Recently in Executive Compensation Category

June 24, 2013

Executive Compensation-First Circuit Rules That The Committee Administering A Bonus Plan Had The Authority To Determine Whether A Participant Was Terminated For Cause And Therefore Lost His Right To A Bonus

In Weiss v. DHL Express, Inc., Nos. 12-1853, 12-1864 (1st Cir. 2013), the defendant, DHL Express, Inc. ("DHL"), was contesting a jury verdict in the district court in favor of the plaintiff, Jeremy Weiss ("Weiss").

In this case, Weiss's employment at DHL had been terminated, ostensibly for his failure to properly investigate, document, and ameliorate the misconduct of an employee under his supervision. The termination occurred just months before Weiss was to receive a $60,000 bonus. Weiss filed suit to recover the bonus on the grounds that he was terminated without good cause, which under the terms of the bonus plan (the "Plan") entitled him to a full payout. Thus, Weiss had brought a breach of contract claim. The district court allowed the claim to go to a jury, which found for Weiss. DHL appeals the jury verdict.

In analyzing the case, the First Circuit Court of Appeals (the "Court") noted that, under the terms of the Plan, if Weiss was terminated for good cause, he would not be entitled to the bonus. Further, the plain language of the Plan designates DHL's Employee Benefits Committee (the "Committee") as the sole arbiter of whether a Plan participant is terminated for good cause. As a result, whether Weiss was terminated for good cause and thus lost his right to the bonus was a decision within the ambit of the Committee's sole and final decision-making authority. Here, the Committee did in fact determine that Weiss was terminated for good cause. As such, the Court overturned the jury verdict in Weiss' favor.

May 22, 2013

Executive Compensation-Tax Court Determines That Compensation Paid Was Reasonable And Deductible

In K & K Veterinary Supply, Inc. v. Commissioner of Internal Revenue, T.C. Memo. 2013-84, the Tax Court faced the question, among others, of whether amounts paid as compensation to officers and certain employees were reasonable, within the meaning of IRC section 162(a)(1), and therefore tax deductible.

In this case, the corporation in question, K & K Veterinary Supply, Inc. (the "Company"), claimed the following tax deductions for salary, which the Commissioner challenged:

2006 2007

Officers:

J. Lipsmeyer $732,300 $559,100
M. Lipsmeyer 134,400 133,500
________ ________
Total 866,700 692,600

Employees:

D. Lipsmeyer 590,500 470,000
Stewart 183,000 192,700
_______ _______
Total 773,500 662,700


In reviewing this case, the Tax Court noted that IRC section 162(a)(1) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered. A taxpayer is entitled to a deduction for salaries or other compensation if the payments were reasonable in amount and are in fact payments purely for services. Sec. 1.162-7(a), Income Tax Regs. Whether the compensation paid by a corporate taxpayer to an officer or employee was reasonable is a question of fact. The following 10 factors may be taken into account:

1. Employee qualifications. An employee's superior qualifications for his or her position with the business may justify high compensation.

2. Nature, extent and scope of employee's work. An employee's position, duties performed, hours worked, and general importance to the corporation's success may justify high compensation.
3. Size and complexity of the business. Courts consider the size and complexity of a taxpayer's business when deciding the reasonableness of compensation paid to its shareholder-employees. The Tax Court has considered a company's sales, net income, gross receipts, or capital value in determining a company's size, as well as the number of clients, the number of employees, growth in these areas and compliance with government regulations.

4. General economic conditions. General economic conditions may affect a company's performance and thus show the extent of the employee's effect on the company. Adverse economic conditions, for example, tend to show that an employee's skill was important to a company that grew during the bad years.

5. Comparison of salaries paid with gross and net income. Compensation as a percentage of a taxpayer's gross and net income has been considered in deciding whether compensation is reasonable. In most cases the comparison of salaries to net income is more probative.

6. Prevailing rates of compensation. A comparison of the compensation under consideration and the prevailing rates of compensation paid to those in similar positions in comparable companies within the same industry is a very significant factor.

7. Salary policy of the employer as to all employees. Courts have considered the taxpayer's compensation policy for its other employees in deciding whether compensation is reasonable. This factor focuses on whether the entity pays top dollar to all of its employees, including both shareholders and nonshareholders.

