A disqualified person is any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during the lookback period.
The lookback period is the five-year period before the excess benefit transaction occurred. The lookback period is used to determine whether an organization is an applicable tax-exempt organization.
If the excess benefit transaction occurred before September 14, 2000, the lookback period begins on September 14, 1995, the effective date of section 4958, and ends on the date the excess benefit transaction occurred.
It is not necessary that the person actually exercise substantial influence, only that the person be in a position to do so.
Substantial Influence Defined
A person who holds any of the following powers, responsibilities, or interests is considered to be in a position to exercise substantial influence over the affairs of the organization, regardless of title:
A voting member of the governing body
A person who 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 has ultimate responsibility for managing the finances of the organization
If ultimate responsibility resides with two or more individuals who may exercise this responsibility together or individually, then each individual is in a position to exercise substantial influence.
Certain persons are considered as not being in a position to exercise substantial influence over the affairs of an applicable tax-exempt organization, such as
Section 501(c)(3) organizations
Section 501(c)(4) organizations with respect to transactions engaged in with other section 501(c)(4) organizations
Employees of an applicable tax-exempt organization who meet the definition of a highly compensated employee under Code section 414(q)(1)(B)(i), but who are not a disqualified person or a substantial contributor to the organization
Any other person may or may not be a disqualified person depending on all the relevant facts and circumstances. Facts and circumstances that tend to show a person has substantial influence over the affairs of an applicable tax-exempt organization include:
The person founded the organization
The person is a substantial contributor to the organization
The person’s compensation is based primarily on revenues derived from organization activities the person controls
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
The person manages a discrete segment or activity of the organization that represents a substantial portion of its activities, assets, income, or expenses
The person owns a controlling interest in a corporation, partnership, or trust that is a disqualified person
The person is a non-stock organization controlled directly or indirectly by one or more disqualified persons
Facts and circumstances that tend to show a person does not have substantial influence over the affairs of an applicable tax-exempt organization include:
The person has taken a bona fide vow of poverty as an employee, agent, or on behalf of a religious organization
The person is an independent contractor whose sole relationship to the organization is providing professional advice and the person has no decision making authority and will derive no direct or indirect benefit from the transaction except for the customary fees for professional advice
The direct supervisor of the person is not a disqualified person
The person does not participate in any management decisions affecting the organization as a whole or affecting a discrete segment of the organization that represents a substantial portion of its activities, assets, income, or expenses of the organization, as compared to the organization as a whole.
Any preferential treatment a person receives based on the size of the person’s donation is also offered to all other donors making comparable contributions and offered as a part of a solicitation intended to attract a substantial number of contributions
Where there are affiliated organizations, the determination of whether a person has substantial influence is made separately for each organization.
For this purpose, donors and donor advisors with respect to a donor advised fund are treated as disqualified persons with respect to transactions with the fund. Moreover, the entire amount involved paid to such persons is treated as an excess benefit. Finally, a person who is able to exercise substantial influence over a section 509(a)(3) supporting organization is a disqualified person not only with respect to that organization, but also with respect to the organization(s) the supporting organization is organized and operated to benefit.
Family members of the disqualified person and entities controlled by the disqualified person are also disqualified persons. For this purpose, the term control is defined as owning more than 35 percent of the voting power of a corporation, more than 35 percent of the profits interest in a partnership, or more than 35 percent of the beneficial interest in a trust.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.