Internal Revenue Bulletin 2019-4 (PDF rendition): IRS Notices

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# INTERNAL REVENUE BULLETIN

IRS

## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## EXCISE TAX

### NOTICE 2019-09, page 403.

This notice provides interim guidance on the provisions of the
new § 4960 added by the Tax Cuts and Jobs Act, and an-
nounces the intent of Treasury and the IRS to issue proposed
regulations. Section 4960 provides that excess remuneration
and excess parachute payments paid by an applicable tax-
exempt organization to a covered employee are subject to an
excise tax (currently 21 percent). This notice provides interim
guidance defining (1) "applicable tax-exempt organization," (2)
"excess remuneration," (3) "covered employee," and (4) "ex-
cess parachute payment." In addition, the notice instructs
taxpayers on how to report and pay the excise tax.

## EXEMPT ORGANIZATIONS

### NOTICE 2019-09, page 403.

Bulletin No.

2019-04

January 22, 2019

## INCOME TAX

### Rev. Proc. 2019-12, page 401.

This document provides safe harbors under section 162 of the
Internal Revenue Code (Code) for certain payments made by a
C corporation or a specified passthrough entity to or for the
use of an organization described in section 170(c) if the C
corporation or specified passthrough entity receives or ex-
pects to receive a state or local tax credit in return for such
payments.

Finding Lists begin on page ii.

## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

## Part III. Administrative, Procedural, and Miscellaneous

26 CFR 1.162-1. Business expenses.
(Also Part I, §§ 162, 164, 170, 212, 642; 1.170A-1.)

### Rev. Proc. 2019-12

#### SECTION 1. PURPOSE

This revenue procedure provides safe
harbors under section 162 of the Internal
Revenue Code (Code) for certain pay-
ments made by a C corporation or a spec-
ified passthrough entity to or for the use of
an organization described in section
170(c) if the C corporation or specified
passthrough entity receives or expects to
receive a state or local tax credit in return
for such payment.

### SECTION 2. BACKGROUND

Section 162(a) allows a deduction for
all the ordinary and necessary expenses
paid or incurred during the taxable year in
carrying on any trade or business. Section
162(b) provides that no deduction shall be
allowed under subsection (a) for any con-
tribution or gift that would be allowed as
a deduction under section 170 were it not
for the percentage limitations, the dollar
limitations, or the requirements as to the
time of payments set forth in that section.

Section 170(a)(1) generally allows an
itemized deduction for any "charitable
contribution" paid within the taxable year.
Section 170(c) defines "charitable contri-
bution" as a "contribution or gift to or for
the use of" any organization described in
that section. Under section 170(c)(1), such
an organization includes a State, a posses-
sion of the United States, or any political
subdivision of the foregoing, including the
District of Columbia. Section 170(c)(2) in-
cludes certain corporations, trusts, or com-
munity chests, funds, or foundations, orga-
nized and operated exclusively for religious,
charitable, scientific, literary, or educational
purposes, or to foster national or interna-
tional amateur sports competition, or for the
prevention of cruelty to children or animals.

Section 1.170A-1(c)(5) provides that
transfers of property to an organization
described in section 170(c) that bear a
direct relationship to the taxpayer's trade
or business and that are made with a rea-
sonable expectation of financial return
commensurate with the amount of the

transfer may constitute allowable deduc-
tions as trade or business expenses rather
than as charitable contributions.

Section 164(a) allows a deduction for
the payment of certain taxes, including:
(1) state and local, and foreign, real prop-
erty taxes; (2) state and local personal
property taxes; and (3) state and local, and
foreign, income, war profits, and excess
profits taxes. In addition, section 164 per-
mits a deduction for taxes not described in
the preceding sentence that are paid or
accrued within the taxable year in carry-
ing on a trade or business or an activity
described in section 212. Moreover, sec-
tion 164(b)(5) provides taxpayers an an-
nual election to allow a deduction under
section 164(a) for the payment of state
and local general sales taxes in lieu of
state and local income taxes.

Section 164(b)(6), as added by section
11042(a) of "An Act to provide for rec-
onciliation pursuant to titles II and V of
the concurrent resolution on the budget
for fiscal year 2018", Pub. L. 115-97,
provides that deductions for foreign real
property taxes are not allowable under
section 164(a)(1) and limits an individu-
al's deduction to $10,000 ($5,000 in the
case of a married individual filing a sep-
arate return) for the aggregate amount of
the following state and local taxes paid
during the calendar year: (1) real property
taxes; (2) personal property taxes; (3) in-
come, war profits, and excess profits tax-
es; and (4) general sales taxes. This limi-
tation applies to taxable years beginning
after December 31, 2017, and does not
apply to foreign taxes described in section
164(a)(3) or to any taxes described in sec-
tion 164(a)(1) and (2) that are paid and
incurred in carrying on a trade or business
or an activity described in section 212.

Since the enactment of section 164(b)(6),
some taxpayers have looked for ways to
avoid the new limitation on the deductibility
of their state and local taxes. In response to
these efforts, the Department of the Trea-
sury (Treasury Department) and the Internal
Revenue Service (IRS) have issued guid-
ance on whether certain approaches cor-
rectly apply the Code and Treasury regula-
tions. On June 11, 2018, the Treasury
Department and the IRS issued Notice
2018-54, 2018-24 I.R.B. 750, announcing

the intention to propose regulations address-
ing the federal income tax treatment of
transfers to certain transferees pursuant to
state and local tax credit programs. On Au-
gust 27, 2018, proposed regulations under
sections 170 and 642(c) were published in
the Federal Register (83 FR 43563). The
proposed regulations generally state that if a
taxpayer makes a payment or transfers prop-
erty to or for the use of an entity listed in
section 170(c), and the taxpayer receives or
expects to receive a state or local tax credit
in return for such payment, the tax credit
constitutes a return benefit, or quid pro quo,
to the taxpayer and reduces the taxpayer's
charitable contribution deduction under sec-
tion 170(a).

After the publication of the proposed
regulations, the Treasury Department and
the IRS received questions from taxpayers
and other stakeholders regarding the ap-
plication of the proposed regulations to
business entities that make payments to
charitable organizations described in sec-
tion 170(c) pursuant to state and local tax
credit programs. These questions related
to the application of section 162 to these
payments, that is, whether a business en-
tity may deduct these payments under sec-
tion 162 as ordinary and necessary busi-
ness expenses incurred in carrying on a
trade or business.

On September 5, 2018, the IRS re-
leased an FAQ addressing these concerns.
The FAQ states that the proposed regula-
tions do not affect the availability of an
ordinary and necessary business expense
deduction under section 162. Specifically,
the FAQ states that a business taxpayer
making a payment to a charitable or gov-
ernment entity described in section 170(c)
is generally permitted to deduct the pay-
ment as an ordinary and necessary busi-
ness expense under section 162 if the pay-
ment is made with a business purpose.
The FAQ also notes that the rules permit-
ting an ordinary and necessary business
expense deduction under section 162 ap-
ply to a taxpayer engaged in carrying on a
trade or business regardless of the form of
the business.

Since the release of the FAQ, the Trea-
sury Department and the IRS have contin-
ued to receive questions regarding the ap-
plication of the proposed regulations and

sections 162 and 164 to taxpayers en-
gaged in trades or businesses. These ques-
tions include whether payments by these
taxpayers to organizations described in
section 170 in return for state income,
property, and other business tax credits
would bear a direct relationship to the
taxpayer's trade or business, such that
these payments would be considered ordi-
nary and necessary business expenses of
carrying on such trade or business under
section 162(a) to the extent of the credit
received or expected.

To the extent a C corporation receives
or expects to receive a state or local tax
credit in return for a payment to an orga-
nization described in section 170(c), it is
reasonable to conclude that there is a di-
rect benefit to the C corporation's busi-
ness in the form of a reduction in the state
or local taxes the C corporation would
otherwise have to pay and, therefore, to
the extent of the amount of the credit
received or expected to be received, there
is a reasonable expectation of financial
return to the C corporation commensurate
with the amount of the transfer.

Similarly, in the case of a business
entity other than a C corporation that is
regarded as separate from its owner for
all federal tax purposes under section
301.7701-3 of the Procedure and Admin-
istration Regulations (passthrough entity)
and that is operating a trade or business
within the meaning of section 162, to
the extent the credit received in return
for such a payment can reduce the
passthrough entity's tax liability, it is
reasonable to conclude that there is a
direct benefit to the passthrough entity
in the form of a reduction in the state or
local taxes the entity would otherwise
have to pay. However, under the princi-
ples of sections 702 and 1366, the de-
ductibility of the payment must be de-
termined at the level of the individual
owners of the entity if the credit re-
ceived or expected to be received will
reduce a state or local income tax sub-
ject to the limitations in section
164(b)(6).

Accordingly, section 3 of this revenue
procedure provides a safe harbor for C
corporations, and section 4 of this revenue
procedure provides a separate safe harbor
for specified passthrough entities de-

scribed in section 4.02 this revenue pro-
cedure.

### SECTION 3. SAFE HARBOR FOR C CORPORATIONS

.01 Scope. The safe harbor provided by
this section 3 applies to a C corporation
that makes payments described in section
3.02 of this revenue procedure in carrying
on its trade or business.

.02 Safe harbor. If a C corporation
makes a payment to or for the use of an
organization described in section 170(c)
and receives or expects to receive a tax
credit that reduces a state or local tax
imposed on the C corporation in return for
such payment, the C corporation may treat
such payment as meeting the requirements
of an ordinary and necessary business ex-
pense for purposes of section 162(a) to the
extent of the credit received or expected to
be received.

.03 Examples.

(1) Example 1. A, a C corporation engaged in a
trade or business, makes a payment of $1,000 to an
organization described in section 170(c). In return
for the payment, A receives or expects to receive a
dollar-for-dollar state tax credit to be applied to A's
state corporate income tax liability. Under section 3
of this revenue procedure, A may treat the $1,000
payment as meeting the requirements of an ordinary
and necessary business expense under section 162.

(2) Example 2. B, a C corporation engaged in a
trade or business, makes a payment of $1,000 to an
organization described in section 170(c). In return
for the payment, B receives or expects to receive a
tax credit equal to 80 percent of the amount of this
payment ($800) to be applied to B's local real prop-
erty tax liability. Under section 3 of this revenue
procedure, B may treat $800 as meeting the require-
ments of an ordinary and necessary business expense
under section 162. The treatment of the remaining
$200 will depend upon the facts and circumstances
and is not affected by this revenue procedure.

### SECTION 4. SAFE HARBOR FOR SPECIFIED PASSTHROUGH ENTITIES

.01 Scope. The safe harbor provided
by this section 4 applies to a specified
passthrough entity described in section
4.02 of this revenue procedure that makes
payments described in section 4.03 of this
revenue procedure in carrying on its trade
or business.

.02 Specified passthrough entity. An
entity will be considered a specified
passthrough entity described in this sec-
tion 4.02 only if each of the requirements

set forth in section 4.02(1) through (4) is
satisfied.

(1) The entity is a business entity other
than a C corporation that is regarded for
all federal income tax purposes as sepa-
rate from its owners under section
301.7701-3;

(2) The entity operates a trade or busi-
ness within the meaning of section 162;

(3) The entity is subject to a state or
local tax incurred in carrying on its trade
or business that is imposed directly on the
entity; and

(4) In return for a payment to an orga-
nization described in section 170(c), the
entity receives or expects to receive a state
or local tax credit that the entity applies or
expects to apply to offset a state or local
tax described in section 4.02(3) of this
revenue procedure other than a state or
local income tax.

.03 Safe harbor. If a specified
passthrough entity described in section
4.02 of this revenue procedure makes a
payment to or for the use of an organiza-
tion described in section 170(c) and re-
ceives or expects to receive a tax credit
described in section 4.02(4) of this revenue
procedure that the entity applies or expects
to apply to offset a state or local tax de-
scribed in section 4.02(3) of this revenue
procedure other than a state or local income
tax, the specified passthrough entity may
treat such payment as meeting the require-
ments of an ordinary and necessary business
expense for purposes of section 162(a) to
the extent of the credit received or expected
to be received.

#### .04 Examples.

(1) Example 1. P is a limited liability company
(LLC) classified as a partnership for federal income
tax purposes under section 301.7701-3 and is owned
by individuals A and B. P is engaged in a trade or
business within the meaning of section 162 and
makes a payment of $1,000 to an organization de-
scribed in section 170(c). In return for the payment,
P receives or expects to receive a dollar-for-dollar
state tax credit to be applied to P's state excise tax
liability incurred by P in carrying on its trade or
business. Under applicable state law, the state's ex-
cise tax is imposed at the entity level (not the owner
level). Under section 4 of this revenue procedure, P
may treat the $1,000 payment as meeting the require-
ments of an ordinary and necessary business expense
under section 162.

(2) Example 2. S is an S corporation engaged in
a trade or business and is owned by individuals C
and D. S makes a payment of $1,000 to an organi-
zation described in section 170(c). In return for the
payment, S receives or expects to receive a state tax
credit equal to 80 percent of the amount of this

payment ($800) to be applied to S's local real prop-
erty tax liability incurred by S in carrying on its trade
or business. Under applicable state and local law, the
real property tax is imposed at the entity level (not
the owner level). Under section 4 of this revenue
procedure, S may treat $800 of the payment as
meeting the requirements of an ordinary and neces-
sary business expense under section 162. The treat-
ment of the remaining $200 will depend upon the
facts and circumstances and is not affected by this
revenue procedure.

### SECTION 5. APPLICABILITY OF SAFE HARBORS

.01 Applicability date. This revenue
procedure applies to amounts described in
section 3.02 of this revenue procedure that
are paid on or after January 1, 2018, by a

C corporation described in section 3.01 of
this revenue procedure. In addition, this
revenue procedure applies to amounts de-
scribed in section 4.03 of this revenue
procedure that are paid on or after January
1, 2018, by a specified passthrough entity
described in section 4.02 of this revenue
procedure.

.02 No multiple deductions. Nothing in
this revenue procedure may be con-
strued as permitting a C corporation that
applies the safe harbor in section 3.02 of
this revenue procedure or a specified
passthrough entity that applies the safe
harbor in section 4.03 of this revenue
procedure to treat the amount of any
payment as deductible under more than

one provision of the Code or Treasury
regulations.

## SECTION 6. DRAFTING INFORMATION

The principal authors of this revenue
procedure are personnel from the Office
of the Associate Chief Counsel (Income
Tax and Accounting). However, other
personnel from the Treasury Department
and the IRS participated in its develop-
ment. For further information regarding
this revenue procedure, contact Robin
Tuczak (202) 317-4059 (not a toll-free
call).

### Interim Guidance Under Section 4960

Notice 2019-09

Contents

I. PURPOSE AND OVERVIEW

404

A. Section 4960 - In General

405

B. Applicable Tax-Exempt Organizations and Related Organizations

406

C. Covered Employees

406

D. Excess Remuneration

407

E. Medical and Veterinary Services

409

F. Excess Parachute Payments

410

G. Three-Times-Base-Amount Test for Parachute Payments

412

H. Computation of Excess Parachute Payments

412

I. Reporting Liability Under Section 4960

412

J. Miscellaneous Issues

413

K. Effective Date

413

II. INTERIM GUIDANCE ON APPLICATION OF SECTION 4960.

413

A. Section 4960 - In General

413

Q-1: What is the effect of section 4960?

413

Q-2: What year is used in calculating the section 4960 excise tax?

413

Q-3: Who is liable for the section 4960 excise tax?

413

B. Applicable Tax-Exempt Organizations and Related Organizations

414

Q-4: What is an applicable tax-exempt organization within the meaning of section 4960(c)(1)?

414

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

414

Q-6: May a governmental entity with a determination letter recognizing its tax exemption relinquish its section 501(c)(3) status?

414

Q-7: What is a related organization for purposes of section 4960?

414

Q-8: What is the meaning of "control" for purposes of section 4960(c)(4)(B)(i)-(ii) and Q/A-7 of this notice?

414

C. Covered Employees

415

Q-9: Who is a covered employee within the meaning of section 4960(c)(2)?

415

Q-10: How are the five highest-compensated employees determined ?.

415

D. Excess Remuneration

415

Q-11: What is excess remuneration paid by an applicable tax-exempt organization under section 4960(a)(1)?

415

Q-12: What is remuneration under section 4960(c)(3)?

415

Q-13: When is remuneration treated as paid for purposes of section 4960(a)(1)?

416

Q-14: How is liability for the section 4960(a)(1) excise tax determined if remuneration is paid to a covered

employee by both an applicable tax-exempt organization and a related organization?

419

E. Medical and Veterinary Services

420

Q-15: How is remuneration for medical services treated under section 4960?

420

F. Excess Parachute Payments

421

Q-16: What is an excess parachute payment under section 4960(c)(5)(A)?

421

Q-17: What is a parachute payment under section 4960(c)(5)(B)?

421

Q-18: What is a payment in the nature of compensation?

421

Q-19: When is a payment in the nature of compensation considered to be made?

421

Q-20: What is a payment that is contingent on an employee's separation from employment?

422

Q-21: What is a payment made under a window program?

423

Q-22: What is an involuntary separation from employment?

423

Q-23: What is a separation from employment?

423

Q-24: How is an accelerated payment or accelerated vesting resulting from an involuntary separation from employment treated?

423

G. Three-Times-Base-Amount Test for Parachute Payments

424

Q-25: Are all payments that are in the nature of compensation, made to a covered employee, and contingent on a separation from employment, parachute payments?

424

Q-26: As of what date is the present value of a payment determined?

425

Q-27: What discount rate is used to determine present value?

425

Q-28: If the present value of a payment to be made in the future is contingent on an uncertain future event or condition, how is the present value of the payment determined?

425

Q-29: What is the base amount for purposes of section 4960(c)(5)(D)?

425

Q-30: What is the base period?

426

Q-31: How is the base amount determined in the case of a covered employee who did not perform services for the applicable tax-exempt organization (or a predecessor entity or a related organization), prior to the calendar year in which the separation from employment with the applicable tax-exempt organization occurred?

426

H. Computation of Excess Parachute Payments

426

Q-32: How is the amount of an excess parachute payment computed?

426

I. Reporting Liability Under Section 4960

427

Q-33: How do applicable tax-exempt organizations or related organizations report and pay the excise tax imposed under section 4960?

427

Q-34: When is the excise tax imposed under section 4960 due?

427

Q-35: Are applicable tax-exempt organizations or related organizations required to pay estimated taxes for the excise tax imposed under section 4960?

428

J. Miscellaneous Issues

428

Q-36: Does the payment of remuneration subject to excise tax under section 4960 automatically constitute an excess benefit transaction under section 4958?

428

Q-37: Does the payment of remuneration subject to excise tax under section 4960 necessarily constitute an act of self-dealing described in section 4941?

428

Q-38: Does section 4960 apply to amounts to which section 162(m) applies?

428

K. Effective Date

428

Q-39: What is the effective date of section 4960?

428

III. REQUEST FOR COMMENTS

428

IV. RELIANCE

429

V. PAPERWORK REDUCTION ACT

429

VI. DRAFTING INFORMATION

429

## I. PURPOSE AND OVERVIEW

This notice provides interim guidance re-
garding section 4960 of the Internal Revenue
Code (Code), enacted on December 22, 2017,
pursuant to section 13602 of Tax Cuts and
Jobs Act, Pub. L. No. 115-97 (the Act). Sec-
tion 4960(a) imposes an excise tax equal to the
rate of tax under section 11 (currently 21 per-
cent) on the amount of remuneration in excess

of $1 million and any excess parachute pay-
ment paid by an applicable tax-exempt orga-
nization to a covered employee.

The interim guidance is intended to
assist taxpayers in applying section 4960
while the Department of the Treasury
(Treasury Department) and the Internal
Revenue Service (IRS) develop further
guidance on the application of section

4960, and addresses certain issues under
section 4960 on which stakeholders have
indicated that they would benefit from in-
terim guidance. Specifically, the Treasury
Department and the IRS intend to issue
proposed regulations on the amendments
made by section 13602 of the Act that will
incorporate the guidance provided in this
notice. However, as provided in Section

IV of this notice, any future guidance un-
der section 4960 will be prospective and
will not apply to taxable years beginning
before the issuance of that guidance. Until
further guidance is issued, to comply with
the requirements of section 4960, taxpay-
ers may base their positions upon a good
faith, reasonable interpretation of the stat-
ute, including consideration of the legis-
lative history, if appropriate. The posi-
tions reflected in this notice constitute a
good faith, reasonable interpretation of the
statute. Whether a taxpayer's position that
is inconsistent with this notice constitutes
a good faith, reasonable interpretation of
the statute generally will be determined
based upon all of the relevant facts and
circumstances, including whether the tax-
payer has applied the position consistently
and the extent to which the taxpayer has
resolved interpretive issues based on con-
sistent principles and in a consistent man-
ner. Notwithstanding the previous sen-
tence, this preamble describes certain
positions that the Treasury Department
and the IRS have concluded are not con-
sistent with a good faith, reasonable inter-
pretation of the statutory language. The
Treasury Department and the IRS intend
to embody these positions as part of the
forthcoming proposed regulations.

