Transcript Available of IRS Hearing on Exec Comp Regs

PUBLIC HEARING ON PROPOSED REGULATIONS "CERTAIN EMPLOYEE REMUNERATION IN EXCESS OF $1,000,000 UNDER INTERNAL REVENUE CODE SECTION 162(m)"

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

[REG-122180-18]

Washington, D.C.

Monday, March 9, 2020

PARTICIPANTS:

For IRS:

For U. S. Department of Treasury:

Speaker:

* * * * *

PROCEEDINGS

(10:00 a.m. )

MR. TACKNEY: All right, we're going to go ahead and start. Welcome. This is the hearing on proposed regulations on certain employee remuneration in excess of a million dollars under Internal Revenue Code § 162(m). That's REG-122180-18. These proposed regulations were issued in the Federal Register on December 20, 2019.

We have scheduled three speakers. Although it's not clear, we may not actually have all three present so we may have fewer. The way this works, we'll have the speakers come up in order. You'll have 10 minutes to speak. You'll have a little timer up here you'll see. As we ask questions, the timer will stop, you don't get costed for our time speaking and answering our questions. And then it will go give you a one minute warning and then it will go red when your time is up although we're pretty relaxed up here.

After — and I think we will have time — if there's anybody who wants to speak from the floor, you are perfectly welcome to do so. Again, for an up to 10 minute period. And we do that in the first come first serve. So, I would ask you to sign up outside if you do want to speak publicly, although judging by the crowd, I'm thinking we're going to be able to facilitate everyone.

One quick reminder, if you do need to leave the auditorium for any reason, either bathrooms, there is also water, you will need to get an escort and then escorted back out when the hearing ends. So, with that, oh, I guess I should introduce the panelists.

To my very far left is Amber Salotto who is a Treasury advisor at Treasury Department Benefits Tax Council, Office of Tax Policy. To her right is Tom Scholz who is the Senior Counsel in the Executive Compensation Branch here at the Office of Chief Counsel, IRS. To my immediate left is Ilya Enkishev who is assistance branch chief of the Executive Compensation Branch of the Office of Chief Counsel, IRS. And I am Stephen Tackney, Deputy Associate Chief Counsel, Employee Benefits for Employee Benefits Exempt Organizations and Employment Taxes here at Office of Chief Counsel, IRS. So, that is our panel today. And with that, we will have our first speak, Henry Talavera, come on up.

MR. TALAVERA: Good morning, everybody. I am — I do have to have — my name is Henry Talavera and I have to have a disclaimer. I drafted comments on behalf of the State Bar of Texas. I am the treasurer of the tax section. But as you may know, I am also involved in employee benefits. And in that capacity, I assist the committee on governmental submissions in preparing the comments.

And here is our disclaimer: The comments are being presented on behalf the tax section of the State Bar of Texas. The comments should not be construed as presenting the position of the board of the directors, the executive committee or the general membership of the State Bar of Texas. The comments are being made as a result of the approval of the committee on governmental submissions of the tax section of the State Bar of Texas and pursuant to the proceedings of the counsel of that section which is the approving body of that section.

No approval or disapproval of the general membership of the tax section of the State Bar of Texas has been obtained. And the comments represent only the views of the members of that section who prepare them. And that would be me and one other attorney from Thompson & Knight in Dallas.

And so, really quickly, I don't know that there's going to be a huge crowd but just to give you a sense why I'm here, is that, you know, does 162(m) matter that much to the great community, probably not. But, you know, why would I get a plane, schlep to Dallas to be here in front of you all today, because it's a very important issue.

And the issue is grandfathering and what will Congress and the Treasury/IRS allow as grandfathering under rules. To make it, in our opinion, these particular regulations are so narrow, narrowly interpreted that the grandfathering would hardly ever apply. In the example, I think the key one is 16, it says, well if you can reduce the — if you have the discretion per the plan document to reduce to, I want to say it was like $400, pick the number, $4000. That anything below that that you could reduce, that was — that was not binding and the contract would be void or not grandfathered under 162(m).

And so, here we are, we submitted comments. And we found that that was super narrow and what I'll do in the few minutes I've got is that there are applicable provisions that we think when viewed in total would find that yes, you do have a binding contract. And it's not just the fact that you would have this one provision relating to negative discretion. As you all know, the proposed, the regulations permit or permitted negative discretion.

Our simple argument is that once the statute came to pass, that most every plan that's out there has a provision that says these provisions are intended to comply with 162(m) to allow the deductions to not be non-deductible. And if you view the agreement in context and you take all the provisions into account, the fact that there is some negative discretion doesn't void the contract as soon as — or doesn't make it non-grandfathered, non-binding.

As soon as, we would assert, as soon as the statute passed, given the provisions and context, that allowed the committee, the regular committee to interpret these provisions and to find that yes, as of that date, this is a binding contract and we're never going to exercise the negative discretion. Because to do so, would say that that compensation is non-deductible.

There was a comment that the AICPA submitted that there are disclosures that get made to the SEC for accounting purposes. Once those disclosures get made, we assert that we have a binding agreement. And the fact that there is some negative discretion left in the plan does not mean that you don't have a binding agreement.

MR. ENKISHEV: Henry?

MR. TALAVERA: Yeah, sure.

MR. ENKISHEV: Sorry. So — okay — under the rule that you're proposing that should be adopted in the final regulations, when does negative discretion exist and when does it not exist?