8. Compensation paid in previous years. This factor applies when a corporation is deducting compensation in one year for services rendered in prior years.

9. Comparison of salaries with distributions and retained earnings. The absence of dividend payments by a profitable corporation is a factor that may be considered in addressing the reasonableness of compensation.

10. Whether the employee guaranteed the employer's debt. Courts have also considered whether an employee personally guaranteed the employer's debt.

Applying the foregoing factors, the Tax Court concluded that the officer's and employee's salaries was reasonable, and therefore upheld the claimed deductions,

April 10, 2013

Executive Compensation-Court Of Federal Claims Confirms That IRC Sec. 409A Applies To The Exercise Of A Discounted Stock Option

In Sutardja v. United States, No. 11-724T (Court of Federal Claims 2013), the Internal Revenue Service (the "IRS") had determined that the exercise by Dr. Sehat Sutardja (" Dr. Sutardja") of nonqualified stock options granted by his company, Marvell Technology Group Limited, was subject to an additional tax and interest under IRC section 409A. Section 409A provides for a 20 percent surtax plus interest on amounts received under a nonqualified deferred compensation plan, if certain conditions exist. The IRS sought to apply the additional tax and interest on the grounds that stock option arrangement did not comply with section 409A.

In analyzing the case, the Court noted that, at the date of grant, the stock options did not have a readily ascertainable market value. As such, the stock options were not taxable at grant or upon vesting. Further, if the option exercise price was set at or above fair market value at the time of the grant, section 409A taxation would be inappropriate even upon exercise. But does section 409A apply to discounted stock options when exercised (the "discount" being an exercise price set below the fair market value on date of grant)? The Court concluded that the answer is yes, since:

--a nonqualified stock option constitutes deferred compensation, which is subject to section 409A (the FICA rules for defining deferred compensation do not apply);

--the taxpayer obtained a legally binding right (under applicable state law, here California) to the compensation at the time the stock options vested, thus creating the right to deferred compensation; and

-- the "short term deferral exception" to section 409A does not apply-at least not here- as nothing required the taxpayer to exercise the stock options within 2 and ½ months after the year of vesting.

The Court ordered a trial on the issue of whther the stock options had in fact been discounted.

April 8, 2013

Executive Compensation-IRS Issues Proposed Regulations On IRC Section 162(m)(6) $500,000 Limit On The Annual Deduction For Compensation Paid To An Individual By A Health Insurance Company

The Internal Revenue Service (the "IRS") has issued proposed regulations on the $500,000 limit under IRC section 162(m)(6) on the annual deduction for compensation paid to an individual by a covered health insurance provider. A "covered health insurance provider" is, generally, an insurance company for which at least 25% of its gross premiums are for minimum essential health care coverage. An employer may rely on the proposed regulations until final regulations are issued. The proposed regulations are over 100 pages long. In sum, the proposed regulations provide the following:

In General. For taxable years beginning after 2012, section 162(m)(6) limits to $500,000 the allowable deduction for the aggregate individual remuneration and deferred deduction remuneration attributable to services performed by an individual for a covered health insurance provider in a taxable year beginning after 2012 which (but for section 162(m)(6)) is otherwise deductible for federal income tax purposes. "Individual remuneration" is pay for services that is not deferred deduction remuneration . "Deferred deduction remuneration" is pay for services that is deductible in a future taxable year.

Tax Years Starting Before 2013. Deferred deduction remuneration attributable to services performed in a taxable year beginning after 2009 and before 2013, which otherwise becomes deductible in a taxable year beginning after 2012, is also subject to the $500,000 deduction limit, determined as if the deduction limit applied to taxable years beginning after 2009.

How The Limit Works. If individual remuneration, deferred deduction remuneration, or a combination of the two that is attributable to services performed by an individual for a covered health insurance provider in a taxable year: (1) exceeds $500,000, the excess is not allowable as a deduction in any taxable year or (2) is less than $500,000, the remuneration generally may be deducted by the covered health insurance provider in the taxable year(s) in which the amount is otherwise deductible.

