AMERICAN COLLEGE OF OBSTETRICIANS AND GYNECOLOGISTS
Internal Revenue Code Section 4958
National, District and Section Officers
Questions and Answers
Current Update as of July 23, 2007*
Preamble: This document describes, in question-and-answer format, information related to compliance by the American College of Obstetricians and Gynecologists (ACOG) with high-profile tax rules, Internal Revenue Code Section 4958 and its interpreting regulations known as intermediate sanctions. ACOG is a nonprofit public charity, 501(c)(3), and such entities are receiving unprecedented attention from Congress, the IRS, and the media with regard to their eligibility for tax-exempt status. In addition to intermediate sanctions, a 501(c)(3) organization must abide by many other IRS requirements. A 501(c)(3) organization also must ensure that its earnings do not inure to the benefit of any individual (private inurement), and it must not operate for the benefit of private interests such as the interests of those individuals who exercise control over the organization.
In order to be in full compliance with all the tax laws, ACOG has implemented appropriate practices and procedures not only to ensure such compliance but also to minimize even the appearance of violating any rules. Violation of these rules can result in monetary penalties and can potentially jeopardize ACOG’s tax-exempt status. Answers to the following questions about the important section of tax law involving intermediate sanctions are noted:
• What is Internal Revenue Code Section 4958?
• Who is affected by intermediate sanctions?
• Do intermediate sanctions apply to districts and sections of ACOG as well as national?
• Why are the rules called intermediate sanctions?
• Why is the IRS emphasizing and increasing enforcement now?
• Why is ACOG responding now?
• To whom does this apply in ACOG?
• Who are the individuals at ACOG affected?
• What are the penalties?
• What defense is available?
• What is compensation?
• Why are the rules for intermediate sanctions so confusing?
• Are activities such as cocktail parties affected?
• Can I get a grant from industry to host a dinner with guests?
• I am attending an ACOG meeting; can my spouse, children, or guest attend events and functions?
• How do the rules for intermediate sanctions affect my spouse?
*The updated question and answer has the new date in italics in parentheses.
• Can ACOG charge a guest fee for a meeting?
• Can ACOG pay for personal expenses at meetings?
• Is there a specific length of meetings?
• Can we have a suite for our district chair?
• Can we have amenities in the room of our district or section chair?
• Where can we hold meetings?
• Can a district or section hold a meeting on a cruise ship?
• Can we have site visits for annual district meetings and interim district meetings?
(July 23, 2007)
• Do these new rules affect travel to meetings?
• May ACOG pay the expenses of an invited speaker and/or the speaker’s spouse or guest at an ACOG district or section meeting?
• May districts waive the annual district meeting (ADM) registration fee for district advisory council members as a business expense?
• Is there standard practice on how many days district officers may be reimbursed for travel expenses to attend the Annual Clinical Meeting (ACM)?
• Can the College obtain a “directors and officers insurance policy” to cover the intermediate sanctions monetary penalties that apply to individual district and section officers?
• Can Junior Fellow officers be reimbursed for business-related travel to the ACM and, if so, for how many days?
• What are my options if I plan to take a vacation following my ACOG meeting?
• Can ACOG reimburse hotel expenses for an individual on ACOG business if the hotel charges a different rate for double occupancy versus single occupancy and the individual’s spouse or guest is staying in the room?
• What are the implications for the future?
• Whom do I contact if I have a question?
What is Internal Revenue Code Section 4958?
In 1996, the Congress of the United States passed Public Law 104-168. This law was designed to curb abuses of 501(c)(3) and 501(c)(4) tax-exempt organizations. These concerns are based on reports of tax-exempt funds being utilized unfairly to benefit the individuals in leadership positions in those organizations.
Subsequent to the passage of the law, the IRS began developing the regulations for implementation. These regulations were first published for comment in 1998. Following the comments and revisions, final regulations were published in 2002.
