Bureau Of National Affairs



Thursday, April 25, 2002

ISSN 1523-5718



Tax Administration


IRS Seeks Comment on Expansion Of Prohibited Transaction Safe Harbors


The Internal Revenue Service asked April 23 for public comment on whether "advice of counsel" safe harbors in several foundation and exempt organization excise tax regulations should be expanded to conform with recent rules issued under tax code Section 4958.


IRS explained in Announcement 2002-47 that excess benefit transaction regulations (T.D. 8978) issued under Section 4958 in January retained the standard for penalizing a manager who "knowingly" participates in such a transaction, but provided a safe harbor if the manager relies on a written opinion by an appropriate professional (29 BPR 342, 1/29/02).


Under the rules, legal counsel, accountants and accounting firms, and qualified appraisers are considered appropriate professionals with respect to various aspects of a transaction, IRS said.


IRS said other code sections impose excise taxes on foundation and exempt organization managers who knowingly participate in prohibited transactions, including:


Section 4941 regarding private foundation self-dealing,


Section 4944 on investments that jeopardize foundations' exempt purposes,


Section 4945 on taxable expenditures by foundations, and


Section 4955 on political expenditures of Section 501(c)(3) organizations.


Moving Beyond Legal Opinions


The regulations under each section contain a safe harbor for managers who rely on a written legal opinion that a particular transaction is not prohibited and the rules under Section 4944 also provide protection for a manager who relies on the opinion of qualified investment counsel, IRS said.


"The Section 4958 regulation project did not undertake any revisions to the advice of counsel safe harbors in other regulations under chapter 42," IRS said in Announcement 2002-47. Now IRS wants to consider whether the revisions to the Section 4958 rules are appropriate and advisable in the case of any or all of the other excise tax regulations, the announcement said.


IRS said it would also consider comments regarding other areas of the excise tax regulations that may need to be updated.


Announcement 2002-47 is scheduled to appear in Internal Revenue Bulletin 2002-18 dated May 6.


Comments should be sent by Aug. 6 to IRS, CC:ITA:RU, Room 5228, 1111 Constitution Ave. N.W., Washington, D.C. 20224.



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