Written by Daniel Crespo

On June 5, 2020 the IRS issued a 177-page proposal intended to provide comprehensive guidance on I.R.C. § 4960 which currently imposes an excise tax of 21 percent on certain tax-exempt organizations on remuneration paid to a “Covered Employee” that either exceeds $1 million in a year, or amounts to an excess parachute payment.[1]

The proposal is largely based on IRS Notice 2019-09[2] and is intended to clarify and codify certain defined terms, in addition to providing rules to guide determinations of:

The amount of remuneration paid for a tax year, including for purposes of identifying Covered Employees.[3]

Whether and in what amount excess remuneration was paid by the organization.[4]

Whether and in what amount excess parachute payment(s) were made.[5]

How liability for payment of the excise tax shall be allocated among any related organizations.[6]

The proposed regulation is expected to codify and clarify certain issues which some have questioned. For example, whether volunteers who are employees of a related taxable organization can trigger the excise tax.[7]

The new regulation is proposed to apply to tax years beginning after the Federal Register publication date (expected June 11, 2020).

With the notice and comment period expected to remain open until mid-August 2020, Lawrence Associates will be following these developments closely and reporting on any notable changes or comments being considered. A full update will be issued once the final rule is adopted.

[1]  Dept. of Treas., Internal Revenue Service, Tax on Excess Tax-Exempt Executive Compensation, 26 C.F.R. Parts 15 and 26 (2020), Treas. Reg. 122345-18, available at: federalregister.gov/d/2020-11859

[2] Internal Revenue Service, Interim Guidance Under Section 4960, IRS Notice 2019-09, Dec. 31, 2018, available at: https://www.irs.gov/pub/irs-drop/n-19-09.pdf

[3] See, Treas. Reg. 122355-18 (2020), Fed. Reg. Doc. No. 2020-11859, at pp. 10-13, available at: federalregister.gov/d/2020-11859

[4] Id. at pp. 39-56.

[5] Id. at pp. 56-69.

[6] Id. at pp. 69-76.

[7] See e.g., Client Alert, May 15 Deadline Approaching for New Excise Tax Triggered Even When Tax-Exempt Organizations Pay No Compensation, Pepper Hamilton, Apr. 30, 2019, available at: https://www.pepperlaw.com/publications/may-15-deadline-approaching-for-new-excise-tax-triggered-even-when-tax-exempt-organizations-pay-no-compensation-2019-04-30/