In Notice 2019-09 (“Notice”), the IRS provides relief from the new excise tax to certain colleges and universities that pay their “covered employees” more than $1 million per year or pay excess parachute payments. Specifically, the Notice provides that the new excise tax under Code Section 4960 does not apply to a governmental entity (including a state college or university) that is not tax-exempt under Code Section 501(a) and does not exclude income under Code Section 115(l). Therefore, those state universities that do not rely on either of these statutory exemptions from income are not subject to Code Section 4960 even if they pay their coaches (or other covered employees) more than $1 million. Rather than relying on either of these statutory exemptions, some universities rely on the doctrine of implied statutory immunity, under which the IRS will not tax states and their political subdivisions (including universities). However, the Notice cautions that, if such a university is “related” to an entity that relies on either of these statutory exemptions, the university is subject to the excise tax for compensation paid to covered employees in excess of $1 million for the year or any excess parachute payment.
The Notice also provides other important interim guidance to help tax-exempt organizations comply with Code Section 4960 until regulations are issued. For example, Code Section 4960 refers to remuneration “paid for the taxable year,” but doesn’t define the term. The Notice provides that “paid for the taxable year” means the calendar year ending with or within the employer’s taxable year. The Notice also provides specific guidance on (i) identifying covered employees, (ii) determining what compensation is considered, (iii) the exclusion for medial and veterinary services, (iv) calculating excess parachute payments, and (v) reporting the excise tax liability.