Comments are requested on all aspects
of this notice. See Section III of this notice
regarding requests for comments on spe-
cific aspects of this notice and for infor-
mation on how to submit comments.

### A. Section 4960 - In General

Section 4960(a) of the Code generally
provides that an applicable tax-exempt or-
ganization (ATEO), or a related organiza-
tion, that pays remuneration in excess of
$1 million or any excess parachute pay-
ment to a covered employee is subject to
an excise tax on the amount of the excess
remuneration and excess parachute pay-
ments at a rate equal to the rate of tax
imposed on corporations under section 11
(currently 21 percent).

Section 4960(a)(1) refers to remunera-
tion paid "for the taxable year," but does
not specify which taxpayer's taxable year
is used, what it means for remuneration to

be paid "for" a taxable year, or how to
measure remuneration if an ATEO and a
related organization have different taxable
years. Q/A-2 provides that the excise tax
imposed on excess remuneration and ex-
cess parachute payments is determined
based on remuneration paid and excess
parachute payments made in the calendar
year ending with or within the taxable
year of the employer. This measurement
period, as commenters suggested, will re-
duce the administrative burdens that
would arise if taxpayers were required to
allocate remuneration paid during a single
calendar year to multiple non-calendar
taxable years. Moreover, this approach
will reduce administrative burdens by
aligning more closely with the calendar
year reporting of compensation on Form
W-2, Wage and Tax Statement, and Form
990, Return of Organization Exempt
From Income Tax.

Some commenters recommended that
ATEOs and related organizations be al-
lowed, but not required, to treat remuner-
ation paid during the calendar year ending
with or within the taxable year of the
employer as remuneration paid "for the
taxable year" under section 4960(a)(1).
Commenters recommended this rule be
elective in order for non-calendar year
taxpayers to avoid the potential inclusion
of remuneration for a period prior to the
effective date of section 4960 (the first
taxable year beginning after December 31,
2017). Q/A-13 and Q/A-39 avoid that
result by treating remuneration in which
the covered employee vested before the
effective date of section 4960 as paid be-
fore that effective date. Because these
Q/As address the issue raised by the com-
menters, the Treasury Department and the
IRS have concluded that an election for
the remuneration measurement period is
unnecessary.

The guidance in this notice provides
rules regarding the entity that is liable for
the excise tax under section 4960, and
how that excise tax is calculated. Q/A-3
provides that the common-law employer,
as determined generally for federal tax
purposes, is liable for the excise tax im-
posed under section 4960. A common-law

employer may not avoid treating a pay-
ment as remuneration under section 4960
by reason of a third party payor arrange-
ment. A payment to the employer's em-
ployee from a third party payor (including
a payroll agent, common paymaster, stat-
utory employer under section 3401(d)(1),
or certified professional employer organi-
zation) or from an unrelated management
company, is considered a payment to the
employee from the common-law em-
ployer. Similarly, a payment to the em-
ployee from a related entity, including a
related entity that is an ATEO, for ser-
vices rendered to the common-law em-
ployer, is considered a payment to the
employee from the common-law em-
ployer for purposes of calculating remu-
neration and determining liability for the
excise tax. Q/A-3 also clarifies that cal-
culation of the excise tax is separate from
any arrangement that an ATEO and any
related organization may have for bearing
the cost of the excise tax under section
4960.

One commenter requested guidance
providing that remuneration paid by a sep-
arate employer that is a related for-profit
or governmental entity (other than an
ATEO) is taken into account in determin-
ing whether a covered employee has re-
muneration in excess of $1 million, but
that the related entity is not liable for its
share of the excise tax under section 4960.
There is no statutory support for creating
such an exception for for-profit and gov-
ernmental entities. Section 4960(c)(4)(B),
which defines related organizations, ap-
plies to any "person or governmental en-
tity" that meets any of the relationship
tests in section 4960(c)(4)(B)(i)-(v). Un-
like the definition of an ATEO under sec-
tion 4960(c)(1)(C), which applies only to
a governmental entity that excludes in-
come from taxation under section 115(1),1
section 4960(c)(4)(B) applies to any "gov-
ernmental entity" that is related to an
ATEO. Similarly, a for-profit entity is a
"person" under generally applicable tax
principles. In addition, excepting for-
profit entities from liability as related or-
ganizations would be inconsistent with
section 4960(c)(6), which coordinates the

1Section 4960(c)(1)(C) refers to an entity that "has income excluded from taxation under section 115(1)." However, section 115(1) refers to income that is excluded from gross income. For
consistency with the language in section 115(1), this notice refers to an entity that "has income excluded from gross income under section 115(1)," except where directly quoting section
4960(c)(1)(C).

tax on excess parachute payments with
the section 162(m) deduction limitation
(which only applies to for-profit entities).
Further, section 4960(c)(4)(C), which de-
scribes the liability for the excise tax, re-
fers to any case in which remuneration
from more than one employer is taken into
account, stating that "each such em-
ployer" shall be liable, without qualifica-
tion as to the employer's status as an
ATEO. For these reasons, the Treasury
Department and the IRS have concluded
that the position that a for-profit or govern-
mental entity that is a related organization
with regard to an ATEO is not liable for its
share of the excise tax under section 4960 is
not consistent with a good faith, reasonable
interpretation of the statute.

Some ATEOs will not be impacted by
section 4960 because they do not pay an
employee enough remuneration to tri-
gger the tax. There can be no excess re-
muneration under section 4960(a)(1) if an
ATEO (together with any related organi-
zation) pays remuneration of less than $1
million to each of its employees for a tax-
able year, and there can be no excess para-
chute payment under section 4960(a)(2) if
the employer does not have any "highly
compensated employees" under section
414(q)2 for the taxable year. In that case, no
excise tax under section 4960 is owed. For
example, an ATEO that does not pay com-
pensation (within the meaning of section
414(q)) of $125,000 or more to any em-
ployee in 2018 and 2019 is not subject to
excise tax under section 4960 for 2019.

However, there is no minimum dollar
threshold for an employee to be a covered
employee. Even if an ATEO has no liability
under section 4960 for one year, the ATEO
may later need to determine its five highest-
compensated employees for that taxable
year, as those employees continue be cov-
ered employees in all future years and may
be paid excess remuneration or excess para-
chute payments in a future year.

### B. Applicable Tax-Exempt Organizations and Related Organizations

Section 4960(c)(1) provides that an
"applicable tax-exempt organization" is
any organization that for the taxable
year-(A) is exempt from taxation under

section 501(a), (B) is a farmers' coopera-
tive organization described in section
521(b)(1), (C) has income excluded from
taxation under section 115(1), or (D) is a
political organization described in section
527(e)(1).

One commenter requested clarification
on the application of section 4960 to gov-
ernmental entities. Q/A-5 clarifies that
certain governmental entities are not
ATEOs within the meaning of section
4960(c)(1). A governmental entity (in-
cluding a state college or university) that
is not recognized as exempt from taxation
under section 501(a) and does not exclude
income from gross income under section
115(1) is not an ATEO described in sec-
tion 4960(c)(1). Conversely, a govern-
mental entity that excludes income from
gross income under section 115(1) (even
if the entity has other income that is not
excluded from gross income under section
115(1)), or is recognized as exempt from
taxation under section 501(a), is an ATEO
described in section 4960(c)(1).

Q/A-6 clarifies that a governmental
entity that sought and received a determi-
nation letter recognizing its tax-exempt
status under section 501(c)(3) may relin-
quish this status pursuant to the proce-
dures described in section 3.01(12) of
Rev. Proc. 2018-5, 2018-1 I.R.B. 233,
239. However, an entity that excludes in-
come from gross income under section
115(1) is an ATEO regardless of whether
it has a private letter ruling to that effect.

Section 4960(c)(4)(A) provides that re-
muneration paid to a covered employee by
an ATEO includes any remuneration paid
with respect to employment of the em-
ployee by any related person or govern-
mental entity. The Treasury Department
and the IRS interpret the phrase "any re-
lated person or governmental entity" to
include not only related ATEOs but also
related taxable organizations and related
governmental units or other governmental
entities. Section 4960(c)(4)(B) provides
that a person or governmental entity is
related to an ATEO if such person or
governmental entity-(i) controls, or is
controlled by, the organization; (ii) is
controlled by one or more persons
which control the organization; (iii) is a

supported organization (as defined in
section 509(f)(3)) during the taxable
year with respect to the organization;
(iv) is a supporting organization de-
scribed in section 509(a)(3) during the
taxable year with respect to the organi-
zation; or (v) in the case of an organi-
zation which is a voluntary employees'
beneficiary association described in sec-
tion 501(c)(9), establishes, maintains, or
makes contributions to such voluntary
employees' beneficiary association.

For purposes of defining "control"
within the meaning of section 4960(c)(4)
(B)(i)-(ii), Q/A-8 provides rules based on
the definition of control under section
512(b)(13)(D). Thus, the definition of re-
lated organization for purposes of section
4960 generally aligns with the definition
of related organization for purposes of the
annual reporting requirements on Form
990, reducing the burden on organizations
in identifying related organizations, calcu-
lating compensation from related organi-
zations, and determining liability under
section 4960.

Q/A-8 does not adopt the test for con-
trol under section 414(b) and (c), which
generally uses the same test for control
of a nonprofit organization as section
512(b)(13)(D) except that it replaces the
50 percent threshold with an 80 percent
threshold. Instead, Q/A-8 adopts the con-
trol test under section 512(b)(13)(D) for
the administrative convenience of taxpay-
ers, to align more closely with other ex-
empt organization control tests, and to
prevent abuse that may occur in the sec-
tion 4960 context under the higher 80
percent control threshold that was estab-
lished for qualified plans.

### C. Covered Employees

Section 4960(c)(2) defines a covered
employee as any employee who is one of
an ATEO's five highest-compensated em-
ployees for the current taxable year or
who was a covered employee of the
ATEO (or any predecessor) for any pre-
ceding taxable year beginning after De-
cember 31, 2016. Therefore, once an em-
ployee is a covered employee, he or she
continues to be a covered employee for all
subsequent taxable years. There is no min-

2The limitation used in the definition of highly compensated employee under section 414(q)(1)(B) is adjusted for inflation. For 2019, the limitation is $125,000. Notice 2018-83, 2018-47
I.R.B. 774.

imum dollar threshold for an employee to
be a covered employee; thus, an employee
need not be paid excess remuneration or
an excess parachute payment nor be a
highly compensated employee within the
meaning of section 414(q) to be a covered
employee for a taxable year and all future
years.

Commenters requested that the Trea-
sury Department and the IRS provide a
rule of administrative convenience under
which a covered employee is no longer
considered a covered employee of an
ATEO after a certain period of time. The
guidance in this notice does not adopt that
suggestion because it is inconsistent with
the statute. For this reason, the Treasury
Department and the IRS have concluded
that the position that a covered employee
ceases to be a covered employee after a
certain period of time is not consistent
with a good faith, reasonable interpreta-
tion of the statute.

Section 4960 does not provide rules
for identifying an ATEO's five highest-
compensated employees for a taxable
year. Q/A-10 provides that whether an
employee is one of an ATEO's five highest-
compensated employees is based on remu-
neration paid in the calendar year ending
with or within the employer's taxable year.
The Treasury Department and the IRS con-
sidered using certain existing reporting stan-
dards for determining the amount of com-
pensation paid, such as the Securities and
Exchange Commission standards that are
used for section 162(m) purposes or the
standards that are used for Form 990 report-
ing purposes. However, Q/A-10 uses remu-
neration paid for purposes of identifying an
ATEO's five highest-compensated em-
ployee because, as defined in Q/A-12, re-
muneration is a fair representation of com-
pensation earned by an employee and it is
more administrable to use a single standard
for both identifying covered employees and
computing the tax, if any, imposed by sec-
tion 4960(a)(1). In addition, having the cal-
endar year ending with or within the
ATEO's or related organization's taxable
year as the measurement period for identi-
fying the ATEO's five highest-compensated
employees is consistent with the measure-
ment period for purposes of determining
remuneration paid for a taxable year.

Q/A-10 provides that remuneration
paid for medical services is not taken into

account for purposes of identifying the
five highest-compensated employees. One
commenter requested that remuneration
paid for medical services be taken into
account for purposes of determining the
five highest-compensated employees. An
interpretation that remuneration for med-
ical services is taken into account for pur-
poses of identifying the five-highest com-
pensated employees would be inconsistent
with the statutory structure and the legis-
lative intent, and therefore the Treasury
Department and the IRS have concluded
that this interpretation is not consistent
with a good faith, reasonable interpreta-
tion of section 4960. As the Conference
Report to accompany H.R. 1 (Conference
Report) states, "[f]or purposes of deter-
mining a covered employee, remuneration
paid to a licensed medical professional
which is directly related to the perfor-
mance of medical or veterinary services
by such professional is not taken into ac-
count, whereas remuneration paid to such
a professional in any other capacity is
taken into account." H.R. Rep. No. 115-
466, at 494 (2017) (Conf. Rep.).

As set forth in Q/A-9, only an ATEO's
common law employees (including offi-
cers) can be one of an ATEO's five
highest-compensated employees. To iden-
tify its five highest-compensated employ-
ees, the ATEO must include remuneration
paid for the taxable year by any related
organization, including remuneration paid
by a related for-profit organization or gov-
ernmental entity, for services performed
as an employee of such related organiza-
tion. Q/A-12(c) also provides that remu-
neration paid by a separate organization
on behalf of the ATEO, whether related to
the ATEO or not, for services performed
as an employee of the ATEO is treated as
remuneration paid by the ATEO for pur-
poses of section 4960. To prevent circum-
stances in which an employee to whom
the ATEO paid minimal remuneration dis-
places an employee who would otherwise
be a covered employee of the ATEO,
Q/A-10(b) provides a limited services ex-
ception under which, unless an ATEO
pays at least 10 percent of the total remu-
neration paid by the ATEO and all related
organizations to an employee during the
calendar year, the employee is not treated
as one of the ATEO's five highest-
compensated employees. However, if no

ATEO pays at least 10 percent of an em-
ployee's total remuneration during a cal-
endar year, this exception does not apply
to the ATEO that paid the most remuner-
ation to the employee during the calendar
year.

Whether an employee is one of the five
highest-compensated employees is deter-
mined separately for each ATEO, and not
for the entire group of related organiza-
tions; thus, each ATEO has its five
highest-compensated employees. As a re-
sult, in many cases, a group of related
organizations will have more than five cov-
ered employees. Some commenters sug-
gested that a group of related ATEOs should
have only five highest-compensated em-
ployees among all of the related ATEOs,
noting that this is the case for purposes
of section 162(m)(1)-(4), as Treas. Reg.
§ 1.162-27(c)(1)(ii) treats a publicly held
corporation and all nonpublic corporations
related to the publicly held corporation as a
single corporation. Section 4960 does not
provide for such treatment. Further, under
Treas. Reg. § 1.162-27(c)(1)(ii), each re-
lated subsidiary within an affiliated group of
corporations that is itself a publicly held
corporation is separately subject to the de-
duction limitation, just as each ATEO
within a group of related organizations is
separately subject to section 4960. Accord-
ingly, this notice does not adopt the com-
menter's suggestion, and the Treasury De-
partment and the IRS have concluded that
the position that a group of related organi-
zations with more than one ATEO has a
single set of five highest-compensated em-
ployees is not consistent with a good faith,
reasonable interpretation of section 4960.

### D. Excess Remuneration

In general, the excise tax imposed un-
der section 4960(a)(1) is based on the
remuneration paid (other than any excess
parachute payment) by an ATEO for the
taxable year with respect to employment
of any covered employee in excess of $1
million. Q/A-11 provides that this amount
is referred to as "excess remuneration."
Consistent with the statute, the $1 million
threshold is not adjusted for inflation.

Section 4960(c)(3)(A) generally de-
fines "remuneration" as wages under sec-
tion 3401(a) (wages subject to federal in-
come tax withholding), but excluding
designated Roth contributions under sec-

tion 402A(c) and including amounts re-
quired to be included in gross income
under section 457(f). Q/A-12 clarifies that
remuneration includes a parachute pay-
ment that is not an excess parachute pay-
ment, but remuneration does not include
certain retirement benefits (see section
3401(a)(12)) or certain directors' fees (see
Rev. Rul. 57-246, 1957-1 C.B. 338).

The flush language at the end of section
4960(a) provides that, for purposes of sec-
tion 4960(a), remuneration is treated as
paid when there is no substantial risk of
forfeiture of the rights to the remunera-
tion. The term "substantial risk of forfei-
ture" is defined by cross-reference to sec-
tion 457(f)(3)(B). Proposed regulations
under section 457(f) were published in
2016 (81 FR 40548 (Jun. 22, 2016)). The
preamble to the proposed regulations
states that taxpayers may rely on them
before they are finalized. Q/A-13 pro-
vides that the definition of substantial risk
of forfeiture under Prop. Treas. Reg.
§ 1.457-12(e)(1) is the definition of sub-
stantial risk of forfeiture within the mean-
ing of section 457(f)(3)(B) for purposes of
section 4960(a).3 Under Prop. Treas. Reg.
§ 1.457-12(e)(1), an amount of compen-
sation is subject to a substantial risk of
forfeiture only if entitlement to the
amount is conditioned on the future per-
formance of substantial services, or upon
the occurrence of a condition that is re-
lated to a purpose of the compensation if
the possibility of forfeiture is substantial.
Consistent with common usage, Q/A-13
refers to an amount the right to which is
not subject to a substantial risk of forfei-
ture as being "vested" and the lapsing of a
substantial risk of forfeiture as "vesting."

Q/A-13 clarifies that although section
4960(a) cross-references the definition of
substantial risk of forfeiture in section
457(f)(3)(B), the rule under section
4960(a) providing that remuneration is
treated as paid upon vesting is not limited
to remuneration that is otherwise subject
to section 457(f), nor is it limited to non-
qualified deferred compensation under
section 457(f) or section 409A. Rather,
this timing rule for determining when re-
muneration is treated as paid applies to all
forms of remuneration.

Some commenters argued that section
4960(c)(3), which defines remuneration
largely by cross-reference to the definition
of wages under section 3401(a), should be
interpreted as a timing rule. Section
3401(a) primarily focuses on whether, not
when, amounts are includible in wages;
the basic timing rule for wage inclusion
appears in regulations under section
3402(a), not section 3401(a). Specifically,
Treas. Reg. § 31.3402(a)-1(b) provides
that wages are paid when actually or con-
structively paid and explains what it
means for an amount to be constructively
paid. Thus, the Treasury Department and
the IRS conclude that the cross-reference
to section 3401(a) (and not section
3402(a)) in section 4960(c)(3) establishes
the scope of the term "remuneration"
without regard to timing, and that the flush
language in section 4960(a) establishes
the timing rule that applies to all forms of
remuneration. Accordingly, Q/A-13 pro-
vides that, for purposes of determining
when remuneration is treated as paid, the
timing rule in section 4960(a) applies and
the timing rule for wage inclusion under
Treas. Reg. § 31.3402(a)-1(b) is not rel-
evant.

Under Q/A-13, the amount of remu-
neration treated as paid at vesting is the
present value of the remuneration in
which the covered employee vests. The
employer must determine the present
value using reasonable actuarial assump-
tions regarding the time and likelihood of
actual or constructive payment. The em-
ployer may use the rules set forth in Prop.
Treas. Reg. § 1.457-12(c)(1) to determine
the present value. In addition, for pur-
poses of determining the present value of
remuneration that is scheduled to be paid
within 90 days of vesting, the employer
may elect to treat the amount that is to be
paid as the present value of the amount on
the date of vesting. Until actually or con-
structively paid, the amount treated as
paid at vesting is referred to as “previ-
ously paid remuneration."