Example: In Year 1, a covered health insurance provider pays $400,000 in salary (individual remuneration) to an individual. It also credits $300,000 to an account for the individual under a nonqualified deferred compensation plan, which is payable in Year 5 (deferred deduction remuneration). The $300,000 credit is fully vested in Year 1 and is attributable to services provided by the individual in that year. In Year 1, the covered health insurance provider may deduct the $400,000 of individual remuneration, since this amount is less than the $500,000 deduction limit. In Year 5, the covered health insurance provider pays the $300,000 that was credited under the nonqualified deferred compensation plan for services provided by the individual in Year 1. Because the aggregated individual remuneration and deferred deduction remuneration attributable to services performed by the individual in Year 1 exceeds the $500,000 deduction limit by $200,000 ($400,000 + $300,000 = $700,000), the covered health insurance provider can deduct only $100,000 of the $300,000 payment in year 5, and the remaining $200,000 is not deductible by the covered health insurance provider in any year.

July 5, 2012

Executive Compensation-IRS Provides Guidance On Whether Dividend And Dividend Equivalents On Restricted Stock And Restricted Stock Units Are Performance Based Compensation

In Revenue Ruling 2012-19, the Internal Revenue Service (the "IRS") examined the question of whether dividends and dividend equivalents relating to restricted stock and restricted stock units ("RSUs"), which are qualified performance-based compensation under § 162(m)(4)(C) of the Internal Revenue Code (the "Code"), must separately satisfy the requirements under § 162(m)(4)(C) to be treated as qualified performance-based compensation (and therefore to be excluded from applicable remuneration for purposes of applying the Code § 162(m)(1) $1,000,000 limit on deductions).

The IRS posited the following facts. Corporation X and Corporation Y are publicly held corporations within the meaning of § 162(m)(2) of the Code. Both corporations maintain plans under which participating employees may be granted restricted common stock of the respective corporation or RSUs based upon the common stock of the respective corporation. The restricted stock and RSUs are qualified performance-based compensation.

The IRS then provided two situations. In Situation 1, Corporation X's plan provides that dividends and dividend equivalents otherwise payable to an employee, during the period from grant to vesting with respect to restricted stock and RSU awards granted to the employee, are accumulated and become vested and payable only if the related performance goals with respect to the restricted stock and RSUs are satisfied. All other requirements of Treas. Reg. § 1.162-27(e) are met with respect to the grant of rights to dividends and dividend equivalents. In Situation 2, Corporation Y's plan provides for payment to an employee, during the period from grant to vesting with respect to restricted stock and RSU awards granted to the employee, of dividends and dividend equivalents on the restricted stock and RSUs at the same time dividends are paid on common stock of Corporation Y, regardless of whether the performance goals established with respect to the restricted stock and RSUs are satisfied.

The IRS said that, under Treas. Reg. § 1.162-27(e)(2)(iv), the dividends and dividend equivalents under Corporation X's plan and under Corporation Y's plan are grants of compensation that are separate and apart from the related restricted stock and RSU grants. Therefore, the grants of the dividends and dividend equivalents must separately satisfy the requirements of Treas. Reg. § 1.162-27(e) to be qualified performance-based compensation. In Situation 1, under Corporation X's plan, participants' rights to restricted stock and RSUs are subject to performance goals that meet the requirements of Treas. Reg. § 1.162-27(e). Under the same plan, participants' rights to dividends and dividend equivalents vest and become payable only if the same performance goals that apply to the related grants of restricted stock and RSUs are satisfied. Therefore,
dividends and dividend equivalents under X's plan are qualified performance-based compensation. In Situation 2, the dividends and dividend equivalents under Corporation Y's plan fail to satisfy the requirements under § 162(m)(4)(C) and § 1.162-27(e) because the rights to these amounts do not vest and become payable solely on account of the attainment of preestablished performance goals. Thus, these amounts are not qualified performance-based compensation, regardless of whether the performance goals are met with respect to the related restricted stock and RSUs.

June 29, 2012

Executive Compensation-IRS Provides Sample Language For Making a Section 83(b) Election

In Revenue Procedure 2012-29, the Internal Revenue Service (the "IRS") provides sample language that may be used (but is not required to be used) for making an election under section 83(b) of the Internal Revenue Code (the "Code"). Also, the Revenue Procedure provides examples of the income tax consequences of making such an election.