In 2003, the IRS issued further instructions regarding “automatic violations.” This action implies that the IRS is focusing on specific rules that were drafted in such a way that someone’s intent to violate the rules is not considered important. Therefore, even an inadvertent violation of the rules can result in severe penalties.
Who is affected by intermediate sanctions?
The law applies to organizations that are granted tax-exempt status under Sections 501(c)(3) and 501(c)(4) of the Internal Revenue Code. The sanctions are a series of monetary penalties that apply to individuals who violate the rules. Liability to pay the penalties attaches to the person, not the organization. However, violations can also result in loss of tax-exempt status of the organization.
Do intermediate sanctions apply to districts and sections of ACOG as well as national?
ACOG is one corporation and thus all districts and sections are considered to be ACOG. As a result, all districts and sections and their officers must be in compliance with these regulations.
Why are the rules called intermediate sanctions?
Prior to the enactment of the intermediate sanctions rules, the penalties for violation of the use of tax-exempt funds were criminal charges or a loss of tax-exempt status or both. Criminal prosecution is difficult and loss of tax-exempt status was considered unfair to the recipients of the organization’s charitable works. As a result, an intermediate punishment or, as it is now known, intermediate sanctions was established.
Why is the IRS emphasizing and increasing enforcement now?
Congress continues to hold hearings regarding what it perceives as widespread abuse of tax-exempt funds by nonprofit organizations. Congress in turn holds the IRS responsible for enforcement of the tax rules applicable to tax-exempt charitable organizations and has directed the IRS to step up enforcement in this area. The IRS is responding with new programs and additional agents directed at uncovering intermediate sanction violations. In addition, two new IRS units have been created to help detect violations of the intermediate sanctions rules.
Why is ACOG responding now?
ACOG first responded to intermediate sanctions in 1998. Since that time, ACOG has continued to adjust its activities in response to intermediate sanctions, particularly with regard to the 2002 final regulations and additional IRS guidance in 2003. In April 2004, ACOG’s auditors made a presentation to the Finance Committee about the new emphasis on intermediate sanctions. This information was presented to the Executive Board in May. Although the ACOG Board felt that the College was in compliance, the Board authorized hiring consultants to review ACOG activities with respect to intermediate sanctions. The tax division of the auditing firm of Grant Thornton was hired and performed an in-depth review of ACOG activities and economic benefits received by members and individuals associated with ACOG. The results of their review were reported to the Board in July 2004. They found a few areas where documentation of
compliance with intermediate sanctions was lacking. They also recommended that an educational program be established to inform all potentially affected individuals of their responsibilities with regard to these rules. This document is part of that education program.
To whom does this apply in ACOG?
The regulations specifically refer to individuals who are in a position to exercise substantial influence over the organization and thus may be in a position to benefit unfairly because of their position. The specific individuals will vary from organization to organization so each 501(c)(3) organization must review its personnel and establish those in positions of authority and thus fall within the intent of the regulations. ACOG has done so.
Who are the individuals at ACOG affected?
The term the IRS has assigned to persons who could unfairly benefit from their position in ACOG is “disqualified person.” This term is used rather than a title and is all-inclusive. ACOG’s Executive Board reviewed all of our officers, committees, etc., and established the following list of “disqualified persons.” The positions are:
• Voting members of the ACOG Executive Board
• District officers, all voting members of the District Advisory Council and program chairs
• Section officers, all voting members of the Section Advisory Council and program chairs
• ACOG Executive Vice President and vice presidents
• ACOG high-level staff to include: Editor of Obstetrics and Gynecology, Director of Women’s Health Issues, chief administrative officers of Districts II and IX
• Any individual who has served in a position as a disqualified person within the past 5 years
By law, the person remains “disqualified” for 5 years after he or she leaves the position. Furthermore, their spouse, children, spouses of children, grandchildren, other family members and lineal descendents are defined by the law as “disqualified” and all may be subject to the monetary penalties that comprise the sanctions. The intermediate sanction rules also designate others who may have “substantial influence” on decisions as a “disqualified person” even if they are nonvoting or do not hold an official position. Such individuals may be “disqualified persons” under a catchall “by facts and circumstances” category. This category emphasizes the all-inclusive nature of the regulations.