MR. TALAVERA: Well, that's a great question. It exists, we think, in — the legislative history is interesting on this. But we think that the instructed — there's 409(a), we cited some 409(a) regs. And the 1993 legislative history on 162(m) we think is instructive. We didn't have a chance, timing and everything, to get that done, incorporate it into the agreement.

But we think that the discretion that is impermissible is discretion as to the formula. So, if you have discretion, and this is, I'll give you the site. The HR confidence report 103-213-976 is the key page. Because the legislative history looks almost identical to the current one.

And the way we looked at it in context and the reason our comments are consistent is that — there is a provision that says that as long as it's pursuant to a performance formula, that precludes discretion. We think typically the formulas preclude discretion. We have — we understand most every plan has this other provision.

But there's also a sentence in there that we thought that was pretty critical. A discretion does not merely exist just because the outside directors have the authority to interpret a compensation plan, a contract in accordance with its terms. And so —

MR. TACKNEY: But what are they interpreting when it —

MR. TALAVERA: Well, I will, well let me explain.

MR. TACKNEY: Rather than exercising.

MR. TALAVERA: Well, there's a provision in most, give me a second. I want to give, we actually debated pretty hard as to whether we wanted to put in provisions that were practical and they were out there. And because if we put provisions in there and we did searches, you know, you can find these provisions most everywhere on public databases.

If we're wrong, you've got a roadmap to, you know, just find. So, we didn't put anybody. I felt it was important to give you three examples of provisions that are very typical, that would help you all understand it. And I'll give you the first one.

If we have that negative discretion and I understand, we have that, every plan has that. But in addition to that, what you've got is a provision in these agreements that say, is the intent of the plan to conform with the requirement, the standards of 162(m) and the regulations thereunder. The agreement will be interpreted consistent with that.

When you take that in context, and you have a law that passes that says that you have to have a binding agreement. And because the service, Treasury, has said that these were going to be interpreted pursuant to state law, once you have that provision in your agreement and there is a finding or an intent to comply with those regulations or the law as adopted on that date. We suggest until that discretion is actually exercised or there's actual evidence that the administrator took, or the committee, took a contrary position, that that should be binding and that should be upheld per the law.

MR. TACKNEY: I guess I'm not understanding when you say you put it in to comply with the rules in the sense that there was on requirement to put a negative discretion. It's elective on behalf of the employer and it's due to a series of comments asking for that not to otherwise cause a plan that was 162(m) compliant to become noncompliant. But there's no — it is not a qualification requirement for performance-based comp.

MR. TALAVERA: Well, that's correct. But as soon as — we would suggest the law passed that said that you had to have a binding agreement. That negative discretion would have been voided per the intent and the understanding of the plan and its context.

Every plan out there had that provision that was permitted under law. But if — or that was permitted by regulation. Now, we understand it was elective but that doesn't make the agreement not binding. I mean, we cited a lot of law in our brief or in our argument.

MR. TACKNEY: So, do you think 409(a) just got it wrong when we complied — when we got all those comments saying they didn't have a legally binding right — they were wrong or are you saying none of these have substantive significance?

MR. TALAVERA: That's what we're saying. That none of them have substantive submissions.

MR. TACKNEY: So, if they did any changes in these that were 409(a) failures, those are all 409(a) failures and all the executives owe 409(a) taxes?

MR. TALAVERA: No but that's different on the negative — that's in a different context.

MR. TACKNEY: Well no, but it's not in a sense of you — the same concepts of a legally binding right. And in 2005, we received a series of comments saying there was no legally binding right when there was negative discretion. And they have been acting that way as far as saying I don't have a 409(a) plan because I have the negative discretion.

So, they could — no one has, as far as I know — they could possibly make changes that wouldn't comply to 409(a). And you're asking us in this context to yes, there is a legally binding right or if, in fact, they don't have substantive significance then they are subject to 409(a).

MR. TALAVERA: Well, I'll challenge you in this sense. In the real world where I live in Texas — and it's as real as any other place — is that 409(a), people put provisions in agreements that don't comply all the time. Or that could be interpreted to show noncompliance.

But most — and I'm digressing — I didn't prepare on this particular point but it's a similar one. Most plans, if not all of them, say now since — I think it's 2010 you're allowed to have these savings clause. If we have a provision that would violate 409(a), that provision will be voided and disregarded and interpreted.

MR. TACKNEY: That's not permitted and it's not permitted under the rules so you're misquoting the rules.

MR. TALAVERA: I know that every plan out there has some ability to interpret 409(a).

MR. TACKNEY: We have said it's an interpretive but if you have a provision that flat out doesn't comply, you can't make it void to come into compliance with 409(a).

MR. TALAVERA: Well, we're not making it void. What typically happens is you have a provision in your document that says, that if your provision is void at an issue, that it's deemed struck. Now maybe the IRS doesn't take it, I would fight it to the death.

MR. TACKNEY: Okay because the rule, the regs flat out say you can't — you can't do that to come into compliance with 409(a).

MR. TALAVERA: In some context, I would say that's correct. But I think that there is a decent argument that if you have an inadvertent failure, that if you have a provision that's a savings clause, and you interpret it. Because the administrator does have interpretation as to the agreement, they can deem that struck or at least I'd have a good argument to you. I understand that the service might take a different position.

MR. TACKNEY: Well, I'm just saying the final regs take a different position.

MR. TALAVERA: Yeah, I understand. But there, you know, there's interpretation and then there's interpretation. I mean, I think that, you know, you can't have — I mean — I would agree with you. Typically, you can't have a provision that's just so out of bounds.

