California Reduces 409A Shadow Tax

In a rare piece of good news relating to Section 409A of the Internal Revenue Code, on October 4, 2013, California reduced its additional state tax on income failing to comply with Section 409A from 20 percent to 5 percent. This reduction is effective for taxable years beginning January 1, 2013 and later.

Article Here

IRS Prevails in Court Case: Discounted Options Subject to 409A

From Benefits Notes Blog:

"I also found the case interesting because of the time periods involved and the role of the taxpayers in the stock issuance. The case involved actions taken during the 409A transition period, the period of time between January 1, 2005, when the statute became effective, and January 1, 2008, when final regulations became effective. During that transition period, employers and employees had a certain amount of leeway to fix arrangements that had not violated tax laws at inception but now were caught by the broad sweep of Section 409A."

Blog Post HERE

Court Decision HERE

California 409A "Double Tax" May Violate State Constitution

Article indicates that tax was not approved by Legislative Super Majority. See Law Review Article Here

The Tracking Rule -- 409A Train Keep a Rollin'

An explanation of the 409A Tracking Rule (and a suggestion that pre-wiring a plan under 409A may avoid the five-year limitation on tracking underlying equity payments): From xtreERISA Blog: "...I'm suggesting, if you have an equity-based plan and it provides when implemented at the outset that distributions in respect of equity units will track third-party post-CiC payments for underlying equity, then the provision doesn't have to limit tracking to third-party payments made within five years. In that case, I believe, you can simply say that the payments will track the third-party payments, whenever made." ARTICLE HERE

Skadden Arps: Accelerate Compensation into 2012 to Avoid Tax Increase

Accordingly to executive compensation lawyers, some executives may wish to consider accelerating compensation so that it is received in 2012 - prior to likely increases in the income tax rates. However, be mindful of 409A. Only compensation that is not subject to 409A (if any) can be accelerated. "Tax rates for highly compensated individuals will increase in 2013, perhaps substantially. This is due in part to: Possible expiration in 2013 of the Bush tax cuts, resulting in increases in the highest marginal tax brackets; An increase in the employee share of the Hospital Insurance portion of FICA from 1.45 percent to 2.35 percent on all wages in excess of $200,000 for single individuals or $250,000 for married individuals filing jointly; Expiration of the 2 percent payroll tax holiday; and Possible increases in the tax rates applicable to capital gains and dividend income. As a result, many employers and executives may wish to accelerate income into 2012 to reduce 2013 tax liabilities. However, the ability to accelerate compensation is severely limited by Section 409A of the Internal Revenue Code, which regulates the ability of employers and employees to change the time of payment of most types of compensation. Accelerating an award in violation of Section 409A will subject the employee to significant tax penalties." Article Here.

Exec Comp "Armegeddon" for Public Corps

From Melbinger Exec Comp Blog: "Imagine a lawsuit brought in the weeks leading up to your company's annual shareholders' meeting, which seeks to postpone that meeting based on inadequate proxy disclosures on executive compensation matters up for a shareholder vote. Now imagine that the lawsuit is successful – and you are forced to decide between (a) paying the class action lawyers hundreds of thousands of dollars of attorneys' fees and issuing enhanced disclosures or (b) fighting the matter through a preliminary injunction hearing, which may have the effect of delaying your shareholder meeting (and create additional legal fees). Does that sound like Armageddon? Well, it happened earlier this year and the lawyers who brought the lawsuit are seeking to duplicate their success – or achieve a large attorneys' fees award – against other public companies in the current proxy season." Article Here

Firm says: "More 409A Headaches"

More 409A headaches: Existing arrangements containing employment release provisions may need to be amended before year-end for Section 409A compliance (and new arrangements with such provisions need to be carefully drafted). Carin C. Carithers, Christian Chandler, Margaret de Lisser, Kurt L.P. Lawson, Joseph R. Rackman, Martha N. Steinman Section 409A of the Internal Revenue Code (“Section 409A”) generally provides rules governing nonqualified deferred compensation arrangements with the main focus of such rules being limiting the ability of both the plan participant and his or her employer to manipulate the timing of payments under such nonqualified plans (although an employee/employer relationship is not required for Section 409A to apply). In order to accomplish this goal, Section 409A is extremely broad in scope and can also apply to employment agreements, change of control agreements.

verance plans as well as other similar agreements that provide for severance or other compensatory payments unless the agreement qualifies under some limited exemptions from Section 409A. HERE

IRS Not Enforcing Bad Options - Yet

From Teknos... No Sign of IRS Enforcement – Yet No one has seen any sign of the IRS moving to enforce the few provisions of IRC 409A which apply to issuing stock options (the sections pertaining to stock options fill only 6 of 138 pages in the final regulations). Why have we not heard anything about IRS enforcement? Because, like any new tax regulation, enforcement takes time. And it takes even more time for enforcement results to become visible to the community. Link Here

409A Changed the Way Business is Done in Hollywood

Causing "chaos." "

No more advances." No more "re-negotiations." Article from Venable Law Firm, here.

IRS Turns to 409A to Analyze Pension Retirement Tax Issues

A multiemployer pension plan, in an effort to permit employees to “retire” under an early retirement benefit before that benefit was eliminated, proposed to let eligible participants “retire” and then immediately return to work. In a private letter ruling, the IRS concluded these employees were not legitimately retired. In analyzing “retirement” for qualified pension plan purposes the IRS looked at Section 409A and other sources.