What are the penalties?
The penalties for violating the rules apply to the person or persons who unfairly benefited and extends to the party who approves the excess benefit. The
individual who receives the excess benefit must return the excess money or value plus 25% interest before the IRS issues a statutory notice of deficiency. If there is a delay in refunding the excess money or value, the penalty can increase to a maximum of 200%. The approving party(ies) are subject to a sanction equal to 10% of the excess benefit per transaction up to a limit of $10,000. The organization is also required to publish notice of the violation on its public 990 form. It should be noted that inaction, abstaining, or silence on the part of the approving party at the time of the approval of the transaction is considered evidence of approval.
What defense is available?
Even a mistake can trigger sanctions. Lack of intent, what other organizations do, or the otherwise positive work of the organization cannot be used to justify the transaction. The best defense is to avoid any excess benefit arising from relationships with ACOG. A “safe harbor” may be available if preexisting documentation indicates that the Board or a delegate of the Board authorized the compensation or the economic benefit before it occurred and that the compensation or economic benefit is fair in relation to what ACOG received in return. This is referred to as the “rebuttable presumption of reasonableness.” In addition, if a payment or benefit is intended to be compensation to the individual, the organization must “clearly establish” its intent to treat the benefit as compensation in exchange for services rendered. Some ways to clearly establish the intent to compensate include reporting the benefit on Form W-2, Form 1099, or the organization’s Form 990. In essence, most any form of compensation or economic benefit paid for by ACOG must be reported to the IRS.
What is compensation?
The IRS defines compensation as any activity or item that has a value. Examples include salaries, honoraria, tours, meals, lodging, clothing, cell phones, computers, travel or automobiles. The concept is all-inclusive and designed to prevent any “disqualified person” from benefiting unfairly because of his or her position. There is no limit to the amount that is considered inconsequential or immaterial. Our consultants are aware of IRS investigations for what appear to be small amounts. ACOG’s Executive Board has created an independent Compensation Committee to establish appropriate compensation levels.
Why are the rules for intermediate sanctions so confusing?
The rules are very complex and full of technicalities. They can and will trap individuals who are unaware of the regulations or attempt to ignore their requirements. The rules cast a very large net for inclusion, embracing both the persons who are subject to the regulations and the items that are classified as compensation.
Are activities such as cocktail parties affected?
ACOG can only fund cocktail parties that have a specific and valid business purpose. Parties for the purpose of social exchange cannot use ACOG tax-exempt funds. Receptions in suites or other rooms can only be held if there is an identified and valid business purpose. Prior to meals a cash bar may be used if non-ACOG members are in attendance or there is no valid business purpose for the meeting, as this will avoid use of ACOG funds for non-business purposes. ACOG cannot fund cocktails or hors d’oeuvres for guests, spouses, or children even if there is otherwise a business purpose for an event that provides such refreshments.
Can I get a grant from industry to host a dinner with guests?
By regulation, any funds that ACOG (including districts and sections) receives, regardless of the source or the intention, such as a grant from industry to sponsor an ACOG event are considered tax-exempt funds and can only be used for events with a business purpose as defined by the Internal Revenue Code and other federal tax authorities. Situations in which a company offers to fund a dinner with guests must first be cleared with either ACOG legal counsel or the Executive Vice President.
I am attending an ACOG meeting; can my spouse, children, or guest attend events and functions?
A spouse, children, or guest can only attend events for which they pay the cost of the event. This includes receptions, meals, tours, presentations or any other activity where ACOG funds are being used. If an overnight stay is included and there is a different room rate for single and double occupancy, then only the single room rate can be reimbursed by ACOG if a spouse, children, or guest are present. Meeting planners should try to negotiate one rate for hotel rooms that is identical for single or double occupancy.
How do the rules for intermediate sanctions affect my spouse?
