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Business Tax

IRS Releases Final REGs on Exempt-Organization Executive Compensation

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The IRS has released final regs under Code Sec. 4960, which imposes an excise tax on compensation in excess of $1,000,000, and any excess parachute payment, paid by an applicable tax-exempt organization to a covered executive (“excessive executive compensation”). The final regs adopt the proposed regulations as modified.

Background.

Under Code Sec. 4960(a), an “applicable tax-exempt organization (ATEO)” must pay a 21% excise tax on

  1. Remuneration in excess of $1 million paid to a “covered employee” (“excess remuneration”) plus
  2. Any “excess parachute payment” paid to a covered employee during the tax year.

An ATEO is any organization that is exempt from taxation under Code Sec. 501(a), is a farmers’ cooperative organization under Code Sec. 521(b)(1), has income excluded from taxation under Code Sec. 115(1), or is a political organization described in Code Sec. 527(e)(1). (Code Sec. 4960(c)(1))

Generally, a parachute payment is any payment in the nature of compensation to (or for the benefit of) a covered employee if the payment is contingent on the employee’s separation from employment with the employer and the aggregate present value of the payment equals or exceeds 3 times the “base amount.” (Code Sec. 4960(c)(5)(B))

An excess parachute payment generally is an amount equal to the excess of any parachute payment over the portion of the “base amount” allocated to such payment. (Code Sec. 4960(c)(5)(A)) The base amount is an individual’s annualized compensation over the “base period,” which is the individual’s last five tax years. (Code Sec. 4960(c)(5)(D))

In Notice 2019-9, 2019-4 IRB 403, the IRS provided initial guidance on the application of Code Sec. 4960. See IRS issues interim guidance on excess remuneration paid by exempt orgs (01/03/2019).

In June 2020, the IRS released proposed regs that provided comprehensive guidance on the application of Code Sec. 4960 to excessive compensation paid to tax-exempt organization executives. (Preamble to Prop Reg REG-122345-18) See Proposed regs on excise tax on excess tax-exempt organization compensation (06/09/2020).

The guidance in the proposed regs generally was consistent with the guidance provided in Notice 2019-9. However, the IRS made certain modifications in response to comments it received after Notice 2019-9 was published. The proposed regs also differ from the guidance provided in Notice 2019-9 regarding the calculation of, and liability for, the tax on excess parachute payments.

Final regs.

The final regs adopt the proposed regs under Code Sec. 4960 with modifications in response to comments made to the proposed regs.

Checkpoint will provide additional information about these final regs in a future Federal Tax Update.

To continue your search on the Code Sec. 4960 excise tax on tax-exempt organizations that pay excess compensation, see FTC 2d/FIN ¶D-4115 et seq.

 

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