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Abstract: 

New IRC §4960, added to the Code by the Tax Cuts and Jobs Act, imposes a 21% excise tax on “excess” compensation paid by an IRC §501(c)(3) organization (as well as other “applicable tax-exempt organizations” defined in the statute) to a “covered employee.” The employer (not the employee) is liable for the tax. Because of its relatively high thresholds, it might seem unlikely that IRC §4960 would apply to the typical family foundation. However, it could apply to larger foundations and, importantly—because of the related-party rules discussed later in this article—it could apply to a private foundation that is related to a for-profit organization. The new tax also could apply to a public charity supported by foundation grants. At minimum, a foundation’s managers need to have a basic awareness of IRC §4960 in order to thoroughly vet larger donee organizations that it funds and should understand that the related-organization rules may cause the foundation to be subject to tax under IRC §4960. And, practitioners who advise family foundations might have clients who are subject to IRC §4960 based on the compensation they pay.

Keywords: “Covered Employee” Under IRC §4960; Treatment of Board Members vs. Officers; Aggregation of Related Organizations; Allocation of Liability; Notice 2019-9 Optional Safe Harbor

Affiliations:  1: Clark Hill Strasburger.