Q/A-13 provides specific rules for tim-
ing of inclusion for earnings and losses on
previously paid remuneration. Net earn-
ings on previously paid remuneration are
treated as paid at the close of the calendar
year in which they accrue. For example,

the present value of vested remuneration
credited to an employee's account under
an account balance plan described in
Treas. Reg. § 1.409A-1(c)(2)(i)(A) (under
which the earnings and losses attributed to
the account are based solely on a prede-
termined actual investment or a reason-
able market interest rate) is treated as paid
on the date credited to the employee's
account and, until subsequently actually
or constructively paid, is treated as previ-
ously paid remuneration. However, at
the close of each calendar year in which
there is previously paid remuneration al-
locable to a covered employee, the present
value of any net earnings accrued on that
previously paid remuneration (the in-
crease in present value due to the prede-
termined actual investment or a reason-
able market interest rate) is treated as
remuneration paid (and subsequently is
treated as previously paid remuneration
until actually or constructively paid). Sim-
ilarly, the present value of a vested, fixed
amount of remuneration under a nonac-
count balance plan described in Treas.
Reg. § 1.409A-1(c)(2)(i)(C) is treated as
paid on the date of vesting and subse-
quently as previously paid remuneration
until actually or constructively paid. But,
at the close of each calendar year in which
there is previously paid remuneration al-
locable to a covered employee, the net
increase in the present value of that
amount during the year constitutes earn-
ings and is treated as remuneration paid
(and subsequently is also treated as previ-
ously paid remuneration until actually or
constructively paid). For this purpose,
earnings and losses from one arrangement
may be aggregated with earnings and
losses from any other arrangement pro-
vided by the same employer in which the
employee participates, resulting in a sin-
gle amount of remuneration and one
amount, if any, of carryover losses (but no
carryover gains, since any net gain would
be treated as remuneration for the taxable
year). For purposes of determining earn-
ings and losses, previously paid remuner-
ation is reduced by the amount actually or
constructively paid under the plan or ar-
rangement granting the rights to such re-
muneration. Q/A-13 further illustrates the
operation of these rules through examples.

3 Any changes to the proposed regulations under section 457(f) when finalized will be taken into account for purposes of section 4960, and further guidance may be issued if appropriate.

One commenter requested a "grandfa-
ther" rule like the transition rule under
section 13601 of the Act that amended
section 162(m). Because section 13602 of
the Act, which added section 4960 to the
Code, does not provide a transition rule
(in contrast to section 13601 of the Act),
and there is no indication in the legislative
history that Congress intended there to
be a transition rule for section 4960, the
Treasury Department and the IRS have
concluded that it is inappropriate to pro-
vide an effective date exception similar to
the one provided for purposes of section
13601 of the Act. However, Q/A-13 clar-
ifies and demonstrates the grandfathering
effect of the remuneration payment timing
rule. Specifically, Q/A-13 clarifies that
any vested remuneration, including vested
but unpaid earnings on deferred amounts,
that is treated as paid before section 4960
is applicable (January 1, 2018, in the case
of a calendar year employer) is not subject
to the excise tax imposed under section
4960(a)(1), although earnings after the ef-
fective date on those amounts are treated
as remuneration paid for purposes of sec-
tion 4960(a)(1). Similarly, Q/A-13 clari-
fies that vested amounts that would have
been treated as remuneration paid (includ-
ing vested but unpaid earnings) before the
year in which an employee first becomes a
covered employee are not remuneration
for the first year the employee becomes a
covered employee or any subsequent year
and, therefore, are not subject to the ex-
cise tax imposed under section 4960(a)(1).
However, subsequent earnings on that
vested remuneration may be subject to
excise tax under section 4960(a)(1).

To reduce administrative burdens,
some commenters recommended that re-
muneration be determined solely by refer-
ence to the amount reportable in Form
W-2, box 1. For the following reasons,
the Treasury Department and the IRS
have concluded it is inappropriate to adopt
that recommendation. In defining remu-
neration, section 4960(c)(3) explicitly
cross-references and modifies the defini-
tion of wages under section 3401(a). Al-
though the amount reportable in Form
W-2, box 1 includes wages as defined
under section 3401(a), it may also include
amounts that are includible in the employ-
ee's gross income but are not wages under
section 3401(a). In addition, as explained

previously, the timing rule for when re-
muneration is paid under section 4960(a)
differs from the timing rule for when
wages are paid under section 3401(a).
Therefore, the amount reported in Form
W-2, box 1 in many cases will not be the
same as the employee's remuneration for
purposes of section 4960.

As an alternative to using the amount
reported in Form W-2, box 1, some com-
menters recommended that remuneration
be defined solely by reference to the
amount reportable in Form W-2, box 5,
which reports the amount of wages (as
defined in section 3121(a)) subject to the
Hospital Insurance tax under sections
3101(b) and 3111(b). However, there are
differences between the definitions of wages
under sections 3401(a) and 3121(a), and
there is no indication in the statute or legis-
lative history that Congress intended that the
definition of wages in section 3121(a) be
used to determine remuneration under sec-
tion 4960(a). In addition, the payment tim-
ing differences discussed previously apply
so that the amounts reported in Form W-2,
box 5 may not accurately reflect the remu-
neration paid for the applicable period for
purposes of section 4960. For these reasons,
the Treasury Department and the IRS have
concluded it is not appropriate to adopt this
recommendation.

An individual may perform services as
a common-law employee for two different
related organizations during the calendar
year, one or both of which is an ATEO, in
which case remuneration paid for the tax-
able year is aggregated for purposes of
determining whether excess remuneration
has been paid. To address these cases,
Q/A-14 provides rules for allocating liabil-
ity for the excise tax among the employers.
As provided in section 4960(c)(4)(C), in any
case in which an ATEO includes remuner-
ation from one or more related organizations
as separate employers of the individual in
determining the excise tax imposed by sec-
tion 4960(a), each employer is liable for its
proportionate share of the excise tax.

The guidance in this notice provides
specific instructions for calculating the ex-
cise tax on excess remuneration under
section 4960(a)(1), including rules for al-
locating the excise tax among related em-
ployers and rules regarding a change in
related status during the calendar year. As
described further in Q/A-14, an employee

may be a covered employee of more than
one ATEO and each ATEO employer
calculates its liability under section
4960(a)(1) taking into account the organi-
zations to which it is related. In that case,
Q/A-14 provides that, rather than owing
tax as both an ATEO and a related orga-
nization for the same remuneration paid to
a covered employee, an employer is liable
only for the greater of the excise tax it
would owe as an ATEO or the excise tax
it would owe as a related organization
with respect to that covered employee.

### E. Medical and Veterinary Services

Section 4960(c)(3)(B) and (c)(5)(C)(iii)
exclude from remuneration and parachute
payments, respectively, the portion of any
compensation that is for the performance of
medical or veterinary services by a licensed
medical professional (including a veterinar-
ian). The Conference Report states that
"[f]or purposes of determining a covered
employee, remuneration paid to a licensed
medical professional which is directly re-
lated to the performance of medical or vet-
erinary services by such professional is not
taken into account, whereas remuneration
paid to such a professional in any other
capacity is taken into account." Conf. Rep.
at 494 (emphasis added).

Sections 4960(c)(3)(B) and (c)(5)(C)(iii)
both use the phrase "medical or veterinary
services." Consistent with the legislative
history quoted previously, Q/A-15 provides
that remuneration for the direct performance
of medical or veterinary services is excluded
for purposes of section 4960. Commenters
requested guidance as to the meaning of
"licensed medical professional," which is
not defined in the statute. The Conference
Report states that "[a] medical professional
for this purpose includes a doctor, nurse, or
veterinarian." Conf. Rep. at 494. Q/A-15
provides that a licensed medical profes-
sional is an individual who is licensed under
state or local law to perform medical or
veterinary services. In addition to those pro-
fessionals listed, this generally includes den-
tists and nurse practitioners and may include
other medical professionals depending on
state or local law.

Commenters also requested guidance
on the definition of medical services for
purposes of section 4960. Q/A-15 adopts
the definition of medical care under sec-
tion 213(d) for purposes of determining

whether services are medical services.
This standard is consistent with the legis-
lative intent that the exception apply only
to remuneration for the direct perfor-
mance of medical services and is a famil-
iar standard for taxpayers. Section 213(d)
provides that medical care consists of ser-
vices for the diagnosis, cure, mitigation,
treatment, or prevention of disease, in-
cluding services for the purpose of affect-
ing any structure or function of the body.
For a veterinarian or other licensed veter-
inary professional, section 213(d)(1)(A)
applies by analogy to determine whether
the activity constitutes veterinary ser-
vices.

In addition, commenters requested
guidance on whether activities related to
medical services, such as administrative,
teaching, and research services, are med-
ical services. Q/A-15 provides that these
activities generally are not medical ser-
vices. However, to the extent a licensed
medical professional provides direct med-
ical care to a patient in the course of these
activities, he or she performs medical ser-
vices, and remuneration allocable to those
services is not taken into account for pur-
poses of section 4960.

When a covered employee is compen-
sated for both medical services and other
services, the employer must allocate re-
muneration paid to such employee be-
tween medical services and such other
services. Q/A-15 permits taxpayers to use
any reasonable, good faith method to al-
locate remuneration between medical ser-
vices and other services. For this purpose,
taxpayers may rely on a reasonable allo-
cation set forth in an employment agree-
ment that explicitly allocates a portion of
the remuneration as for medical services
or other services. If some or all of the
remuneration is not reasonably allocated
in an employment agreement, taxpayers
must use a reasonable method of alloca-
tion. As an example of a reasonable
method, a taxpayer may use records such
as patient, insurance, and Medicare/Med-
icaid billing records or internal time re-
porting mechanisms to determine the time
spent providing medical services, and then
allocate remuneration to medical services

in the proportion such time bears to the
total hours the covered employee worked
for the employer. The same rules apply
with respect to veterinary services.

### F. Excess Parachute Payments

Section 4960(a)(2) imposes an excise
tax on "any excess parachute payment."
Section 4960(c)(5)(A) provides that the
term "excess parachute payment" means
an amount equal to the excess of any
parachute payment over the portion of the
base amount allocated to such payment.
Section 4960(c)(5)(B) provides that the
term "parachute payment" means any
payment in the nature of compensation to
(or for the benefit of) a covered employee
if (i) such payment is contingent on such
employee's separation from employment
with the employer, and (ii) the aggregate
present value of the payments in the na-
ture of compensation to (or for the benefit
of) such individual which are contingent
on such separation equals or exceeds an
amount equal to three times the base
amount. Section 4960(c)(5)(C) provides
exceptions for certain retirement plans,
certain payments to licensed medical pro-
fessionals, and payments to individuals
who are not highly compensated employ-
ees as defined in section 414(q).4

The excess parachute payment rules
under section 4960 are modeled after sec-
tion 280G. Section 280G disallows a de-
duction for any excess parachute payment.
Although sections 280G and 4960 both
use the term "parachute payment," they
define it differently. Whereas the section
4960 definition refers to payments contin-
gent on an employee's separation from
employment, the section 280G definition
refers to payments contingent on a change
in the ownership or effective control of a
corporation (or in the ownership of a sub-
stantial portion of the assets of the corpo-
ration). There are also other differences
between sections 280G and 4960. For ex-
ample, section 280G does not include ex-
ceptions for payments to licensed medical
professionals or non-highly compensated
employees. The guidance in this notice
incorporates many of the questions and

answers (Q/As) under Treas. Reg.
§ 1.280G-1, with modifications to reflect
the statutory differences between sections
280G and 4960. However, certain Q/As
under Treas. Reg. § 1.280G-1 are not
incorporated into this notice because they
address issues that do not arise under sec-
tion 4960. Conversely, certain Q/As in
this notice do not have parallel Q/As un-
der Treas. Reg. § 1.280G-1 because they
address issues that arise under section
4960 but not under section 280G.

The discussion of Q/A-16 through
Q/A-34 that follows provides an over-
view of the guidance in this notice for
purposes of calculating the excise tax un-
der section 4960(a)(2), noting certain sim-
ilarities and differences between those
Q/As and the Q/As under Treas. Reg.
§ 1.280G-1. As a preliminary matter,
however, the following summarizes the
basic steps used to determine the amount
of excise tax (if any) under section
4960(a)(2):

Step 1: Determine if a covered em-
ployee is entitled to receive payments in
the nature of compensation that are con-
tingent on an involuntary separation from
employment and are not subject to an ex-
clusion.

Step 2: Calculate the total aggregate
present value of the contingent payments,
taking into account the special valuation
rules that apply when an involuntary sep-
aration from employment accelerates pay-
ment or vesting of a right to a payment.

Step 3: Calculate the covered employ-
ee's base amount with respect to the base
period.

Step 4: Determine if the contingent
payments are parachute payments. The
contingent payments are parachute pay-
ments if their total aggregate present value
equals or exceeds an amount equal to
three times the covered employee's base
amount.

Step 5: Calculate the amount of excess
parachute payments. A parachute pay-
ment is an excess parachute payment to
the extent the payment exceeds the base
amount allocated to the payment. (Note
that this is the excess over 1 times the base

4Under section 414(q), a highly compensated employee generally is defined as any employee who was a five-percent owner at any time during the year or the preceding year or who had
compensation from the employer in the preceding year in excess of an inflation-adjusted amount. Notice 2017-64, 2017-45 I.R.B. 486, and Notice 2018-83, provide that the
inflation-adjusted amounts for 2018 and 2019 are $120,000 and $125,000, respectively. See section 414(q) and the regulations thereunder for additional details, including the availability
of an election to treat no more than the top 20 percent of an employer's employees as highly compensated employees by reason of their compensation.

amount, and not the excess over 3 times
the base amount.)

Step 6: Calculate the amount of excise
tax under section 4960(a)(2). The excise
tax is the amount equal to the product of
the rate of tax under section 11 and the
sum of any excess parachute payments
paid by an ATEO or related organization
to the covered employee.

Q/A-16 defines the term "excess para-
chute payment," and Q/A-17 defines
the term "parachute payment." Q/A-18,
which defines a "payment in the nature of
compensation," is based on Treas. Reg.
§ 1.280G-1, Q/A-11. Q/A-19, which de-
scribes when a payment is considered
made for purposes of section 4960(a)(2),
including the treatment of section 83
property, stock options, and stock appre-
ciation rights and the treatment of consid-
eration paid by an employee, is based on
Treas. Reg. § 1.280G-1, Q/A-12 through
Q/A-14.

Q/A-20 describes when a payment is
contingent on an employee's separation
from employment. Commenters requested
that the Treasury Department and the IRS
clarify what it means for a payment to be
contingent on a separation from employ-
ment, noting that the statute does not pro-
vide a definition. One commenter sug-
gested that the Treasury Department and
the IRS issue guidance treating a payment
as contingent on an employee's separation
from employment only if the payment is
subject to a substantial risk of forfeiture
(defined in a manner consistent with sec-
tion 457(f) or section 409A) at the time of
a separation from employment and the
separation causes the risk of forfeiture to
lapse. The guidance in this notice is gen-
erally consistent with that suggestion,
with certain exceptions discussed in the
next several paragraphs.

Separation from employment (whether
voluntary or involuntary) is often used in
compensation arrangements as the trigger
to pay vested amounts. For example, it is
typical for a nonqualified deferred com-
pensation plan to provide that payments
will be made or begin upon a separation
from employment, including separation
from employment resulting from death
or disability. In contrast, Treas. Reg.
§ 1.280G-1, Q/A-22 generally treats a
payment as contingent on a change in
ownership or control if the payment

would not have been made had no change
in ownership or control occurred, taking
into consideration whether vesting or pay-
ment is accelerated by reason of the
change in ownership or control. Similarly,
in defining when a payment is contingent
on separation from employment, this no-
tice does not focus solely on whether the
payment would not have been made but
for a separation from employment, but
instead also takes into consideration
whether the separation from employment
results in the employee becoming vested
or otherwise accelerates the right to pay-
ment.

The guidance in this notice limits the
payments treated as contingent on a sep-
aration from employment to payments
contingent on an involuntary separation
from employment because payments that
vest upon a separation from employment
typically vest only upon an involuntary
separation from employment. If an em-
ployee may voluntarily separate from ser-
vice and still be entitled to a payment,
then the payment either is not subject to a
substantial risk of forfeiture or the forfei-
ture condition is not related to the separa-
tion from employment. If, however, there
are other types of separation from em-
ployment conditions that may result in the
lapse of a substantial risk of forfeiture
applicable to a payment, the standard in
this notice may be expanded in future
guidance to ensure that those payments
are also treated as contingent on a separa-
tion from employment.

Specifically, Q/A-20 provides that a
payment is contingent on a separation
from employment if the payment would
not have been made in the absence of an
involuntary separation from employment.
It further provides that if the right to a
payment vests as a result of an involuntary
separation from employment, the payment
is treated as a payment that is contingent
on a separation from employment. For
example, a right to a severance payment
provided in an employment agreement
that vests upon an involuntary separation
from employment is a payment contingent
on a separation from employment.

However, not all payments that are
made after an involuntary separation from
employment are contingent on a separa-
tion from employment. For example, a
payment of deferred compensation after

an involuntary separation from employ-
ment that vested based on years of service
completed before the involuntary separa-
tion from employment generally is not a
payment that is contingent on a separation
from employment because the payment
would be paid at some point, and the
separation from employment may impact
the time of, but not the right to, the pay-
ment. Similarly, medical benefits that
vested based on years of service com-
pleted before an involuntary separation
from employment but that are provided
after the involuntary separation from em-
ployment generally are not treated as pay-
ments that are contingent on a separation
from employment.

Q/A-20 also provides that an amount
that was included in gross income in a
previous year and excess remuneration
that was treated as paid under Q/A-13
before the separation from employment
are not contingent on the separation from
employment. Therefore, while these
amounts may be included in the employ-
ee's base amount, payments of these
amounts are not parachute payments.

Q/A-24 provides that if a payment is
accelerated or a substantial risk of forfei-
ture lapses as a result of an involuntary
separation from employment, the addi-
tional value due to the acceleration is
treated as a payment contingent on a sep-
aration from employment. Q/A-24 is
based on the rules of Treas. Reg.
§ 1.280G-1, Q/A-24(b) and (c) for pur-
poses of determining the value of these
accelerations.

Notwithstanding the foregoing, if the
facts and circumstances demonstrate that
either vesting or payment of an amount
(whether before or after the involuntary
separation from employment) would not
have occurred but for the involuntary na-
ture of the separation from employment,
the amount will be treated as contingent
on a separation from employment. For
example, an employer's exercise of dis-
cretion to accelerate vesting of an amount
shortly before an involuntary separation
from employment may indicate that the
acceleration of vesting was due to the
involuntary nature of the separation from
employment and, thus, was contingent on
the employee's separation from employ-
ment. Similarly, payment of an amount in
excess of an amount otherwise payable (for

example, increased salary) shortly before or
after an involuntary separation from em-
ployment may indicate that the amount was
paid because the separation was involuntary
and, thus, was contingent on the employee's
separation from employment.

Q/A-21 provides that payments pursu-
ant to certain window programs are
treated as payments contingent on a sep-
aration from employment and is based on
Treas. Reg. § 1.409A-1(b)(9).

Q/A-23 generally adopts the standards
of the regulations under section 409A for
purposes of determining whether there has
been a separation from employment, ex-
cept that a bona fide change from em-
ployee to independent contractor status is
treated as a separation from employment.
However, the IRS may assert based on all
the facts and circumstances that there was
not a bona fide change from employee to
independent contractor status. Specifi-
cally, Q/A-23 adopts the standards of
Treas. Reg. § 1.409A-1(h)(1)(ii), provid-
ing that an anticipated reduction in the
level of services of more than 80 percent
is treated as a separation from employ-
ment and an anticipated reduction in the
level of services of less than 50 percent is
not treated as a separation from employ-
ment, with the treatment of an anticipated
reduction between these two levels de-
pending on the facts and circumstances.
The guidance in this notice does not adopt
the rule of Treas. Reg. § 1.409A-1(h)
(1)(ii) under which an employer may
modify the level of the anticipated reduc-
tion in future services that will be consid-
ered to result in a separation from employ-
ment. Instead, the default 80 percent and
50 percent levels provided under Treas.
Reg. § 1.409A-1(h)(1)(ii) apply for pur-
poses of section 4960.

Unlike Q/A-25 and Q/A-26 of Treas.
Reg. § 1.280G-1, the guidance in this no-
tice does not provide a presumption that a
payment made pursuant to an agreement
entered into or modified within twelve
months of a separation from employment is
a payment that is contingent on a separation
from employment. However, as noted pre-
viously, if the facts and circumstances dem-
onstrate that either the vesting or the pay-
ment of an amount would not have occurred
but for the involuntary nature of the separa-
tion from employment, the amount will be

treated as a payment contingent on a sepa-
ration from employment.

