IRS Preparing to Regulate Paid Tax Preparers

Off Topic Article Here

Going Concern Blog Nominates 409A as Worst Tax of Decade

"The Enron scandal featured elaborate deferred compensation plans to provide executives a gilded liferaft when the ship sinks. Congress responds with a code section affecting schoolteachers. They showed Ken Lay what for by designing a tax on folks on money they may never see because of somebody else’s foot fault.

Sec. 409A clobbers its victims two ways:

• It taxes employees on their deferred comp balances when the plan is out of compliance, even if the employee doesn’t get the money, ever.

• It hits them again with a 20% excise tax.

Worse, the code section imposing these penalties is so complicated that it took 3 years to complete the regulations that run to 200 pages, and are so complicated and intrusive that accidental noncompliance must be rampant.

This all makes Sec. 409A my choice as the worst tax enactment of the decade."

Article by Joe Kristan of "Going Concern"

Another Good Article Re: 409A Valuation Methods

Article From Kenneth J. Pantoga Here

IRS Releases Guidance on Intersection of 409A and TARP

"Notice 2009-92 provides that, subject to certain conditions, a financial institution that has received financial assistance under the Troubled Asset Relief Program (TARP) that complies with an advisory opinion of the Special Master determining that it is necessary to change the time or form of payment of compensation to a service provider of the TARP recipient, or to condition payment upon a TARP-related condition such as the prior repayment of some or all of the financial assistance, or both, will not result in a failure to comply with the requirements of § 409A(a) of the Internal Revenue Code."

Article Here

Further Thoughts From Stanley D. Baum

"Under the Notice, any changes made to the time or form of payment of compensation under a Tarp Recipient's Plan, as required by the advisory opinion, will not cause the Plan to fail to meet the requirements of section 409A, so long as a number of conditions are met. In general, these conditions are:
-- the advisory opinion is specifically addressed to that TARP Recipient and Plan;
--the TARP Recipient has fully disclosed to the Special Master the employees whose compensation will be affected by complying with the advisory opinion, and
any similarly situated employees;
-- the advisory opinion explicitly sets forth (1) a revised time and form of
payment for the compensation which complies with section 409A and/or (2) a condition on payment of compensation under the Plan that is directly related to the TARP financial assistance received by the TARP Recipient, or to the ability of the TARP Recipient to repay the TARP financial assistance;
-- the advisory opinion does not authorize the TARP Recipient or any recipient of compensation under the Plan to elect another time or form of payment of compensation due from the Plan, other than in a manner which complies with section 409A;
-- the TARP Recipient and any recipient of compensation under the Plan must enter into a written agreement containing the revised time and form of payment, and any applicable conditions on payment, not later than by the end of the compensation recipient's taxable year in which the advisory opinion is issued, or by the 15th day of the third month following the date on which the advisory opinion is issued, if later; and
-- the TARP Recipient and any recipient of compensation under the Plan
complies with the terms of the advisory opinion in all material respects."

409A Correction Period Ending Soon - Last Chance

"We are just weeks away from the last chance for companies to rely on the transitional relief provided under IRS Notice 2008-113. I hope that your company has already taken action to complete a thorough review of compensation arrangements to identify and correct any arrangements that do not comply with Section 409A. Although it might be too late administratively to make major changes to correct errors under the transition relief, it is still a good idea for stock plan managers to do a final review and confirm that corrective action has been taken, especially when it comes to discounted options or SARS."

Article From NASPP

Advice on 409A Valuations for Start Up Companies

"With the advent of IRS Section 409A and the introduction of certain fair value accounting rules, valuation issues have become increasingly important for start-up companies. In the past, industry specific start-up “rules of thumb” may have been sufficient to serve as reasonable basis for any valuation concern. For example, the “Silicon Valley Rule” holds that the value of a common share is equal to 1/10 of the value of the preferred share pricing in the most recent capital round. While the simplicity of such rules can be appealing, the scrutiny of the IRS, SEC, and your auditors in combination with the potential liability associated with misreporting financial performance make it critical that value be determined and articulated in a credible fashion."

ARTICLE BY B. PATRICK LYNCH HERE

Student Law Article Re: 409A Correction Program

"This article reviews the current Code §409A(a) correction program and analyzes several issues related to creating the program, including whether the Treasury Department and the Service have legal authority to create it. The first section of this article discusses the history of Code §409A(a) and its requirements. The second section reviews Notice 2007-100 and provides an analysis of several issues related to the Notice. The third section reviews a few authoritative and administrative issues related to the development of the Code §409A(a) correction program. The fourth section suggests measures that should accompany the creation of an effective correction program under Code §409A(a). The fifth and final section provides concluding thoughts on the issues discussed in this article"

Article By Brian A. Benko Here

409A Audits - IRS Request List

Information Document Request

409A AUDITS COMMENCE

"The Internal Revenue Service ("IRS") has begun auditing companies' compliance with Section 409A of the Internal Revenue Code ("Section 409A"). This news may come as an unwelcome surprise to many who were hoping that the complexities and uncertainties of Section 409A might delay the IRS's enforcement efforts until more guidance was available and practices further developed. Information Document Requests ("IDRs") from the IRS to companies undergoing audits reveal that the IRS requires an audited company to disclose details of pay practices that could be subject to Section 409A and also to consider the possible application of Section 409A to these practices."

