Tuesday, November 27, 2018
[Questionable] Strategies to Avoid the IRC 4960 Excise Tax on Nick Saban's, Urban Meyer's, Jim Harbaugh's and Jimbo Fisher's Salaries.
Nick Saban will make $8.3 million this year, Urban Meyer $7.6 million, Jim Harbaugh and Jimbo Fisher will each make $7.5 million and Gus Malzahn $6.7 million. They are all football coaches for public universities, which typically don't bother applying for 501(c)(3) status (although some of their constituent organizations often get determination letters). Many public universities avoid federal tax under IRC 115 instead. Nevertheless, and in all likelihood, all those coaches' employers (a typical college football coaching contract is made between the coach, the university, and an athletic foundation; the foundation usually pays the bulk of the enormous salaries to avoid state law salary caps) are looking at ways to comply with or legitimately avoid the new excise tax under IRC 4960. According to this article in the National Law Review, exempt organizations are considering a number of options to avoid the new excise tax under IRC 4960. Those options include:
- There are those who believe that public universities and colleges could use their political subdivision status to be exempt from not only this tax, but also federal taxes in general.
- Some universities are looking into having portions of the covered employee’s compensation paid by an organization that is not related to that university. Such an arrangement could allow the compensation paid by the university or college to stay under the $1-million threshold. “Not related” is the key term here. As stated above, for purposes of determining the compensation for the taxable year, monies paid from all related entities are included.
- Split-dollar life insurance policies may become popular again. Organizations have long used split dollar policies as part of the compensation packages for many of their highest-paid individuals. Although this is not a new idea, the addition of Section 4960 may bring split-dollar policies to the mainstream due to the perceived flexibility such policies provide. The theory is that an organization would buy a split-dollar policy and have the policy allow loans against the life insurance. The policy would loan monies to the covered employee, and the loan proceeds would not be included for purposes of determining the $1-million threshold under Section 4960. Although some split-dollar policies are legitimate, employers may want to carefully consider the ones that seem too good to be true, as the Internal Revenue Service (IRS) is likely to eventually tighten the rules on these policies.
None of those options seem very promising to me. I am especially unsure about the first option, particularly in light of IRC 4960(c)(1)(C), which includes 115(1) organizations [relating to income derived from the exercise of an "essential governmental function and accruing to the state or any political subdivison thereof"] within the definition of exempt entities subject to the tax. Perhaps the author is implying some sort of constitutional challenge under the murky "intergovernmental tax immunity" doctrine. Richard Epstein has a good recent article out on that topic entitled Dual Sovereignty Under the Constitution: How Best to Protect States Against Federal Taxation and Regulation.