In addition, the guidance in this notice
does not incorporate Treas. Reg. § 1.280G-1,
Q/A-9, excluding reasonable compensation
for services from the definition of parachute
payment. In many cases, whether payments
after a separation from employment are rea-
sonable compensation for services will not
be an issue because the employee will not
provide services after the separation from
employment. However, if the employee
continues to provide services (including as a
bona fide independent contractor) after a
separation from employment, payments for
those services are not contingent on the in-
voluntary separation from employment to
the extent those payments are reasonable
and are not made due to the involuntary
nature of the separation from employment.

Finally, the guidance in this notice
does not include a rule similar to Treas.
Reg. § 1.280G-1, Q/A-16, under which a
personal service corporation (PSC) is
treated as an employee. Q/A-3 provides
that section 4960 applies to amounts paid
to common law employees who are cov-
ered employees of an ATEO. Although a
PSC that performs services for an ATEO
is not treated as an employee, the IRS may
assert that the individual owner of a PSC
is in fact a common law employee of an
ATEO based on all the facts and circum-
stances.

#### G. Three-Times-Base-Amount Test for Parachute Payments

Section 4960(c)(5)(B) provides that a
payment is a parachute payment only if
the aggregate present value of the pay-
ments in the nature of compensation to (or
for the benefit of) an individual that are
contingent on a separation from employ-
ment equals or exceeds an amount equal
to three times the base amount.

Section 4960(c)(5)(D) provides that
rules similar to the rules of section
280G(b)(3) apply for purposes of deter-
mining the base amount, and section
4960(c)(5)(E) provides that rules similar
to the rules of paragraphs (3) and (4) of
section 280G(d) apply for purposes of
present value determinations. Section
280G(b)(3) provides that the term "base
amount" means an individual's annual-
ized includible compensation for a base
period. Section 280G(d)(2) defines "base

period" as the period consisting of the five
most recent taxable years of the service
provider ending before the date on which
the change in ownership or control oc-
curs or the portion of such period during
which the individual performed personal
services for the corporation. Section
280G(d)(3) provides that any transfer of
property is treated as a payment and is
taken into account at its fair market
value. Section 280G(d)(4) provides that
present value is determined using a dis-
count rate equal to 120 percent of the
applicable Federal rate determined un-
der section 1274(d), compounded semi-
annually.

Q/A-25 through Q/A-31 are based on
the rules under Treas. Reg. § 1.280G-1,
Q/A-30 through Q/A-35 (substituting an
involuntary separation from employment
for a change in control) for determining
whether a payment is an excess parachute
payment, including the rules for applying
the three-times-base-amount test, determin-
ing the base amount and base period, and
determining present value, including deter-
mining the present value of payments that
are contingent on uncertain future events.

##### H. Computation of Excess Parachute Payments

Section 4960(c)(5)(A) provides that an
"excess parachute payment" is an amount
equal to the excess of any parachute pay-
ment over the portion of the base amount
allocated to such payment. Q/A-32(a) is
based on Treas. Reg. § 1.280G-1, Q/A-
38, regarding allocating the base amount
to a parachute payment (that is, determin-
ing the portion that is not a parachute
payment because it does not exceed the
base amount). Q/A-2 provides that the
excise tax on excess parachute payments
for a taxable year is based on any excess
parachute payments made in the calendar
year ending with or within the taxable
year of the ATEO.

###### I. Reporting Liability Under Section 4960

As requested by some commenters,
Q/A-34 provides guidance as to the re-
porting and due date for paying the sec-
tion 4960 excise tax. On November 7,
2018, the Treasury Department and the
IRS issued proposed regulations under

sections 6011 and 6071 (Prop. Treas. Reg.
§§ 53.6011-1 and 53.6071-1, 83 F.R.
55653) to address reporting and the due
date for paying the tax. The proposed reg-
ulations provide that the excise tax under
section 4960 is reported on Form 4720,
Return of Certain Excise Taxes Under
Chapters 41 and 42 of the Internal Revenue
Code, which is the form generally used for
reporting and paying chapter 42 taxes. Each
employer liable for section 4960 tax,
whether an ATEO or a related organization
described in section 4960(c)(4)(B), is re-
sponsible for separately reporting and pay-
ing its share of the tax. The proposed regu-
lations provide that Form 4720 and payment
are due when chapter 42 taxes ordinarily are
due (the 15th day of the 5th month after the
end of the taxpayer's taxable year-May 15
for a calendar year employer), subject to an
extension of time for filing that generally
applies. This rule is also reflected in Q/A-
34(a).

Q/A-34(b) provides that an employer
may elect to prepay the excise tax im-
posed under section 4960(a)(2) in the year
of separation from employment (or any
taxable year prior to the year in which the
parachute payment is actually paid). This
rule is similar to the rule in Treas. Reg.
§ 1.280G-1, Q/A-11(c), under which a
disqualified employee may elect to prepay
the excise tax under section 4999 based on
the present value of the excise tax that
would be owed by the employee when the
parachute payments are actually made.

Some commenters requested clarifica-
tion as to whether section 4960 excise tax
is subject to quarterly payments of esti-
mated tax under section 6655. Since sec-
tion 6655 was not amended to include
section 4960, no quarterly payments of
estimated section 4960 tax are required
under section 6655. See Q/A-35.

### J. Miscellaneous Issues

Q/A-36 through Q/A-38 address coor-
dination of section 4960 with other Code
provisions. Commenters requested clarifi-
cation of the relationship between the sec-
tion 4960 excise tax and excise taxes for
unreasonable or excessive compensation
under section 4958 or, in the case of com-
pensation to disqualified persons for per-
sonal services, section 4941. Q/A-36 and
Q/A-37 confirm that there is no particular
relationship between liability for excise

tax under section 4960 and liability under
these other provisions. In cases involving
excessive compensation for purposes of
section 4958 or section 4941, there may or
may not be concurrent excise tax liability
under section 4960, and in cases involving
section 4960 excise tax liability, there
may or may not be concurrent liability
under section 4958 or section 4941.

Q/A-38 addresses the rule under sec-
tion 4960(c)(6) that remuneration for
which a deduction is disallowed under
section 162(m) is not taken into account
under section 4960. For example, an
ATEO's covered employee may also be a
covered employee of a publicly held cor-
poration (as those terms are defined in
section 162(m)(2) and (3)) if the publicly
held corporation is related to the ATEO
under section 4960(c)(4)(B). In that case,
any portion of remuneration disallowed as
a deduction by reason of section 162(m) is
not taken into account under section 4960.

#### K. Effective Date

Section 4960 is effective for the first
taxable year beginning after December 31,
2017. Q/A-39 provides that amounts paid
before the beginning of that taxable year
are not subject to the excise tax under
section 4960. As described previously in
the discussion of remuneration for pur-
poses of section 4960(a)(1), remuneration
that was vested before the effective date
of section 4960 is not subject to excise tax
under section 4960 because it is treated as
having been paid at vesting. For example,
amounts includible in gross income under
section 457(f)(1)(A) and any vested earn-
ings that accrued before the effective date
of section 4960 are not subject to the
excise tax under section 4960. However,
earnings accrued on those amounts in tax-
able years beginning after December 31,
2017, may be subject to excise tax under
section 4960(a)(1).

## II. INTERIM GUIDANCE ON APPLICATION OF SECTION 4960

### A. Section 4960 - In General

#### Q-1: What is the effect of section 4960?

A-1: An ATEO or related organization
that pays excess remuneration or an ex-
cess parachute payment to a covered em-

ployee is subject to an excise tax on that
amount at a rate equal to the rate of tax
under section 11. For taxable years begin-
ning after December 31, 2017, the rate of
tax under section 11 is 21 percent. See
section 13001 of the Act.

#### Q-2: What year is used in calculating the section 4960 excise tax?

A-2: Excess remuneration paid and ex-
cess parachute payments made in the calen-
dar year ending with or within the taxable
year of an ATEO or a related organization,
whichever is the applicable employer, are
treated as paid for that taxable year. Thus,
the excise tax on excess remuneration and
excess parachute payments is calculated
based on excess remuneration paid and ex-
cess parachute payments made during the
calendar year ending with or within the em-
ployer's taxable year.

#### Q-3: Who is liable for the section 4960 excise tax?

A-3: (a) In general. The common-law
employer, as generally determined for
federal tax purposes, is liable for the ex-
cise tax imposed under section 4960. Only
an ATEO has covered employees, but a
covered employee may also be an em-
ployee of a related organization. When an
employer that is an ATEO or a related
organization pays a covered employee ei-
ther excess remuneration or an excess
parachute payment, each employer is lia-
ble for the excise tax under section 4960.
See Q/A-14 for rules that apply when
more than one employer is liable for the
excise tax on excess remuneration.

Whether a person or entity is the
common-law employer generally depends on
the facts and circumstances. A common-law
employer may not avoid liability under section
4960 by reason of a third party payor arrange-
ment, such as an arrangement with a payroll
agent, common paymaster, statutory employer
under section 3401(d)(1), or certified profes-
sional employer organization, or any similar
arrangement. For purposes of section 4960, a
payment to an employee by a third-party
payor is considered paid by the common-law
employer with respect to the services for
which the payment is made. Similarly, a pay-
ment to an employee on behalf of the
common-law employer (such as a payment

from a related organization for which the in-
dividual is not providing services as an em-
ployee or a payment from an unrelated man-
agement company), is considered paid by the
common-law employer for purposes of sec-
tion 4960.

(b) Disregarded entities. In the case of
employment by a disregarded entity de-
scribed in Treas. Reg. § 301.7701-3, the
sole owner of the disregarded entity is
treated as the common-law employer for
purposes of section 4960.

(c) Arrangements between an ATEO
and a related organization. Calculation
of, and liability for, the excise tax based
on excess remuneration or an excess para-
chute payment in accordance with this
Q/A-3 is separate from and unaffected by
any arrangement that the ATEO and any
related organization may have for bearing
the cost of any excise tax liability under
section 4960.

### B. Applicable Tax-Exempt Organizations and Related Organizations

Q-4: What is an applicable tax-
exempt organization within the
meaning of section 4960(c)(1)?

A-4: As provided in section 4960(c)(1),
an ATEO is any organization which for its
taxable year-

(A) is exempt from taxation under sec-
tion 501(a),

(B) is a farmers' cooperative organiza-
tion described in section 521(b)(1),

(D) is a political organization de-
scribed in section 527(e)(1).

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

A-5: Governmental entities specifi-
cally described in section 4960(c)(1), that
is, organizations that have income ex-
cluded from taxation under section 115(1)
and organizations that are exempt from
taxation under section 501(a), are ATEOs.
For example, federal instrumentalities ex-
empt 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 sepa-
rately 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 subdi-
vision 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) be-
cause section 115(1) does not apply to
income from an activity that the state con-
ducts directly, rather than through a sep-
arate 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 gov-
ernmental unit generally is not taxable in
the absence of specific statutory authori-
zation 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 tax-
ing 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.

Q-6: May a governmental entity with
a determination letter recognizing its
tax exemption relinquish its section
501(c)(3) status?

A-6: Yes, a governmental entity may
voluntarily relinquish its section 501(c)(3)

tax-exempt status pursuant to section
3.01(12) of Rev. Proc. 2018-5, 2018-1
I.R.B. 233, 239 (or the analogous section
in any successor revenue procedure), un-
der the procedures described in that reve-
nue procedure.

### Q-7: What is a related organization for purposes of section 4960?

A-7: As provided in section 4960(c)
(4)(B), a person or governmental entity is
related to an ATEO if such person or gov-
ernmental entity-

(i) controls, or is controlled by, the
ATEO;

(ii) is controlled by one or more per-
sons which control the ATEO;

(iii) is a supported organization (as de-
fined in section 509(f)(3)) with respect to
the ATEO;

(iv) is a supporting organization de-
scribed in section 509(a)(3) with respect
to the ATEO; or

(v) in the case of an ATEO which is a
voluntary employees' beneficiary associa-
tion described in section 501(c)(9), estab-
lishes, maintains, or makes contributions
to such voluntary employees' beneficiary
association.

See Q/A-14(c) for rules regarding a
change in related status during the year.

Q-8: What is the meaning of
"control" for purposes of section
4960(c)(4)(B)(i)-(ii) and Q/A-7 of this
notice?

A-8: (a) In general. For purposes of
section 4960(c)(4)(B)(i)-(ii) and Q/A-7 of
this notice, the term "control" is defined as
follows:

(1) Stock corporation. In the case of a
stock corporation, control means owner-
ship (by vote or value) of more than 50
percent of the stock in such corporation.

(2) Partnership. In the case of a part-
nership, control means ownership of more
than 50 percent of the profits interest or
capital interest in such partnership.

(3) Trust. In the case of a trust with
beneficial interests, control means owner-
ship of more than 50 percent of the ben-
eficial interests in the trust.

(4) Nonstock organization. In the case
of a nonprofit organization or other orga-
nization without owners or persons having
beneficial interests (nonstock organiza-

tion), including a governmental entity,
control means that (i) more than 50 per-
cent of the directors or trustees of the
ATEO or nonstock organization are either
representatives of, or are directly or indi-
rectly controlled by, the other entity; or
(ii) more than 50 percent of the directors
or trustees of the nonstock organization
are either representatives of, or are di-
rectly or indirectly controlled by, one or
more persons that control the ATEO. For
purposes of this paragraph, a "representa-
tive" means a trustee, director, agent, or
employee, and control includes the power
to remove a trustee or director and desig-
nate a new trustee or director.

(5) Constructive ownership. For pur-
poses of Q/A-7 and this Q/A-8, section
318 (relating to constructive ownership of
stock) applies for purposes of determining
control of stock in a corporation. For pur-
poses of determining control of any other
entity, including a nonstock organization,
under this Q/A-8, the principles of sec-
tion 318 apply.

(b) Examples. The following examples
illustrate how the rules of Q/A-7 and this
Q/A-8 apply:

Example 1. A, B, and C are nonstock organiza-
tions and are ATEOs within the meaning of section
4960(c)(1). C owns 80 percent of the stock of cor-
poration D. Eighty percent of B's directors are rep-
resentatives of A. In addition, 80 percent of C's
directors are representatives of A. A is a related
organization with respect to B (and vice versa) be-
cause more than 50 percent of B's directors are
representatives of A; thus, A controls B. Based on
the same analysis, A is also a related organization
with respect to C (and vice versa). D is a related
organization with respect to C because, as the owner
of more than 50 percent of D's stock, C controls D.
Applying the principles of section 318, A is deemed
to own 64 percent of the stock of D (80 percent of
C's stock in D). Thus, D is a related organization
with respect to A because A controls D. B is a related
organization with respect to C, C is a related orga-
nization with respect to B, and D is a related orga-
nization with respect to B because B, C, and D are all
controlled by the same person (A).

Example 2. X, Y, and Z are nonstock organiza-
tions and are ATEOs within the meaning of section
4960(c)(1). Sixty percent of Y's directors are repre-
sentatives of X. In addition, 60 percent of Z's direc-
tors are representatives of Y. X is a related organi-
zation with respect to Y (and vice versa) because
more than 50 percent of Y's directors are represen-
tatives of X; thus, X controls Y. Based on the same
analysis, Z is a related organization with respect to Y
(and vice versa). Applying the principles of section
318, X is deemed to control 36 percent of Z's direc-
tors (60 percent of Y's 60 percent control over Z).
Because less than 50 percent of Z's directors are
representatives of or controlled by X, and absent any

facts suggesting that X directly or indirectly controls
Z, X is not a related organization with respect to Z.

#### C. Covered Employees

Q-9: Who is a covered employee
within the meaning of section
4960(c)(2)?

A-9: The term "covered employee"
means any employee (including any for-
mer employee) of an ATEO, if the em-
ployee-

(A) is one of the five highest-
compensated employees of the organiza-
tion for the taxable year of the ATEO, or

(B) was a covered employee of the
ATEO (or any predecessor) for any of the
ATEO's preceding taxable years begin-
ning after December 31, 2016.

### Q-10: How are the five highest- compensated employees determined?

A-10: (a) In general. Except as pro-
vided in Q/A-10(b), the determination of
whether an employee is one of the five
highest-compensated employees of an
ATEO is made on the basis of his or her
remuneration for services performed as an
employee of the ATEO, including remu-
neration for services performed as an em-
ployee of a related organization with re-
spect to the ATEO. The remuneration
used for purposes of identifying the five
highest-compensated employees is the re-
muneration paid to an employee during
the calendar year ending with or within
the ATEO's or related organization's tax-
able year. Remuneration paid for medical
services (or veterinary services) is not
taken into account for purposes of identi-
fying the five highest-compensated em-
ployees.

(b) Limited services exception. An em-
ployee is not one of an ATEO's five
highest-compensated employees for a tax-
able year if, during the calendar year end-
ing with or within the taxable year, as
described in Q/A-2, the ATEO paid less
than 10 percent of the employee's total
remuneration for services performed as an
employee of the ATEO and all related
organizations. However, if an employee
would not be treated as one of the five
highest-compensated employees of any
ATEO in an ATEO's group of related
organizations because no ATEO in the

group paid at least 10 percent of the total
remuneration paid by the group during the
calendar year, then this exception does not
apply to the ATEO that paid the employee
the most remuneration during that year.

Example 1. X and Y are both calendar year
taxpayers and ATEOs that are related organizations
with respect to each other, and both employ E during
calendar year 2020. Of the total remuneration paid to
E for services performed as an employee of X and Y,
50 percent was for services for X and 50 percent was
for services for Y. Based on the aggregate remuner-
ation from X and Y, E is one of the five highest-
compensated employees of both X and Y. E is a
covered employee of both X and Y for 2020 and all
future taxable years.

Example 2. Assume the same facts as Example
1, except that of the total remuneration paid to E for
services performed as an employee of X and Y, 95
percent was for services for X and 5 percent was for
services for Y. E is a covered employee of X for
2020 and all future taxable years, but is not a covered
employee of Y for 2020 because Y did not pay at
least 10 percent of the total remuneration paid to E
by Y and all related organizations and at least one
other related ATEO paid at least 10 percent of that
remuneration.

### D. Excess Remuneration

#### Q-11: What is excess remuneration paid by an applicable tax-exempt organization under section 4960(a)(1)?

A-11: For each covered employee, ex-
cess remuneration is the excess (if any)
for a taxable year of the remuneration that
is paid (other than any excess parachute
payment) by an ATEO, including remu-
neration paid by a related organization,
over $1 million for the taxable year.

#### Q-12: What is remuneration under section 4960(c)(3)?

A-12: (a) General rule. The term "re-
muneration" has the same meaning as the
term "wages," as defined in section
3401(a), except that it excludes any des-
ignated Roth contribution (as defined in
section 402A(c)) and includes amounts
required to be included in gross income
under section 457(f). Remuneration in-
cludes an amount that is a parachute pay-
ment; however, a parachute payment is
not subject to tax as excess remuneration
if it is also subject to tax as an excess
parachute payment. Further, remuneration
does not include the portion of any remu-
neration paid to a licensed medical pro-

fessional (including a veterinarian) that is
directly related to the performance of
medical or veterinary services by such
professional.

(b) Section 3401(a) wages. Section
3401(a) provides that the term "wages"
generally means all remuneration for ser-
vices performed by an employee for his
employer (with certain exceptions pro-
vided under section 3401(a)(1) through
(a)(23)), including the cash value of all
remuneration (including benefits) paid in
any medium other than cash. Among the
more broadly applicable exclusions, sec-
tion 3401(a)(12) provides that wages do
not include remuneration paid to, or on
behalf of, an employee or his beneficiary-

(1) from or to a trust described in sec-
tion 401(a) which is exempt from tax un-
der section 501(a) at the time of such
payment unless such payment is made to
an employee of the trust as remuneration
for services rendered as such employee
and not as a beneficiary of the trust;

(2) under or to an annuity plan which,
at the time of such payment, is a plan
described in section 403(a);

(3) for a payment described in section
402(h)(1) and (2) if, at the time of such
payment, it is reasonable to believe that
the employee will be entitled to an exclu-
sion under such section for payment;

(4) under an arrangement to which sec-
tion 408(p) applies; or

(5) under or to an eligible deferred
compensation plan which, at the time of
such payment, is a plan described in
section 457(b) that is maintained by an
eligible employer described in section
457(e)(1)(A) (governmental employer).