Section 83(a) of the Code provides, generally, that if in connection with the performance of services, property is transferred to the service provider, then the fair market value (the "FMV") of the property is included in his/her gross income as of the first time that the service provider's rights in the property are transferable to another person or are not subject to a substantial risk of forfeiture, whichever occurs earlier. Section 83(b) of the Code, and Treas. Reg. Sec. 1.83-2(a), generally permit the service provider to elect to include in gross income the FMV of the property at the time of transfer to him/her (e.g., instead of waiting until a substantial risk of forfeiture no longer exists). Why would you make the election? The FMV of the property is likely to be less at the time of transfer than later on when the property value would otherwise be included in gross income under section 83(a), so income taxes can be saved by making the section 83(b) election.

Under section 83(b)(2), an election made under section 83(b) must be made in accordance with the regulations thereunder, and must be filed with the IRS no later than 30 days after the date that the property is transferred to the service provider. Under Treas. Reg. Sec.1.83-2(c), an election under section 83(b) is made by filing a copy of a written statement with the IRS office with which the service provider files his/her return. In addition, the service provider is required to submit a copy of such statement with his or her income tax return for the taxable year in which such property was transferred. Treas. Reg. Sec. 1.83-2(d) requires the service provider to submit a copy of the section 83(b) election to the service recipient. Under Treas. Reg. Sec. 1.83-2(e), the election must be signed by the service provider, indicate that an election is being made under section 83(b) and contain certain information specified in the regulation. The sample language in the Revenue Procedure (modified as needed since this language specifically relates to transferred common stock) can be used to make a section 83(b) election.

May 30, 2012

Executive Compensation-IRS Provides New Guidance On Income Inclusion Upon Section 83 Property Transfers

The Internal Revenue Service ("IRS") has provided new guidance, in the form of proposed regulations, on the timing of income inclusion under section 83 when property has been transferred in connection with the provision of services.

By way of background, in general under section 83(a), if property is transferred in connection with the provision of services, the fair market value of the property is included in the recipient's gross income on the first date on which either the recipient's rights in the property are transferable or are not subject to a substantial risk of forfeiture. Under section 83(c)(1), the rights of a person in property is subject to a substantial risk of forfeiture, if such person's rights to the full enjoyment of the property are conditioned on the future performance of substantial services by any individual. Treas. Reg. Sec. 1.83-3(c)(1) elaborates on this rule.

The IRS's proposed regulations would amend sec. 1.83-3(c)(1) to clarify whether a substantial risk of forfeiture exists. Under the proposed regulations:

--a substantial risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer;

--in determining whether a substantial risk of forfeiture exists based on a condition related to the purpose of the transfer, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered; and

--a restriction on transferring the property- including a restriction which carries the potential for forfeiture, disgorgement of some or all of the property or other penalties if the restriction is violated- does not create a substantial risk of forfeiture.

The change in the regulations is proposed to apply as of January 1, 2013, and will apply to property transferred after that date. However, taxpayers may rely on the change for property transferred on or after May 30, 2012.


January 26, 2012

Executive Compensation-A Reminder: Form 3921s and Form 3922s For 2011 Are Due Next Tuesday

Under section 6039 of the Internal Revenue Code (the "Code") and IRS rules, a corporation is required to provide a report to an employee of: (1) any transfer it makes to the employee, during the 2011 calendar year, of a share of stock pursuant to the employee's exercise of an "incentive stock option" ( within the meaning of section 422(b) of the Code), or (2) any record the corporation (or its agent) makes, during the 2011 calendar year, of a transfer of the legal title of a share of stock acquired by the employee, under an employee stock purchase plan, pursuant to his or her exercise of an option described in section 423(c) of the Code (that is, an option for which the exercise price is either less than 100% of the stock's value on the option grant date, or is not fixed or determinable on such date).

The report to the employee is provided on Form 3921 for a transfer described in (1) above, and on Form 3922 for a record described in (2) above. One Form 3921 or Form 3922, as applicable, is required for each separate transfer of stock or title. The due date for furnishing these Forms to employees is January 31, 2012. The corporation must file the Forms with the IRS at a later date (generally, unless extended, by April 2, 2012 if filed electronically (check rules to see when electronic filing is required or permitted), or by February 28, 2012 if filed on paper).

