Charities Group Says Executive Compensation Rules Need Clarity
Charities Group Says Executive Compensation Rules Need Clarity
- Institutional AuthorsAlliance for Charitable Reform
- Code Sections
- Subject Area/Tax Topics
- Industry GroupsNonprofit sector
- Jurisdictions
- Tax Analysts Document Number2019-24012
- Tax Analysts Electronic Citation2019 TNTF 120-312019 EOR 7-56
- Magazine CitationThe Exempt Organization Tax Review, July 2019, p. 10084 Exempt Org. Tax Rev. 100 (2019)
June 18, 2019
Internal Revenue Service
CC:PA:LPD:PR (Notice 2019-09), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044]
Re: Notice 2019-09
Dear Sir/Madam:
Thank you for the opportunity to provide comments regarding the implementation of section 4960 tax on excess tax-exempt organization executive compensation and the helpful guidance provided under Notice 2019-09 (the “Notice”).
We write on behalf of our clients who are concerned that the interim rules set forth in the Notice create ambiguity regarding the scope of the tax with respect to compensation paid by entities related to applicable tax exempt organizations (“ATEOs”) and its potential application to highly compensated employees of for-profit companies, such as employees of family businesses who volunteer their, or provide minimal, time and services in furtherance of the tax-exempt entity's mission and activities.
Here's how we understand the tax would be applied:
Lucy is the president of Lucy, LLC, which helps to fund Lucy Family Foundation. Lucy is also the president of the foundation (and receives token compensation). The Treasury guidance under Notice 2019-09 would levy the 21 percent tax on her combined salary if over $1 million. And the foundation and Lucy, LLC, would owe a pro-rata share of the tax.
If Treasury and the IRS do not resolve this ambiguity favorably, and soon, the nonprofit sector will suffer a major setback. The risk that for-profit companies will be responsible for the tax simply because their highly skilled, highly compensated employees volunteer, or provide minimal time, with a related ATEO will lead many companies to prevent these individuals from providing any services to related ATEOs whatsoever. Family foundations and corporate foundations affiliated with successful entrepreneurs and business executives are likely to be the first to suffer the consequences of this brain drain. Additionally, the penalty on being charitable creates a disincentive to start a foundation in the first place, or to fund them while the donor is alive and affiliated with his business. That disincentive consequently hurts many of the charities these foundations would have funded, creating a ripple effect in the entire sector. Over time, an increasing number of nonprofits will lose these vital services as inflation erodes the compensation threshold triggering the tax. This stifling effect and its impact on civil society is particularly acute give that once an individual is a “covered employee” of an ATEO and therefore subject to the tax under Section 4960, that person remains a “covered employee” and subject to the tax even if he or she no longer provides any services to the ATEO. For example, assume the founder of a company provides significant services to a family foundation that is related to the company during one year in order to establish the family foundation's investment strategy and as such becomes a “covered employee” with respect to the foundation. The founder's remuneration paid by the company would be taxable under Section 4960 in all future years, even if the founder no longer renders services to the family foundation.
Future regulatory guidance interpreting Section 4960 should not discourage highly skilled workers from actively engaging with civil society organizations because of the possible application of Section 4960. Rather, the regulations should encourage the provision of quality services to tax-exempt entities.
In order to prevent a brain drain from civil society, we recommend the IRS consider the following approaches when issuing proposed regulations:
1. Consider only remuneration paid in consideration of services provided to the ATEO in determining whether an individual is a “covered employee” for purposes of Section 4960 and, relatedly, clarify that a tax-exempt entity with only volunteer service provides may have no “covered employees” for its taxable year.
2. Consider providing a bright-line rule such that if only a minimal portion of an individual's time is spent providing services to the ATEO, the individual will not be considered under any circumstances a “covered employee” of the ATEO.
3. Provide that if an individual no longer provides any services to the ATEO, the individual will cease being considered a “covered employee” for any subsequent taxable year. This would allow an individual to provide significant services to an ATEO for a limited period of time and thus become a “covered employee” without having to factor in the future application of Section 4960 for all subsequent years that the individual receives compensation as part of the cost-benefit in determining whether to provide such services to the ATEO.
We believe these are straightforward, practical, and administrable solutions to the above issue that are grounded in the tax policy and incentivize the provision of services by highly-skilled individuals to civil society.
We hope that these comments are helpful to you as you formulate proposed regulations under Section 4960. We would be happy to speak with you or provide further clarification or input on the information discussed above. Thank you for your consideration.
Sincerely,
Sandra Swirski
Executive Director
Alliance for Charitable Reform
- Institutional AuthorsAlliance for Charitable Reform
- Code Sections
- Subject Area/Tax Topics
- Industry GroupsNonprofit sector
- Jurisdictions
- Tax Analysts Document Number2019-24012
- Tax Analysts Electronic Citation2019 TNTF 120-312019 EOR 7-56
- Magazine CitationThe Exempt Organization Tax Review, July 2019, p. 10084 Exempt Org. Tax Rev. 100 (2019)