LINK FROM JONES DAY

Franchisors Using 409A Plans to Encourage Franchisee Store Remodeling

"A key provision of 409A allows a manufacturer (franchisor) to sponsor a deferred compensation plan for a service provider or independent contractor (franchisee). The resulting plan enables the franchisee to save up to 100 percent of their franchisee income pre-tax and invest it tax-deferred for the needed remodel. When the date arrives for the remodel, the franchisee takes the distribution and pays ordinary income taxes on the money received. If used for remodeling, which is a business expense, the franchisee may be able to expense it again.

To encourage system-wide participation, the franchisor could even make a matching contribution, or could predicate the match to the franchisee resigning their contract. A vesting provision could be added stating the match be used only for a refresh, remodel, or rebuild.

By sponsoring a tax-favored savings plan and encouraging participation with a match, the franchisor is assured that needed updating will take place on schedule. An updated store assures a consistent, positive customer experience across the system. The franchisor has also contributed to the goodwill of the relationship between franchisor and franchisee. And finally, the franchisee is happy because he or she now has a vehicle to save pre-tax and tax-deferred for a large future expenditure."

ARTICLE HERE

xtremErisa Discusses Substantial Risk of Forfeiture Under 457A

Forfeitable Manager Compensation - Here

"A question is bouncing around the market regarding what type of substantial risk of forfeiture is necessary before compensation will be subject to a substantial risk of forfeiture. This particular question boils down to the question of whether there needs to be a substantial risk that a service provider will voluntary separate or be terminated in order for that SP to be considered unvested. If the SP is considered unvested, and if the compensation in question is paid while the service requirement continues in place, or immediately after it expires, then the compensation may be a S-TD and Section 457A will, as to that compensation, be much ado about nada."

Sysco Reports Material Accelerated Distributions Under 409A Transition Relief

"The net balances of other long-term liabilities and prepaid pension cost decreased $85,596,000 during the first quarter of fiscal 2010 and decreased $34,507,000 during the first quarter of fiscal 2009. The decrease in the first quarter of fiscal 2010 is primarily attributable to three items....Second, our liability for deferred incentive compensation decreased due to accelerated distributions taken by plan participants of all or a portion of their vested balances pursuant to certain transitional relief under the provisions of Section 409A of the Internal Revenue Code...."

Report in 10-Q

News Report

Year End Planning Issues for Exec Comp - Includes 409A

Checklist of Year End Executive Compensation Issues

"Of unique importance for the 2009 calendar year, the Notice provides one-time transition relief for non-insiders. Under this transition relief, 2009 will be treated as the immediately following taxable year for correction of operational failures occurring prior to 2008, which should result in less severe tax penalties. In addition, companies should be cognizant that certain general income tax principles may provide opportunities to make same-year corrections to Code Section 409A violations without relying on the Notice for relief. Finally, Code Section 409A regulations occasionally provide relief from certain apparent operational failures. For example, a payment made up to 30 days prior to the scheduled due date may not be treated as a violation of Code Section 409A."

ABA and Skadden Get 409A Clarity from IRS

Skadden summarizes 409A Q&A session with IRS

"Annually, the American Bar Association's Joint Committee on Employee Benefits organizes a conference with IRS and Treasury officials to present written questions and proposed responses for reaction from the government panelists. Although the government's responses to these interpretive and practical questions do not constitute official guidance and cannot be relied upon, this year's responses to questions posed by Skadden, Arps and other practitioners help clarify the government's position on some of the difficult questions that remain unanswered by the Treasury regulations under Internal Revenue Code Section 409A relating to taxation of nonqualified deferred compensation arrangement."

"An Inconvenient Tax" Documentary - Movie Trailer Released

Move Web Site and Trailer

Press Packet

ERISA Discussion at "Above The Law"

Here

NY Bar Reports to US Treasury on 457A

Recommends changes and makes suggestions for new guidance.

NYSBA Documents

IRS Says it Will Guide on 457A

Will provide guidance and issue private rulings on 457A.

