IRS letter ruling - Employed physician not a disqualified person 

September 10: The IRS ruled that an employed physician was not a disqualified person, and thus, payments made to him did not constitute excess benefit transactions under the intermediate sanctions rules. PLR 201336020 (release date September 6, 2013; and dated June 13, 2013)

Read the letter ruling: PLR 201336020 [PDF 735 KB]


A section 501(c)(3) tax-exempt healthcare organization employed a full-time physician pursuant to a 36-month contract.

The physician’s principal duty was to provide medical services to the organization’s patients, while the organization provided necessary managerial and administrative services. The physician was paid pursuant to an arrangement that included minimum compensation, productivity payments, and additional payments for call coverage.

The physician demonstrated extremely high productivity during his initial term of employment, but failed to fulfill his contract when he did not return from an extended leave of absence and was subsequently fired for cause. Prior to the termination, the organization believed that the physician would return to work and continued to pay him, based on prior year compensation, resulting in compensation that was in excess of the amount he was entitled to receive based on the services actually provided. The organization was unable to recover the excess amounts paid.

Section 4958 provisions

Section 4958, through the imposition of an excise tax, generally prohibits a section 501(c)(3) public charity from providing a disqualified person with an economic benefit that exceeds the fair market value of the consideration the organization receives in return.

Transactions that implicate the intermediate sanctions rules of section 4958 may also threaten the tax-exempt status of the organization participating in the excess benefit transaction.

IRS letter ruling

The IRS ruled that, under the facts, the physician was not a disqualified person with respect to the organization within the meaning of section 4958(f)(1). Therefore, the excess benefit transaction rules of section 4958 did not apply.

Accordingly, the IRS did not address the issue of whether or not the organization took sufficient corrective actions to prevent the payments from adversely affecting the organization’s tax exempt status under section 501(c)(3). See Reg. section 1.501(c)(3)-1(f), which was not cited in the ruling.

For more information, contact:

Rick Speizman, Partner-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group

+1 (202) 533-3084

©2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

Share this

Share this


Current and future KPMG clients may subscribe to TaxNewsFlash email alerts.

Email your contact information.

TaxNewsFlash-Exempt Organizations by year