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Publication 557

Chapter 5
Excise Taxes(p59)


An excise tax may be imposed on certain tax-exempt organizations.


Useful items

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Forms (and Instructions)
 4720: Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code
See chapter 6 for more information about getting Form 4720.

Prohibited Tax Shelter Transactions(p59)

Section 4965 imposes an excise tax on:
Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction.

Tax-exempt entities.(p59)

Tax-exempt entities that are subject to section 4965 include:
  1. Entities described in section 501(c), including but not limited to the following common types of entities:
    1.  Instrumentalities of the United States described in section 501(c)(1);
    2.  Churches, hospitals, museums, schools, scientific research organizations, and other charities described in section 501(c)(3);
    3.  Civic leagues, social welfare organizations, and local associations of employees described in section 501(c)(4);
    4.  Labor, agricultural, or horticultural organizations described in section 501(c)(5);
    5.  Business leagues, chambers of commerce, trade associations, and other organizations described in section 501(c)(6);
    6.  Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9);
    7.  Credit unions described in section 501(c)(14);
    8.  Insurance companies described in section 501(c)(15); and
    9.   Veterans' organizations described in section 501(c)(19).
  2. Religious or apostolic associations or corporations described in section 501(d).
  3. Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States).
  4. Indian tribal governments within the meaning of section 7701(a)(40).

Entity manager.(p59)

An entity manager is any person with authority or responsibility similar to that exercised by an officer, director, or trustee, and, for any act, the person that has authority or responsibility with respect to the prohibited transaction.

Prohibited tax shelter transaction.(p59)

A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1.6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1.6011-4(b)(4). See the Instructions for Form 8886-T for more information on listed transactions and prohibited reportable transactions.

Subsequently listed transaction.(p59)

Any transaction to which the tax-exempt entity is a party and is later determined to be a listed transaction after the entity has become a party to it, is a subsequently listed transaction.

Entity Level Tax(p59)

Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction.
To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720.
For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720.

Manager Level Tax(p60)

Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. To report this tax, file Form 4720.