No Country for Rich Executives – Final Regs Issued on ATEO Executive Compensation Tax

No Country for Rich Executives – Final Regs Issued on ATEO Executive Compensation Tax

You caught me listening to the Moody Blues. Writing about taxes brings a man so very low.

It’s a Tuesday afternoon, so I sought out that song, properly called Forever Afternoon. On my ‘Maudlin’ playlist, Ride My See-Saw cues up next. It’s a good theme for tax attorneys, estate planners and plain folk like us. Taxes go up, taxes come down, but the rules, they are forever impenetrable, even for experts.

Blue Monday. Wednesday Evenin’ Blues – that’s John Lee Hooker, he knows the down-low. Thursday’s Child, poor old Bowie; Friday, I’m most certainly not in love. At my age? Please… Another Saturday Night in lockdown – still in effect in my locale, alas. Come Sunday, Duke Ellington and Mahalia Jackson – you’ll thank me for that one, dear readers.

President Donald Trump. Peak Hour or freak hour for our country? He’s a tough one to crack, rather like tricky Dick Nixon – the smartest, wiliest president of modern times, with a soul that could crack mirrors. My brother worked in Nixon’s White House, jumped ship when he noticed nervous eyes searching for scapegoats, but at age 13 I got to eat a steak, tough as an old brown briefcase, in the presidential dining room.

Is the president here? Can I meet him? “You don’t wanna,” said brother Paul. “His hand is boneless, when you shake it. We call him ‘rubber hand’.” Dandy. Rather like calling the devil ‘old sweaty face’.

Back to the Donald. Supposedly the sleeper agent gone wildly ‘live’ for the sickeningly rich, he sponsored a surprisingly fat package of tax increases on his purported puppeteers. Like I always say, those missile subs aren’t cheap, and someone has to pay.

His Tax Cuts and Jobs Act of 2017 contained an initiative to tax – get ready for a word-fest – the excess compensation paid to some executives and other highly paid employees working at a closely defined parcel of tax-exempt organizations. Section 4960 laid the bullseye on this target.

The investment income of major private universities and colleges was addressed by Section 4968. That one might be important to you, but 4960 is the most broadly worrisome kicker.

Section 4960 puts an excise tax on remuneration exceeding $1 million and on ‘excess parachute payments’ paid to the affected execs by applicable tax-exempt organizations (ATEO – let that acronym stick). The excise tax may also apply to entities seen as ‘related’ to those organizations, as defined by a pot-of-spaghetti set of rules.

I’ve tried manfully to condense the definition of ‘excess parachute payments’ and list the organizations that must now be living in fear. On January 11, Treasury and the IRS issued final regulations for 4960, making only minor revisions to them in June 2020. It took a good while to knot-up the loose ends – not uncommon with federal regs.

Good old lawyers – I don’t care what anyone says – if you need one, they’re golden. I graduated college in 1983. I was sitting on my university’s grassy commons, talking with friends about what to do next. Clever Julie, 2nd year law, opined: “Why not go to law school? It’s stupidly easy.” I listened with interest, because Julie was dressed for the Washington heat and I was easily riveted in my youth. Still, it seemed something not for me – too pricey by half.

I lamented, for neither the first time nor last: why was I born with good looks and not rich? If only, dear readers… I should have found a way, if only to clarify matters today. Yet I’ll try my liberal-arts best.

First, let’s define an ATEO, to see if you’re liable. ATEOs are tax-exempt organizations, as defined by tax code section 501(a). Whoever wrote the leaden, long-winded definition should be watching for carpal-tunnel symptoms, so I’ll redact for clarity: these include corporations, funds and foundations that operate solely for religious, charitable, scientific, literary (yes!) or educational purposes. Farmers’ cooperatives and certain political organization are also affected.

The employees concerned – that is, liable for taxes – are generally the five highest-paid executives in the organization for taxable years after December 31, 2016. The excise tax applies to compensation in excess of $1 million as well as some of those impenetrable ‘parachute payments’.
I fear you’ll need the biggest table at the ritziest local steak house to contain the legal team sorting it all out. It would be a good idea to convene quickly, as the current mandarin inhabiting the White House, President Joe Biden, stands poised – all right, stoops poised – tax crop in whip hand. He may have trouble negotiating stairs – I’m old enough to relate – but seems stubborn as old ‘Nick’ to siphon-up income to pay for his rich spending plans.

I can’t speak to the literal firmness of Joe Biden’s handshake. Figuratively, I’d expect a white-knuckle grip and a vigorous shake primed to pump out your wallet. The Democratic Party has clearly defined its foes: anyone earning more than $400,000 a year. Those enwrapped in ATEO and 4960 sit right in their sweet-and-sour spot.

As I run over the changes to the original proposal, I see only minor adjustments – opaque as can be, yes, but they seem nothing of substance – so, for ATEO executives, the heat is on.

The IRS has been fiendishly active of late, and their enforcement budget is slated to rise. This new excise tax isn’t a matter for rookies or even brave commentators, no matter how wily. These are tough days for the wealthy. If you’re a top gal or guy at an ATEO, and if Blue Ain’t Your Color, book that legal-size dinner table quickly.

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