In a generic legal advice memorandum (GLAM), the IRS Office of Chief Counsel (AM 2026-001) concluded that an "applicable tax-exempt organization" (ATEO) in an affiliated group that includes a taxable health insurance provider must pay excise tax under IRC Section 4960 on excess remuneration that was paid to employees. In reaching its conclusion, the IRS noted that (1) IRC Section 162(m)(6), which disallows deductions for excess remuneration paid by certain taxable health insurers, did not apply to the ATEO; and (2) CCA 201752008 (the 2017 CCA) was incorrect and could not be relied upon in interpreting IRC Section 4960.

Facts

The GLAM describes a hypothetical situation in which an ATEO is part of an affiliated group that includes a related taxable health insurance provider that qualifies as a covered health insurance provider (CHIP) under IRC Section 162(m)(6). The entire group is treated as an aggregated group under Treas. Reg. Section 1.162-31(b)(2) and as a related group under Treas. Reg. Section 53.4960-1(i).

During the relevant years, the ATEO's covered employees performed exclusively tax-exempt activities, and none of the remuneration paid by the ATEO was attributed to unrelated business operations or deducted on Form 990-T. Taxable group members paying remuneration to individuals who were also ATEO covered employees applied the $500,000 deduction limit under IRC Section 162(m)(6) to the combined payments.

The ATEO filed Forms 4720 for tax years 2018–2021 and paid IRC Section 4960 excise tax on the excess remuneration and sought refunds of all those taxes. It argued that the excess remuneration paid by ATEOs within the aggregated group should be excluded under IRC Section 4960(c)(6) and asserted that this position was supported by the 2017 CCA.

Law

IRC Section 4960 imposes a 21% excise tax on remuneration above $1 million and excess parachute payments paid to covered employees of ATEOs. Remuneration includes amounts paid by related organizations, whether taxable or tax-exempt.

IRC Section 162(m)(6) separately limits deductible remuneration for CHIPs, capping deductions at $500,000 for applicable individual remuneration and deferred-deduction remuneration. Members of an aggregated group are treated as a single employer for purposes of the limitation.

IRC Section 4960(c)(6) coordinates the two regimes by providing that remuneration for which a deduction is not allowed because of IRC Section 162(m) is excluded from the IRC Section 4960 excise tax calculation. Legislative history clarifies that this provision prevents a double detriment: an employer should not be denied a deduction under IRC Section 162(m) and simultaneously face excise tax under IRC Section 4960 on the same amount.

After the December 22, 2017, enactment of IRC Section 4960, the IRS issued Notice 2019-9 at the end of 2018, then proposed regulations in June 2020 and final regulations in January 2021. Unlike the notice and proposed regulations, the final regulations reserve guidance on coordination with IRC Section 162(m) and allow taxpayers to take certain positions based on a reasonable, good-faith interpretation of the law.

The 2017 CCA, although not released to the public until a week after the December 22, 2017 enactment of IRC Section 4960, was dated December 4, 2017, and did not address IRC Section 4960. Rather, it addressed how to apply the $500,000 deduction limit under IRC Section 162(m)(6) when an individual receives compensation for services performed for both a taxable CHIP and a tax-exempt organization within the same aggregated group. The CCA focused on whether remuneration paid by a tax-exempt entity should be included when allocating the $500,000 limit between group members. It concluded that such remuneration is considered "otherwise deductible" for allocation purposes, even if the tax-exempt entity has no unrelated business taxable income (UBTI) and thus cannot actually benefit from the deduction. The CCA relied on Treasury regulations that define "otherwise deductible" as amounts deductible but for the operation of IRC Section 162(m)(6) and clarified that there is no exception for tax-exempt entities in the allocation rules.

IRS conclusions

Remuneration counted for IRC Section 4960 purposes

The GLAM concludes that excess remuneration paid by an ATEO remains subject to IRC Section 4960 unless it was actually disallowed under IRC Section 162(m). Because ATEOs generally cannot deduct compensation allocable to tax-exempt activities, they cannot claim deductions that could be disallowed. As a result, remuneration paid by an ATEO — even if above $500,000 — does not fall within IRC Section 4960(c)(6)'s exclusion.

The GLAM emphasizes the distinction between "allowable" and "allowed." A deduction is "allowed" only when it is actually claimed on a tax return and not challenged. Because an ATEO cannot claim deductions for compensation related to exempt activities, no deduction is disallowed by reason of IRC Section 162(m), so the remuneration remains included for IRC Section 4960 purposes.

Reliance on the 2017 CCA is unreasonable

The GLAM concludes that the 2017 CCA cannot support a reasonable, good-faith interpretation of IRC Section 4960 for several reasons:

1. It predates the enactment of IRC Section 4960 and therefore could not interpret it.
2. It conflicts with IRC Section 4960(c)(6), which only covers deductions not allowed due to IRC Section 162(m), and the ATEO did not report any disallowed amounts.
3. Authoritative guidance — including statutory text, legislative history, Notice 2019-9 and regulatory preambles — clearly established that the IRC Section 4960(c)(6) exclusion applies only when a deduction was actually disallowed.

Implications

With the issuance of the GLAM, it seems taxpayers that currently have pending IRC Section 4960 excise tax refund claims based on the 2017 CCA will not receive the refunds. The effect of the GLAM on other taxpayers taking the same position is less clear.

The GLAM arrives at a critical moment, just as the OBBBA expands the "covered employee" definition for purposes of IRC Section 4960 for tax years beginning after December 31, 2025 (see Tax Alert 2025-1423). In the GLAM, the Chief Counsel not only concludes that IRC Section 4960(c)(6) excludes remuneration only when an IRC Section 162(m) deduction was actually disallowed, but also takes the notable step of characterizing the 2017 CCA's IRC Section 162(m)(6) analysis as incorrect, reflecting the view that the IRS could not preserve the CCA's allocation logic while simultaneously rejecting taxpayers' CHIP-group theory to eliminate IRC Section 4960 exposure.

The GLAM forcefully rejects the 2017 CCA itself — even going so far as to include a heading "The 2017 CCA Was Incorrect." Because the GLAM so emphatically rejects the IRC Section 162(m)(6) conclusion in the 2017 CCA, taxpayers that reduced deductions based on the 2017 CCA may want to re-evaluate whether deductions were overly limited and whether any refund opportunities exist. At a minimum, for-profit taxpayers might consider this rejection of the 2017 CCA when filing tax returns in the future.

While the GLAM closes the door on broad CHIP-group arguments, it implicitly preserves a narrow path for IRC Section 4960(c)(6) relief where a tax-exempt organization actually claims compensation deductions allocable to UBTI, and those deductions are disallowed by IRC Section 162(m)(6). Tax-exempt organizations with meaningful UBTI and shared service employees should carefully review allocation methodologies and documentation, as these fact patterns may still support partial exclusion from IRC Section 4960, though only in limited and well-supported circumstances.