But I think that as a whole, I think that there's a good argument that if you have a document and you intend to comply with the law, that the IRS and the rules should allow you to comply with those provisions. That's the way I would assert it.

MR. TACKNEY: Okay.

MR. TALAVERA: So.

MR. ENKISHEV: Sorry. We keep interrupting you with questions.

MR. TALAVERA: Yeah, I don't know, my time hasn't started.

MR. TACKNEY: Oh no, you have a little bit but yeah, we stopped during the questionings. It's all good.

MR. TALAVERA: But — well — but I got — okay well then, you know, I've got more — I've two or three other provisions. Feel free to stop me.

MR. ENKISHEV: So, all these provisions that they are so-called savings clauses that you basically say the plan must meet administered in accordance with 162(m).

MR. TALAVERA: Sure.

MR. ENKISHEV: I mean, that's basically what all the provisions are going to say. Aren't these provisions in there just to ensure that the Compensation Committee and the corporation act in accordance with 162(m) to ensure that the performance-based compensation actually meets the requirements? In the sense that you said the goal — the Compensation Committee certifies the goal and that if we're paying.

And I'm wondering if — and correct me if I'm wrong — your argument is that these savings clauses are controlling the negative discretion clauses and they should be read together. I'm just wondering, why wouldn't a state law provide a remedy since this is really a matter of contract interpretation?

Just by saying, for example, well these savings clauses are only meant to ensure that the performance, that the compensation is performance-based and they have nothing to do with negative discretion. Why —

MR. TELAVERA: But it's — well, your question, I think is a good one. Here's the answer. It's not that, I don't think it's that narrow. Again, I think I said it earlier. The key is to make sure that that compensation gets to be deductible under 162(m).

Once that statute passed, it couldn't — that negative discretion can't be used. So, it's not just that there's technical compliance. There are representations made all over to shareholders where we know the company could get in trouble if they're not correct, to accountants, to the executives themselves. That these —

MR. TACKNEY: Now you're talking about the original 162(m) in 1993 or are you talking about this?

MR. TALAVERA: I'm talking about savings clauses generally. Because his question was on the savings clause and the question was, does the savings clause just mean it's interpreting purposes for technical compliance of 162(m)? And what I'm saying is no, it's broader than that. And that's part of the state law requirements.

You have broad discretion under state law to interpret your plan document as you see fit to be able to get the deduction. And with the interpretation that you're suggesting is that there is not way for any plan that has that savings clause to interpret it in a way that would cause the deduction to be deductible because there is some ability in the document that's not used to assert this question.

MR. TACKNEY: Well no, I guess we're confused because I think what Ilya is saying is if that — whether or not that provision discretion is in the plan or not is immaterial to whether it's deductible. Whether or not if it is in the plan you exercise it is immaterial to whether it is deductible.

So we are wondering what is it saving to say that you can save things to comply with 162(m) when whatever you do with that particular provision doesn't affect the deductibility under the 96 regs.

MR. TALAVERA: I would disagree because if we — if that negative discretion provision is what's making all of these plans non-binding contracts and the benefit to be nondeductible and so the only way —

MR. TACKNEY: Under the grandfather rule.

MR. TALAVERA: Under the grandfather and that's all we're talking about.

MR. TACKNEY: No, we were talking about is it the — it was completely immaterial before the change to whether it was deductible under the —

MR. TALAVERA: Correct.

MR. TACKNEY: — old rules, correct?

MR. TALAVERA: Correct. It was immaterial.

MR. TACKNEY: So what is, what was — when it was put in, what was the savings clause that said I can only do this to be complaint with 162(m)?

So are you saying that those discretionary provisions if we go with this reg, that savings clause means none of those bonuses can be — that discretion cannot be exercised?

MR. TALAVERA: I think that that's exactly what it means. That as soon as the — that as soon as the, that law came into being —

MR. TACKNEY: I see.

MR. TALAVERA: You couldn't exercise that discretion without it not being a non-binding contract. And at that point, you lost your grandfathering status and you lost the deductibility and so our argument and what's based on state laws to what's a binding agreement is that yeah, before that you could exercise that negative discretion and it didn't impact because the IRS, the Treasury allowed you to exercise to have that negative discretion downward. But as soon as that law came into place, you had to have a binding contract and in consistent with the plan — okay, go ahead.

MR. TACKNEY: Well, I guess our rule doesn't really have anything to do with whether it was exercised or not.

MR. TALAVERA: Yeah, it —

MR. TACKNEY: It's whether it existed. So it doesn't have anything to do with whether it was actually exercised. It had to do with whether it was exercised of all but I guess you're saying it's not exercisable.

MR. TALAVERA: It's not exercisable because to exercise it would be to have a non-binding contract if —

MR. TACKNEY: But then I think we have said under state law if you can show it wasn't exercisable then you would have a deduction. So we — that's a state law issue.

MR. TALAVERA: Yeah, but you've trumped state law. Or I would assert that you've trumped state law on what's a binding contract by saying well, once you have that negative discretion, you're done and you can't —

MR. TACKNEY: No, no, we've been very clear that if state law would have voided that discretion, so that you had to pay that bonus as of November — what — 4, 2017 — that you had a legally binding payment.

