Wednesday, January 2, 2019

Interim Guidance Under Section 4960


Happy New Year folks!  The partial government shutdown has apparently not stopped the regulation writers.  On New Years Eve,  the Service Issued Notice 2019-09,  92 glorious pages of "interim guidance" on IRC 4960, all in question and answer format.  We previously blogged about 4960 here and here, and in response one of our readers educated us on the fact that public universities (some of which pay football and basketball coaches well above the triggering amount in 4960) are not presently covered under the law.  The reader, Ellen Aprill, notes that there would need to be a technical correction if Congress intends to cover public universities and the interim guidance confirms her analysis.  Here is what the interim guidance currently says regarding 4960's applicability to public universities:

Q–5: When is a governmental entity an applicable tax-exempt organization within  the meaning of section 4960(c)(1)?

A–5: Governmental entities specifically described in section 4960(c)(1), that is, organizations that have income excluded from taxation under section 115(1) and organizations that are exempt from taxation under section 501(a), are ATEOs. For example, federal instrumentalities exempt from tax under section 501(c)(1) and public universities with IRS determination letters recognizing their tax-exempt status under section 501(c)(3) are governmental entities exempt from tax under section 501(a), and thus are ATEOs.

A governmental entity that is separately organized from a state or political subdivision of a state may meet the requirements to exclude income from gross income (and thereby have income excluded from taxation) under section 115(1). See Rev. Rul. 77-261, 1977-2 C.B.45. However, a state, political subdivision of a state, or integral part of a state or political subdivision, often referred to as a “governmental unit,” does not meet the requirements to exclude income from gross income under section 115(1) because section 115(1) does not apply to income from an activity that the state conducts directly, rather than through a separate entity. See Rev. Rul. 77-261; see also Rev. Rul. 71-131, 1971-1 C.B. 28 (superseding and restating the position stated in G.C.M. 14407, C.B. XIV-1 103). 

Instead, under the doctrine of implied statutory immunity, the income of a governmental unit generally is not taxable in the absence of specific statutory authorization for taxing that income. See Rev. Rul. 87-2, 1987-1 C.B. 18; Rev. Rul. 71-131; Rev. Rul. 71-132, 1971-1 C.B. 29; and G.C.M. 14407. Section 511(a)(2)(B), which imposes tax on the unrelated business taxable income of state colleges and universities, is an example of a specific statutory authorization for taxing income earned by a state, a political subdivision of a state, or an integral part of a state or political subdivision of a state.  Thus, a governmental unit (including a state college or university) that does not have a determination letter recognizing its exemption from taxation under section 501(a) and does not exclude income from gross income under section 115(1) is not an ATEO described in section 4960(c)(1). However, such a governmental unit may be liable for excise tax under section 4960 if it is a related organization under section 4960(c)(4)(B) with respect to an ATEO.

What's even more interesting is that the interim guidance goes on to advise public universities how to relinquish their 501(c)(3) status, if they have a determination letter, in order to avoid the tax.  I find this interesting only because IRC 4960, along with the tax on nondeductible qualified fringe benefits provided by exempt organizations (in this case, including public universities since they are specifically taxed under IRC 511) were enacted to "level the playing field" for non-profit and for-profit organizations -- a proposition I still find troublesome since those organizations ostensibly exist on different playing fields, but I am still pondering that in my head.  I am not sure at all, though, that public and private universities compete on different playing fields and therefore should be treated differently.  I think Aprill implies that the distinction is not intentional but rather the result of sloppy or hurried legislative drafting.  That, too, seems baffling.  All of the new taxes on exempt organizations seem like ideas that have been sitting on the shelf for some time, to be taken down and used when the Congress determined a need for budgetary offsets to balance out other tax expenditures or cuts.  Sloppy or hurried legislative drafting suggests these new taxes are actually new ideas that just happened to occur to during the Trump administration.  I bet, though, that the ideas have been kicked around for some time, and were swept into the pot to provide budgetary offsets. 

Anyway, the guidance has lots of examples of the sort you might find in long drawn out regulations.  The comment period is now open and comments should be submitted no later than April 2, 2019.  Heck, it will probably take until mid February just to read the thing carefully!

Darryll K. Jones

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