AON Notes Problem with Linked Plan Guidance

IRS Guidance not sufficient. Waiting for response to ABA comments.

Article by John Lowell - HERE

Pleased to Announce the Launch of Project Interactive

PROJECT INTERACTIVE

Exciting Comments from the JP Morgan Chase Exec Comp Trends Conference (Did 162(m) Cause the Tech Stock Bubble?)

Thanks to JP Morgan Chase for sponsoring the Executive Compensation Trends Conference at Baltusrol Country Club in Springfield, New Jersey.

From speaker Brick Susko of Cleary Gottlieb: the implementation of Section 162(m) led to a significant increase in option grants and may have caused the Tech Stock Bubble. Notwithstanding the implementation of 409A, use of deferred compensation is on the rise; seeing "widespread deferrals" reaching lower levels of management. Some companies getting comfortable with informal corrections outside of the IRS procedure for "foot faults" - but sticking with the formal procedure for larger issues. Foreign companies struggle. Current IRS document correction procedure "not sufficient."

From speaker Claude Johnston of Fred W. Cook & Co: executive compensation is in a "recovery" and returning to "2008 levels" after dropping in 2009. Companies are being "less rigid" with respect to analyzing compensation survey data. Salary cuts are being reinstated.

From speaker Robert Barbetti of JP Morgan Chase: "west coast" companies are granting options, and "east coast" companies are granting stock and stock units. Section 83(b) elections are on the rise in anticipation of increasing tax rates.

Executive Compensation attorney in attendance, Michelle Capezza of Epstein Becker & Green, commented that the question of whether or not companies may informally correct 409A errors outside of the formal IRS procedure remains a contraversial question - and that the attorney-attendees at the conference "perked up" when the issue was discussed.

Lawyers ask IRS to "Lighten Up"

Article by Financial Advisor

"Tax lawyers want the IRS to lighten up on corporate executives when honest mistakes are made in their deferred pay plans. Right now, those executives face heavy tax penalties from even small, and often widely occurring, errors. So the American Bar Association's tax group is asking that the Internal Revenue Service relax parts of the tax code's section 409A, which covers deferred compensation plans."

"6 Month Delay" Crushes Executive

Bankruptcy Court orders Sharper Image CEO to return $6 million of severance

"Thalheimer resigned from the board of directors in December 2006. However, tax consideration, 26 U.S.C.A. § 409A ("IRS Rule 409A"), prevented Debtor from paying Thalheimer's $6,055,000 severance until April 2007. In April 2007, Thalheimer received his severance from Debtor and less than a year later, Debtor commenced this bankruptcy case by filing a voluntary Chapter 11 petition."

Expert: Hire U.S. Appraiser for 409A Valuation Work

In light of IRS audits and litigation risk, Badruswamy of Accuserve suggests problem with expert testimony if using foreign appraiser.

"One of the main issues with working in an outsourced manner is the lack of an expert that can be relied upon as expert testimony in such cases. As we all know, the IRS imposes penalties if the tax liabilities have not been measured under a fair market value standard under the 409A regulations. Given the size of IRS penalties and the nature of add-on penalties, it is important to work with US based firms that have a good understanding of the legal systems here, an understanding of what it takes to be an expert witness and have solid relationships with audit firms. We have been concerned a bit by the outsourced model, where foreign analysts compute and calculate the valuations with no experts out here to back such values."

BLOG POST HERE

409A Causing Dismay in South Carolina

"Large payments to members of the Santee Electric Cooperative Board of Trustees that prompted some public backlash were the result of a one-time payment from a terminated financial plan, according to officials from the electrical co-op.

Santee Electric CEO Floyd Keels said the termination of a financial plan for board members who were non-employees of the co-op caused the inflated numbers on the organization’s 2008 report of board member compensation.

An IRS 409a Nonqualified Deferred Compensation Plan funded by contributions made from each of the members of the board who were not co-op employees was first implemented in 1989, Keels said. Tax advantages associated with the plan changed under new IRS regulations implemented in 2008, causing the co-op to cease using in the plan and distribute the balance to participating members.

Keels provided a March 23 memo to the board from Ronnie A. Sabb, the co-op’s attorney, explaining the changes. The memo states Santee Electric terminated the 409a plan and distributed the net value of the benefits to the participants in a one-time payment, the large amounts listed on the co-op’s 990-form from 2008.

“Those individuals were participants under the plan,” Keels said, referring to the people on the 990-form, posted online by the IRS, which received payment. “It was a self-funded plan not funded by the co-op.”"

Article One

Article Two

Ivins, Phillips Expands on Novel Theory of Informal 409A Corrections

More on IRS 2010-6 From Ivins, Phillips. Summary of article from Rosina Barker and Kevin O'Brien here.

Link to full article here.

We are following the articles from these authors with particular interest towards their novel view that corrections may be possible outside of the formal IRS procedures.