(c) Remuneration paid by related or-
ganizations. Remuneration includes re-
muneration paid to a covered employee by
any related organization with respect to
the employee's employment by that re-
lated organization. (See Q/A-14(b) for
rules on allocating the liability for the
excise tax when remuneration from more
than one employer is taken into account in
determining the liability for the excise tax
under section 4960(a)(1).) In contrast, re-
muneration paid by another organization,
whether or not a related organization, with
respect to an employee's employment by

an ATEO, is treated as remuneration paid
by that ATEO for purposes of section
4960.

(d) Directors. Compensation paid by
an organization to a member of its board
of directors (or an individual holding a
substantially similar position) for serving
in that capacity is not remuneration be-
cause the fees received by the director for
performing those services constitute self-
employment income, rather than wages
under section 3401(a). See Rev. Rul. 57-
246, 1957-1 C.B. 338. If the individual
also performs services for the organiza-
tion as an employee, then the compensa-
tion paid for the services as an employee
is remuneration. Moreover, for purposes
of section 4960, compensation that an em-
ployer pays to an employee to serve as a
director of another organization is remu-
neration.

#### Q-13: When is remuneration treated as paid for purposes of section 4960(a)(1)?

A-13: (a) General rule. For purposes
of section 4960(a)(1), remuneration is
paid for a taxable year if it is paid during
the calendar year ending with or within
the employer's taxable year. Remunera-
tion is treated as paid on the first date
that the right to the remuneration is not
subject to a substantial risk of forfeiture
within the meaning of section 457(f)
(3)(B) (regardless of whether the ar-
rangement under which the amount is or
will be paid is subject to section 457(f)
or section 409A). An amount of remu-
neration is subject to a substantial risk
of forfeiture if the right to the remuner-
ation would be treated as subject to a
substantial risk of forfeiture under Prop.
Treas. Reg. § 1.457-12(e)(1). In gen-
eral, this means that the amount is sub-
ject to a substantial risk of forfeiture
only if entitlement to the amount is con-
ditioned on the future performance of
substantial services, or upon the occur-
rence of a condition that is related to a
purpose of the remuneration if the pos-
sibility of forfeiture is substantial. See
Prop. Treas. Reg. § 1.457-12(e)(1) for
further guidance on the application of

this standard.5 For purposes of this no-
tice, remuneration that is no longer sub-
ject to a substantial risk of forfeiture is
referred to as "vested" remuneration and
the lapsing of a substantial risk of for-
feiture is referred to as "vesting."

(b) Amount of remuneration treated as
paid - (1) In general. The amount of
remuneration treated as paid upon vesting
is the present value (on the vesting date)
of the future payments to which the par-
ticipant has a legally binding right. The
present value of the right to future pay-
ments as of the vesting date includes any
earnings that have accrued as of the vesting
date. The present value must be determined
using reasonable actuarial assumptions.
Present value determined in accordance
with the rules set forth in Prop. Treas. Reg.
§ 1.457-12(c)(1), including the assumptions
regarding payment timing set forth in those
proposed regulations, will be deemed to
have been determined using reasonable ac-
tuarial assumptions. For purposes of deter-
mining the present value of remuneration
under a nonaccount balance plan described
in Treas. Reg. § 1.409A-1(c)(2)(i)(C) that is
scheduled to be actually or constructively
paid within 90 days of vesting, the employer
may elect to treat the nominal amount that is
to be paid as the present value of the amount
on the date of vesting.

Net earnings, as defined in paragraph
(b)(2)(C), on previously paid remunera-
tion, as defined in paragraph (b)(2)(D)(i),
are treated as paid at the close of the
calendar year in which they accrue. For
example, the present value of vested re-
muneration credited to an employee's
account under an account balance plan
described in Treas. Reg. § 1.409A-
1(c)(2)(i)(A) (under which the earnings
and losses attributed to the account are
based solely on a predetermined actual
investment or a reasonable market inter-
est rate) is treated as paid on the date
credited to the employee's account, but
the present value of any net earnings
accrued on that amount (the increase in
value due to the predetermined actual
investment or a reasonable market inter-
est rate) is treated as paid at the close of
the calendar year in which they accrue.
Similarly, the present value of a vested,

5When the proposed regulations under section 457(f) are finalized, the Treasury Department and the IRS anticipate providing further guidance on how and when those final regulations apply
for purposes of section 4960.

fixed amount of remuneration under a
nonaccount balance plan described in
Treas. Reg. § 1.409A-1(c)(2)(i)(C) is
treated as paid on the date of vesting,
but the present value of the net earnings
on that amount (the increase in the pres-
ent value) is treated as paid at the close
of the calendar year in which they ac-
crue.

(2) Earnings and losses. (A) Earnings.
Earnings generally refer to any increase in
the vested present value of any previously
paid remuneration as of the close of a
calendar year, regardless of whether the
plan or arrangement denominates such in-
crease as earnings, to the extent the em-
ployee's right to payment of the increase
is vested. For example, an increase in the
vested account balance of a nonqualified
deferred compensation plan based solely
on the investment return of a predeter-
mined actual investment (and disregard-
ing any additional contributions) consti-
tutes earnings. Similarly, an increase in
the vested present value of a benefit under
a nonqualified nonaccount balance plan
described in Treas. Reg. § 1.409A-
1(c)(2)(i)(C) due solely to the passage of
time (and disregarding any additional ben-
efit accruals) constitutes earnings. How-
ever, an increase in an account balance of
a nonqualified deferred compensation
plan due to a salary reduction contribution
or an employer contribution does not con-
stitute earnings. Likewise, an increase in
the benefit under a nonaccount balance
plan described in Treas. Reg. § 1.409A-
1(c)(2)(i)(C) due to an additional year of
service or an increase in compensation
that is reflected in a benefit formula does
not constitute earnings.

(B) Losses. Losses generally refer to
any decrease in the vested present value of
any previously paid remuneration as of
the close of the calendar year, regardless
of whether the plan denominates that de-
crease as losses.

(C) Net earnings and losses. Net earn-
ings and losses for each covered employee
are determined on a net aggregate basis
for each taxable year based on the previ-
ously paid remuneration paid by the em-
ployer. For example, losses under an ac-
count balance plan described in Treas.
Reg. § 1.409A-1(c)(2)(i)(A) may offset
earnings under a nonaccount balance plan
described in Treas. Reg. § 1.409A-

1(c)(2)(i)(C) maintained by the same em-
ployer for the same employee, but earn-
ings and losses from a plan maintained by
another employer are disregarded.

Net earnings refer to the amount (if
any) by which the earnings accrued during
a calendar year ending with or within the
taxable year (as described in Q/A-2) on
any previously paid remuneration exceeds
the sum of the losses accrued on those
amounts during that calendar year and any
net losses carried forward from a previous
taxable year. Net losses refer to the
amount (if any) by which the sum of the
losses accrued during a calendar year end-
ing with or within the taxable year (as
described in Q/A-2) on any previously
paid remuneration and the net losses car-
ried forward from a previous taxable year
exceeds the earnings accrued on those
amounts during that calendar year. Losses
do not reduce the remuneration treated as
paid in a calendar year except to the extent
of the earnings for that calendar year.
Thus, if an employee vests in an amount
of earnings under a nonaccount balance
plan within the meaning of Treas. Reg.
§ 1.409A-1(c)(2)(i)(C), and also has
losses under an account balance plan
within the meaning of Treas. Reg.
§ 1.409A-1(c)(2)(i)(A) that exceed the
vested earnings treated as remuneration
under the nonaccount balance plan,
those excess losses are carried forward
to the next following taxable year and
offset vested earnings for purposes of
determining net earnings or losses for
that taxable year. If, for the next follow-
ing year, there are not sufficient earn-
ings to offset the entire amount of losses
carried forward from the previous year
(and any additional losses), the offset
process repeats for each later year until
there are earnings for the calendar year
in excess of the losses carried forward.

(D) Previously paid remuneration - (i)
In general. Remuneration is treated as
previously paid remuneration for a taxable
year to the extent that, by the close of the
calendar year ending with or within such
taxable year (as described in Q/A-2), it is
treated as paid under Q/A-13(b)(1) but is
not actually or constructively paid.

(ii) Employee who becomes a covered
employee. Any remuneration that is vested
but is not actually or constructively paid
as of the close of the calendar year pre-

ceding the calendar year ending with or
within the taxable year of the employer
for which an employee first becomes a
covered employee of an ATEO is treated
as paid for the employer's preceding tax-
able year. For example, if an employee
first becomes a covered employee of an
employer for the employer's taxable year
ending June 30, 2022, any remuneration
that was vested but was not actually or
constructively paid as of December 31,
2020, is treated as paid for the taxable
year ending June 30, 2021, and thus is not
subject to the excise tax. Net losses from
the preceding taxable year do not carry
forward to the taxable year an employee
becomes a covered employee.

(iii) Pre-effective date remuneration.
Any remuneration that was vested but was
not actually or constructively paid as of
the close of the taxable year preceding the
first taxable year in which section 4960 is
effective for the employer is treated as
paid for the preceding taxable year and is
not subject to the excise tax. Thus, for an
employer that uses a calendar year taxable
year, the present value of any remunera-
tion that was vested but was not actually
or constructively paid as of December 31,
2017, is treated as paid for taxable year
2017. For an employer that uses a non-
calendar year taxable year, the present
value of any remuneration that was vested
but was not actually or constructively paid
as of the close of the taxable year that
includes December 31, 2017 (for exam-
ple, June 30, 2018 in the case of an em-
ployer with a taxable year beginning July
1 and ending June 30) is treated as paid
for that taxable year. Regardless of the
employer's taxable year, there is no car-
ryover of net losses from the preceding
taxable year to the first taxable year for
which section 4960 is effective.

Example 1. E is a covered employee of R, an
ATEO that uses a calendar year taxable year. E
participates in a nonqualified deferred compensation
plan in which the account balance is adjusted based
on the investment returns on predetermined actual
investments chosen by the employee. On January 1,
2019, R credits $100,000 to E's account under the
plan, subject to the requirement that E remain em-
ployed through June 30, 2021. On June 30, 2021, the
vested account balance is $110,000. Due to earnings
or losses on the account balance, the closing account
balance on each of the following dates is: (i)

$115,000 on December 31, 2021, (ii) $120,000 on
December 31, 2022, (iii) $100,000 on December 31,
2023, and (iv) $110,000 on December 31, 2024.
During 2025, E defers an additional $10,000 under
the plan, which is vested at the time of deferral. On
December 31, 2025, the closing account balance is
$125,000. In 2026, R distributes $10,000 to E under
the plan. On December 31, 2026, the closing account
balance is $135,000 due to earnings on the account
balance.

2019 and 2020 (nonvested amounts). For 2019
and 2020, R pays no remuneration to E under the
plan. The substantial future services condition is not
met; thus, any amount deferred under the plan, in-
cluding unvested earnings, remains subject to a sub-
stantial risk of forfeiture within the meaning of sec-
tion 457(f)(3)(B) as of December 31, 2019, and
December 31, 2020.

2021 (amounts in year of vesting). For 2021, R
pays E $115,000 of remuneration, including (i)
$110,000 of remuneration on June 30, 2021, when
the substantial future services condition is met and
the amount is no longer subject to a substantial
risk of forfeiture within the meaning of section
457(f)(3)(B), and (ii) an additional $5,000 of earn-
ings on the previously paid remuneration ($110,000)
on December 31, 2021.

2022 (earnings). For 2022, R pays E $5,000 of
remuneration, the additional earnings on the previ-
ously paid remuneration ($115,000) as of December
31, 2022.

2023 (losses). For 2023, R pays no remuneration
to E since the vested present value of the previously
paid remuneration ($120,000) declines to $100,000
as of December 31, 2023. The $20,000 loss for 2023
does not reduce any amount previously treated as
remuneration but is available for carry over to future
taxable years.

2024 (recovery of losses through earnings). For
2024, R pays no remuneration to E, since the vested
present value of the previously paid remuneration
($120,000) was $110,000 as of December 31, 2024.
Due to earnings on the account balance, R recovers
$10,000 of the $20,000 of losses carried over from
2023. The net losses as of December 31, 2024, are
$10,000, and none of the $10,000 in earnings during
2024 is remuneration paid in 2024.

2025 (no recovery of losses against additional
deferrals of compensation). For 2025, R pays E
$10,000 of remuneration to E. The additional
$10,000 deferral is not subject to a substantial risk
of forfeiture within the meaning of section
457(f)(3)(B), and thus is remuneration paid on the
date deferred. This deferral increases the amount
previously treated as remuneration from $120,000 to
$130,000. Additionally, due to earnings on the ac-
count balance, R recovers $5,000 of losses of the
$10,000 of losses carried over from 2024, none of
which was remuneration for 2025, so that the net
losses as of December 31, 2025 is $5,000.

2026 (distributions, recovery of remainder of
losses through earnings and additional earnings).
For 2026, R pays E $15,000 in remuneration. The
vested present value of the account balance increases
by $20,000 to $135,000 as of December 31, 2026.
Therefore, due to earnings on the account balance, R
recovers the remaining $5,000 of losses carried over
from 2025 and pays E an additional $15,000 of

remuneration as earnings. The $10,000 distribution
reduces the amount of previously paid remuneration
($130,000) to $120,000, and the additional remuner-
ation paid in 2026 increases the amount of previ-
ously paid remuneration by $15,000 to $135,000.

Example 2. F is a covered employee of S, an
ATEO, and is also employed by corporation C, a
related organization. S and C are calendar year tax-
payers. On January 1, 2018, C and F enter into an
agreement under which C will pay F $100,000 on
December 31, 2021, if F remains employed by C
through January 1, 2020. F remains employed by C
through January 1, 2020. On January 1, 2020, the
present value based on reasonable actuarial assump-
tions of the $100,000 to be paid on December 31,
2021 is $75,000. On December 31, 2020, the vested
present value increases to $85,000 due solely to the
passage of time. On December 31, 2021, C pays F
$100,000.

2018 and 2019. For 2018 and 2019, C pays F no
remuneration because the amount deferred under the
plan remains subject to a substantial risk of forfeiture
within the meaning of section 457(f)(3)(B).

2020\. For 2020, C pays F $75,000 in remunera-
tion on January 1, 2020, which is the vested present
value of $100,000 payable on December 31, 2021. In
addition C pays F an additional $10,000 in remuner-
ation on December 31, 2020 as earnings based on the
increase in the vested present value of the previously
paid remuneration ($75,000) to $85,000 as of De-
cember 31, 2020.

2021\. For 2021, C pays R $15,000 in additional
remuneration and distributes $100,000 of previously
paid remuneration. The $100,000 distribution is
treated as reducing the amount of previously paid
remuneration ($85,000) to zero, and the remaining
$15,000 is a payment of earnings.

Example 3. G is a covered employee of T, an
ATEO that uses a calendar year taxable year. G
participates in a nonqualified deferred compensation
plan in which the account balance is adjusted based
on the investment returns on predetermined actual
investments chosen by the employee. All amounts
credited under the plan are vested when credited. On
December 31, 2017, T credits $100,000 to G's ac-
count and the closing account balance is $100,000.
On June 30, 2018, T credits $50,000 to G's account.
On December 31, 2018, T credits $50,000 to G's
account and the closing account balance is $210,000.

2017\. T is a calendar year taxpayer, so the pres-
ent value of all remuneration in which G was vested
but that was not actually or constructively paid to G
as of December 31, 2017, ($100,000) is treated as
paid for 2017 and is not subject to excise tax under
section 4960.

2018\. For 2018, T pays G $110,000 of remuner-
ation, including $50,000 credited to G's account on
June 30 and $50,000 credited on December 31 (to-
taling $100,000), plus $10,000 in remuneration as
earnings, as the vested present value of the $200,000
of previously paid remuneration ($100,000 as of
December 31, 2017 + $100,000 in 2018) increases
to $210,000 as of December 31 2018.

Example 4. Assume the same facts as Example
3, except that T uses a non-calendar year taxable
year that begins on July 1 and ends on June 30. The
closing account balance on June 30, 2018 is
$155,000.

Amounts paid through June 30, 2018. T is a
non-calendar year taxpayer, so the present value of
all remuneration in which G is vested but that is not
actually or constructively paid as of the close of the
first taxable year ending after December 31, 2017
(June 30, 2018) ($155,000) is treated as paid for that
year and is not subject to excise tax under section
4960.

Amounts paid from July 1 through December 31,
2018. For the taxable year ending June 30, 2019, T
pays G $55,000 in remuneration, including $50,000
credited to G's account on December 31, 2018, plus
$5,000 in remuneration as earnings, as the previ-
ously paid remuneration ($155,000 as of June 30,
2018 + $50,000 credited on December 31, 2018)
increases to $210,000 as of December 31, 2018.

Example 5. H is an employee of U, an ATEO
that uses a calendar year taxable year. H participates
in a nonqualified deferred compensation plan in
which the account balance is adjusted based on the
investment returns on predetermined actual invest-
ments chosen by the employee. All amounts credited
under the plan are vested when credited. On January
1, 2018, U credits $100,000 to H's account under the
plan. On December 31, 2018, the closing account
balance is $105,000. On January 1, 2019, U credits
$100,000 to H's account. On December 31, 2019,
the closing account balance is $210,000. H becomes
a covered employee of U for U's taxable year ending
December 31, 2019.

2018 (remuneration paid before becoming a cov-
ered employee). Remuneration that is vested as of
the last day of the calendar year preceding the cal-
endar year for which the employee becomes a cov-
ered employee is not subject to excise tax under
section 4960. Thus, H's vested account balance on
December 31, 2018 ($105,000) is not subject to
excise tax under section 4960.

2019 (remuneration in the year an employee
becomes a covered employee). For the taxable year
ending December 31, 2019, U pays H $105,000 of
remuneration, including the $100,000 credited to H's
account on January 1, 2019, plus $5,000 in net
earnings in 2019, the amount by which the vested
account balance at the close of the calendar year
($210,000) exceeds the amount of previously paid
remuneration ($205,000, consisting of $105,000 as
of December 31, 2018 + $100,000 paid on January
1, 2019).

Example 6. J is a covered employee of T, an
ATEO that uses a calendar year taxable year. J
participates in a nonqualified deferred compensation
plan under which T agrees to pay J $100,000 two
months after the date a specified performance goal
that is a substantial risk of forfeiture within the
meaning of section 457(f)(3)(B) is satisfied. J satis-
fies the performance goal on November 30, 2019. T
elects to treat the amount to be paid as the present
value of the amount at vesting.

Election to treat amount payable within 90 days
treated as paid at vesting. For taxable year 2019, T
pays J $100,000 of remuneration. J vests in the
$100,000 amount in 2019 upon meeting the perfor-
mance goal. Under the general rule, T would be
required to treat the present value as of November
30, 2019 of $100,000 payable in 2020 (two months
after the performance goal was met) as paid in 2019,
the difference between that amount and the present

value as of December 31, 2019 as earnings for 2019,
and any difference between the sum of the two
present values and $100,000 as earnings for 2020.
However, because T elected to treat the amount of
remuneration payable within 90 days of vesting as
paid at vesting in 2019, the $100,000 payable to J in
2020 is treated as remuneration paid in 2019 for
purposes of section 4960(a)(1).

Q-14: How is liability for the section
4960(a)(1) excise tax determined if
remuneration is paid to a covered
employee by both an applicable tax-
exempt organization and a related
organization?

A-14: (a) In general. As provided in
section 4960(c)(4)(C), in any case in
which an ATEO includes remuneration
from one or more other employers of a
covered employee that are related organi-
zations in determining the excise tax im-
posed by section 4960(a)(1), each em-
ployer is liable for the excise tax in an
amount that bears the same ratio to the
total excise tax determined with respect to
the remuneration as-

(1) the amount of remuneration paid by
the employer with respect to that em-
ployee, bears to

(2) the amount of remuneration paid by
all the employers to that employee.

(b) Calculation of excise tax involving
multiple related organizations. Each ATEO
calculates liability for the excise tax under
section 4960(a)(1) with respect to a covered
employee by including remuneration paid
by the ATEO and any related organization
that employs the covered employee and then
allocating that excise tax liability among
each of the employers. However, the ATEO
may also be liable for the excise tax under
section 4960(a)(1) as a related organization
with respect to another ATEO that calcu-
lates the excise tax for its own covered em-
ployees. If an employer is liable for the
excise tax under section 4960(a)(1) as an
ATEO and as a related organization for the
same remuneration to a covered employee,
the employer is not liable for the excise tax
in both capacities; rather it is liable for the
greater of the excise tax it would owe as an
ATEO or the excise tax it would owe as a
related organization with respect to that cov-
ered employee.