"The IRS is planning to issue guidance on a number of issues involving Code Sec. 457 deferred compensation plans, officials from Treasury and the IRS indicated. In the meantime, the IRS is issuing private letter rulings and responses to congressional inquiries on hardship issues, grandfathered plans and other concerns, Cheryl Press, a senior attorney with the IRS Associate Chief Counsel (Tax Exempt and Government Entities), stated."

IRS Says Salary Advances May Cause 409A Issue

Hat Tip from Stanley D. Baum - Article Here

"The IRS said that the doctrine of constructive receipt applies to the "salary advances" to employees. Accordingly, an employee would be required to include the amount available as a salary advance in gross income in the earliest open tax year in which the advance was available (even if not taken), and this amount would be subject to income tax withholding at such time as a constructive payment. The IRS continued by saying that, even if there was no constructive receipt, salary advances which an employee is expected to earn through future services are taxed as compensation, and are therefore included in gross income, at the time of receipt. The IRS conceded that an (unspecified) employment tax exception would apply to an employee, so that any advance would not be subject to employment tax. Further, if there is no constructive receipt, the salary advance program causes the Plan to violate IRC Section 409A, due to the permitted off-set feature described above. Apparently, the IRS felt that this offset, which is a pre-employment termination use of amounts deferred under the Plan, causes an acceleration of the payment of deferred compensation by the Plan, and this acceleration violates Section 409A."

IRS Memo

Correcting 409A Failures

Interesting/Contraversial Article Regarding Correcting Failures and Mistakes

"In Part Two, we explore how to correct failures
when the notice’s program is unavailable. We suspect
these will be legion. The IRS might not think that
correction outside the notice is permitted. If this is
their view, we do not agree. The IRS’s narrow view
appears based on the notice’s underlying and, we
believe, mistaken theory of section 409A. We set forth
a better view of section 409A, one more consistent
with the statute and regulations, and based on traditional
concepts of income receipt. On the basis of this
preferred view, we explore how 409A operational
failures might be corrected using rescission doctrine,
the longstanding rule of Couch v. Commissioner, and
other theories of income receipt derived from the case
law. The difference between these two opposing theories
of section 409A will underlie this and no doubt
other disputes about section 409A compliance and
administration for years to come."

Supreme Court Will Hear Case on Executive Pay

"The Supreme Court will hear the case this fall, as anger over huge bonuses paid to the executives of failing companies continues to grow. The case, Jones v. Harris Associates, may turn out to be the court’s first significant statement on the corporate culture that helped lead to the Great Recession."
Link

"Ignorning 409A" Chosen Top "Classic and Costly" Mistake for Start-ups

"The introduction of this element of 409A has dramatically changed the practices of private start up company boards who historically had priced options using their business judgment and some simple rules of thumb based on discounts from the most recent preferred stock price."

LINK

Backdating Returns to Spotlight; IRS GC Memorandum

Link from CFO Magazine

"The IRS legal memorandum, AM 2009-006, released on July 6, 2009, addresses the issue of whether the compensation emanating from these discounted options constitutes "qualified performance based compensation." The answer is an unequivocal no...

Whether a stock option satisfies the requirements of Regulation Section 1.162-27(e)(2)(vi)(A) is determined as of the date of grant of the option. The regulations do not provide a mechanism to retroactively reprice an option to transform compensation resulting from the exercise of the option into performance based compensation. Because the compensation arising from the option grants in this case was not based solely on an increase in the price of the stock after the grant date, none of the compensation attributable to the options in question was qualified performance based compensation."

Link to IRS GC Memo

Is it Still Possible to Fix Unvested Arrangements?

Article suggests that it is not too late to fix arrangements if they are not yet vested.

Link From ComplianceWeek

"In most cases, an employer with a plan document failure can only report the violation, fix the problem so that it doesn’t affect any future deferrals, and possibly make a tax gross-up payment to an employee who gets hit with the tax, penalty, and interest for a violation. However, the authors note that employers may have a limited opportunity to correct errors for certain types of non-compliant plans that impose vesting conditions, such as severance arrangements."

Law Article Discusses 409A

Article by Joy Mullane of Villanova Law Review Article discusses regulation of Executive Compensation through the tax code, including 409A.

"Section 409A was also enacted in response to popular sentiment. The public was in an uproar over Enron’s pay practices in general and its deferred compensation practices in particular. Enron’s deferred compensation practices allowed executives to access their retirement plans and deplete Enron’s assets while rank-and-file employees were locked out of accessing their retirement plans. In response, Congress enacted section 409A to discourage companies from establishing nonqualified deferred compensation plans that would allow an executive to have a significant degree of control over amounts deferred. While it is too early to make any certain claims regarding section 409A, prior experience suggests that it will share the experience of its predecessors and thus do little to prevent executives from finding a way around the rules to whatever end they desire, or else their employers will pay any imposed penalties."