So if you can make and demonstrate under state law that you could not have used that negative discretion, then yes, you would have a, I think you would have —

MR. TALAVERA: Well, and that's our argument. I mean, you've made our argument because —

MR. TACKNEY: But that's —

MR. TALAVERA: — under state law if you have to interpret the contract as a whole. So if you have a savings clause and you have state law that says that you can interpret it in that contracts will be presumed to be binding which is what we have under state, most state laws, then that's what makes the contract binding.

I understand that in, that the IRS takes a slightly different, Treasury takes a slightly different position but, in the regs, but we think it's the state law that makes it clear that you have to interpret that those — it's not a savings clause, it's an interpretation clause and that, it's — you as the committee have the right and the obligation to interpret that in a way to get a deductible contribution on the 162(m).

Your interpretation would suggest that we've got no ability and no — once that's in there, the committee loses its discretion and — or to interpret that provision is in essence what you're saying or what I hear on, what I'm hearing.

MR. ENKISHEV: Well, I think we are all on the same page in a sense that applicable law will control the — in determining the amount that the corporation is obligated to pay under the agreed and binding contract. And if applicable law or state law forces you to take a look at all the elements or provisions in the contract, it doesn't mean that just because you have a negative discretion clause in the contract, nothing is grandfathers.

MR. TALAVERA: Well no, no.

MR. TACKNEY: I think this is an interesting discretion — sorry to interrupt. I think we are having a chicken or egg issue and it will be interesting how we look at this from, because I think, Henry, you are making a very interesting point.

It's kind of which comes first. Does if the 162(m) rule makes the state law say they can't exercise their discretion which just happened first? Was it a legally binding right, because of the 162(m) rule or was it not a legally binding reg until the 162(m) rule and how do we — so I think you're making an interesting.

We as an institution — we do federal tax law. We are not, while we are not particularly adept and so we generally don't write rules that are based on state law, that seems to be what the statute did so we are kind of stuck.

We won't opine or write — be able to write federal regulations on what 50 state was plus District of Columbia and territories do so that's not really on the menu. But I can see your point and we seem to have a chicken or egg analysis we may need to think about.

MR. TALAVERA: Well, and that's why, you know, that's why it's — this is a point that I think transcends any kind of, I mean, the 162(m) is a, you know, a small regulation — but in the grand scheme of things — in the laws to come there is going to be this issue of binding contract that will come up over and over and over —

MR. TACKNEY: I didn't say —

MR. TALAVERA: Oh, go ahead. 

MR. TACKNEY: Interestingly you've — your analysis then though does put all of those plans into being 409(a) deferred comp as well and that would be interesting.

MR. TALAVERA: Well, assuming that there is — they have a — you know, substantial risks of forfeiture that aren't in the short term deferral. Maybe you're right. Maybe there is an issue of —

MR. TACKNEY: I just think if they had a noncompliant plan that they were trying to make work because they were saying it had, they had negative discretion all the way through the payment date for instance and so they had noncompliant election provisions or other things, your analysis would throw them into a 49(a) plan.

MR. TALAVERA: I disagree. I don't think that that's a, I mean, even under, I mean, we cited 409(a) and thought there was, unless it had some substantive significance I think was the rule —

MR. TACKNEY: Doesn't, yeah. If it doesn't have —

MR. TALAVERA: If it doesn't have substantive significance then it would be an issue. But I think that it's — again, it's the interpretation of the contract as a whole. I mean, in the real world, in Texas, okay, maybe it's not the real world, but where I live, you have to look at all of the provisions of the plan in effect and you have to harmonize those — all of the provisions to meet the intent.

Because if it's just one provision like 409(a) is a classic one and we got in a little bit of debate as to how it would work, but there are things that hit the line every single day under 409(a) and if you have to, we're called upon as lawyers to interpret those documents consistent with 409(a) and maybe you got something that's marginally out of a box and that's what kind of we have here.

MR. TACKNEY: I'm not saying that whether it complies or not. I'm talking about I think a lot of practitioners assume if they have negative discretion in their document based on the 409(a) regs, they do not have a legally binding right to pay therefore they do not have deferred compensation.

Under your analysis, they either have had a 409(a) plan or they now have a 409(a) plan because they cannot exercise that discretion. So that — I'm just merely pointing that out would flow from your analysis.

MR. TALAVERA: Well, and most times on the performance-based comp, you have to be employed to the date that you get paid. So I don't think that under 162 and I —

MR. TACKNEY: And it may, again it may be that we have no —

MR. TALAVERA: And again —

MR. TACKNEY: — problem, I just —

MR. TALAVERA: And we may never know because we are talking about history. I mean, this is grandfathering, you know, 162(m) going forward doesn't have much applicability if anything.

But the — under — this raised so many alarm bells to the practitioner community and there are lots of folks who have these provisions in their document and so the only way that the clients have gotten any comfort — and it's not a ton because of the proposed regs is to say well, I'm the committee. I have the discretion to interpret my document, my document and there is actually some more beautiful language that some people have put in there about, you know, and maybe you don't like the (inaudible) but, you know, we can say well, we have got this negative discretion provision. We are not going to interpret, we are not going to use that provision.

As soon as that law came up saying we had a binding contact, we've got a binding contract. We are going to make sure we pay those amounts because we have got to preserve deductibility. And that's going to be the overriding discretion and it's not a discretion as to amount is what I would suggest.

MR. ENKISHEV: Let me throw some —

MR. TALAVERA: This is the longest five minutes of my life by the way. (Laughter)

MR. TACKNEY: This doesn't count. You can always, you know, step down but —

MR. TALAVERA: I just had because my clock stopped about 20 minute ago.