November 17, 2011

Executive Compensation-IRS Says That Bonuses Can Meet The "Fact Of Liability Requirement" Of Code Section 461 For A Tax Year, Even Though The Employer Does Not Know The Amount Or Recipient Of Any Particular Bonus Until After The Year Ends

In Rev. Rul. 2011-29, the Internal Revenue Service (the "IRS") reviewed the question of whether certain bonuses, which are payable by an accrual basis taxpayer for a tax year, can meet the "fact of liability" requirement for that year, even though the amount or recipient of any particular bonus is unknown until the next year. The "fact of liability" requirement is found in Treas. Reg. Sec. 1.461-1(a)(2)(i), promulgated under section 461 of the Internal Revenue Code (the "Code"). In addition to the fact of liability requirement, that Treas. Reg. Sec. also contains an "amount of liability requirement" and an "economic performance requirement". The Revenue Ruling does not consider the latter two requirements.

The bonuses at issue work as follows. The employer pays bonuses to a group of employees, for services rendered during a taxable year, pursuant to a program that defines the terms and conditions under which the bonuses are paid for that year. The employer communicates the general terms of the bonus program to employees when they become eligible to participate. The total amount of bonuses payable under the program to all employees as a group is determinable either (1) through a formula that is fixed prior to the end of the taxable year, or (2) through other corporate action, such as a resolution of the employer's board of directors or compensation committee, made before the end of the taxable year, that fixes the bonuses payable to the employees as a group. To be eligible for a bonus, an employee must perform services during the taxable year and be employed on the date that the bonus is actually paid. Under the program, bonuses are paid after the end of the taxable year in which the employee performed the services, but before the 15th day of the 3rd calendar month after the close of that year. Any bonus amount allocable to an employee who is not employed on the date on which bonuses are actually paid is reallocated among other eligible employees.

According to the Revenue Ruling, the "fact of liability" is established when: (a) the event fixing the liability, whether that be the required performance or other event, occurs, or (b) payment is unconditionally due. Here, the employer's liability to pay a total amount of bonuses to the group of eligible employees is fixed at the end of the tax year in which the services are rendered. Any bonus allocable to an employee, who is not employed on the date on which bonuses are actually paid, is reallocated to other eligible employees. Thus, the total amount of bonuses the employer pays to its group of eligible employees is not reduced by the departure of an employee before actual payment. As such, the "fact of liability" for the total amount of bonuses is established by the end of the tax year in which the services are rendered. This obtains, even though the identity of the ultimate recipients and the amount, if any, each employee will receive cannot be determined prior to the end of that year.

December 2, 2010

Executive Compensation-IRS Modifies The Relief And Guidance It Previously Provided On The Correction Of Certain Failures Of A Nonqualified Deferred Compensation Plan to Meet Section 409A

The IRS has issued Notice 2010-80. This notice modifies certain provisions of Notice 2008-113 and Notice 2010-6, dealing with the correction of failures to comply with Section 409A of the Internal Revenue Code (the "Code"), by:

• Clarifying that the types of plans eligible for relief under Notice 2010-6 include a
nonqualified plan linked to a qualified plan or another nonqualified plan, provided
that the linkage does not affect the time and form of payments under the plans;

• Expanding the types of plans eligible for relief under Notice 2010-6 to include
certain stock rights that were intended to comply with the requirements of
Code Section 409A(a) (rather than be exempt from the requirements of Section 409A(a));

• Providing an additional method of correction under Notice 2010-6 for certain
failures involving payments at separation from service subject to the requirement
to submit a release of claims or similar document; and providing transition relief
permitting the correction of such failures that were in effect on or before
December 31, 2010 (including relief from the service provider information
reporting requirements);

• Providing relief from the service provider information reporting requirements
under Notice 2010-6 for corrections made under the transition relief ending
December 31, 2010; and

• Providing relief from the requirement that service recipients furnish certain
information to service providers under Notice 2008-113 for corrections made in
the same taxable year as the failure occurs.