In order to calculate liability under this
provision, an ATEO should take the fol-
lowing steps:

(1) calculate remuneration paid (other
than any excess parachute payment) for
each of its covered employees, including
remuneration from any related organiza-
tion (if remuneration for any covered em-
ployee calculated in this step (1) is more
than $1 million, then the remuneration
over $1 million is subject to the excise tax
under section 4960(a)(1) at the rate of tax
under section 11);

(2) calculate the share of liability for
each employer that employs the covered
employee that was included in step (1) as
a fraction of the total excise tax liability
that bears the same ratio to the total excise
tax as the amount of remuneration paid
by the employer bears to the total remu-
neration calculated in step (1);

(3) inform any related organization of
its share of liability calculated in step (2);

(4) obtain information on the ATEO's
share of liability as a related organization
for any covered employee of another
ATEO. If the ATEO is a related organi-
zation to more than one other ATEO, treat
the ATEO's highest share of liability as a
related organization as its liability as a
related organization for the covered em-
ployee; and

(5) compare the ATEO's liability as an
ATEO in step (2) to its share of liability as
a related organization under step (4) for
each of the ATEO's covered employees.
The ATEO reports the greater of the share
calculated under step (4) or the share cal-
culated under step (2) (or the share calcu-
lated under step (2) if they are the same)
as the ATEO's share of liability for remu-
neration paid to the covered employee.

(c) Change in related status during the
year. If an employer becomes or ceases to
be a related organization with respect to
an ATEO during the calendar year ending
with or within the ATEO's taxable year,
then only the remuneration paid by the
related organization to a covered em-
ployee with respect to services performed
during that portion of the calendar year
that the employer is a related organization
is included for purposes of calculating li-
ability for the excise tax under section
4960(a)(1). Thus, only remuneration that
vests while the employer is a related or-
ganization with regard to the ATEO is
taken into account for purposes of section
4960.

(d) Examples. The following examples
illustrate the rules of this Q/A-14. As-
sume for purposes of these examples that
the rate of excise tax under section 4960 is
21 percent.

Example 1. F and G are each ATEOs; G is a
related organization with respect to F. E is a covered
employee of both F and G. F pays E $1.2 million of
remuneration, and G pays E $800,000 of remunera-
tion for a total of $2 million of remuneration, and $1
million of excess remuneration. The total excise tax
is $210,000 (21 percent of the $1 million excess
remuneration). F paid 3/5 of E's total remuneration
($1.2 million / $2 million); thus, F is liable for 3/5 of
the excise tax, which is $126,000. G is liable for 2/5
of the excise tax, which is $84,000.

Example 2. H, I, and J are each ATEOs. J owns
60 percent of the stock of Corporation K. Sixty
percent of I's directors are representatives of H. In
addition, 60 percent of J's directors are representa-
tives of I. Employee L is a covered employee of H,
I, and J. H, I, J, and K each pay Employee L $1.2
million per year. Under the rules described in Q/A-7
and Q/A-8, I determines that its related organiza-
tions are H and J. H determines that its related
organization is I. J determines that its related orga-
nizations are I and K.

ATEO I. Under I's calculation as an ATEO,
Employee L receives a total of $3.6 million in re-
muneration from H, I, and J (3 x $1.2 million). The
total excise tax is $546,000 (21 percent of the $2.6
million excess remuneration). H, I, and J each paid
1/3 of the total remuneration to Employee L ($1.2
million / $3.6 million); thus, H, I, and J are each
liable for 1/3 of the excise tax, which is $182,000.

ATEO H. Under H's calculation as an ATEO,
Employee L receives a total of $2.4 million in re-
muneration from H and I (2 x $1.2 million). The total
excise tax is $294,000 (21 percent of the $1,400,000
excess remuneration). H and I each paid 1/2 of the
total remuneration to Employee L ($1.2 million /
$2.4 million); thus, H and I are each liable for 1/2 of
the excise tax, which is $147,000.

ATEO J. Under J's calculation as an ATEO, L
receives a total of $3.6 million in remuneration from
I, J, and K (3 x $1.2 million). The total excise tax is
$546,000 (21 percent of the $2.6 million excess
remuneration). I, J, and K each paid 1/3 of the total
remuneration to Employee L ($1.2 million / $3.6
million); thus, I, J, and K are each liable for 1/3 of
the excise tax, which is $182,000.

Liability of H, I, J, and K. I is liable as a related
organization for $147,000 of excise tax according to
H's calculation and $182,000 according to J's cal-
culation, but under I's calculation, I is liable for
$182,000 of excise tax. Thus, I's excise tax liability
is $182,000. H is liable for $182,000 of excise tax
under I's calculation, which is greater than the
$147,000 of excise tax H calculated under H's cal-
culation. Thus, H's excise tax liability is $182,000. J
is liable as a related organization for $182,000 of
excise tax under I's calculation, but is liable for
$182,000 of excise tax under J's calculation. Thus,
J's excise tax liability is $182,000. K is liable as a
related organization for $182,000 of excise tax ac-
cording to J's calculation.

#### E. Medical and Veterinary Services

#### Q-15: How is remuneration for medical services treated under section 4960?

A-15: (a) In general. Remuneration
paid to a licensed medical professional for
the direct performance of medical services
(including nursing services) or veterinary
services by the professional is not remu-
neration for purposes of calculating the
excess remuneration (if any) subject to the
excise tax. However, remuneration paid to
the professional for any other services,
including administrative and management
services associated with the performance
of medical or veterinary services, is remu-
neration for purposes of calculating the
excess remuneration (if any) subject to the
excise tax. Remuneration for medical ser-
vices is also disregarded for purposes of
determining whether an individual is a
covered employee and for purposes of de-
termining whether a payment is a para-
chute payment.

(b) Licensed medical professional. A
licensed medical professional is an indi-
vidual who is licensed under state or local
law to perform medical services (includ-
ing nursing services) or veterinary ser-
vices.

(c) Medical and veterinary services. A
licensed medical professional directly per-
forms medical services to the extent that
the services constitute "medical care" as
defined in section 213(d)(1)(A) and the
regulations thereunder. Thus, medical ser-
vices are services for the diagnosis, cure,
mitigation, treatment, or prevention of
disease, including services for the purpose
of affecting any structure or function of
the body. For example, teaching or re-
search services are not medical services to
the extent the services performed do not
relate directly to the diagnosis, cure, mit-
igation, treatment, or prevention of dis-
ease or affect a structure or function of the
body. For purposes of section 4960, doc-
umenting the care and condition of a pa-
tient is part of the direct performance of
medical services, as is accompanying an-
other licensed professional as a supervisor
while that medical professional performs
medical services. But managing an orga-
nization's operations, including schedul-
ing, staffing, appraisal, and other similar

functions that may relate to a particular
medical professional or professionals who
perform medical services, is not the per-
formance of medical services. With re-
spect to veterinary services, the rules in
this paragraph apply by analogy to deter-
mine whether services performed with re-
spect to an animal are veterinary services.

(d) Allocation. If during a calendar
year an employer pays a covered em-
ployee remuneration for both medical ser-
vices and other services, the employer
must make a reasonable, good faith allo-
cation between remuneration for medical
services and other services. For example,
if a medical doctor receives remuneration
for both medical services and for admin-
istrative or management services, the em-
ployer must make a reasonable allocation
between remuneration for the medical ser-
vices and remuneration for the adminis-
trative or management services. For this
purpose, if an employment agreement or
similar written arrangement sets forth the
remuneration to be paid for particular ser-
vices, that allocation of remuneration
must be applied unless the facts and cir-
cumstances demonstrate that the amount
allocated for medical services is unreason-
able for those services or that the alloca-
tion was established for purposes of
avoiding application of the excise tax un-
der section 4960. If some or all of the
remuneration is not reasonably allocated
in an employment or other agreement, an
employer may use any reasonable alloca-
tion method. For example, an employer
may use a representative sample of re-
cords, such as patient, insurance, and
Medicare/Medicaid billing records or in-
ternal time reporting mechanisms to de-
termine the time spent providing medical
services, and then allocate remuneration
to medical services in the proportion such
time bears to the total hours the covered
employee worked for the employer for
purposes of making a reasonable alloca-
tion of remuneration. Similarly, if some or
all of the remuneration is not reasonably
allocated in an employment or other
agreement, an employer may use salaries
or other remuneration for duties compara-
ble to those the employee performs (for
example, hospital administrator and phy-
sician) for purposes of making a reason-
able allocation between remuneration for
medical services and nonmedical services.

These same allocation rules also apply
with respect to veterinary services.

(e) Examples. The following examples
illustrate the rules of this Q/A-15. As-
sume for purposes of these examples that
there is no employment agreement or sim-
ilar written arrangement allocating remu-
neration to any particular services.

Example 1. H is a hospital and is an ATEO. A is
a covered employee of H. A provides patient care
services to H and also provides management and
administrative services to H as the head of a medical
practice group within H. Based on a representative
sample of insurance and Medicare billing records, as
well as time reports that A submits to H, H deter-
mines that A spends half of her time providing
medical care to patients and half of her time per-
forming administrative and management services in
her capacity as head of the practice group. H allo-
cates half of A's remuneration to medical services.
H's allocation of A's remuneration is a reasonable,
good faith allocation. Accordingly, only the portion
of A's remuneration allocated to the other, non-
medical services is remuneration for purposes of the
excise tax.

Example 2. R is a medical research organization
and is an ATEO. B is a covered employee of R. B is
employed to work on a research trial. B provides an
experimental treatment to patients afflicted by a dis-
ease. B tracks the patients' individual conditions in a
manner that occurs ordinarily in a medical practice.
As part of the research trial, B also compiles the
patients' records on their individual conditions and
prepares reports detailing both individual and overall
results. These reports are not ordinarily prepared for
patients or provided to patients in a medical practice.
Although the primary purpose of B's activities is
research, B is treating a patient's disease within the
meaning of section 213(d) when B performs services
that are ordinarily performed in a medical practice,
and, thus, these services are medical services for
purposes of section 4960. Accordingly, any remu-
neration allocable to the medical services is not
remuneration for purposes of the excise tax. How-
ever, B does not directly perform medical services to
the extent B performs research services that are not
ordinarily performed in a medical practice; accord-
ingly, any remuneration allocable to those services is
remuneration for purposes of section 4960.

Example 3. C is a medical doctor who is em-
ployed by a university hospital that is an ATEO. C's
duties include overseeing and teaching a group of
resident physicians who have a restricted license to
practice medicine. C's duties include supervising
and instructing the resident physicians while they
treat patients. C's other duties include instructing the
resident physicians in a classroom setting. To the
extent that C, in conjunction with the resident phy-
sicians, performs services directly related to the di-
agnosis, cure, mitigation, treatment or prevention of
a patient's disease, or affecting a structure or func-
tion of the patient's body, those services constitute
"medical care" for purposes of section 213(d), and,
thus, C directly performs medical services. Accord-
ingly, any remuneration allocable to those medical
services is not remuneration for purposes of the
excise tax. However, because classroom instruction

does not involve actual patient treatment, those ac-
tivities are not medical care for purposes of section
213(d), and, thus, do not constitute the direct perfor-
mance of medical services. Accordingly, any remu-
neration allocable to those services is remuneration
for purposes of section 4960.

#### F. Excess Parachute Payments

#### Q-16: What is an excess parachute payment under section 4960(c)(5)(A)?

A-16: The term "excess parachute
payment" means an amount equal to the
excess (if any) of the total amount of any
parachute payment over the portion of the
base amount allocated to such payment.

#### Q-17: What is a parachute payment under section 4960(c)(5)(B)?

A-17: (a) In general. The term "para-
chute payment" means any payment in the
nature of compensation made by an
ATEO (or a predecessor organization of
the ATEO) or a related organization to (or
for the benefit of) a covered employee if-

(1) the payment is contingent on the
employee's separation from employment
with the employer; and

(2) the aggregate present value of the
payments in the nature of compensation to
(or for the benefit of) the individual that
are contingent on the separation equals or
exceeds an amount equal to three times
the base amount.

(b) Exclusions. The term "parachute
payment" does not include any payment:

(1) to or from a plan described in sec-
tion 401(a) that includes a trust exempt
from tax under section 501(a), an annuity
plan described in section 403(a), a simpli-
fied employee pension (as defined in sec-
tion 408(k)), or a simple retirement ac-
count described in section 408(p);

(2) made under or to an annuity con-
tract described in section 403(b) or a plan
described in section 457(b);

(3) made to a licensed medical profes-
sional (including a veterinarian) for the
performance of medical or veterinary ser-
vices performed by such professional; or

(4) made to an individual who is not a
highly compensated employee as defined
in section 414(q). See generally Treas.
Reg. § 1.414(q)-1T. Under Treas. Reg.
§ 1.414(q)-1T, Q/A-14(a)(1), for pur-
poses of determining the group of highly
compensated employees for a determina-

tion year, the determination year calcula-
tion is made on the basis of the applicable
year of the plan or other entity for which
a determination is made and the look-back
year calculation is made on the basis of
the twelve month period immediately pre-
ceding that year. An ATEO that maintains
a qualified retirement plan should have
already identified the employees who are
HCEs for purposes of the plan and the
same individuals are HCEs for purposes
of section 4960. For an ATEO that does
not maintain a qualified retirement plan,
the rules are applied by analogy, substi-
tuting the calendar year for the plan year.
Accordingly, in 2019, for an ATEO that
does not maintain a qualified retirement
plan, the ATEO would use the employees'
2018 annual compensation (as defined in
Treas. Reg. § 1.414(q)-1T Q/A-13, in-
cluding any of the safe harbor definitions
if applied consistently to all employees) to
determine whether and which employees
were HCEs for 2019 for purposes of sec-
tion 4960. If an employee is an HCE at the
time of the separation from employment,
then any parachute payment made as a
consequence of the separation from em-
ployment is treated as paid to an HCE,
even if the payments occur during one or
more later taxable years (that is, taxable
years after the taxable year during which
the employee separated from employ-
ment).

#### Q-18: What is a payment in the nature of compensation?

A-18: For purposes of section 4960(a)(2),
any payment-in whatever form-is a pay-
ment in the nature of compensation if the
payment arises out of an employment rela-
tionship, including holding oneself out as
available to perform services and refraining
from performing services. Thus, for exam-
ple, payments made under a covenant not to
compete or a similar arrangement are pay-
ments in the nature of compensation. A pay-
ment in the nature of compensation includes
(but is not limited to) wages and salary,
bonuses, severance pay, fringe benefits, life
insurance, pension benefits, and other de-
ferred compensation (including any amount
characterized by the parties as interest or
earnings thereon). A payment in the nature
of compensation also includes cash when
paid, the value of the right to receive cash,

including the value of accelerated vesting,
or a transfer of property. However, a pay-
ment in the nature of compensation does not
include attorney's fees or court costs paid or
incurred in connection with the payment of
any parachute payment or a reasonable rate
of interest accrued on any amount during
the period the parties contest whether a pay-
ment will be made.

#### Q-19: When is a payment in the nature of compensation considered to be made?

A-19: (a) In general. A payment in the
nature of compensation is considered
made in the taxable year in which it is
includible in the covered employee's
gross income (in the case of taxable non-
cash fringe benefits, consistent with An-
nouncement 85-113, 1985-31 I.R.B. 31)
or, in the case of fringe benefits and other
benefits that are excludible from income,
in the taxable year the benefits are re-
ceived.

(b) Transfers of section 83 property. A
transfer of property in connection with the
performance of services that is subject to
section 83 is considered a payment made
in the taxable year in which the property is
transferred or would be includible in the
gross income of the covered employee
under section 83 and the regulations there-
under, disregarding any election made by
the employee under section 83(b) or 83(i).
Thus, in general, such a payment is con-
sidered made at the later of the date the
property is transferred (as defined in
Treas. Reg. § 1.83-3(a)) to the covered
employee or the date the property be-
comes substantially vested (as defined in
Treas. Reg. § 1.83-3(b) and (j)). The
amount of the payment is the compensa-
tion income as determined under section
83 and the regulations thereunder, disre-
garding any amount includible in income
pursuant to an election made by an em-
ployee under section 83(b).

(c) Stock options and stock apprecia-
tion rights. For purposes of this Q/A-19,
an option (including an option to which
section 421 applies) is treated as property
that is transferred when the option be-
comes vested (regardless of whether the
option has a readily ascertainable fair
market value as defined in Treas. Reg.
§ 1.83-7(b)). For purposes of determining

the timing and amount of any payment
related to the option, the principles of
Treas. Reg. § 1.280G-1, Q/A-13 and Rev.
Proc. 2003-68, 2003-2 C.B. 398, apply.
Thus, the vesting of an option as a result
of a covered employee's separation from
employment is a payment in the nature of
compensation.

(d) Consideration paid by covered em-
ployee. Any payment in the nature of
compensation is reduced by the amount of
any money or the fair market value of any
property (owned by the covered employee
without restriction) that is (or will be)
transferred by the covered employee in
exchange for the payment.

#### Q-20: What is a payment that is contingent on an employee's separation from employment?

A-20: (a) In general. A payment is
contingent on an employee's separation
from employment if the facts and circum-
stances indicate that the employer would
not make the payment in the absence of an
involuntary separation from employment. A
payment, the right to which is not subject to
a substantial risk of forfeiture within the
meaning of section 457(f)(3)(B) at the time
of an involuntary separation from employ-
ment, generally is a payment that would
have been made in the absence of a separa-
tion from employment (and, thus, is not
contingent on a separation from employ-
ment), except that the increased value of an
accelerated payment of a vested amount de-
scribed in Q/A-24(b) resulting from an in-
voluntary separation from employment is
not treated as a payment that would have
been made in the absence of a separation
from employment. A payment the right to
which is no longer subject to a substantial
risk of forfeiture within the meaning of sec-
tion 457(f)(3)(B) as a result of an involun-
tary separation from employment, including
a payment the vesting of which would have
occurred had the employee remained em-
ployed for a subsequent period of time but
that is accelerated due to the separation from
employment as described in Q/A-24(c), is
not treated as a payment that would have
been made in the absence of an involuntary
separation from employment (and thus is
contingent on a separation from employ-
ment). A payment would be made in the
absence of a separation from employment if

it is substantially certain at the time of the
separation from employment that the pay-
ment would be made whether or not the
separation occurred. A payment does not
fail to be contingent on a separation from
employment merely because the payment is
conditioned upon the execution of a release
of claims, noncompetition or nondisclosure
provisions, or other similar requirements. If
an employee separates from service and
continues to provide services (including as a
bona fide independent contractor), pay-
ments for those services are not payments
that are contingent on a separation from
employment to the extent those payments
are reasonable and are not made because of
the involuntary separation from employ-
ment.

(b) Employment agreements. (1) If a
covered employee involuntarily separates
from employment before the end of a con-
tract term and is paid damages for breach
of contract pursuant to an employment
agreement, those damages are treated as a
payment that is contingent on a separation
from employment. For purposes of this
paragraph (b), an employment agreement
means an agreement between an em-
ployee and employer that describes,
among other things, the amount of com-
pensation or remuneration payable to the
employee for services performed during
the term of the agreement.

(2) The following example illustrates
the rules of this Q/A-20(b):

Example. A, a covered employee, has a three-
year employment agreement with X, an ATEO. Un-
der the agreement, A will receive a salary of
$200,000 for the first year of the agreement, and for
each succeeding year, an annual salary that is
$100,000 higher than the previous year. The agree-
ment provides that, in the event of A's involuntary
separation from employment without cause, A will
receive the remaining salary due under the agree-
ment. At the beginning of the second year of the
agreement, X involuntarily terminates A's employ-
ment without cause and pays A $700,000 represent-
ing the remaining salary due under the employment
agreement ($300,000 for the second year of the
agreement + $400,000 for the third year of
the agreement). The $700,000 payment is treated as
a payment that is contingent on a separation from
employment.

(c) Noncompetition agreements. A
payment under an agreement requiring a
covered employee to refrain from per-
forming services (for example, a covenant
not to compete) is a payment that is con-
tingent on a separation from employment
for purposes of this Q/A-20 if the pay-

ment would not have been made in the
absence of an involuntary separation from
employment. For example, if a covenant
not to compete including one or more
payments contingent on compliance in
whole or in part with the covenant not to
compete is negotiated as part of a sever-
ance arrangement arising from an invol-
untary separation from employment, gen-
erally the payment(s) will be treated as
contingent on a separation from employ-
ment.