MR. TACKNEY: Yeah, yeah, we don't, well, we don't — your Q and A time doesn't count towards your time so —

MR. ENKISHEV: And you're welcome to stop at any time.

MR. TACKNEY: Stop, you know, if you want.

MR. TALAVERA: No, no, I'm — its —

MR. TACKNEY: We are not imprisoning you up here.

MR. TALAVERA: Yes. Its fine, I mean, as long as we're having a — you know — because this is — these are super important issues and, I mean, they affect and again, it's not just here but go ahead.

MR. ENKISHEV: Sure. Well, let me throw some meat on the bones and put numbers in context. And so let's assume that on January 1, 2017, the compensation committee decided to meet New Year's Day. They set a performance goal and they say if you sell a certain number of widgets by December 31 of 2017, you're going to get $10 but we have negative discretion to reduce it to zero.

MR. TALAVERA: Correct.

MR. ENKISHEV: Let's assume that applicable law takes into account prior use of negative discretion. And let's assume the committee has exercised it and (inaudible) we come up with a number that says if you sell the widgets, the corporation is obligated to pay you $5.

And under the analysis, that's the grandfathered amount. Let's say you sell the widgets on January 1, 2018, the company certifies and it says all right well, we want to pay $10. We know the $5 is grandfathered, so why don't we — so we are just going to pay five because if we pay the extra, the other five it's not grandfathered. Is that the fact pattern?

MR. TACKNEY: Just to, I think Henry is saying they lost the ability to reduce it to five because the contract says they have to do what they have to do to get to 162(m) deductions so no matter what, they've go to pay 10.

MR. ENKISHEV: But isn't the five —

MR. TALAVERA: That's, well, I mean, Stephen, you've made, your augment —

MR. TACKNEY: So you're saying no board with these provisions can even reduce.

MR. TALAVERA: Yeah. I don't think they can reduce without, because once you reduce, then that shows that you've got the discretion to arguably based on state law to reduce it to zero.

MR. TACKNEY: So do you think if an employee went up to you and they projected a $15 million bonus and it hits 100 million, that they've got to pay out that 100 million and the employee has a right to sue under the contract for it?

MR. TALAVERA: No, I think they might. I mean, based on what we are talking about today they sure would, I would think. I think that they've got a binding agreement and absent anything and part of that is to preserve the deductibility for the corporation and without — to — without paying that full amount, I think that you have put it all at risk.

And one of the questions that you raised which is an interesting one is or your assumption was that they used the discretion prior to actually reduce. I think that's something and we'd be glad to comment on that further if you wanted us to or and actually we — you know — because of time permitting, I did this nights and weekends.

MR. TACKNEY: Sure.

MR. TALAVERA: Well, you know, along with my colleague. We'd be glad to research the legislative history more fully. We just got to the 93 one and just didn't have time to put it in but the ability to use — the ability to have or the actual exercise of that negative discretion would be something that a comp committee would really have to take into account in determining whether that's a binding agreement.

If you have in fact used that negative discretion before, then I think that impacts whether you have a binding agreement on that date. I'm not saying which way it goes —

MR. TACKNEY: But I thought you were saying it was totally based on whether it was 162(m) deductible.

MR. TALAVERA: It — absolutely, absolutely. But —

MR. TACKNEY: So if they've already used it and so then how is there a, you know, is there — are you saying it's — the new law changed the analysis or what?

MR. TALAVERA: I think the new law did, the law — and that's — I haven't thought it all the way through but I do think that what happened was you could exercise that negative discretion beforehand but as soon as the law changed and the only way to preserve deductibility was to — was to interpret that agreement as binding on that date, then I think that —

MR. TACKNEY: Well, I guess again we have a chicken or egg because I think one other argument is since they'd already exercised the discretion, they've shown that they would and could and it would exercise the discretion so whether or not they exercised the discretion it's not going to be deductible.

MR. TALAVERA: It could be, that — but that's a, that is an argument and that's why I stopped him in the sense that that would be something I would like to look at further if you wanted us to because that wasn't on the agenda of my 10 minutes or my five minutes.

MR. TACKNEY: Do you want me to start the timer? I can start the timer?

MR. TALAVERA: No, no, no, no, no, no. (Laughter)

MR. TACKNEY: No, no, it's a good joke, I can roll with it.

MR. ENKISHEV: But we'll come back to —

MR. TALAVERA: But that's an interesting point. I'd have to look at that further, you know, we'd have to — but it's a really, it's a valid point that to the extent that folks have used the negative discretion that that suggests that there is a — it is a chicken or the egg kind of thing.

MR. ENKISHEV: Well, hold on. Let me, let's come back to my fact pattern because we know that if you sell the widgets, the corporation is obligated to pay you the $5. Why can't the corporations simply say look at the savings clause and say okay, we can't do anything that will jeopardize the decision so we will just pay you the five if you sell the widgets. And you still get to deduct the five.

MR. TACKNEY: I think Henry is saying it's not going to be, we should — it should be a fact and correct me if I'm wrong — I think Henry is saying it should be a facts and circumstances test. It won't end up being five. It will be huh, have I used this discretion enough that I no longer can claim I am bound to pay the full amount, or perhaps I never used it or used it only in an absolutely extraordinary circumstances so now I am bound to pay the amount?. So and I think he is arguing there is not going to be a real clear five.

