The clock was ticking. 

But the final regulations for IRC section 4960, the excise tax on the “excess compensation” of nonprofit executives, made it into the Federal Register in the nick of time on January 19, 2021 – just hours before Inauguration Day. 

This was the official conclusion of rule-making for the last of the controversial statutes directly affecting tax-exempt organizations that had been tossed into the rushed and sloppy mix of the Tax Cuts and Jobs Act of 2017 (TCJA ‘17). 

So that’s that, right? All done?

Not so fast. There’s a new sheriff in town: See Regulatory Freeze Pending Review (January 20, 2021), The White House.  

           Rule-making Freeze

This (at least 30-day) review affects all rule-making across the entire federal government. It applies to any matters still in the regulatory pipeline and everything published within the last sixty days including – of course – the freshly minted section 4960 regulations. 

Also swept up in this massive dragnet is the rule-making under the deeply unpopular new “silo” rules for calculating the unrelated business income tax. See our last post, Final UBIT Rules Issued (January 27, 2021). Those final regulations were published on December 2, 2020) regulations were made official by publication in the Federal Register on December 2, 2020. (The final regulations on the new excise tax on net investment income, section 4940, escaped this particular scrutiny, having been published in September 2020.)

          Tax Laws Affecting Nonprofits 

It’s no wonder that it took three long years for federal officials in the Treasury and the IRS to get through the tortuous process of producing a final set of regulations interpreting and applying these troublesome statutes. 

We’ve taken every opportunity since December 2017 to reiterate the sorry details about how the former Administration and the GOP leadership “rushed through their pet legislative project”: the massive Tax Cuts and Jobs Act (TCJA ’17). They “tossed aside many of the customary procedures – helpful items like committee hearings, multiple revisions of draft bills, and meaningful bipartisan debate.” It was, simply put, a 500-page+ mess that few lawmakers read before voting on it. To make matters worse, the customary transition period was also left out; the new laws took effect immediately on January 1, 2018. 

All along, the nation’s nonprofits, academics, professional advisors, and leading sector organizations have voiced dismay about the four new statutory provisions in the TCJA ’17.

Thankfully, one of the four statutes was so odious that all sides came together in the December 2019 darkness to give it an ignominious burial: see Poof! The Nonprofit Parking Tax is Gone (January 7, 2020). 

       Nonprofit Excess Compensation

Neither the UBIT silo rule-making (new section 512(s)(6)) nor the excess-compensation statute (new section 4960) made it even to the proposed- regulations stage within a reasonable period of time; that is, before 2020. In both cases, the feds issued “interim guidance” documents to help the nonprofit sector with the confusion and uncertainty. 

For the section 4960 process, the first written guidance was Notice 2019-09 dated December 31, 2018 – a full year after the new law went into effect.  As one legal commentator explained, there was good news and bad news for the nonprofit community in that document. “First the ‘good’ news: the IRS addressed many questions left open by the rather vague statutory provisions. Now the ‘bad’ news: the IRS narrowly construed many of the statutory provisions, which ultimately will result in additional administrative burden and cost to tax-exempt organizations subject to the rules….” The public comment period yielded fourteen responses from nonprofits and their advisors.

It was almost eighteen months until the Treasury/IRS officials followed up with published proposed regulations on June 11, 2020. The 177-pages long document reasserts the interim guidance originally set forth in the [earlier] Notice, with some adjustments.” Most particularly, the proposed regulations address a key concern raised in the first round of public comments; that is, “whether the excise tax should apply to businesses that supply highly compensated volunteers to affiliated nonprofits.” 

       Final Nonprofit Compensation Regs 

The just-published final regulations under Internal Revenue Service section 4960 follow the welcome pattern displayed by these federal officials; that is, they note particularly what the public has written during the 60-day comment period, and how they evaluated these suggestions and questions.

Generally, the final regulations adopt much of what was in the proposed regulations but where possible definitions and other matters are further refined. The final regulations go through this process point-by-point. 

See also, excellent commentary including: Final section 4960 regulations on excise tax for excess remuneration and excess parachute payment (January 13, 2021) KPMG (based on unofficial draft of final regs); and Final rules on exempt organization excess remuneration (January 12, 2021) Sally P. Schreiber, J.D., The Tax Advisor


The regulatory freeze and review issued by Chief of Staff Ron Klain on the first day of the Biden Administration is a harbinger of what is to come well beyond the tax laws of the United States. There will be broad-based reevaluation of laws of interest to many nonprofits around the nation including on critical topics like immigration, the environment, labor law, and income inequality. 

            — Linda J. Rosenthal, J.D., FPLG Information & Research Director 

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