Proposed Regulations under Section 4960 of the Internal Revenue Code provide important guidance for tax-exempt organizations and their affiliates regarding an excise tax on certain executive compensation. The U.S. Department of the Treasury (“Treasury”) and Internal Revenue Service (the “IRS”) are accepting comments until August 10, 2020. (Throughout this post, “Sections” refer to sections of the Internal Revenue Code.)
As a refresher, Section 4960 was enacted as part of the 2017 Tax Cuts and Jobs Act (the “TCJA”). Effective for taxable years beginning after December 31, 2017, Section 4960 imposes an excise tax at the corporate tax rate (currently at 21%) on certain remuneration in excess of $1 million and on certain separation pay (“excess parachute payments”). The excise tax falls on “applicable tax-exempt entities” (“ATEOs”) and related organizations. It is intended to have the same economic effect as a for-profit corporation losing a tax deduction.
The Proposed Regulations are generally consistent with the IRS’s interim guidance under Notice 2019-09 (the “Notice”), which is discussed here and here. But the Proposed Regulations elaborate on certain points and include some helpful changes in response to comments.
If finalized, the Proposed Regulations will apply for tax years beginning on or after the final regulations are published in the Federal Register. Until then, tax-exempt organizations may apply a “reasonable, good faith” interpretation of the statute. For this purpose, tax-exempt organizations may rely on the Proposed Regulations or the Notice. Although the Proposed Regulations are not binding, they include a list of positions that the IRS considers to be an unreasonable interpretation of the statute.