"Scrivener’s error and other precepts of contract construction applicable when the written documents do not reflect the “plan,” arguably allowing document correction to conform with the parties’ intent outside of Notice 2010-6, at least in some circumstances."

More on 409A Audits and IRS "IDR" Requests

Provided by Tara Silver-Malyska of Grant Thornton HERE

"IDRs have included requests such the following:

Provide a list of all plans and arrangements that provide an employee with a legally binding right to compensation in one year, but payment in a subsequent year

Provide the basis for the position that the arrangement(s) is not subject to Section 409A, e.g., the short-term deferral rule, if applicable

Identify the terms of the nonqualified deferred compensation plan’s elections, including the deadline for the elections

If a payment was deferred beyond the originally scheduled payment date, identify the terms, including the payment date and the rescheduled payment date

Identify any acceleration in payments, including transition relief elections and deadlines, the original payment and actual payment dates

Identify “specified employees” and any payments of nonqualified deferred compensation made to specified employees within six months after separation from service

Provide a description of the plan and each modification made to comply with Section 409A

Identify and describe Section 409A violations and if such amounts were reported on a W-2 or Form 1099

Identify participation in any correction programs

Provide certain information on stock options and SARs that may be subject to Section 409A

Provide a description of any nonqualified deferred compensation funding resulting from a decline in the company’s financial condition"

409A Scuttles Silicon Valley Deal

Experts concluded that valuation needs to reflect the implied value of preferred equities.

Deal Salvaged With Help from 409A Appraiser - from Teknos HERE

409A Forces Facebook to Value Itself ($35 Billion?)

"Prior to the enforcement of IRC 409A, many companies might have used a default discount such as 80% for the pricing of options. These days with IRC 409A in place, the companies now have to “show their work” when pricing these options. With that being said, we have reviewed numerous option filings by Facebook, and some of those prices of the common listed on these typically fell within a 75% to 80% discount as to the most recent round of Preferred Stock that had been issued."


Article from Clusterstock HERE

More on 409A Corrections - Cracking the Code

Presentation from Ivins, Phillips & Barker to DC Bar Tax Section on making corrections OUTSIDE of IRS Formal Programs: "409 Failures: Correcting Outside of the IRS's Formal Correction Programs" HERE

Flashback: Is it permitted to correct 409A failures outside of formal IRS programs? Lawyers say "yes." See Rosina B. Barker & Kevin P. O’Brien (both of Ivins, Phillips & Barker, Washington, D.C.) have published 409A Failures: Correcting With and Without Notice 2008-113, 124 Tax Notes 557 (Aug. 10, 2009).

"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 § 409A. We set forth a better view of § 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 § 409A will underlie this and no doubt other disputes about § 409A compliance and administration for years to come."

"409A is not Horseshoes" - IRS Will Audit Wall Street Payouts

"The U.S. Internal Revenue Service is taking a look at compensation plans that hold a lot of the big money Wall Street firms pay out to executives. Major accounting firms and tax attorneys are instructing firms on how to prepare for a wave of audits they expect for deferred compensation plans. Executives themselves face stiff tax penalties when employers run afoul of the rules. Susan Lennon, managing director of the human resources service group at PricewaterhouseCoopers LLP, predicts that IRS audits of deferred compensation plans will increase in "number and scope."

Section 409A went into full swing last year and the tax authority apparently wants to make sure employers are obeying it. There is still a lot of confusion on the part of companies and their tax advisors over how to comply. Nonetheless, an audit is a "very binary" process, according to Hogans. "This is not horseshoes," he said. "Close does not count, as a matter of pure legality.""

Article from Financial Advisor Magazine HERE

Sports & Talents Lawyers Discuss 409A

It was interesting to listen in on a 409A discussion that was geared towards a specific industry. The ABA-CLE Program noted some interested points:

* The sports and talent industry, including attorneys, were indeed late to the game and for the most part started addressing 409A only as the transition period was ending.

* Section 409A is only 4 pages, but the IRS needs over 200 pages of regulations and guidance to explain those 4 pages.

* Copyrights and similar intellectual property rights are "property" and therefore not subject to 409A. Therefore, it is important that documents with artists and other industry providers are drafted with language that discuss "property transfers" rather than as "providing services."

Questions to Professor Sobel

Sports and Entertainment Agents Gearing up for 409A

File under "better late than never" as sports and entertainment agents are gearing up for Section 409A through an upcoming ABA Webcast. Welcome to the party, and we are happy to help spread the word. But our advice is to seek an expert for 409A assistance.

Below is a summary of the webcast and information on how to register. Also, see our prior posts from last year regarding the NFL and its struggle with 409A and other tax law issues.