(d) Payment of amounts previously in-
cluded in income or excess remuneration.
Actual or constructive payment of an
amount that was previously includible in
gross income is not a payment contingent
on a separation from employment. For
example, payment of an amount includ-
ible in income under section 457(f)(1)(A)
due to the lapsing of a substantial risk of
forfeiture on a date before the separation
from employment is not a payment that is
contingent on a separation from employ-
ment, even if the amount is paid in cash or
otherwise to the employee because of the
separation from employment. In addition,
actual or constructive payment of an
amount treated as excess remuneration is
not a payment that is contingent on a
separation from employment (and thus is
not a parachute payment), even if the
amount is paid to the employee because of
the separation from employment.

(e) Window programs. A payment un-
der a window program is contingent on a
separation from employment.

(f) Anti-abuse provision. Notwith-
standing the foregoing paragraphs (a)
through (e) of this Q/A-20, if the facts and
circumstances demonstrate that either
vesting or the payment of an amount
(whether before or after the involuntary
separation from employment) would not
have occurred but for the involuntary na-
ture of the separation from employment,
the payment of the amount will be treated
as contingent on a separation from em-
ployment. For example, an employer's ex-
ercise of discretion to accelerate vesting
of an amount shortly before an involun-
tary separation from employment may in-
dicate that the acceleration of vesting was
due to the involuntary nature of the sepa-
ration from employment and, thus, was
contingent on the employee's separation
from employment. Similarly, payment of

amount in excess of an amount otherwise
payable (for example, increased salary),
shortly before or after an involuntary sep-
aration from employment, may indicate
that the amount was paid because the sep-
aration was involuntary and, thus, was
contingent on the employee's separation
from employment.

#### Q-21: What is a payment made under a window program?

A-21: A window program is a program
established by an employer in connection
with an impending separation from employ-
ment to provide separation pay, where the
program is made available by the employer
for a limited period of time (no longer than
12 months) to employees who separate from
employment during that period or to em-
ployees who separate from service during
that period under specified circumstances. A
payment made under a window program is
treated as a payment that is contingent on an
employee's separation from employment
notwithstanding that the employee may not
have had an involuntary separation from
employment.

#### Q-22: What is an involuntary separation from employment?

A-22: An involuntary separation from
employment means a separation from em-
ployment due to the independent exercise
of the employer's unilateral authority to
terminate the employee's services, other
than due to the employee's implicit or
explicit request, if the employee was will-
ing and able to continue performing ser-
vices. An involuntary separation from em-
ployment may include an employer's failure
to renew a contract at the time the contract
expires, provided that the employee was
willing and able to execute a new contract
providing terms and conditions substantially
similar to those in the expiring contract and
to continue providing services. The determi-
nation of whether a separation from em-
ployment is involuntary is based on all the
facts and circumstances. An employee's
voluntary separation from employment for
good reason (as defined in Prop. Treas. Reg.
§ 1.457-11(d)(2)(ii), 81 FR 40548, 40560)
is treated as an involuntary separation from
employment.

#### Q-23: What is a separation from employment?

A-23: For purposes of section 4960,
separation from employment generally
has the same meaning as separation
from service as defined in Treas. Reg.
§ 1.409A-1(h), without regard to Treas.
Reg. § 1.409A-1(h)(2) and (5) (applica-
tion to independent contractors), since
generally only an employee may have a
separation from employment and a
change from employee status to bona
fide independent contractor status would
also be a separation from employment.
See Q/A-12(d) regarding the treatment
of an employee who also serves as a
director (or in a substantially similar
position). In addition, the definition of
termination of employment in Treas.
Reg. § 1.409A-1(h)(1)(ii) is modified such
that an employer may not set the level of the
anticipated reduction in future services that
will give rise to a separation from employ-
ment and that the defaults set forth in the
regulations apply. Thus, an anticipated re-
duction of the level of service of less than 50
percent is not treated as a separation from
employment, an anticipated reduction of
more than 80 percent is treated as a termi-
nation of employment, and the treatment of
an anticipated reduction between those two
levels is determined based on the facts and
circumstances. Pursuant to Treas. Reg.
§ 1.409A-1(h), an employee generally sep-
arates from employment with the employer
if the employee dies, retires, or otherwise
has a termination of employment with the
employer. Treas. Reg. § 1.409A-1(h) pro-
vides additional rules addressing leaves of
absence, including military leaves of ab-
sence (Treas. Reg. § 1.409A-1(h)(1)(i)), as-
set purchase transactions (Treas. Reg.
§ 1.409A-1(h)(4)), and employees partici-
pating in collectively bargained plans cov-
ering multiple employers (Treas. Reg.
§ 1.409A-1(h)(6)). This notice adopts the
rules provided in Treas. Reg. § 1.409A-
1(h)(3), under which an employee separates
from employment only if the employee has
a separation from employment with the em-
ployer and all employers that would be con-
sidered a single employer under section
414(b) and (c), except that for purposes of
section 4960, this notice uses the "at least 80
percent" rule under section 414(b) and (c)
rather than replacing it with "at least 50

percent." However, for purposes of deter-
mining whether there has been a separation
from employment, a purported ongoing em-
ployment relationship between a covered
employee and an ATEO or a related orga-
nization will be disregarded if the facts and
circumstances demonstrate that the pur-
ported employment relationship is not bona
fide or the primary purpose of the establish-
ment or continuation of the relationship is
avoidance of the application of section
4960.

#### Q-24: How is an accelerated payment or accelerated vesting resulting from an involuntary separation from employment treated?

A-24: (a) In general. As described in
Q/A-24(b) and (c), if a payment is accel-
erated or a substantial risk of forfeiture
lapses as a result of an involuntary sepa-
ration from employment, only the value
due to the acceleration is treated as con-
tingent on a separation from employment.
For purposes of this Q/A-24, the terms
"vested" and "substantial risk of forfei-
ture" have the same meaning as provided
in Q/A-13(a).

(b) Vested payments. If an involuntary
separation from employment accelerates
actual or constructive payment of an
amount that vested without regard to the
separation, the portion of the payment, if
any, that is contingent on the separation
from employment is the amount by which
the present value of the accelerated pay-
ment exceeds the present value of the pay-
ment absent the acceleration. For this pur-
pose, the payment of an amount otherwise
due upon a separation from employment
(whether voluntary or involuntary) is not
treated as an acceleration of the payment
because the payment timing was not ac-
celerated due to the involuntary nature of
the separation from employment. If the
value of the payment absent the accelera-
tion is not reasonably ascertainable, and
the acceleration of the payment does not
significantly increase the present value of
the payment absent the acceleration, the
present value of the payment absent the
acceleration is the amount of the acceler-
ated payment (so the amount contingent
on the separation from employment is
zero). If the present value of the payment
absent the acceleration is not reasonably

ascertainable, but the acceleration signifi-
cantly increases the present value of the
payment, the future value of the payment
contingent on the separation from em-
ployment is treated as equal to the amount
of the accelerated payment. For this pur-
pose, the acceleration of a payment by 90
days or less is not treated as significantly
increasing the present value of the pay-
ment. For rules on determining present
value, see Q/A-24(f) and Q/A-26 through
Q/A-28.

(A) a payment vests as a result of an
involuntary separation from employment;

(B) disregarding the separation from
employment, the payment was contingent
only on the continued performance of ser-
vices for the employer for a specified pe-
riod of time; and

(C) the payment is attributable, at least
in part, to the performance of services
before the date the payment is made or
becomes certain to be made;

then the portion that is contingent on
the separation from employment is the
amount described in Q/A-24(b), plus the
value of the lapse of the obligation to
continue to perform services described in
paragraph (c)(3). The portion of the pay-
ment that is contingent on the separation
from employment under this Q/A-24(c)
cannot exceed the amount of the acceler-
ated payment, or, if the payment is not
accelerated, the present value of the pay-
ment.

(2) For purposes of paragraph Q/A-
24(b), the acceleration of the vesting of a
stock option or the lapse of a restriction on
restricted stock is considered to signifi-
cantly increase the value of a payment.

(3) The value of the lapse of the obli-
gation to continue to perform services (de-
scribed in Q/A-24(c)(1)) is one percent of
the amount of the accelerated payment
multiplied by the number of full months
between the date that the employee's right
to receive the payment is vested and the
date that, absent the acceleration, the pay-
ment would have been vested. This para-
graph (c)(3) applies to the accelerated
vesting of a payment in the nature of
compensation even if the time when the
payment is made is not accelerated. In that
case, the amount reflecting the lapse of the
obligation to continue to perform services

is one percent of the present value of the
future payment multiplied by the number
of full months between the date that the
individual's right to receive the payment
is vested and the date that, absent the
acceleration, the payment would have
been vested.

(d) Nonvested payments subject to a
vesting condition other than a service
condition. Neither Q/A-24(b) nor (c) ap-
plies to a payment if (without regard to the
separation from employment) vesting of
the payment depends on an event other
than the performance of services, such
as the attainment of a performance goal,
and the vesting event does not occur prior
to the separation from employment. For
example, neither Q/A-24(b) nor (c) apply
if the payment not only vests due to the
involuntary separation from employment
(despite not having met a separate alter-
native vesting condition other than the
continued performance of services) but
the payment also is accelerated due to the
involuntary separation from employment.
In these circumstances, the full amount of
the accelerated payment is treated as con-
tingent on the separation from employ-
ment under this Q/A-24(d).

(e) Application to benefits under a non-
qualified deferred compensation plan. In
the case of a payment of benefits under a
nonqualified deferred compensation plan,
Q/A-24(b) applies to the extent benefits
under the plan are vested without regard
to the separation from employment but the
payment of benefits is accelerated due to
the involuntary separation from employ-
ment. Q/A-24(c) applies to the extent
benefits under the plan become vested as a
result of the separation from employment
and are attributable, at least in part, to the
performance of services prior to vesting.
For any other payment of benefits under a
nonqualified deferred compensation plan
(such as a contribution made due to the
employee's involuntary separation from
employment) the full amount of the pay-
ment is contingent on the employee's sep-
aration from employment.

(f) Present value. For purposes of this
Q/A-24, if an accelerated payment is
made, the increase in the present value of
the payment due under the original pay-
ment schedule is determined based on the
date on which the accelerated payment is
made. The amount that is treated as con-

tingent on the separation from employ-
ment is the amount by which the present
value of the accelerated payment exceeds
the present value of the payment absent
the acceleration.

(g) Examples. See Treas. Reg. § 1.280G,
Q/A-24(f) for examples that may be applied
by analogy to illustrate the rules of this Q/A-
24.

G. Three-Times-Base-Amount Test for
Parachute Payments

Q-25: Are all payments that are in
the nature of compensation, made to a
covered employee, and contingent on
a separation from employment,
parachute payments?

A-25: (a) In general. To determine
whether payments in the nature of com-
pensation made to a covered employee
that are contingent on the covered em-
ployee separating from employment with
the ATEO are parachute payments, they
must be compared to the individual's base
amount. To do this, the aggregate present
value of all payments in the nature of
compensation that are made or to be made
to (or for the benefit of) the same covered
employee by an ATEO (or any predeces-
sor of the ATEO) or related organization
and that are contingent on the separation
from employment must be determined. If
this aggregate present value equals or ex-
ceeds the amount equal to three times the
individual's base amount, the payments are
parachute payments. If this aggregate pres-
ent value is less than the amount equal to
three times the individual's base amount, no
portion of the payments is a parachute pay-
ment. See Q/A-26 and Q/A-27 for rules on
determining present value.

(b) Examples. The following examples
illustrate the rules of this Q/A-25:

Example 1. A is a covered employee with re-
spect to M, an ATEO. A's base amount is $200,000.
Payments in the nature of compensation that are
contingent on a separation from employment totaling
$800,000 are made to A on the date of the separation
from employment. The payments are parachute pay-
ments because they have an aggregate present value
at least equal to three times A's base amount of
$200,000 (3 x $200,000 = $600,000).

Example 2. Assume the same facts as in Exam-
ple 1, except that the payments contingent on the
separation from employment total $580,000. Be-
cause the payments do not have an aggregate present
value at least equal to three times A's base amount,
no portion of the payments is a parachute payment.

#### Q-26: As of what date is the present value of a payment determined?

A-26: (a) In general. Except as other-
wise provided in this Q/A-26, for pur-
poses of determining if a parachute pay-
ment exceeds three times the base amount,
the present value of a payment is deter-
mined as of the date of the separation
from employment, or, if the payment is
made prior to that date, the date on which
the payment is made.

(b) Deferred payments. For purposes of
determining whether a payment is a para-
chute payment, if a payment in the nature
of compensation is the right to receive
payments in a year (or years) subsequent
to the year of the separation from employ-
ment, the value of the payment is the
present value of the payment (or pay-
ments) calculated on the basis of reason-
able actuarial assumptions and using the
applicable discount rate for the present
value calculation that is determined in ac-
cordance with Q/A-27.

(c) Health care. If the payment in the
nature of compensation is an obligation to
provide health care (including an obliga-
tion to purchase or provide health insur-
ance), then for purposes of this Q/A-26
and for applying the three-times-base-
amount test under Q/A-25, the present
value of the obligation should be calcu-
lated in accordance with generally ac-
cepted accounting principles. For pur-
poses of Q/A-25 and this Q/A-26, the
obligation to provide health care is per-
mitted to be measured by projecting the
cost of premiums for health care insur-
ance, even if no health care insurance is
actually purchased. If the obligation to
provide health care is made in coordina-
tion with a health care plan that the em-
ployer makes available to a group, then
the premiums used for this purpose may
be the allocable portion of group premi-
ums.

#### Q-27: What discount rate is used to determine present value?

A-27: For purposes of computing the
excise tax under section 4960(a)(2), pres-
ent value generally is determined by using
a discount rate equal to 120 percent of the
applicable Federal rate (determined under
section 1274(d) and the regulations there-

under) compounded semiannually. The
applicable Federal rate to be used is the
Federal rate that is in effect on the date as
of which the present value is determined,
using the period until the payment is ex-
pected to be made as the term of the debt
instrument under section 1274(d). See
Q/A-26. However, for any payment, the
employer and the covered employee may
elect to use the applicable Federal rate that
is in effect on the date that the contract
that provides for the payment is entered
into, if that election is made in the con-
tract.

#### Q-28: If the present value of a payment to be made in the future is contingent on an uncertain future event or condition, how is the present value of the payment determined?

A-28: (a) Treatment based on the es-
timated probability of payment. In certain
cases, it may be necessary to apply the
three-times-base-amount test or to allo-
cate a portion of the base amount to a
payment that is contingent on separation
from employment at a time when the ag-
gregate present value of all the payments
is uncertain because the time, amount, or
right to receive one or more of the pay-
ments is also contingent on the occurrence
of an uncertain future event or condition.
In that case, the employer must reasonably
estimate whether it will make the pay-
ment. If the employer reasonably esti-
mates there is a 50-percent or greater
probability that it will make the payment,
the full amount of the payment is consid-
ered for purposes of the three-times-base-
amount test and the allocation of the base
amount. If the employer reasonably esti-
mates there is a less than 50-percent prob-
ability that the payment will be made, the
payment is not considered for either pur-
pose.

(b) Correction of incorrect estimates.
If the ATEO later determines that the es-
timate made under Q/A-28(a) was incor-
rect, it must reapply the three-times-base-
amount test described in Q/A-25 (and, if
necessary, reallocate the portion of the
base amount allocated to previous pay-
ments in accordance with Q/A-32) to re-
flect the actual time and amount of the
payment. In reapplying the three-times-
base-amount test (and, if necessary, real-

locating the base amount), the ATEO must
determine the aggregate present value of
payments paid or to be paid as of the date
described in Q/A-26, using the discount rate
described in Q/A-27. This redetermination
may affect the amount of any excess para-
chute payment for a prior taxable year.
However, if, based on the application of the
three-times-base-amount test without regard
to the payment described in this Q/A-28, an
ATEO has determined it will pay an em-
ployee an excess parachute payment or pay-
ments, then the three-times-base-amount
test does not have to be reapplied when a
payment described in this Q/A-28 is made
(or becomes certain to be made) if no base
amount is allocated to such payment.

(c) Initial option value estimate. To the
extent provided in published guidance of
general applicability under § 601.601(d)(2)
of this Chapter, an initial estimate of the
value of an option subject to Q/A-19(c) is
permitted to be made, with the valuation
subsequently redetermined, and the three-
times-base-amount test reapplied. Until
such guidance is published, the guidance
under section 280G applies by analogy.

(d) Examples. See Treas. Reg.
§ 1.280G-1, Q/A-33(d), for examples that
may be applied by analogy to illustrate the
rules of this Q/A-28.

#### Q-29: What is the base amount for purposes of section 4960(c)(5)(D)?

A-29: (a) In general. A covered em-
ployee's base amount is the average an-
nual compensation for services performed
as an employee of the ATEO (including
compensation for services performed for a
predecessor entity of the ATEO), or a
related organization with respect to which
there has been a separation from employ-
ment, if the compensation was includible
in the gross income of the individual for
taxable years in the base period (including
amounts that were excluded under section
911), or would have been includible in the
individual's gross income if the individual
had been a United States citizen or resi-
dent. See Q/A-30 for the definition of
base period and for examples of base
amount computations.

(b) Short or incomplete taxable years.
If the base period of a covered employee
includes a short taxable year or less than
all of a taxable year of the employee,

compensation for the short or incomplete
taxable year must be annualized before
determining the average annual compen-
sation for the base period. In annualizing
compensation, the frequency with which
payments are expected to be made over an
annual period must be taken into account.
Thus, any amount of compensation for a
short or incomplete taxable year that rep-
resents a payment that will not be made
more often than once per year is not an-
nualized.

(c) Excludable fringe benefits. Because
the base amount includes only compensa-
tion that is includible in gross income, the
base amount does not include certain
items that constitute parachute payments.
For example, payments in the form of
excludible fringe benefits or excludible
health care benefits are not included in the
base amount but may be treated as para-
chute payments.

(d) Section 83(b) income. The base
amount includes the amount of compen-
sation included in income under section
83(b) during the base period.

### Q-30: What is the base period?

A-30: (a) In general. The base period
of a covered employee is the covered em-
ployee's five most recent taxable years
ending before the date on which the sep-
aration from employment occurs. How-
ever, if the covered employee was not an
employee of the ATEO for this entire
five-year period, the individual's base pe-
riod is the portion of the five-year period
during which the covered employee per-
formed services for the ATEO, a prede-
cessor entity, or a related organization.

(b) Examples. The following examples
illustrate the rules of Q/A-29 and this
Q/A-30:

Example 1. C, a covered employee, receives an
annual salary of $500,000 per year during the base
period. C defers $100,000 of salary each year under
a nonqualified deferred compensation plan (none of
which is includible in C's income until paid). C's
base amount is $400,000 (($400,000 x 5) / 5).

Example 2. D, a covered employee, was em-
ployed by an ATEO for two years and four months
preceding the year in which D separates from em-
ployment. D's compensation includible in gross in-
come was $100,000 for the four-month period,
$420,000 for the first full year, and $450,000 for the
second full year. D's base amount is $390,000 ((3 x
$100,000) + $420,000 + $450,000) / 3).

Example 3. Assume the same facts as in Exam-
ple 2, except that D also received a $60,000 signing

bonus when D's employment with the ATEO com-
menced at the beginning of the four-month period.
D's base amount is $410,000 ((($60,000 + (3 x
$100,000)) + $420,000 + $450,000) / 3). Since the
bonus is a payment that will not be paid more often
than once per year, the bonus is not taken into
account in annualizing D's compensation for the
four-month period.

Example 4. E, a covered employee with respect
to ATEO X, was not an employee of X for the full
five-year base period. In 2024 and 2025, E is a
director of X and receives $30,000 per year for E's
services. On January 1, 2026, E becomes an officer
and covered employee of X. E's includible compen-
sation for services as an officer of X is $250,000 for
each of 2026 and 2027, and $300,000 for 2028. In
2028, E separates from employment. E's base
amount is $250,000 ((2 x $250,000) / 2). The
$300,000 salary paid in 2028 does not affect the base
amount because it was paid in the year of separation.

Q-31: How is the base amount
determined in the case of a covered
employee who did not perform
services for the applicable tax-exempt
organization (or a predecessor entity
or a related organization), prior to the
calendar year in which the separation
from employment with the applicable
tax-exempt organization occurred?

A-31: (a) In general. In that case, the
covered employee's base amount is the
annualized compensation for services per-
formed for the ATEO (or a predecessor
entity or related organization) that-

(1) was includible in the employee's
gross income for that portion of the em-
ployee's taxable year prior to the employ-
ee's separation from employment (includ-
ing amounts that were excluded under
section 911), or would have been includ-
ible in the employee's gross income if the
employee had been a United States citizen
or resident; and

(2) was not contingent on the separa-
tion from employment.

