Temp. Reg. § 53-4958-7T(e)—Relationship of disqualified person and successor organization
The temporary regulations provide that, if the applicable tax-exempt organization that was part of an excess benefit transaction no longer exists at the time of the correction, any necessary payments must be made to an organization described in the dissolution clause of the applicable tax-exempt organization’s governing documents. The temporary regulations prohibit a distributee organization from being "related to" the disqualified person.
We believe the "related to" standard is insufficiently precise. Many tax-exempt organizations have dissolution clauses that permit the distribution of their assets upon dissolution to any organization then classified as a section 501(c)(3) organization. It is not clear that, for example, a private foundation controlled by a corporation in which the disqualified person is a shareholder would meet the "related to" standard. Similarly, it is not clear that a public charity establishing a donor-advised fund with the proceeds of the correction amount would be classified as "related to" the disqualified person.
The temporary regulations should be modified in two respects. First of all, the regulations should clarify that for purposes of the correction, an organization will not be treated as "related to" the disqualified person if the organization is described in section 170(b)(1)(A)(vi) and if the disqualified person (or any person who is a disqualified person by virtue of a relationship to the disqualified person making the correction) has no authority to make or recommend grants by the organization receiving the correction payment.
If the recipient organization does not meet this safe harbor standard, the regulations should provide that, in situations where the tax-exempt organization has ceased to exist, the organization receiving the correction payment must be selected with the consent of an appropriate state official, such as a state Attorney General, with supervisory power over the dissolved tax-exempt organization, or by a court of competent jurisdiction. The participation of such an official or a court will prevent abuse by the disqualified person and also assure that any state law standards on the distribution of assets of the dissolved tax-exempt organization are satisfied.