MR. ENKISHEV: But that's the analysis —

MR. TALAVERA: Stephen, thank you.

MR. ENKISHEV: — you have to do is to figure out —

MR. TACKNEY: Well, no, we don't know if that's the analysis we have to do. We are open to this argument.

MR. ENKISHEV: Yeah, that's kind of —

MR. TALAVERA: Yes. Thank you. That's why I flew on a plane from Dallas to come here because I think it's something that the service should and — we are again, we are glad to look at it further and provide additional comments on this point if we need to but —

MR. TACKNEY: Because it, the commentary we have heard informally is that boards aren't wanting to give up this discretion and aren't taking the position that they do not have this negative discretion. They are telling us we have this discretion, we want this discretion, and we will continue to have it in the future.

MR. TALAVERA: Well, that's different from what I hear in my neck of the woods. I think that — and maybe to the point is that if your position is that you don't care about 162(m) despite the fact that your plan document says that you have to make sure that your plan is compliant with 162(m) and you've made disclosures all over the place that you're supposed to maximize deductibility, I think you've got a problem with your shareholders and a problem with the —

MR. TACKNEY: Well, no, I think our position — I think they were viewing our position as saying because I have this negative discretion, it is not going to be grandfathered. But — and that's just, that's the way it is so I don't really have a choice on what to do or not.

I don't think they were really applying your analysis. They were just more saying do you — prior to your analysis, just for strictly under state law, do I have the ability to exercise this discretion? And our understanding is when the comp committees were being approached with do you want us to take the position that you do not and that this would be grandfathered they said no. We want — we think we can exercise and would exercise the discretion.

MR. TALAVERA: Yeah, I think and that's after the passage of the law —

MR. TACKNEY: Oh, yeah.

MR. TALAVERA: You know, and maybe —

MR. TACKNEY: Which is I think consistent with our financial filings.

MR. TALAVERA: Well, and maybe — well, see and that's a different what do you call it, different argument. If someone says okay we are going to interpret this plan and we can use this negative discretion and we are going to, then I think they've lost the 162(m) deductibility under even my analysis. But because again, it's an interpretation — interpretive provision. If you interpret that provision as being —

MR. TACKNEY: But I thought you —

MR. TALAVERA: — in effect and – go ahead.

MR. TACKNEY: — I thought you were saying it wasn't because the employee could sue and get it.

MR. TALAVERA: Well, he could sue and get it but if your —

MR. TACKNEY: But then it's not interpretive because you're saying that's the right interpretation of the contract.

MR. TALAVERA: Well, except for at the end of the day, and we are a chicken or the egg aren't we? But the, that the comp committee has the ultimate, I mean, they're, other than a court, they're the ultimate arbiter of everything.

MR. TACKNEY: But you can't say other than the court because I think what we are saying is either the employee has the right to the full 100 million and it's a binding right to pay and there is no way the company can get out of it or there's discretion and they can reduce it or eliminate it and then the employee doesn't have the right to it and it's not binding.

And I thought you were saying the former that no matter what, they've got to pay it because the contract says they have to do whatever they have to do to preserve deductions and that includes never and being willing to say I cannot exercise my discretion.

MR. TALAVERA: I agree with that analysis. And that they would be sued and that the employee would come in and they probably would win under the — you know — the argument that we've laid out under our analysis. But, and —

MR. TACKNEY: So you're saying the position in their financials is wrong, they should have bigger —

MR. TALAVERA: No, I'm saying —

MR. TACKNEY: — tax, deferred tax assets.

MR. TALAVERA: I'm saying that — well, and perhaps. But — or arguably but — I think that the key thing is that the comp committee has the authority to interpret it. They should interpret it in accordance with 162(m) to maximize the — but — maximize the deductibility. But if you're correct that okay, this comp committee looks at it and goes well, even though, you know, Henry has come up with this great argument, and Stephen likes it okay, but, you know, we're just not going to fight that fight. I think that a comp committee could reasonably come in there and say, well, you know, we're just going to give up 162(m), and there are consequences. They could have binding rights, that could be enforced by employees. They could have other consequences, that (overtalking).

MR. TACKNEY: That's what we're looking at. We're looking either you have to pay the 100 million, or you don't —

MR. TALAVERA: And — and —

MR. TACKNEY: — and I'm not understanding this medium position, where we could — we could reduce it, but then the employee could get it because, if the employee can get it, then you have to pay it. If the employee couldn't get it, you don't. That's kind of how we view the world.

MR. TALAVERA: Well, I — but I, again, I — really — think it's a matter of how you interpret. I mean, all of this, it's like you talked about. It's the facts and circumstances, and if the facts and circumstances show that you have interpreted this consistent with maximizing deductibility, then you should be able to have a binding agreement and be grandfathered on that date. It's to the extent that you have acted in ways inconsistent with that, with that interpretation, suggests that there could be folks who have jeopardized their — because this is, again, under state law it's a binding contract, and it's how you've interpreted this agreement.

I think that you're right, that the position I would have, for my clients, would be you have 162(m) language in there. You have said that you are going to comply to the maximum extent possible. You have a binding agreement. You can't reduce it, and, if you have, you've got a problem. That would be the position I would take, but we're having a discussion among friends, and, so, we've got to, you know, you've got a temporary — because it is, you know, what is it, the old adage, how many angels can dance on the head of a pin kind of thing? It's — there is some ability to look at it a little bit different.

