The University of Alabama

There are few institutions as loved or hated as the University of Alabama. Its alumni give generously, and its fans spend heavily to support Nick Saban and his $8.3 million salary. But Alabama and other public universities just received a huge advantage over private universities because of an error in the new Tax Cuts and Jobs Act.

Under the new law, public companies cannot deduct executive compensation over $1 million. And to keep public companies and public charities on the same playing field, Congress added Section 4960, which is an excise tax on tax-exempt entities with executive compensation in excess of $1 million. Since these organizations pay no income tax, the excise tax is 21%, which is the top corporate rate.

However, in the statue list of “applicable tax-exempt organizations,” Congress left out one major player—public universities. It names Section 501(a) organizations, which is the primary type of tax-exempt entity, and attempts to capture outliers by listing three other entity types. But none of them address public universities.

The IRS has essentially confirmed this exception through the issuance of Notice 2019-09, “Interim Guidance Under Section 4960.” And in a tax regime that typically favors faith and football, it’s no surprise that this inconsistency fell through the cracks. But it does appear to be a legitimate mistake as Congress is currently attempting to correct the oversight.

But until they do, public universities will have a clear edge over private universities. For perspective, Saban’s compensation would cost a private school an additional $1.5 million in excise taxes. I’m sure they would be willing to pay it, but for now, they don’t have to.

Josh Norris