November 23, 2010

Executive Compensation-IRS Issues New Forms To Be Used To Report Transfers Of Stock Pursuant To An Exercise Of An Incentive Stock Option Or An Option Under An Employee Stock Purchase Plan

The Internal Revenue Service ("IRS") has issued Forms 3921 and 3922 (both information returns), to be used by corporations to report certain transfers of stock to employees. According to IRS Instructions, Forms 3921 and 3922 are required to be filed for such stock transfers occurring after 2009. The filing of these information returns is required by section 6039 of the Internal Revenue Code (the "Code"), as amended by the Tax Relief and Health Care Act of 2006. Form 3921 is to be used to report a corporation's transfer of stock pursuant to an employee's exercise of an incentive stock option described in section 422(b) of the Code. Form 3922 is to be used to report a transfer of stock by an employee where the stock was acquired pursuant to the exercise of an option described in Section 423(c) of the Code (that is, an option granted under an employee stock purchase plan, where the exercise price is less than 100% of the value of the stock on the date of grant, or is not fixed or determinable on the date of grant).

January 6, 2010

Executive Compensation- IRS Issues Procedures To Correct Section 409A Document Failures

The IRS has issued Notice 2010-6, which contains procedures for voluntarily correcting many types of failures to comply with the document requirements that apply to nonqualified deferred compensation plans under Section 409A of the Internal Revenue Code. The Notice provides:

--clarification that certain language commonly included in plan documents will not
cause a document failure;

-- relief which permits correction of certain document failures without current income inclusion or additional taxes under Section 409A, so long as, in certain cases, the corrected plan provision does not affect the operation of the plan within
one year following the date of correction;

--relief limiting the amount currently includible in income and the additional taxes
under Section 409A for certain document failures, if correction of the failure affects the
operation of the plan within one year following the date of correction;

--relief permitting correction of certain document failures without current income
inclusion or additional taxes under § 409A, if the plan is generally the service recipient's
first plan of that type, and the failure is corrected within a limited period following the plan's adoption; and

--transition relief permitting corrections of certain document failures without
current income inclusion or additional taxes under Section 409A, if the document failure
is corrected by December 31, 2010, and any operational failures resulting from
the document failure are also corrected in accordance with IRS Notice 2008-113 by December 31, 2010.

The Notice also clarifies certain aspects of IRS Notice 2008-113, which addresses
various failures of nonqualified deferred compensation plans to comply with Section 409A in operation, including clarification of:

--the application of the subsequent year correction method to late payments of
amounts deferred; and

--the calculation of the amount that must be paid to the service provider as a
correction of a late or ealy payment of a deferred amount, if the payment
would have been made in property, such as shares of stock.

December 17, 2009

Executive Compensation-IRS Provides Guidance On Application Of Section 409A To Changes To Nonqualified Deferred Compensation Plans Made To Comply With An Advisory Opinion Of The Office Of The Special Master For TARP Executive Compensation

This item is of interest because it illustrates how issues involving section 409A can arise.

IRS Notice 2009-92 (the "Notice") provides guidance for a financial institution (a "TARP Recipient"), which has received financial assistance under the Troubled Asset Relief Program ("TARP"), on how to comply with section 409A of the Internal Revenue Code (the "Code") when amending its nonqualified deferred compensation plan to comply with an advisory opinion of the Office of the Special Master for TARP Executive Compensation (the "Special Master").

In October, 2008, the Treasury Department established TARP under the Emergency Economic Stabilization Act of 2008 ("EESA"). Under an interim final rule published by the Treasury Department on June 15, 2009, a TARP Recipient may request an advisory opinion from the Special Master as to whether a compensation structure is consistent with TARP, EESA, and the public interest. Also, the Special Master may render such an advisory opinion at his own initiative. The advisory opinion is not binding on the TARP Recipient who receives it, but the TARP Recipient may rely on the advisory opinion as to whether the covered compensation structure discussed in the opinion meets the consistency requirement.

An advisory opinion issued by the Special Master may indicate that changes to the time or form of payment of compensation under the TARP Recipient's nonqualified deferred compensation plan (the "Plan") are needed for the Plan to be consistent with TARP, EESA, and the public interest. The advisory opinion may also indicate that, to achieve such consistency, payment of compensation made under the Plan must be subject to
certainTARP-related conditions, for example, the prior repayment of some or all of
the financial assistance received by the TARP Recipient. However, the foregoing raises the problem that, to modify the Plan in the manner indicated in the advisory opinion, payments of compensation made under the Plan might have to be accelerated or delayed, causing the Plan to fail to meet the requirements of Code section 409A. The Notice addresses this problem.