Well, you know, our position is that the suggestion would be — we would request the Treasury and Service to consider that there is this whole body of law out there, and contractual provisions, and the ability to interpret that, we would suggest, can, in the right circumstances, trump everything.

MR. TACKNEY: All right, but just to back up in here —

MR. TALAVERA: Okay.

MR. TACKNEY: — we — we're trying to figure out if there's a legally binding right, and, to us, a legally binding right shouldn't be subject to interpretation. It's just — that's discretion. Either there is a legally binding right in the sense — legally binding contract, that binds them to pay, or there isn't. I think you're saying that the contractual terms doesn't give them that discretion. Then, we have a — that's why I'm getting mixed — confused —

MR. TALAVERA: Well, in — I —

MR. TACKNEY: — because there shouldn't be any interpretation.

MR. TALAVERA: Well —

MR. TACKNEY: You should be saying there is no interpretation that leads us to discretion. Therefore, we — we're grandfathered. 

MR. TALAVERA: I don't think that's a — I mean, based on the leg — and, again, I think it would be something, if we can — if you want us to comment further, but there was language in the '93 regs. It's on — under the '93 statute, which was almost identical to the 2017 one, and it says discretion does not exist merely because you have the authority to interpret, in accordance with its terms, and, so, I mean, you — if you've got — it's on page — of the House — did I already say it? I can't remember my (overtalking).

SPEAKER: Yeah.

MR. TACKNEY: Yes. Yes.

MR. TALAVERA: — but it's the discretion on the formula that causes the issue. It's not — it's the — but the Directors still have — the comp committee still has the right to interpret the plan, consistent with maximizing its deductibility, under 162(m) (overtalking).

MR. TACKNEY: Do you think negative discretion could be considered part of the formula, since you're — basically, that is part of determining the amount you would pay?

MR. TALAVERA: I would argue no, but that's — as soon as the statute came in, but that's, you know, that's why I'm here, right? That's, you know, that's — I just think that — and we'd really, at the Texas Bar, thought it was important enough to come in because it is such a debatable issue. I mean, it's not crystal clear, and, so, we just wanted these thoughts, and the thoughts of our comments to be incorporated, as much as possible, into the final regs and taken into consideration, and that's about all we can ask for, is to have — I mean, this is — I mean, I hate to say it, this is what makes America great, but it's this kind of debate, and back and forth, and allowing the various constituents to come forth, which makes it all worthwhile, and, you know, why I was put on a plane to come here because it's — you know, again, it's not just — not just here, and, so, well, do you want me to go on, or do we want to — do you want to —

MR. TACKNEY: Do you have another question, or —

MR. TALAVERA: Yeah, you have —

MS. ENKISHEV: I have another question. I'm so sorry. I have questions.

MR. TALAVERA: Well, yeah, I got about a minute into my presentation, but —

MS. ENKISHEV: I guess I'm still wondering — you know, with these facts and circumstances analysis, and some — and the compensation committees wishing to retain and exercise negative discretion, why doesn't state law provide a remedy in a — because it is applicable law, and my concern is creating a rule in the final new regs, that says that a comp committee does not have discretion in certain circumstances, when, depending on which applicable controls and which, in jurisdiction, are (inaudible) you may want to exercise negative discretion, and it will point to the — to a Federal rule, and say, but the Federal rule says I don't have negative discretion, and I want to exercise it because, the contract, it give it to me —

MR. TALAVERA: Yeah.

MS. ENKISHEV: — and, so, I'm a little kind of — yes, I'm trying to reconcile the —

MR. TALAVERA: I — you know, again, well, not again, but we looked at the law. In Texas common law, you know, everybody but Louisiana, I think, has maybe one other outlier out there has common law, and everything that we saw in the state law analysis, and it's in our — is that contracts are presumed to be binding, and you've got to interpret it, given all of the other language in the agreement, to make sure it's binding, and to Stephen's point, that, you know, it's funny, we were arguing different sides at different times, but I think that it's really critical to preserve the deductibility that the contract be presumed to be binding, under state law. Most state laws would have it, and to allow the comp committee the right to interpret it that way.

MS. ENKISHEV: But I cannot — it brings me to the question why do you need the regs disbarred to adopt the rule that you are suggesting, if applicable law already provides for it?

MR. TALAVERA: Well, because the regulations say, if you've got negative discretion, you've lost —

MS. ENKISHEV: But that's not what we've (overtalking).

MR. TALAVERA: I think — well, I think it does say it (overtalking).

MR. TACKNEY: We say its negative discretion and we say in the facts you can assume that that can be enforced. So, you know, that's what we say because we can't write Federal rules about what 50 plus jurisdictions' state law requires. So, we do say, as a assumption, that all the negative discretion can actually be exercised.

MR. TALAVERA: Yeah, well, and it — but it's not — and, maybe, what — where I'm quibbling more than anything is it's not under the applicable law, per se. It's under the applicable terms of the contract. If, under the terms of the contract, you have to comply with 162(m) and there's all sorts of language that say that you're going to interpret the rule as a binding con — you know, or in our argument that it's not just the law, it's the terms of the plan, that — this provision is taken completely out of context, and, so —

MR. TACKNEY: So, just to back — for us, we were saying that, you know, if it's binding, in the sense that the employee could actually sue, and get the full 100,000 million in that example, then, because you, under applicable state law, cannot exercise the negative discretion. Then, you don't have negative discretion, and you would have a grandfathered amount.

MR. TALAVERA: Yeah.

