Firm Addresses Impact of Excise Tax Rules on Volunteer Services

May 20, 2019

CC:PA:LPD:PR (Notice 2019-09)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Comments to Notice 2019-9

Dear Sir or Madam:

On behalf of a corporation that has established a private foundation and a voluntary employees' beneficiary association (a “VEBA”), thank you for the opportunity to comment on Notice 2019-09. We greatly appreciate your invitation to address the issue of volunteer officers and the relationships between private companies and these exempt organizations (“EOs”). We respectfully offer these comments and recommendations which are of concern to our client and other similarly-situated taxpayers.

In particular, this letter addresses the potential application of Internal Revenue Code §4960(c)(4)(A) when corporate executives provide services to a related private foundation or VEBA. As you know, many large, for-profit companies have established tax-exempt private foundations and VEBAs. Through their beneficial and charitable activities, these organizations provide significant benefits to employees and the public. Charitable giving from large corporate foundations alone amounts to billions of dollars annually.¹

Frequently, these organizations are established and governed in the following manner:

Notice 2019-9 suggests that Code §4960(e)(4)(A) may impose excise taxes on these arrangements, even though the foundation pays nothing whatsoever to its officers, if those officers received remuneration of more than $1 million from the related for-profit company for services performed for the company.

We believe that this result was not intended by §4960. Congress's concern in enacting §4960 was that excess compensation paid by EOs diverted resources from the exempt purpose for which such EOs were created.⁴ When employees of a related for-profit organization volunteer with an EO, there are no resources that are being diverted from the EO to pay excessive compensation. To the contrary, the EO is conserving resources that likely would otherwise be spent engaging unrelated parties to serve in these roles. Senior executives of a corporation that establishes an EO are usually closely aligned to the EO's mission and values, and thus often willing to serve as volunteer officers. Unrelated parties are more likely to demand compensation, and less likely to possess the talent, experience and commitment of the related corporation's senior leadership.

Applying §4960 in the manner proposed in the Notice would discourage this service by senior corporate executives. EOs established by large companies that pay their senior executives more than the threshold amount would be encouraged to pay outsiders rather than volunteer related officers, thus diverting EO resources, or rely on less senior corporate staff. We believe that future guidance should clarify that §4960 does not apply to volunteer EO officers, and that such an application would be consistent with the intended policy and within the authority of the Treasury and the IRS. This could be accomplished in a variety of ways:

• Treasury guidance could apply principles consistent with employment taxation, and find that EO officers who do not receive any compensation, directly or indirectly, for these volunteer services, are not considered employees of the EO for purpose of §4960. See, Treas. Reg. §31.3121(d)-1(b).

• Alternately, the Service could provide that volunteer officers who spend a limited amount of time performing their services as an officer of an EO are not employees for purposes of §4960. A more finite alternative would be to provide a safe harbor for de minimis time spent by such officers on EO activities. We suggest for this purpose a safe harbor of 100 hours per year (less than 5% of normal annual working hours) spent by an officer on undertakings of the EO.

• Finally, and more simply, the IRS could provide that the determination of an EO's covered employees is made without taking into account any remuneration received by an EO's employees from a related entity for services that the individual performs for that entity.

Thank you very much for your consideration of this matter. Feel free to contact me at (202) 289-8700 with any questions or comments.

Regards,

Joseph M. Mikrut
Capitol Tax Partners
Washington, DC