1 Who Is Personally Liable?
Under IRS regulations (26 CFR Section 53.4958-3), certain individuals are classified as "disqualified persons" based on their ability to exercise substantial influence over a nonprofit organization.
This determination is based on function, not title. The IRS looks at what you actually do, not what your business card says.
Critical: If you hold any position of influence over a 501(c)(3) nonprofit and participate in an "excess benefit transaction," you are personally liable for excise taxes that can exceed $30 million. This liability attaches to you as an individual, not to any company.
-
Chief Executive Officer (CEO)
Anyone serving as the principal executive officer, regardless of actual title. If you run the organization day-to-day, you are presumed to have substantial influence.
-
Board Directors
Current and former voting members of the board. The "lookback period" extends 5 years, so former directors who recently departed remain disqualified persons.
-
Chief Financial Officer (CFO) or Equivalent
Anyone responsible for managing the organization's financial assets: CFO, Treasurer, Director of Finance and Operations, Controller, or anyone with check-signing authority and financial oversight.
-
Other Key Decision-Makers
Anyone who controls or manages a "discrete segment" of the organization's activities, or anyone who, based on facts and circumstances, has substantial influence over the nonprofit's affairs.
In the Bootstrap context: This includes the conflicted CEO, recently removed conflicted directors, anyone serving in a CFO/financial oversight role, and potentially other NewCo principals who benefit from any transaction.
2 What "Joint and Several" Means
When liability is "joint and several," it means the IRS can collect the entire debt from any one person, or split it however they choose among all liable parties.
Plain English Explanation
Imagine three people owe $30 million together. "Joint and several" means:
- The IRS can demand the full $30 million from Person A alone
- Or the full $30 million from Person B alone
- Or any combination: $15M from A, $10M from B, $5M from C
- The IRS picks whoever is easiest to collect from
If the IRS collects the full amount from you, it's your problem to go after the others for their share. The IRS doesn't care about fairness between liable parties - they just want their money.
Real-World Scenario
Three principals (CEO, former director, and financial officer) are jointly and severally liable for $30.375 million.
The CEO has significant liquid assets. The IRS garnishes the CEO's accounts and seizes property to collect the full $30.375 million.
The CEO can then sue the other two for their "fair share" - but if they're judgment-proof or in bankruptcy, the CEO is stuck with the entire bill.
This is why joint and several liability is so dangerous: your exposure isn't limited to "your share."
3 Calculate Your Personal Exposure
This calculator estimates the potential excise tax liability under IRC Section 4958 for an excess benefit transaction. Adjust the sliders to see how different scenarios affect personal liability.
Excess Benefit Tax Calculator
Default Scenario
The calculator loads with values approximating the proposed transaction:
- 3x revenue multiple: A conservative valuation for a software business with $5M annual run-rate revenue, implying a $15M fair market value
- $1.5M total price: The proposed payment amount for the assets
- 9 years: Payment spread over this period significantly reduces the net present value
- 10% discount rate: Standard rate for private company transactions, reflecting the time value of money and risk
At these defaults, the NPV of payments (~$863K) falls far short of fair market value ($15M), creating a substantial excess benefit and corresponding tax liability.
Remember: This liability is joint and several. The IRS can collect the entire amount from any single disqualified person. Each principal (CEO, former directors, financial officers) faces this full exposure individually.