Tax Insight

IRS guidance interprets limits on remuneration for tax-exempt organization compensation excise tax

Insight
5 minute read
March 11, 2026

What happened?

The IRS on January 29 issued Generic Legal Advice Memorandum 2026-001 (GLAM) concluding that an applicable tax-exempt organization (ATEO) must include certain nondeductible compensation in calculating the Section 4960 excise tax even if the ATEO is part of an affiliated group with a covered health insurance provider (CHIP) that is subject to the Section 162(m)(6) compensation deduction limitation. Notably, the IRS stated that relying on Chief Counsel Advice 201752008 (the 2017 CCA) does not constitute a reasonable, good-faith interpretation for refund claims seeking to exclude such compensation.

Why is it relevant?

Many exempt organizations—particularly healthcare systems with taxable affiliates— have grappled with how Section 4960 interacts with Section 162(m). The GLAM addresses refund claims by ATEOs that attempt to exclude compensation from the Section 4960 calculation based on the $500,000 deduction limitation in Section 162(m)(6) when the ATEO had no taxable income and therefore could not claim deductions for compensation expenses. The GLAM rejects that position and makes clear that unless a deduction was actually disallowed under Section 162(m), the compensation must be included for Section 4960 purposes. The GLAM also signals a strict view of what constitutes a reasonable, good-faith interpretation in this area.

Actions to consider

ATEOs within healthcare or insurance-affiliated groups should review prior Section 4960 filings and any refund positions taken based on the 2017 CCA. They also should consider whether their coordination of Sections 4960 and 162(m) reflects the IRS position that only compensation actually disallowed as a deduction is excluded from the Section 4960 excise tax base.