The Notice applies when the advisory opinion is issued after September 30, 2009. 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.

November 6, 2009

Executive Compensation-Deadline For Amending Bonus Plans Is Approaching

IRS Revenue Ruling 2008-13 changed one of the exceptions to the $1million limit under Section 162(m) of the Internal Revenue Code (the "Code") on the deductibility of bonus pay by public companies, and generally requires that bonus plans be amended before the start of 2010 to reflect this change.

By way of background, Section 162(m)(1) of the Code provides that, in the case of any publicly held corporation, no deduction is allowed for the compensation of any "covered employee" (generally, the chief executive officer or one of the 3 other highest paid executive officers other than the chief financial officer), to the extent that the employee's compensation for the year in question exceeds $1,000,000. However, Section 162(m)(4)(C) of the Code and Section 1.162-27(e)(1) of the Treasury regulations provide that this limit does not apply to qualified performance-based compensation. Under the Treasury regulations, to be qualified performance-based compensation, several requirements must be satisfied. One such requirement is found in Treasury regulation Section 1.162-27(e)(2)(i), under which qualified performance-based compensation must be paid solely on account of the attainment of one or more preestablished, objective performance goals. Treasury regulation Section 1.162-27(e)(2)(v) states that compensation is not performance-based if the facts and circumstances indicate that the employee would receive all or part of the compensation regardless of whether the performance goal is attained. It further states that compensation does not fail to be qualified performance-based compensation merely because the plan in question allows the compensation to be payable upon the employee's death, disability, or change of control, although compensation actually paid on account of one of those events, prior to the attainment of the performance goal, would not be qualified performance-based compensation.

In Revenue Ruling 2008-13, the IRS considered the case in which a plan, agreement or contract (a "Plan") of a public company, under which compensation is paid to a covered employee, provides that the compensation will be paid (1) upon attainment of a performance goal or (2) without regard to whether the performance goal is attained, if (a) the covered employee's employment is involuntarily terminated by the employer without cause, or (b) the covered employee resigns from employment for good reason, or retires. The IRS ruled that compensation paid under this Plan is not qualified performance-based compensation, since it could be paid even if the performance goals are not met. The Ruling affirmed the IRS's position taken in a 2008 private letter ruling, which reversed the IRS's position in some earlier private letter rulings. This Ruling requires that any Plan of a public company, such as a bonus plan, which contains the language in (2) (or similar language) must be amended to remove such language, otherwise all compensation payable under the Plan to covered employees will be subject to the $1 million dollar limit on deductions under Section 162(m).

Fortunately, the IRS gave employers a period of time to make this amendment. Revenue Ruling 2008-13 stated that the Ruling will not be applied to disallow a deduction for any compensation which otherwise satisfies the requirements for being qualified performance-based compensation, and which is paid under a Plan that has language similar to that in (2) above, if either:

--the performance period (i.e., the period of service to which the performance goal applicable
to such compensation relates) for the compensation begins on or before January 1, 2009; or

--the compensation is paid pursuant to the terms of an employment contract as in effect on February 21, 2008, unless that contract has been renewed or extended after that date.

Thus, except for the case of an employment contract referred to above, the final performance period to which the Ruling will not apply is the performance period starting on January 1, 2009. If an employer's Plan has a calendar year performance period, it may still avoid the adverse effect of Revenue Ruling 2008-13 by amending its Plan to remove the proscribed language prior to the end of 2009.

September 17, 2009

Executive Compensation-IRS Says That Salary Advances Could Be Subject to Constructive Receipt, But If Not Could Result In A Violation Of Section 409A

In Chief Counsel Advice Memorandum 200935029 (8/28/2009), the IRS was reviewing a "salary advance program." Under this program, an employee would receive a salary advance, apparently as a loan. However, the employee was permitted to apply the amount otherwise due him or her, under a nonqualified deferred compensation plan (the "Plan") upon termination of employment, to offset and eliminate the loan balance.

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.