IRS Private Letter Ruling HERE

Article HERE

New App Brings Code and Regs to your Smart Phone

At long last, here is the link for bringing the Code and the Regs to your smartphone or tablet.

Prof. Polsky: 409A "Legislative Calamity"

Gregg D. Polsky (North Carolina), Fixing Section 409A: Legislative and Administrative Options, 55 Vill. L. Rev. ___ (2012):

This [article] ... describes the legislative calamity that is § 409A of the Internal Revenue Code. Section 409A manages, all at once, to (i) fail to better neutralize the tax treatment of deferred compensation with that of current compensation, (ii) impose significant compliance costs on sophisticated taxpayers, and (iii) provide a dangerous trap for unsophisticated taxpayers.
Ideally, Congress should repeal § 409A and replace it with a system that taxes deferred compensation more neutrally vis-a-vis current compensation. Failing that, Congress should either replace § 409A with a broad grant of authority to the Treasury and IRS to strengthen the constructive receipt and economic benefit doctrines or amend § 409A to limit its scope to employee compensation paid by public companies.

If Congress fails to act, the Treasury should interpret the term “compensation” as used in § 409A to include only compensation paid by public companies to their employees or directors. This arguably counter-textual interpretation of the statute creates the potential for whipsaw of the IRS by nonpublic companies and their employees, but this problem is outweighed by the benefits from cleaning up § 409A.

Article via Tax Prof Blog: Here

Roth CPA says "kill it" - Here

Constructive Receipt Effective, Appropriate; 409A "Micromanages" - Should be Repealed

Article Here

"To survive and thrive, businesses need a regulatory system that is predictable and fair, but does not micromanage. Constructive receipt is a time-tested doctrine that accomplishes those ends. By contrast, Section 409A is neither predictable nor fair, and micromanages the relationship between businesses and their executives. Section 409A should be repealed."

Going Concern Blog Says 409A is Tax Policy Scam

Penalties for foot-faults insane; akin to shooting jaywalkers; ranked #2 on list of top tax policy scams.

Article HERE

IRS Will "Clean Up" 409A

Plans on using 457A regs to clean up 409A. Click Here.

According to Sherman & Patterson:

"A key IRS attor­ney said last week that the § 457(f) reg­u­la­tions will be used as a vehi­cle to do some § 409A “clean-up.” He also referred to the ini­tial guid­ance being pro­posed rules. These com­ments seem to indi­cate that the reg­u­la­tions are mov­ing for­ward, are broader than orig­i­nally thought, and have a bet­ter chance of receiv­ing ear­lier rather than later atten­tion. The indi­ca­tion that they will come out in pro­posed form is pos­i­tive news as it will not only give a chance for com­ment, but a longer period for eas­ing into the new rules."

409A Tax Hits Income Earned Overseas

Article by EisnerAmper Here

Attorney Barker Shares the Roadmap for 409A Corrections

The secret recipe for 409A Corrections - HERE

Professor Lazar Urges Congress to Refrain from Regulating Executive Compensation

Buffalo Law Review Here

IRS Focusing 409A Audits on Do-It-Yourself Valuations

Article from Matt Armanino via AccountingToday.com

3rd Circuit Affirms Strange 409A Case

Plaintiff claimed imposing 409A 6-month-wait was illegal retaliation under the New Jersey Law Against Discrimination (LAD).

TV Show "Suits" Jokes about 409A

Hat Tip to xtreme Erisa blog.

New Regs on Deferred Comp for Non-Profits and Government

457(f) to be updated to in line with 409A

Mintz Levin Article HERE

Pillsbury Article HERE

Stockholder "Say On Pay" Initiatives Blocked by 409A

409A Wreaks New Havoc

"To illustrate the complexity of the interaction between Section 409A and corporate governance, let's say there's a negative say-on-pay vote against XYZ Corp. that appears to result, in part, from the CEO having accrued a $20 million vested SERP benefit. In order to convince shareholders that their concerns have been properly taken into account, the compensation committee negotiates a $5 million reduction to this SERP benefit with the CEO. This reduction, if implemented, would result from disregarding certain types of incentive pay that had counted as eligible compensation when calculating the SERP.

As a practical matter, XYZ's compensation committee intends to make larger annual equity compensation awards in future years based on the company meeting objective and challenging performance goals. The awards would allow the executive an opportunity to make up for the loss of the $5 million through future performance. It would seem that this type of negotiation and restructuring is what Congress had in mind when it enacted the say-on-pay provisions in Dodd-Frank.

Well, not so fast. The CEO could be stuck with a significant tax bill. As noted above, the SERP is nonqualified deferred compensation subject to Section 409A. So, if the later performance share awards are viewed as a substituted payment for the forfeited portion of the CEO's SERP, then there will be a Section 409A violation."

Article from CFO Magazine HERE

Start-Up America Says: 409A Stymies Access to Talent and Gain Sharing

The problem is that many regulations assume — or almost mandate — a traditional workaday paycheck relationship between company and labor. In particular, IRS tax code elements (e.g., contractor/employee tax rules and Section 409A deferred compensation) and SEC regulations (e.g., on secondary markets of shares in private companies and stock-option accounting rules) stymie the kind of flexible access to skilled talent and gain-sharing that high-growth companies need.

Article Here

Private Equity Investors Demanding Strict 409A Compliance and Indemnifications

Article Here