensation is primarily in 
the form of a fixed salary. In addition, X is eligible to receive an 
incentive award based on revenues of the radiology department. X's 
compensation is greater than the amount referenced for a highly 
compensated employee in section 414(q)(1)(B)(i) in the year benefits are 
provided. X is not related to any other disqualified person of U. X does 
not serve on U's governing body or as an officer of U. Although U 
participates in a provider-sponsored organization (as defined in section 
1855(e) of the Social Security Act), X does not have a material 
financial interest in that organization. X does not receive compensation 
primarily based on revenues derived from activities of U that X 
controls. X does not participate in any management decisions affecting 
either U as a whole or a discrete segment of U that represents a 
substantial portion of its activities, assets, income, or expenses. 
Under these facts and circumstances, X does not have substantial 
influence over the affairs of U, and therefore X is not a disqualified 
person with respect to U.

[[Page 222]]

    Example 11. W is a cardiologist and head of the cardiology 
department of the same hospital U described in Example 10. The 
cardiology department is a major source of patients admitted to U and 
consequently represents a substantial portion of U's income, as compared 
to U as a whole. W does not serve on U's governing board or as an 
officer of U. W does not have a material financial interest in the 
provider-sponsored organization (as defined in section 1855(e) of the 
Social Security Act) in which U participates. W receives a salary and 
retirement and welfare benefits fixed by a three-year renewable 
employment contract with U. W's compensation is greater than the amount 
referenced for a highly compensated employee in section 414(q)(1)(B)(i) 
in the year benefits are provided. As department head, W manages the 
cardiology department and has authority to allocate the budget for that 
department, which includes authority to distribute incentive bonuses 
among cardiologists according to criteria that W has authority to set. 
W's management of a discrete segment of U that represents a substantial 
portion of its income and activities (as compared to U as a whole) 
places W in a position to exercise substantial influence over the 
affairs of U. Under these facts and circumstances, W is a disqualified 
person with respect to U.
    Example 12. M is a museum that is an applicable tax-exempt 
organization for purposes of section 4958. D provides accounting 
services and tax advice to M as a contractor in return for a fee. D has 
no other relationship with M and is not related to any disqualified 
person of M. D does not provide professional advice with respect to any 
transaction from which D might economically benefit either directly or 
indirectly (aside from fees received for the professional advice 
rendered). Because D's sole relationship to M is providing professional 
advice (without having decision-making authority) with respect to 
transactions from which D will not economically benefit either directly 
or indirectly (aside from customary fees received for the professional 
advice rendered), under these facts and circumstances, D is not a 
disqualified person with respect to M.
    Example 13. F is a repertory theater company that is an applicable 
tax-exempt organization for purposes of section 4958. F holds a fund-
raising campaign to pay for the construction of a new theater. J is a 
regular subscriber to F's productions who has made modest gifts to F in 
the past. J has no relationship to F other than as a subscriber and 
contributor. F solicits contributions as part of a broad public campaign 
intended to attract a large number of donors, including a substantial 
number of donors making large gifts. In its solicitations for 
contributions, F promises to invite all contributors giving $z or more 
to a special opening production and party held at the new theater. These 
contributors are also given a special number to call in F's office to 
reserve tickets for performances, make ticket exchanges, and make other 
special arrangements for their convenience. J makes a contribution of $z 
to F, which makes J a substantial contributor within the meaning of 
section 507(d)(2)(A), taking into account only contributions received by 
F during its current and the four preceding taxable years. J receives 
the benefits described in F's solicitation. Because F offers the same 
benefit to all donors of $z or more, the preferential treatment that J 
receives does not indicate that J is in a position to exercise 
substantial influence over the affairs of the organization. Therefore, 
under these facts and circumstances, J is not a disqualified person with 
respect to F.

[T.D. 8978, 67 FR 3083, Jan. 23, 2002]