For many years, ACOG has had a policy that prohibits the use of ACOG funds for spouses who are not ACOG members. The intermediate sanction rules also provide that spouses, children, spouses of children, grandchildren, other family members and lineal descendents of disqualified persons are defined by the law as “disqualified” and all may be subject to the monetary penalties that comprise the sanctions. ACOG cannot pay travel of spouses for any reason. Members must pay the full cost of spouses’ meals at any event where ACOG is hosting the meal (eg, business meetings, educational meetings, receptions).
Can ACOG charge a guest fee for a meeting?
Yes. In fact, ACOG would encourage a spouse or guest registration fee or a separate charge for an event, which would cover the actual cost of the event or
activities for guests. In most instances, the separate charge will be easier and simpler to use. These fees should be identified in advance.
Can ACOG pay for personal expenses at meetings?
No, ACOG cannot pay for personal expenses. Individual attendees must pay for all personal expenses, such as golf fees, spa charges and social tours.
Is there a specific length of meetings?
ACOG’s Executive Board has established the policy that all ACOG-sponsored educational and other meetings should be a minimum of 5 to 6 hours per day exclusive of breaks and meals. This excludes single speakers such as grand rounds, dinner meetings with speakers, and the first or last day of the meeting.
Can we have a suite for our district chair?
The district chair at the Annual or Interim District Meeting is allowed to have a small suite (eg, a junior suite or similar-sized suite) at ACOG district expense in order to have meetings with district members. The sole purpose of the suite is to allow business with Fellows to be conducted as needed. This will avoid the necessity to pay for a meeting room for their meetings and will allow for confidentiality when needed. Whenever possible, the suite should be included in the hotel contract and without additional cost above the standard room rate.
Can we have amenities in the room of our district or section chair?
No. There can be no amenities such as flowers or stocked bars, paid with ACOG funds. In addition, only regular rooms can be paid by ACOG. If suites are desired, the additional cost is at the expense of the individual (with the aforementioned exception).
Where can we hold meetings?
Special tax rules apply to foreign meetings. ACOG can only schedule meetings in North America as defined by IRS Publication 463 (2005). The current list of countries, which includes Caribbean and Pacific areas as well, can be found on the IRS website. The publication also details the specific factors that apply to meetings outside North America.
Can a district or section hold a meeting on a cruise ship?
Special IRS rules apply to cruise ships. They are very restrictive. Since violations of the cruise ship rules can adversely affect ACOG, cruise ship meetings must comply with the IRS rules. Please consult the IRS website to see the current rules.
Can we have site visits for annual district meetings and interim district meetings?
(July 23, 2007)
Site visits are allowed for annual and interim district meetings following certain guidelines. For all site visits related to annual and interim district meetings, the following applies:
• The site visit shall be limited to two days and two nights plus travel costs at ACOG expense.
• The Internal Revenue Service rules regarding an additional stay or travel must be followed.
• All other travel policies of the district and of ACOG apply.
Additionally, for interim district meetings not held at the Annual Clinical Meeting (where site visits are not allowed), the following guidelines apply:
• An attempt to determine all relevant information first will be made by telephone or use of the Internet or similar media. If obtaining the relevant information in this manner is successful, no site visit will be made.
• If prior ACOG meetings have been held at the same venue, except in unusual circumstances such as major renovations, no site visit will be made.
• If a site visit is necessary, it will be limited to the district chair or his or her designee.
Do these new rules affect travel to meetings?
Travel to meetings is affected only if ACOG funds are used. Executive Board policy provides that ACOG will only reimburse expenses for two travel days for any ACOG meeting. This includes going to and returning from the meeting.
May ACOG pay the expenses of an invited speaker and/or the speaker’s spouse or guest at an ACOG district or section meeting?
ACOG may pay for an invited speaker’s reasonable expenses, including transportation, food and lodging associated with being a speaker at the meeting. ACOG shall not pay for the speaker’s expenses for the spouse or guest, including transportation, food and lodging.
May districts waive the annual district meeting (ADM) registration fee for district advisory council members as a business expense?
