Proposed Excess Compensation Regs Issued

• Published date: 01 August 2020
• Date: 01 August 2020
• DOI: http://doi.org/10.1002/npc.30748

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

PROPOSED EXCESS

COMPENSATION REGS

ISSUED

The Department of the Treasury and the IRS, on June 5, published pro-

posed regulations in amplification of the law (IRC § 4960) imposing an excise tax

on most types of tax-exempt organizations in connection with payment of remu-

neration of employees in excess of $1 million and excess parachute payments by

these organizations (REG-122345-18).

Background

This body of law is summarized in the February 2018 issue. Essentially, the rule

is that an applicable tax-exempt organization that, for a tax year, pays to a covered

employee remuneration in excess of $1 million or any excess parachute payment is

subject to an excise tax (currently, 21 percent) on the excess amount of the remu-

neration, plus excess parachute payments, paid during that year (IRC § 4960(a)).

The statute defines most of these terms. The proposed regulations (and the

accompanying preamble) amplify these definitions, provide a host of rules and

exceptions, and address calculation, reporting, and payment of the tax.

Perspectives

Most tax-exempt organizations (and related nonexempt organizations) are

unaffected by this law simply because they do not pay any employees remunera-

tion at the level that triggers the tax. That is, there is no excess remuneration (IRC

§ 4960(a)(1)) if an exempt organization (and any related organization) does not

pay more than $1 million of remuneration to any employee for a tax year, and

there cannot be an excess parachute payment (IRC § 4960(a)(2)) if the employer

does not have any highly compensated employees (for 2020, individuals earning

more than $130,000) for the year.

The government estimates that these proposed regulations will affect about

261,000 exempt organizations and 77,000 nonexempt related organizations.

As to these exempt entities, 239,000 are conventional (IRC § 501(a)) exempt

organizations (including 23,000 private foundations), 19,000 are state and local

entities that have income excluded from taxation (IRC § 115), 2,000 are political

organizations (IRC § 527), 600 are farmers’ cooperatives (IRC § 521), and 200 are

federal instrumentalities (IRC § 501(c)(1)).

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DOI:10.1002/npc

Analysis of current developments in tax

and related law for nonprofit organiza-

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Volume 37 Number 8

August 2020

Also in This issue...

Final Regulations Updating EO

Reporting Requirements Issued 4

Golf Course Easement Decision

Reversed 5

Tax Court (Again) Finds

Defective Easement Deed

Extinguishment Clause 5

Tax Court Holds Easement

Regulation Valid 5

Commerciality Doctrine Derails

Illegal Drug Mitigation Efforts 6

Additional Filing Deadline

Extensions 6

Other Conservation Easement

Litigation 6

IRS Needs More Time for

Taxpayer First Act Reports 7

Other Recent IRS Private Letter

Rulings 7

Other Developments 8