Source: https://www.erisalawyerblog.com/category/executive-compensation/
Timestamp: 2019-04-20 10:23:42+00:00

Document:
In an IRS Memorandum, the IRS dealt with the following issue: Does the correction of a failure to comply with section 409A(a) of the Internal Revenue Code, which correction applies only to compensation subject to a substantial risk of forfeiture, avoid income inclusion under section 409A if the correction is made before the compensation vests but during the service provider’s taxable year in which it vests? And the IRS concluded that income inclusion is NOT avoided. Why?
The IRS said in the Memorandum that section 409A(a)(1)(A)(i) provides that, if a nonqualified deferred compensation plan fails to comply, or fails to be operated in accordance, with section 409A(a)(2), (3) and (4) “at any time during a taxable year,” compensation deferred under the plan that is not subject to a substantial risk of forfeiture and that has not previously been included in income is includible in the service provider’s gross income for the taxable year. Deferred compensation, which is subject to a substantial risk of forfeiture, is subject to the requirements of section 409A(a)(2), (3), and (4) at all times during a taxable year, though a deferred amount is not includible in income under section 409A if it is subject to a substantial risk of forfeiture at all times during the taxable year.
In contrast, if the amount is not subject to a substantial risk of forfeiture at all times during the taxable year (generally meaning the amount is vested as of the end of the taxable year), the amount is includible in income. The correction of a failure to comply with section 409A(a) during a taxable year indicates that a failure existed during the taxable year in which the correction is made. In accordance with section 409A(a)(1)(A)(i), a failure applicable to deferred compensation subject to a substantial risk of forfeiture that lapses during the taxable year results in income inclusion of the deferred amount under section 409A, regardless of whether the failure is corrected during the same taxable year but before the substantial risk of forfeiture lapses.
On June 24, 2011, the Treasury Department and the IRS published a notice of proposed rulemaking (the “Proposed Regulations”) under section 162(m) of the Internal Revenue Code (the “Code”). The existing regulations for section 162(m) are found in Treas. Reg. § 1.162-27. The Treasury Department and the IRS have now adopted the Proposed Regulations, with modifications, as final regulations (the “Final Regulations”).
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 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.
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.

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