A Look at the Tax for Paying “Excessive” Compensation

• Date: 01 February 2018
• Published date: 01 February 2018
• DOI: http://doi.org/10.1002/npc.30432

Bruce R. Hopkins’ NONPROFIT COUNSEL

February 20188THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

A LOOK AT THE TAX FOR

PAYING “EXCESSIVE”

COMPENSATION

The tax reform legislation brought new IRC § 4960,

which imposes a 21 percent excise tax on an applicable

tax-exempt organization, with the tax base consisting of

the remuneration paid (other than an excess parachute

payment) by the organization for a year with respect

to the employment of a covered employee that is in

excess of $1 million, plus the amount of any excess

parachute payment paid by the organization to a cov-

ered employee.

In this context, an applicable tax-exempt organiza-

tion is a conventional exempt organization (exempt by

reason of IRC § 501(a)), a farmers’ cooperative (IRC §

521), a government entity that has income excluded

from taxation (IRC § 115), and a political organization

(IRC § 527).

A covered employee is an employee of an applicable

tax-exempt organization where the employee is one of

the five highest-compensated employees of the orga-

nization or had that status in the past beginning with

2017. A parachute payment essentially is compensation

that is contingent on the employee’s separation from

employment with the employer.

The statute also defines the term remuneration to

mean wages, including payment from certain deferred

compensation plans (IRC § 457(f)). Remuneration does

not include any designated Roth contribution. Remu-

neration is treated as paid when there is no substantial

risk of forfeiture of the right to the compensation.

During the conference process, an exception was

inserted that exempts from the concept of remunera-

tion the portion of any compensation paid to a licensed

medical practitioner, including a veterinarian, which is

for the performance of medical or veterinarian services

by the professional. This exception does not exempt

the professional from the tax regime; it only exempts

this type of compensation. Thus, for example, a medi-

cal practitioner’s compensation for other ends, such as

administration or research, is remuneration for purposes

of this statute.

Compensation of a covered person by a related per-

son or governmental entity is also taken into account for

these purposes. A person is a related person if it controls

or is controlled by the exempt organization, is controlled

by one or more persons that control the exempt organi-

zation, is a supported organization (IRC § 509(f)(3)) with

respect to the organization, is a supporting organization

(IRC § 509(a)(3)) with respect to the organization, or, in

the case of a voluntary employees’ beneficiary associa-

tion (IRC § 501(c)(9)), is a person who established, main-

tains, or makes contributions to the VEBA. ◆

OTHER DEVELOPMENT

◆The court in the ministers’ rental allowance constitu-

tional law case on December 13 enjoined the govern-

ment from enforcing the statute (IRC § 107(2)), with the

injunction taking effect 180 days after the conclusion of

any appeals (Gaylor v. Mnuchin (W.D. Wis.)). [10.1(a)(ii)]

Quote of the Month: A concurring opinion in the

Parks case (see the article beginning on p. 4) questioned

applicability of the methodology test in the context of

determining whether the funding of communications

amounts to taxable expenditures. It was observed that

the test “was used as a means to determine whether tax-

exempt status should be granted in the first instance, by

surveying the methods used throughout the entire body

of an organization’s communications, not as a means

to identify specific noneducational expenditures for the

purpose of assessing excise taxes.” That statement is

generally accurate (except for the “granting” part). This

opinion concluded with the thought that the methodol-

ogy test “may someday require a closer look,” without

any explanation as to why the concept of educational

might be different in the exemption setting than in the

private foundation taxable expenditures setting. ◆

Each article in the newsletter on a tax-exempt organizations law topic ends with a citation to the appropriate chapter(s) or

subchapter(s) in Hopkins, The Law of Tax-Exempt Organizations, Eleventh Edition (Wiley, 2017 cumulative supplement). This is done

to provide ready access to additional and background information concerning these articles. For example, underlying information

concerning the third article in this issue is available in Chapter 8 § 2 and Chapter 22 § 3(d) of the book; thus, the citation is refer-

enced as [8.2, 22.3(d)]. Likewise, each article in the newsletter on a charitable giving law topic ends with a citation to the appro-

priate chapter(s) or subchapter(s) in Hopkins, The Tax Law of Charitable Giving, Fifth Edition (Wiley, 2017 cumulative supplement).

For example, underlying information concerning the fifth article in this issue is available in Chapter 9 § 7(b) of the book; thus, the

citation is referenced as [9.7(b)].

This newsletter is a stand-alone publication. An inventory of articles in the newsletter since its inception in 1983, and a subject mat-

ter index, as well as an index of the court opinions, IRS revenue rulings and procedures, IRS technical advice memoranda, and IRS

private letter rulings discussed in the newsletter, are available at www.brucerhopkinslaw.com. For those who have the books, the

newsletter also provides monthly updates. Both books are annually supplemented. Questions concerning nonprofit law develop-

ments in general may be sent to brucerhopkins@brucerhopkinslaw.com. Also, a comprehensive summary of nonprofit law is avail-

able in the Bruce R. Hopkins Nonprofit Law Library, an e-book published by Wiley. Follow BRHopkins_NPLaw on Twitter.

The newsletter has a dedicated website. Please visit www.hopkinsnonprofitcounsel.com.