Tax News Update    Email this document    Print this document  

The House Ways and Means Subcommittee on Oversight (Committee) released a report on December 1, 2022, summarizing responses the Committee received from nine state and private universities on how compensation packages for their athletic coaches further the schools' tax-exempt purposes under IRC Section 501(c)(3). The Committee had sent inquiries to these nine universities because of their "notable football or basketball head coach salaries." All the universities that received inquiries responded to the committee's questions, the report notes.

Background

To meet the requirements of IRC Section 501(c)(3), an organization must (1) be organized and operated exclusively for charitable, educational, or other tax-exempt purposes, and (2) allow no part of its net earnings to inure to the private benefit of any shareholder or individual. Tax-exempt organizations must maintain books and records showing items of gross income, receipts, and disbursements, and provide them to the IRS upon request.

Several questions from the Committee to the nine universities focused on the IRC Section 4960 implications of their compensation to athletic coaches. IRC Section 4960 imposes a 21% excise tax on applicable tax-exempt organizations (ATEOs) and related organizations that pay remuneration exceeding $1m (i.e., excess compensation) or an excess parachute payment to a covered employee. Public charities, described in IRC Section 501(c)(3), are considered ATEOs. But many governmental entities, such as state universities, are normally excluded from the ATEO definition. A governmental entity is, however, an ATEO if it has an IRC Section 501(a) tax exemption letter from the IRS or income excluded from taxation under IRC Section 115(1). Even if it is not an ATEO, a governmental entity may still be subject to the IRC Section 4960 excise tax if it is related to, and employs a covered employee of, an ATEO. A "covered employee" is one of the five highest compensated employees of the organization for any tax year beginning after December 31, 2016.

Report

In the report, the Committee summarizes responses received from the nine universities between December 2021 and March 2022. The schools explained how their athletic programs are an integral part of campus life and provide important contributions to the student body as a whole. For instance, the athletic programs provide valuable training opportunities for student-athletes and other students, strengthen student bonds and community, resulting in a stronger academic experience, and positively impact student recruiting and retention. The report also summarized the schools' responses to the Committee's questions about compensation, including IRC Section 4960 compensation excise tax issues. For instance, the schools reported how many of their employees have a compensation package over $1m, which employees they compensate over $5m annually, whether they are subject to IRC Section 4960 and, if they are, how much compensation excise tax they have paid since the enactment of IRC Section 4960.

Implications

This report serves as a reminder of the importance of diligent recordkeeping for tax-exempt organizations, especially for activities facing continued or increased scrutiny, such as executive compensation and relatedness of activities to tax-exempt purposes. Maintaining complete and accurate records can facilitate better tax compliance (e.g., with IRC Section 4960 excise tax payments, compensation reporting on the Form 990 information return and Form 4720 excise tax return) and enable accurate, timely responses to federal and state government inquires, such as these from the House Ways and Means Subcommittee on Oversight, the IRS and state regulators. Some commentators have suggested extending the IRC Section 4960 tax to all colleges and universities to close a perceived "loophole" that allows state universities to skirt liability for the compensation excise tax. With continued public scrutiny on exempt organizations, it remains important to stay abreast of potential additions and amendments to federal and state tax codes, in addition to diligently keeping records.

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

———————————————