MR. TACKNEY: So, that's kind of where we were, when we put the rule on. I think the question that Ilya's asking is do we need to say anything more than fact.

MR. TALAVERA: Yeah, I think we do. I think it's — it's really important because it's not just applicable law because the — what it left us, at — looking at this, is that you've got this law out there. Well, they've already said you can't exercise any discretion under law. I don't know what that means, in context. We've got to have a good argument, based on the whole planned document, and I think you're right, though, in the sense that I think an employee could sue. Now, we're going to find out, five, 10 years from now, whether that's an actual binding right, in a sense, but because — it's because I there's going to be —

MR. TACKNEY: Well, would you write an opinion —

MR. TALAVERA: There's going to be —

MR. TACKNEY: — because the accountants were asking for lawyers' opinions? So, would you ever — written a lawyer's opinion, saying this is the deductible amount?

MR. TALAVERA: It depends on where you come out with the final regs, but —

MR. TACKNEY: Well, no, I mean, under the current — under the current —

MR. TALAVERA: I think — I think, under the current law, I've taken the position — in essence, what I've argued here, to the clients, is that it's not super clear what the law is. I mean, there's been commentary all over the place on it, but that — to the extent what you can't do, under the existing law, is actually have exercised that discretion, especially after the 17. Once you've done that, it makes it very difficult to enforce that agreement and say that you're entitled to the total ton amount, for the reasons that we've discussed today, but to the extent that you haven't used that discretion beforehand, you can't. The law would say that that was a binding agreement on the adoption of the law, and there were going to be some serious consequences to pay, if you actually exercise that discretion, and, so, that's the position I've taken with a client. Other people have taken different positions, which is we're not going to fight with the IRS. Don't worry about the issue, but I think that this is — again, it transcends this particular regulation. I mean, it's a real you know, then you have this negative discretion, and you're just — I mean, I don't see how you, by — really important issue on a go forward basis, but I think that the — to the ex — that's the position I've taken that, to the extent that you have decent planned provisions because, if you didn't have a savings clause, if you didn't have anything in there that said we're not intended to comply with 162(m) performance standards, I think, contract, can say you have a binding agreement, but I've taken that position. I know others have taken that position, but we're hopeful that the IRS will be accommodating and incorporate the comments that we have to — on this, to be able to preserve most — because most of the contracts — because the way we see it, based on the examples you've given, they just don't apply where we are, and, so, in a sense, this negative discretion, the ability to even exercise it, causes the position that you said, Stephen, which is, okay, we've got negative discretion. The IRS has put out these proposed regs. We're just — we just fold the tent, but we're from Texas. We don't fold the tent.

MS. ENKISHEV: Although we greatly appreciate the suggested revisions to the example, I'm wondering if you get to the same place, where we say, in example, under applicable law, if you just insert, maybe, a parenthetical, saying, applying the relevant plan provisions, and leave it at that.

MR. TALAVERA: You know, it's better than a poke in the eye. It's not — it's not, ideally, what we'd like, but it, you know, that, at least, it's a start, and, you know, we — we'd, for sure, like the provisions that we added, or at least to be considered, but, but that — that, at least, is a clarification that that's, at least, a little gift.

MR. TACKNEY: Well, I will say this has been very — this has been very elucidating, about the comments. So, it's been a very helpful discussion. You do have five more minutes, if you want to take it. I'm, you know, happy to —

MR. TALAVERA: Do you want to start the clock back up —

MR. TACKNEY: Yeah, no.

MR. TALAVERA: — just for a —

MR. TACKNEY: Or not. I mean, it's really up to you.

MR. TALAVERA: Well, is there anything else I can add? I think — I don't even know how long I've been up here, but —

MR. TACKNEY: I mean, do you guys have —

MR. TALAVERA: Any — it's —

MR. TACKNEY: — any more questions?

MS. ENKISHEV: No.

MR. TALAVERA: Yeah, I think it's been almost an hour, I think, so. I can — maybe, maybe I'll — I mean, this has been a really wonderful — we're really grateful that you —

MR. TACKNEY: Well, thank you, and it's been a great conversation.

MR. TALAVERA: — allowed me to visit. It would have been better over a cup of coffee, but I think that — let me see if there's any other points. I've got a few minutes, unless I'm taking someone else's time.

MR. TACKNEY: No.

MR. TALAVERA: I'm afraid I'm not —

MR. TACKNEY: We only had three speakers. Otherwise, we would probably be more —

MR. TALAVERA: More demanding?

MR. TACKNEY: Yeah.

MR. TALAVERA: Yeah, I mean, I think, actually, you know, we've hashed out the issues pretty well. I don't know if there's anything else that's left to be said.

MR. TACKNEY: Well, thank you again.

That was — this is a very illuminating conversation, and very much appreciated. Thank you.

MR. TALAVERA: Well, we're grateful. Thank you.

MS. ENKISHEV: Thank you, Henry.

MR. TACKNEY: Our next speaker is — is Steve Seelig here? Okay, our next speaker is not Steve Seelig. I don't see — Mr. Kevin O'Brien, is Mr. Spencer Walters here? Okay, hearing no more, is there anybody who would like to make comments from the floor? All right, seeing no — thank you, Henry. That's the end of our hearing on the reg. Thanks, everyone, for attending, and thank you to the — my fellow panelists and, as usual, we will be moving forward with considering all the comments in the hearing to final regulations. So, thanks, everyone.

(Whereupon, at 10:54 a.m., the PROCEEDINGS were adjourned. )