Source: https://www.bna.com/notice-20098-provides-n3941/
Timestamp: 2019-04-23 06:18:07+00:00

Document:
The IRS has issued Notice 2009-8, providing interim guidance on the application of new §457A1 to certain nonqualified deferred compensation (“NQDC”) plans or arrangements. This article examines the provisions of Notice 2009-8 and their importance to affected taxpayers.
The enactment of §457A constituted a dramatic and sudden change in the U.S. income taxation of offshore entities and persons. Notice 2009-8 attempts to fill in some of the details of this hastily enacted statute, at least on an interim basis as Notice 2005-1 did with respect to §409A. Notice 2009-8, however, unlike Notice 2005-1, may really raise as many new questions as it answers. As they say, the devil is in the details, and the issuance of Notice 2009-8 demonstrates that there will be many details, with still more to come in the form of further IRS guidance.
Under §457A, compensation deferred under a NQDC plan of a “nonqualified entity” becomes taxable when it is not subject to a substantial risk of forfeiture (“nonforfeitable”), unless the amount of NQDC is not determinable, in which case it is taxed when it becomes determinable.2 Congress enacted §457A to limit taxpayers' ability to defer compensation by using offshore entities, such as foreign corporations, in tax-haven jurisdictions. One example of such an entity would be an offshore feeder fund in corporate form that is part of a “master-feeder” hedge fund structure. Until IRS issues further guidance, taxpayers may rely on the Notice effective from October 3, 2008.3 Future guidance that is more restrictive than the Notice will only apply prospectively.
(2) determines the distributive share of income of any partner under §704.
If a service provider obtains a nonforfeitable right to NQDC before January, 2009 and, as of December 31, 2008 the NQDC plan provides for payments under a formula that relates to a specified period of service within a taxable year (e.g., compensation paid during a particular quarter) NQDC generally is attributable to that period. To the extent that under the plan as of December 31, 2008, NQDC is not attributable to services performed in a specified period, it is generally attributed to services performed during the year in which the service provider obtains a nonforfeitable right. If a service provider is entitled to NQDC only upon an involuntary separation from service, the amount attributable to services performed before January 1, 2009, is the amount to which the service provider would be entitled based on service and compensation earned as of December 31, 2008. Any requirement to perform further services is disregarded for this purpose. Any additional amount to which the service provider becomes entitled on or after January 1, 2009, which relates solely to services performed after December 31, 2008, is attributable to service performed on or after January 1, 2009.
The Notice treats a right to reasonable earnings on amounts attributable to services performed before January 1, 2009 as attributable to services performed before January 1, 2009, but only to the extent further services were not required on or after January 1, 2009 in order to retain the earnings.
A service provider does not have a nonforfeitable right to the extent that NQDC can be reduced unilaterally or eliminated by the service recipient or other person after the services are performed. If the surrounding facts and circumstances indicate that the discretion to reduce or eliminate NQDC is available or exercisable only upon a condition, or the discretion lacks substantive significance, however, the Notice treats the NQDC as nonforfeitable. NQDC is not considered to be subject to unilateral reduction or elimination, however, solely because it may be reduced or eliminated pursuant to the plan's objective terms, such as applying a nondiscretionary, objective provision that creates a forfeiture risk.
Section 457A dramatically changes the U.S. income taxation of offshore persons' NQDC. Despite the transition rules, it constitutes a remarkable reversal of tax policy in a very short time frame. As such, the very unpredictability of this change is likely to have a destabilizing and adverse effect on markets already stretched to their breaking point.
As Notice 2009-8 demonstrates, the intricacies of §457A compliance run as deep as or deeper than the requirements of §409A, with the difference that the transitional rules of §409A gave domestic NQDC plan sponsors and beneficiaries sufficient time to restructure their arrangements and to thoroughly examine and digest the details before taking action. The suddenness with which these changes came about will make §457A compliance much more costly in the short run than §409A compliance has proved to be, despite any synergies that may be derived by overlaying large portions of the §409A regulatory regime upon §457A. Persons subject to U.S. income tax that sponsor or benefit under offshore NQDC arrangements should immediately consult their advisors to determine the optimal course of action in response to these developments. Advisors and clients will need to factor into their decision-making process, among other things, their level of risk tolerance and their willingness to pay increased compliance costs. Notice 2009-8 provides ample evidence that the process will be an exacting one so long as markets remain unstable and that, for clients and their advisors, the compliance requirements of §457A are not so much a set of rules, but rather, are a constantly moving target. As such, even someone who supports the basic principles underlying §457A may be inclined to question the timing of the enactment of a new complex regulatory regime in the midst of an economic crisis. The issue of how offshore deferred compensation should be taxed has been around for many years. In light of that, was there really an imperative to pull the trigger at this particular point in time?
For more information, in the Tax Management Portfolios, see Brisendine and Drigotas, 385 T.M., Deferred Compensation Arrangements, and in Tax Practice Series, see ¶5710, Nonqualified Deferred Compensation.
1 All section references herein are to the Internal Revenue Code of 1986 as amended and the Treasury regulations thereunder unless otherwise specified. Section 457A was enacted by the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, P.L. 110-343 (TEAMTRA), enacted Oct. 3, 2008.
2 Notice 2009-8, Q&A-12. Nonforfeitability is determined under the “legally binding right” standard of §409A. See Regs. §§1.409A-1(b)(1) and 31.3121(v)(2)-1(b)(3)(i).
3 Corresponding to §457A's enactment date.
4 See Notice 2009-8, Q&A-2.
7 §457A(d)(3)(B); Notice 2009-8, Q&A 4. The definition in Regs. §1.409A-1(b)(4) applies for this purpose, using the definitions of “deferred compensation” and “substantial risk of forfeiture” provided in §457A.
8 Notice 2009-8, Q&A-5. Independent contractors, however, are not service providers if they have multiple independent clients and do not provide management services. See Q&A-5, citing Regs. §1.409A-1(f)(2).
9 Notice 2009-8, Q&A-6. “Foreign corporation” is defined in §7701(a)(3)-(4). “Partnership” is defined in §7701(a)(2). Id. at Q&A-7.
25 Notice 2009-8, Q&A-15, 16.
27 Notice 2009-8, Q&A-18, citing Prop. Regs. §1.409A-4(g).
29 Notice 2009-8, Q&A-19(a), citing Prop. Regs. §1.409A-4(b)(2)(iv).
31 Notice 2009-8, Q&A-24, citing Regs. §1.409A-1(b)(4).
32 Under §409A(a)(3) and Regs. §1.409A-3(j)(1).

References: §457
 §457
 §409
 §457
 §457
 §704
 §457
 §409
 §409
 §457
 §409
 §409
 §457
 §457
 §457
 §409
 §457
 §457
 §1
 §457
 §1
 §7701
 §7701
 §1
 §1
 §1
 §409
 §1