Carol Calhoun was quoted in Tax Notes on March 8, 2018, about the new excise tax that targets highly-paid employees of tax-exempt organizations, excluding college coaches.
According to the article, the Tax Cuts and Jobs Act (P.L. 115-97) created a 21 percent excise tax on exempt organizations for compensation in excess of $1 million paid to the five highest-paid employees. When tax practitioners discuss the new excise tax, one name inevitably comes up: University of Alabama head football coach, Nick Saban. It was widely reported last year that Saban would make $11.125 million in 2017, and at least $65 million over the next eight years, following a contract extension. Many practitioners believe Congress intended the tax to apply to Saban and other highly paid coaches at public universities. Treasury and IRS officials are aware there could be a problem.
Ms. Calhoun said that a technical correction seems like the most straightforward solution, but she’s unsure whether a corrections package will get the necessary votes to pass. Lawmakers are already sparring over how to approach corrections, including how long the process should take.
Commenting on whether or not universities are covered by the excise tax, Calhoun said that by referencing section 115(1), Congress has plunged into a legal morass that the IRS has never fully reconciled. She said that the existing authority is decidedly mixed on whether a university is a governmental instrumentality subject to section 115(1), or an integral part of subdivision of government and thus constitutionally exempt from tax.
In the absence of technical corrections, Calhoun said that the IRS could choose to issue guidance finding that all public universities are governmental instrumentalities, and overrule and existing guidance to the contrary. Given that universities are one of the few types of EOs with employees making more than $1 million, singling them out as instrumentalities might be practical for the IRS. She continued to state that a technical correction would be the cleaner approach, because having the IRS simply declare all universities instrumentalities could further muddy the subject, especially as it relates to other kinds of government entities.