The IRS has published proposed regulations (REG-107163-18) specifying which returns to use to pay certain excise taxes and the timing for filing those returns. The regulations would also add two excise taxes to the first-tier taxes subject to abatement.

The proposed regulations would affect certain tax-exempt organizations and their related organizations, applicable educational institutions, sponsoring organizations that maintain certain donor-advised funds, fund managers of these sponsoring organizations, and certain donors, donor advisors and related persons.

Background

The proposed regulations would amend guidance under Section 6011 to:

1. Specify the tax returns that must be submitted with a payment of excise tax under Sections:

• 4960, Tax on excess tax-exempt organization executive compensation
• 4966, Taxes on taxable distributions
• 4967, Taxes on prohibited benefits
• 4968, Excise tax based on investment income of private colleges and universities

2. Specify the time for filing returns (by amending regulations under Section 6071, Time for filing returns and other documents)

3. Add taxes under Sections 4966 and 4967 to the definitions of "first-tier tax" and "taxable event" (amending the Section 4963 regulations, which define the first-tier taxes subject to abatement under Section 4962)

Added to the Code under the Pension Protection Act (PPA), Sections 4966 and 4967 impose excise taxes on certain distributions from donor-advised funds maintained by sponsoring organizations, as defined under Section 4966(d)(1).

A 20% excise tax is imposed on the sponsoring organization of a donor-advised fund for each "taxable distribution" from the fund (Section 4966(a)(1)). A separate 5% excise tax is imposed on any fund manager who agrees to make a distribution that he or she knows is a taxable distribution (Section 4966(a)(2)). If more than one fund manager is liable for the tax, joint and several liability applies (Section 4966(b)(1)). A maximum $10,000 in tax may be imposed on all fund managers for any one taxable distribution (Section 4966(b)(2)).

Defined in Section 4966(c)(1), a "taxable distribution" is any distribution from a donor-advised fund to a natural person or any other person if: (1) the distribution is for any purpose other than the one specified in Section 170(c)(2)(B); or (2) the sponsoring organization does not exercise expenditure responsibility in accordance with Section 4945(h). Taxable distributions do not include: (1) distributions to any organization described in Section 170(b)(1)(A), other than a disqualified supporting organization; (2) distributions to the donor-advised fund's sponsoring organization; or (3) distributions to any other donor-advised fund (Section 4966(c)(2)).

If a distribution from a donor-advised fund results in a donor, donor advisor, or related person receiving more than an incidental benefit (a prohibited benefit) from the fund, a tax equal to 125% of the amount of the prohibited benefit may be imposed under Section 4967(a)(1) on anyone described in Section 4967(d) who provided advice regarding the distribution or received a prohibited benefit. Joint and several liability applies if more than one person is liable for the tax.

Further, a 10% tax may be imposed under Section 4967(a)(2) on a fund manager who agrees to make a distribution that would confer a prohibited benefit on a donor, donor advisor, or related person. Joint and several liability applies here as well if more than one fund manager is involved. Maximum liability of $10,000 may be imposed on all fund managers for each prohibited benefit transaction, and no tax is imposed under Section 4967 if an excess benefits transaction tax has been imposed on the distribution under Section 4958.

Section 4966 and 4967 taxes were added to the definition of "first-tier taxes" in Section 4963(a) and "taxable event" in Section 4963(c) under the PPA, and are subject to tax abatement under Section 4962(b).

Added to the Code under the Tax Cuts and Jobs Act (TCJA), Section 4960 (Tax on excess tax-exempt organization executive compensation) imposes an excise tax on the sum of: (1) the amount of remuneration (other than an excess parachute payment) exceeding $1m that an applicable tax-exempt organization pays any covered employee, plus (2) any excess parachute payment the organization pays any covered employee.

Also added under the TCJA, Section 4968 (Excise tax based on investment income of private colleges and universities) imposes an excise tax on each applicable educational institution based on its net investment income for the tax year.

Proposed regulations

The new proposed regulations would:

• Amend Reg. Section 53.4963-1 to add the taxes under Sections 4966 and 4967 to the definitions of a "first-tier tax" and "taxable event," which are subject to abatement under Section 4962
• Amend Reg. Section 53.6011-1(b) to provide that persons, including government entities, liable for excise tax under Section 4960, 4966, 4967, or 4968 must file a return on Form 4720 and pay the tax due by the 15th day of the 5th month after the end of the person's tax year during which the excise tax liability was incurred (i.e., May 15 for calendar-year basis taxpayers).

The proposed regulations will be effective on the date the final regulations are published in the Federal Register.

Implications

Tax-exempt organizations continue to welcome guidance from the IRS and Treasury on implementing any applicable excise tax provisions and specifically those enacted by the TCJA. The proposed regulations offer additional insight into the new Section 4960 compensation excise tax and the Section 4968 net investment income tax that began with the draft 2018 instructions for Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code (see Tax Alert 2018-1669).

The proposed regulations would require individuals and organizations liable for excise taxes under Sections 4960, 4966, 4967, or 4968 to file Form 4720 and pay the tax due by the 15th day of the 5th month after the end of the person's tax year. Sections 4966 and 4967 were included on Form 4720 in prior years (Schedules K and L, respectively). The draft 2018 Form 4720 added Sections 4960 (Schedule N) and 4968 (Schedule O), which foreshadowed the proposed regulations' requirement to file Form 4720. Previously, Form 4720 had to be filed "by the due date (not including extensions) for filing the organization's Form 990-PF, Form 990, Form 990-EZ, or Form 5227 [or if not filing any of the stated forms then] by the 15th day of the 5th month after the organization's accounting period ends," the Form 4720 instructions explain. With the proposed regulations, filing by the due date of other required forms is not required, instead organizations filing Form 4720 for tax due under the aforementioned code sections, must file and pay the tax due "by the 15th day of the 5th month after the end of the person's tax year during which the excise tax liability was incurred."

The proposed regulations also discuss the reclassification of taxes under Sections 4966 (taxes on taxable distributions) and 4967 (taxes on prohibited benefits) as "qualified first-tier taxes." Qualified first-tier taxes are eligible for abatement under Section 4962. Organizations subject to these taxes qualify for abatement under Section 4962 "[i]f it is established to the satisfaction of the Secretary that: (1) a taxable event was due to a reasonable cause and not to willful neglect, and (2) such event was corrected within the correction period for such event." If these conditions are met, then "any qualified [first-tier] tax imposed with respect to such event (including interest) shall not be assessed and, if assessed, the assessment shall be abated and, if collected, shall be credited or refunded as an overpayment."

To the extent organizations correct a taxable event that causes an excise tax under these sections, they should take the proper measures to document those corrections and determine if the entity is eligible to request abatement of the qualified first-tier tax under the proposed regulations.

Please contact your Ernst & Young LLP tax professional with any questions.

———————————————