"Among other things, the program will explore:

·What kinds of athletes and entertainers are exempt or may be 409A, and why they are or may be exempt

·What few kinds of compensation arrangements are exempt, and why most are not

·How non-exempt compensation arrangements must be structured in order to comply with 409A's requirements

·When compensation must be paid in order to comply with 409A's requirements

·Why the use of loan-out corporations does not eliminate the risk of 409A non-compliance, and may even increase that risk

·Why advances against deferred compensation -- even as part of a contract renegotiation or extension -- result in non-compliance

·Why the use of deferred compensation as loan collateral results in non-compliance (according to the Regulations)"

ABA Webcast Information - HERE

BNA Webinar Provides Some Clarity on Notice 2010-6

Guidance provides reasonable solutions as to how to fix plan document problems, and possibly avoid or limit tax penalties. However, rules are complex and even more guidance will be needed to outline the correction procedures. Mr. Tackney indicated a revenue procedure may be issued down the road.

BNA - Groom Law Release HERE

Exec Comp Audits to leave "No Stone Unturned"

6,000 audits will be "deeper" and "more intensive" than typical audits - Article HERE

"The 6,000 exams, to be conducted over three years, will be deeper than typical audits and look at fringe benefits such as executive use of corporate jets, company cars and other reimbursements arrangements, Arcidiacono said.

"The examiners have been instructed to leave no stone unturned," he said on a recent call with clients.

The IRS has not taken a systematic focus on employment issues in decades, according to tax lawyers. The agency will examine a cross section of companies by size and industry.

"We've had quite a few clients who have had more intensive employment tax and executive compensation audits," in recent months, said Anne Batter, an attorney at Miller Chevalier who previously worked in the IRS chief counsel office, which interprets the tax code."

Webinar on 409A Audits and Enforcement

I wanted to share this information regarding a BNA webinar relating to the IRS' audit activities on January 28, 2010.

HERE

"The IRS is signaling more §409A enforcement. The agency's recent audit activity and document requests requiring comprehensive disclosures about plans and individuals subject to §409A confirm this trend. Plan document and operational errors should be identified and corrected to avoid heavy tax penalties.

Our panel of experts from the IRS and a leading law firm will analyze new IRS guidance on correcting §409A plan document failures and will discuss opportunities and potential pitfalls under the guidance. The panel will identify commonly occurring hazards -- including ambiguous plan terms and impermissible definitions and payment events, to name just a few -- and will offer practical solutions to help you avoid costly and damaging results.

Program highlights include:

• Identifying opportunities to correct certain document failures with limited or no income inclusion or additional taxes
• Reviewing the scope of this relief based on whether the correction affects plan operation within one year of the correction
• Analyzing common document correction scenarios and any related operational correction requirements
• Highlighting clarifications in the new guidance that certain common plan provisions do not result in document failures
• Noting clarifications to the operational correction program in the new guidance
• Discussing any alternatives to the operational and document correction programs

The objectives of this Webinar include providing participants with an understanding of the IRS’s new correction program for certain types of failures of nonqualified deferred compensation plans to comply with §409A. Upon completion of the program, participants will be able to:

• Describe the correction program guidance
• Understand how the new program fits with earlier IRS guidance on plan corrections
• Identify commonly occurring §409A failures to comply
• Understand the risks associated with §409A noncompliance and the possible opportunities created by the IRS guidance
• Apply correction principles to client plans"

Guide to 409A Business Valuations

Written by Neil Beaton and published by Business Valuation Resources - HERE.

409A Case Law Arrives (Slater vs. IRS)

This is the first case that I am aware of. Please use to comments to cite any other cases, or to comments on the case.

Link to Slater vs. IRS HERE

More on Corrections under IRS Notice 2010-6

Experts believe companies may "tweak" documents. Guidance seems to "give a pass" on non-technical language.

Article from Financial Advisor quotes Drigotas and Hogans - HERE

A brief summary by Liza Hecht of Nukk-Freeman & Cerra HERE

"What Should Employers Do?

Given the opportunity to avoid accelerated taxes for the affected participant, as well as the IRS' stated intent to increase audit activity in this area, employers should review any and all agreements that could be considered deferred compensation under Code §409A. If any document failures are uncovered the employer should make any and all corrections before December 31, 2010."

IRS Issues Guidance on 409A Corrections - Notice 2010-6

IRS Notice 2010-6 Here

"This notice provides methods for taxpayers to voluntarily correct many types of failures to comply with the document requirements applicable under § 409A of the Internal Revenue Code (Code) to nonqualified deferred compensation plans and thereby avoid or reduce the current income inclusion and additional taxes under § 409A. This document correction program is intended to encourage taxpayers to review nonqualified deferred compensation plans to identify provisions that fail to comply with the requirements of § 409A and § 1.409A-1(c) of the Income Tax Regulations (a document failure), and to correct those plan provisions promptly, while also not providing an advantage to taxpayers participating in plans that initially fail to comply with § 409A over taxpayers participating in plans drafted in compliance with § 409A."

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