(b) Examples. The following examples
illustrate the rules of this Q/A-31:

Example 1. On January 1, 2026, A, a covered
employee, enters into a four-year employment con-
tract with ATEO M as an officer of the organization.
A did not previously perform services for M (or any
predecessor entity or related organization). Under
the employment contract, A is to receive an annual
salary of $420,000 for each of the four years that A
remains employed by M, with any remaining unpaid
balance to be paid immediately in the event that A's
employment is terminated without cause. On July 1,
2026, after A has worked six months and received
compensation of $210,000, A's employment is
involuntarily terminated without cause, and A re-
ceives a payment of $1,470,000. The payment of
$1,470,000 is contingent on A's separation from

employment from M. In this case, A's base
amount is $420,000 (2 x $210,000). Since the
present value of the payment that is contingent on
A's separation from employment with M
($1,470,000) is more than three times A's base
amount of $420,000 (3 x $420,000 = $1,260,000),
the payment is a parachute payment.

Example 2. Assume the same facts as in Exam-
ple 1, except that A also receives a signing bonus of
$500,000 from M on January 1, 2026. The bonus is
not contingent on A's separation from employment
with M. When A's separation occurs on July 1, 2026,
A has received compensation of $710,000 (the
$500,000 bonus + $210,000 in salary). A's base
amount is $940,000 ($500,000 + (2 x $210,000)).
Because the $500,000 bonus will not be paid more
than once per year, the amount of the bonus is not
taken into account in annualizing A's compensation.
The present value of the potential parachute payment
($1,470,000) is less than three times A's base
amount of $940,000 (3 x $940,000 = $2,820,000),
and therefore no portion of the payment is a para-
chute payment.

### H. Computation of Excess Parachute Payments

### Q-32: How is the amount of an excess parachute payment computed?

A-32: (a) Calculation. The amount of
an excess parachute payment is the excess
of the amount of any parachute payment
made by an ATEO (or related organiza-
tion or predecessor organization) over the
portion of the covered employee's base
amount that is allocated to the payment.
For this purpose, the portion of the base
amount allocated to any parachute pay-
ment is the amount that bears the same
ratio to the base amount as the present
value of the parachute payment bears to
the aggregate present value of all para-
chute payments made or to be made to (or
for the benefit of) the same covered em-
ployee. Thus, the portion of the base
amount allocated to any parachute pay-
ment is determined by multiplying the
base amount by a fraction, the numerator
of which is the present value of the para-
chute payment and the denominator of
which is the aggregate present value of all
parachute payments.

(b) Examples. The following examples
illustrate the rules of this Q/A-32:

Example 1. E is a covered employee of ATEO X
and an employee of related organization Y. E's base
amount is $200,000 with respect to X and $400,000
with respect to Y. E receives $1 million from X and
$1 million from Y contingent upon E's involuntary
separation from employment from X and Y. For
purposes of determining the excise tax under section
4960(a)(2), E has a base amount of $600,000

($200,000 + $400,000). The two $1 million pay-
ments are parachute payments because their aggre-
gate present value is at least three times E's base
amount (3 x $600,000 = $1.8 million). The portion
of the base amount allocated to each parachute pay-
ment is $300,000 (($1 million / $2 million) x
$600,000). Thus, the amount of each excess para-
chute payment is $700,000 ($1 million - $300,000).

Example 2. A covered employee with a base
amount of $200,000 is entitled to receive two para-
chute payments, one of $200,000 and the other of
$900,000. The $200,000 payment is made upon sep-
aration from employment, and the $900,000 pay-
ment is to be made on a date in a future taxable year.
The present value of the $900,000 payment is
$800,000 as of the date of the separation from em-
ployment. The portions of the base amount allocated
to these payments are $40,000 (($200,000 / $1 mil-
lion) x $200,000) and $160,000 (($800,000 / $1
million) x $200,000), respectively. Thus, the amount
of the first excess parachute payment is $160,000
($200,000 - $40,000) and that of the second is
$740,000 ($900,000 - $160,000).

#### I. Reporting Liability Under Section 4960

## Q-33: How do applicable tax-exempt organizations or related organizations report and pay the excise tax imposed under section 4960?

A-33: (a) In general. Taxes imposed
under section 4960 are reported and paid
using Form 4720, Return of Certain Ex-
cise Taxes Under Chapters 41 and 42 of
the Internal Revenue Code. See also Prop.
Treas. Reg. §§ 53.6011-1 and 54.6071-1,
83 F.R. 55653. In any case in which re-
muneration from a related organization is
included to determine the excise tax im-
posed by section 4960, each ATEO and
related organization (including a related
taxable organization) must file a separate
Form 4720 to report its share of liability.
ATEOs and related organizations that are
not liable for excise tax under section
4960 for the taxable year need not a file
Form 4720 for the taxable year unless
filing is required under other provisions of
the Code or regulations.

(b) Examples. The following examples
illustrate the rules of this Q/A-33:

Example 1. P, an ATEO, pays $250,000 of re-
muneration to Employee A for the taxable year for
services performed as a common-law employee of P.
A is a covered employee of P and is a highly-
compensated employee within the meaning of sec-
tion 414(q) for the taxable year. P also pays A an
excess parachute payment of $550,000 for the tax-
able year. Q is a for-profit entity that is a related
organization with respect to P. P and Q both use a
calendar year taxable year. Q pays A $1 million of
remuneration for the taxable year for services ren-

dered as a common-law employee of Q, and pays no
other remuneration to or parachute payment to any
covered employee of P.

P and Q must report their respective liabilities for
the excise tax for the taxable year on separate Forms
4720. P must report liability for the $50,000 of
excess remuneration it paid to A (($250,000 / $1.25
million) x $250,000) and the $550,000 excess para-
chute payment it paid to A. Even though Q has no
covered employees because it is not an ATEO, Q
must report liability for the $200,000 of excess re-
muneration it paid to A (($1 million / $1.25 million)
x $250,000) as a related organization of P.

Example 2. R, an ATEO, pays $25,000 of re-
muneration each to five employees (the highest-
compensated group) for each of the taxable year and
the preceding taxable year for services performed as
common-law employees of R and pays less than
$10,000 of remuneration each to all other employees
for each of the taxable year and the preceding tax-
able year. The amount described in section
414(q)(1)(A), adjusted for inflation for the taxable
year, is $125,000. In addition, for the taxable year, R
pays B, a member of the highest-compensated group,
an $80,000 payment in the nature of compensation
that was contingent on B involuntarily separating
from employment and that exceeds three times B's
base amount.

R is not liable for tax under section 4960 and
therefore does not need to file a Form 4720 for the
taxable year (assuming R is not liable for excise tax
under a provision other than section 4960). R paid no
excess remuneration for the taxable year because it
did not pay any employee remuneration in excess of
$1 million. R paid no excess parachute payment for
the taxable year, even though B received a parachute
payment that was more than three times the base
amount, because B (who received $105,000 of re-
muneration in the year of the separation from em-
ployment) is not a highly-compensated employee
within the meaning of section 414(q).

## Q-34: When is the excise tax imposed under section 4960 due?

A-34: (a) In general. The section 4960
excise tax must be paid and reported by
filing Form 4720 by the 15th day of the
5th month after the end of the employer's
taxable year. An employer may file Form
8868, Application for Automatic Exten-
sion of Time to File an Exempt Organiza-
tion Return, to request an automatic ex-
tension of time to file Form 4720. The
automatic extension will be granted if
Form 8868 is properly completed, and
timely filed. Form 8868 does not extend
the time to pay tax. To avoid interest and
penalties, an employer must pay the tax
due by the original due date of Form 4720.

(b) Election to prepay tax. Notwith-
standing the general rule described in
Q/A-2 and Q/A-34(a), an employer may
prepay the excise tax under section

4960(a)(2) for the taxable year of the sep-
aration from employment or any later tax-
able year before the taxable year for which
the parachute payment is actually or con-
structively paid (see Q/A-2). (However, an
employer may not prepay the excise tax on
a payment to be made in cash if the present
value of the payment is not reasonably as-
certainable under section 3121(v)(2) and
Treas. Reg. § 31.3121(v)(2)-1(e)(4) or on a
payment related to health coverage.) Any
prepayment must be based on the present
value of the excise tax that would be due for
the taxable year for which the employer will
pay the excess parachute payment, and be
calculated using the discount rate equal to
120 percent of the applicable Federal rate
(determined under section 1274(d) and reg-
ulations thereunder; see Q/A-27) and the
tax rate in effect under section 11 for the
year in which the excise tax is paid. For
purposes of projecting the future value of a
payment that provides for interest to be
credited at a variable interest rate, the em-
ployer may make a reasonable assumption
regarding the variable rate. An employer is
not required to adjust the excise tax paid
under this Q/A-34(b) merely because the
actual future interest rates are not the same
as the rate used for purposes of projecting
the future value of the payment.

Example. A covered employee with a base
amount of $200,000 is entitled to receive two para-
chute payments, one of $200,000 and the other of
$900,000. The $200,000 payment is made upon sep-
aration from employment, and the $900,000 pay-
ment is to be made on a date in a future taxable year.
The present value of the $900,000 payment is
$800,000 as of the date of the separation from em-
ployment. The employer elects to prepay the excise
tax on the $900,000 future parachute payment (of
which $740,000 is an excess parachute payment).
The tax rate under section 11 is 21 percent for the
taxable year the excise tax is paid and, using a
discount rate determined under Q/A-27, the present
value of the $155,400 ($740,000 x 21 percent) excise
tax on the $740,000 future excess parachute payment
is $140,000. To prepay the excise tax on the
$740,000 future excess parachute payment, the em-
ployer must satisfy its $140,000 obligation under
section 4960 with respect to the future payment, in
addition to the $33,600 excise tax ($160,000 x 21
percent) on the $160,000 excess parachute payment
made upon separation from employment. For pur-
poses of determining the amount of excess remuner-
ation (if any) under Q/A-11, the amount of remu-
neration paid by the employer to the covered
employee for the taxable year of the separation from
employment is reduced by the $900,000 of total
excess parachute payments ($160,000 + $740,000).

Q-35: Are applicable tax-exempt
organizations or related organizations
required to pay estimated taxes for
the excise tax imposed under section
4960?

A-35: No. There is no requirement un-
der section 6655 for ATEOs or related
organizations to pay estimated taxes on
excise taxes imposed under section 4960.
Instead, the excise tax is reported and paid
annually on Form 4720.

### J. Miscellaneous Issues

#### Q-36: Does the payment of remuneration subject to excise tax under section 4960 automatically constitute an excess benefit transaction under section 4958?

A-36: No, the imposition of excise
tax under section 4960 is not determi-
native as to whether the remuneration
paid to the covered employee is exces-
sive or unreasonable compensation for
purposes of section 4958. Similarly,
there is no presumption, inference, or
basis for concluding that remuneration
paid to a covered employee that is not
subject to excise tax under section 4960
is reasonable compensation for purposes
of determining liability for excise tax
under section 4958.

##### Q-37: Does the payment of remuneration subject to excise tax under section 4960 necessarily constitute an act of self-dealing described in section 4941?

A-37: No, if the covered employee is a
disqualified person described in section
4946, the imposition of excise tax under
section 4960 is not determinative as to
whether the remuneration paid to the cov-
ered employee is excessive or unreason-
able compensation for purposes of section
4941. Similarly, there is no presumption,
inference, or basis for concluding that re-
muneration paid to a covered employee
that is not subject to excise tax under
section 4960 is reasonable compensation
for purposes of determining excise tax
under section 4941.

#### Q-38: Does section 4960 apply to amounts to which section 162(m) applies?

A-38: (a) In general. Remuneration
paid by a publicly held corporation within
the meaning of section 162(m)(2) to a
covered employee within the meaning of
section 162(m)(3) generally is taken into
account for purposes of section 4960.
Similarly, remuneration paid by a covered
health insurance provider within the
meaning of section 162(m)(6)(C) to an
applicable individual within the meaning
of section 162(m)(6)(F) generally is taken
into account for purposes of section 4960.
However, any amount of remuneration for
which a deduction is not allowed by rea-
son of section 162(m) is not taken into
account for purposes of section 4960.

(b) Example. The following example
illustrates the rules of this Q/A-38:

Example. Employee A is an officer of Corpora-
tion X. Corporation X is a related organization as
described in Q/A-7 with respect to an ATEO. A is
also a covered employee of the ATEO. A receives
compensation of $1.5 million from X, of which
$500,000 is nondeductible by reason of section
162(m)(1). The amount of deduction disallowed un-
der section 162(m) ($500,000) is not treated as re-
muneration for purposes of section 4960. However,
the remuneration paid by X that is not disallowed by
reason of section 162(m)(1) ($1 million) is treated as
remuneration for section 4960 purposes.

## K. Effective Date

## Q-39: What is the effective date of section 4960?

A-39: (a) In general. Section 4960 ap-
plies to taxable years of an employer be-
ginning after December 31, 2017. Remu-
neration paid before the beginning of the
first taxable year that begins after Decem-
ber 31, 2017, is not subject to the excise
tax under section 4960.

(b) Examples. The following examples
illustrate the rules of this Q/A-39:

Example 1. ATEO X uses a calendar year tax-
able year. ATEO Y is a related organization with
respect to X and uses a taxable year beginning July
1 and ending June 30. X and Y each pay covered
employee L $1.2 million of remuneration in calendar
year 2018 ($2.4 million total) in equal monthly
amounts.

X and Y's liability under section 4960(a)(1) is
determined by taking into account only remuneration
paid during their respective taxable years beginning
after December 31, 2017. X pays L a total of $1.2
million in remuneration during X's first taxable year
beginning after December 31, 2017 (January 1, 2018

through December 31, 2018). Y pays L $600,000
during the portion of the calendar year ending with
or within Y's first taxable year beginning after De-
cember 31, 2017 (July 1, 2018 through December
31, 2018), resulting in $800,000 ($1.2 million +
$600,000 - $1 million) of excess remuneration paid
in calendar year 2018.

Example 2. ATEO Z uses a calendar year tax-
able year. On January 1, 2017, Z credits $1 million
of remuneration to an account under a nonqualified
account balance plan on behalf of covered employee
M. Under the plan, M will not vest in the amount
unless M performs substantial services through De-
cember 31, 2018. On December 31, 2017, the ac-
count balance is $1.1 million. On December 31,
2018, the account balance is $1.2 million. Although
M's account balance as of December 31, 2017 was
$1.1 million, the entire $1.2 million is treated as
remuneration paid in calendar year 2018, because
vesting did not occur until December 31, 2018. If
instead the $1.1 million had vested during 2017, only
the $100,000 increase in the account balance during
2018 would have been treated as remuneration paid
in 2018 potentially subject to the excise tax under
section 4960(a)(1).

## III. REQUEST FOR COMMENTS

The Treasury Department and the IRS
intend to issue proposed regulations with
respect to section 4960. The Treasury De-
partment and the IRS request comments
on the topics addressed in this notice and
any other issues arising under section
4960. The Treasury Department and the
IRS specifically request comments regard-
ing the following topics:

(1) Whether, for purposes of determin-
ing whether an employee is a covered
employee, calculating remuneration, and
calculating excess parachute payments, an
employer should be permitted to rely on
the employee's written representation that
the employee did not perform services for
any other employer during the calendar
year ending with or within the ATEO's
taxable year (or did not perform services
for one or more specified employers). If
so, whether there are circumstances (for
example, an employer has reason to know
that the written representation was incor-
rect) under which an employer should not
be permitted to rely on such a representa-
tion, and in what manner such a written
representation must be documented in or-
der to be relied upon.

(2) Whether, for purposes of calculat-
ing remuneration from a related organiza-
tion with a change in status as a related
organization during the year, there should
be an alternative to calculating the actual
amount paid while the employer was a

related organization with respect to the
ATEO and, if so, what alternative(s)
should be available that would continue to
provide a useful calculation with respect
to both the ATEO and the related organi-
zations without creating opportunities for
abusive reallocations of remuneration
among the related organizations.

(3) How remuneration based on the
appreciation and depreciation of the fair
market value of the stock underlying stock
options and stock appreciation rights (or
other similar equity rights) should be
taken into account.

(4) How a related organization should
treat remuneration on which it was subject
to excise tax under section 4960 in a prior
taxable year and for which it is denied a
deduction under section 162(m) in the
current taxable year.

(5) How the term "predecessor" should
be defined for purposes of defining cov-
ered employees.

(6) How remuneration paid to medical
service providers should be reasonably al-
located between medical services and
other services, including how reasonable
allocations can be made taking into ac-
count comparable salaries, time spent per-
forming medical services and other ser-
vices, and any applicable employment
agreements.

All materials submitted will be avail-
able for public inspection and copying.
Public comments should be submitted no
later than April 2, 2019. Comments
should include a reference to Notice 2019-
09. Comments may be submitted electron-
ically via the Federal eRulemaking Portal

at www.regulations.gov (type IRS-2019-
0001 in the search field on the regula-
tions.gov homepage to find this notice and
submit comments). Alternatively, submis-
sions may be sent to CC:PA:LPD:PR (No-
tice 2019-09), Room 5203, Internal Rev-
enue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions also may be hand delivered
Monday through Friday between the
hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (Notice 2019-09), Courier's
Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington,
DC 20044. All recommendations for guid-
ance submitted by the public in response
to this notice will be available for public
inspection and copying in their entirety.

## IV. RELIANCE

The Treasury Department and the IRS
intend to issue further guidance regarding
section 4960 in the form of proposed reg-
ulations. Until further guidance is issued,
taxpayers may rely on the rules in this
notice for purposes of section 4960 effec-
tive from December 22, 2017 (the date of
enactment). Further guidance will be pro-
spective and will not apply to taxable
years beginning before the issuance of
such guidance.

## V. PAPERWORK REDUCTION ACT

The collection of information in this
notice is the requirement under section
4960 that an ATEO determine and keep
records of its covered employees, related
organizations, and excess remuneration

and excess parachute payments paid to
covered employees by the ATEO and re-
lated organizations, disclose this informa-
tion to each related organization, and that
each ATEO and related organization re-
port excise tax liability to the IRS. The
collection of information contained in this
notice is reflected in the collection of in-
formation for Form 4720 that has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507(c)) under control number
1545-0052.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less the collection of information displays
a valid OMB control number.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by § 6103.

## VI. DRAFTING INFORMATION

The principal authors of this notice are
William McNally and Chelsea Rubin of
the Office of Associate Chief Counsel
(Tax Exempt and Government Entities).
For Executive Compensation questions,
contact Mr. McNally at (202) 317-5600
(not a toll-free number). For Exempt Or-
ganizations questions, contact Ms. Rubin
at (202) 317-5800 (not a toll-free
number).

## Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

## Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

TFE-Transferee.

TFR-Transferor.

CI-City.

GR-Grantor.

IC-Insurance Company.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

U.S.C .- United States Code.

DC-Dummy Corporation.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

BK-Bank.

B.T.A .- Board of Tax Appeals.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

GP-General Partner.

T.I.R .- Technical Information Release.

COOP-Cooperative.

LR-Lessor.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

### Numerical Finding List1

Bulletin 2019-4

Notices:

2019-01, 2019-02 I.R.B. 275
2019-02, 2019-02 I.R.B. 281
2019-03, 2019-03 I.R.B. 350
2019-04, 2019-02 I.R.B. 282
2019-05, 2019-02 I.R.B. 283
2019-06, 2019-03 I.R.B. 353
2019-08, 2019-03 I.R.B. 354
2019-09, 2019-04 I.R.B. 403

#### Proposed Regulations:

REG-104259-18, 2019-02 I.R.B. 300
REG-104352-18, 2019-03 I.R.B. 357

Revenue Procedures:

2019-1, 2019-01 I.R.B. 1
2019-2, 2019-01 I.R.B. 106

2019-3, 2019-01 I.R.B. 130
2019-4, 2019-01 I.R.B. 146
2019-5, 2019-01 I.R.B. 230
2019-6, 2019-02 I.R.B. 284
2019-7, 2019-01 I.R.B. 268
2019-8, 2019-03 I.R.B. 347
2019-9, 2019-02 I.R.B. 293
2019-12, 2019-04 I.R.B. 401
2019-10, 2019-2 I.R.B. 296

Revenue Rulings:

2019-03, 2019-02 I.R.B. 272

# Finding List of Current Actions on Previously Published Items1

Bulletin 2019-4

# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.

Internal Revenue Bulletin 2019-4 (PDF rendition): IRS Notices

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