Yes, the meeting registration fees for district advisory council members (those members who are required to attend the ADM to conduct the necessary governance functions of the district) may be waived.
Is there standard practice on how many days district officers may be reimbursed for travel expenses to attend the Annual Clinical Meeting (ACM)?
In general, district chairs are reimbursed for seven nights of reasonable expenses, including transportation, food and lodging because district chairs are required to attend two Executive Board meetings–one pre-ACM and one post-ACM. (The national office reimburses these expenses.) They also must chair the district advisory council meetings and participate in other district business activities throughout the ACM. Other voting members of the district advisory council may be reimbursed for no more than two nights only if their interim advisory council meeting occurs at the ACM.
Can the College obtain a “directors and officers insurance policy” to cover the intermediate sanctions monetary penalties that apply to individual district and section officers?
No, the liability to pay the penalties attaches to the individual and may not be reimbursed by the organization or through insurance.
Can Junior Fellow officers be reimbursed for business-related travel to the ACM and, if so, for how may days?
Junior Fellow district chairs will be reimbursed by the national office for reasonable expenses, including the ACM registration fee, transportation, food
and lodging, for up to a maximum of six days based on submitted expenses. The districts agreed to fund Junior Fellow district vice chairs using the same guidelines.
What are my options if I plan to take a vacation following my ACOG meeting?
Vacation or add-on travel is travel either before or after a meeting of the College and is at the sole discretion of the individual traveling. All vacation or add-on travel expenses–additional transportation costs to destinations other than home, food, lodging and incidentals–are the responsibility of the individual traveling. Additionally, the trip must be primarily for business purposes in order for the transportation to be allowed as a business expense. As long as at least 40% of the entire trip is business related and travel is in the United States, no allocation of the transportation costs between business and personal is required. If the purpose of the travel is primarily personal, none of the transportation costs will be reimbursed, even if the individual incorporates a few business appointments while at his or her destination. However, a different set of very complex reimbursement rules apply to travel outside the United States when the trip is business and personal. The IRS definition of the United States includes only the 50 states and the District of Columbia. These reimbursement rules apply even if the travel was to Mexico, Canada, Puerto Rico, Central America or other ACOG geographic regions outside the United States. If any personal travel is contemplated in addition to the business trip, individuals should seek advice from the Finance and Legal Divisions of ACOG prior to scheduling a trip.
Can ACOG reimburse hotel expenses for an individual on ACOG business if the hotel charges a different rate for double occupancy versus single occupancy and the individual’s spouse or guest is staying in the room?
In general, if a hotel charges a different room rate for double versus single occupancy, ACOG will reimburse no more than the single occupancy rate for hotel expenses. The difference between the single occupancy rate and the double occupancy rate is considered personal expense. If the hotel’s room rate is based on a per person, per day rate (i.e., due to a meal plan), ACOG will only reimburse the per person, per day charge based on the applicable occupancy. For example, if an individual on ACOG business stayed at a hotel with her spouse and the double per person, per day rate was $240 a day and the single per person, per day rate was $270, ACOG would only reimburse the double per person, per day rate of $240 for the individual on ACOG business.
What are the implications for the future?
Nonprofit organizations, such as ACOG have entered a new era of inspection and review by the Congress, the IRS, and the media. ACOG volunteers and staff will have to be constantly aware of and adhere to the intermediate sanction rules and other IRS requirements. Although ACOG has been in compliance with the intermediate sanction rules, more effort will be required to ensure appropriate documentation.
Whom do I contact if I have a question?
Contact our CFO or chief legal officer for specific areas of concern. In addition, you may call or e-mail the Executive Vice President. These individuals are:
Richard C. Bailey, CPA, Vice President and Chief Financial Officer
Penny Rutledge, JD, Vice President Legal Affairs and General Counsel
Ralph W. Hale, MD, Executive Vice President
American College of Obstetricians and Gynecologists
409 12th Street, SW
PO Box 96920
Washington, DC 20090-6920