New Charitable Excise Tax Threatens Private Foundations:

Unintended Consequences Strike Again

A recent release by the IRS, Notice 19-09, provides guidance on §4960 which was enacted in December, 2017. The section imposes an excise tax of 21% on compensation that exceeds $1 million annually for employees of tax-exempt organizations. The Notice goes into great detail and provides many examples of who is considered highly compensated and what is considered to be compensation. Clearly intended to provide clarity and also to stop possible shell games to “sneak” compensation through back channels to executives, the code is meant to prevent what the IRS sees as abuses. While it can be argued that the non-profit sector needs to provide competitive compensation to attract great leaders, they will now pay a hefty price to provide the financial rewards that top executives command in the public sector.


There is another consequence of §4960 as well. It seems that if you have a Private Family Foundation (which is exempt under §501(a)), and you take zero compensation as the founder or director but you have earned income from other businesses that exceed $1 million, you will be subject to the excise tax on your income.


“Section 4960(c)(4)(A) provides that remuneration paid to a covered employee by an ATEO includes any remuneration paid with respect to employment of the employee by any related person or governmental entity. The Treasury Department and the IRS interpret the phrase “any related person or governmental entity” to include not only related ATEOs but also related taxable organizations and related governmental units or other governmental entities. Section 4960(c)(4)(B) provides that a person or governmental entity is related to an ATEO if such person or governmental entity (i) controls, or is controlled by, the organization; (ii) is controlled by one or more persons which control the organization; (iii) is a supported organization (as defined in section 509(f)(3)) during the taxable year with respect to the organization; (iv) is a supporting organization described in section 509(a)(3) during the taxable year with respect to the organization; or (v) in the case of an organization which is a voluntary employees beneficiary association described in section 501(c)(9), establishes, maintains, or makes contributions to such voluntary employees beneficiary association.”

This is a huge threat for those with private foundations. Fortunately, the service has published this with a request for comments. It seems to be judicious to raise an outcry now, before it’s too late.


For more information on this, please contact Two Hawks consulting today!


#ateo #excisetax #irs4960 #irsnotice1909

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