Menu
Tax Notes logo

Firm Addresses Treatment of Amounts 'Paid' Under Executive Comp Regs

SEP. 16, 2020

Firm Addresses Treatment of Amounts 'Paid' Under Executive Comp Regs

DATED SEP. 16, 2020
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Miller & Chevalier Chtd
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-39186
  • Tax Analysts Electronic Citation
    2020 TNTF 192-32
    2020 EOR 11-60
  • Magazine Citation
    The Exempt Organization Tax Review, Nov. 2020, p. 593
    86 Exempt Org. Tax Rev. 593 (2020)

September 16, 2020

Internal Revenue Service
CC:PA:LPD:PR (REG-122345-18)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Comment on Proposed Regulations under Section 4960 of the Internal Revenue Code (REG-122345-18)

Dear Sir or Madam:

We are writing to offer a recommendation for consideration by the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“Service”) as they develop final guidance under section 4960 of the Internal Revenue Code (“Code”)1 as enacted by section 13602 of Public Law Number 115-97 (“Act”). In particular, this comment responds to Prop. Reg. §§ 53.4960-0 - 53.4960-5 (“Proposed Regulations”) issued under section 4960 on June 11, 2020.2 We appreciate the time and resources that the Treasury and the Service have dedicated to reviewing the issues and further appreciate the opportunity to provide these written comments.

We specifically recommend that the Treasury and the Service clarify, within the final regulations, that remuneration (including vested but unpaid earnings accrued on deferred amounts) treated as “paid” for purposes of section 4960(a) in a taxable year beginning before January 1, 2018 is not subject to the excise tax imposed by section 4960(a). The treatment of amounts “paid” before the statutory effective date was clarified in Notice 2019-09 (“Notice”) and the Preamble to the Proposed Regulations but was not discussed within the text of the Proposed Regulations.3

Statutory Effective Date and Notice 2019-09

Section 13602(c) of the Act provides that “[t]he amendments made by this section shall apply to taxable years beginning after December 31, 2017.”4 Consistent with the statute, the Notice provides that section 4960 applies to taxable years “of an employer” beginning after December 31, 2017.5 The Notice also explicitly states that “[r]emuneration paid before the beginning of the first taxable year that begins after December 31, 2017, is not subject to the excise tax under section 4960.”6

Section 4960(a) provides that “remuneration shall be treated as paid when there is no substantial risk of forfeiture (within the meaning of § 457(f)(3)(B)) of the rights to such remuneration” (“Timing Rule”). The Proposed Regulations specifically incorporate the Timing Rule7 and further provide that vested net earnings on previously paid remuneration are themselves treated as “paid” remuneration at the end of the year in which they accrued.8 Q/A — 39 of the Notice makes clear that remuneration “paid” under the Timing Rule before the first tax year starting after December 31, 2017 is exempt from the excise tax.9

Preamble to Proposed Regulations

Consistent with the clear language in the Notice, the Preamble to the Proposed Regulations states:

. . . these proposed regulations do not provide a grandfather rule. . . . However, these proposed regulations provide rules that have the effect of grandfathering certain compensation. The proposed regulations provide that any nonqualified deferred compensation that vested prior to the first day of the first taxable year of the ATEO beginning after December 31, 2017, is not considered remuneration for purposes of section 4960. Specifically, these proposed regulations provide that any vested remuneration, including vested but unpaid earnings accrued on deferred amounts, that is treated as paid before the effective date of section 4960 (January 1, 2018, for a calendar year employer) is not subject to the excise tax imposed under section 4960(a)(1). All earnings on that remuneration that accrue or vest after the effective date, however, are treated as remuneration paid for purposes of section 4960(a)(1).

(Emphasis added).

Despite the language in the Preamble and in the Notice, the text of the Proposed Regulations does not discuss the treatment of amounts “paid” before the effective date of section 4960 (the first calendar year starting after December 31, 2017). We recommend that Treasury and the Service include explicit language in the text of the final regulations — identical or similar to the language in Q/A — 39 of the Notice — that confirms that remuneration “paid” in a taxable year beginning before January 1, 2018 is not subject to the excise tax. Amounts “paid” prior to 2018 would include earnings accrued on deferred amounts that were vested but unpaid as of December 31, 2017 (for a calendar year taxpayer). We also recommend including examples, similar to Examples 1 and 2 in Q/A — 39 and Examples 3 and 4 in Q/A — 13 in the Notice, illustrating the application of the effective date.

This conclusion is required by the plain language of the statute and is supported by all published guidance to date, save for its omission in the text of the Proposed Regulations. The final regulations under section 4960 should clearly state that remuneration treated as paid before the effective date of section 4960, including earnings on previously deferred amounts, is not subject to the excise tax imposed under section 4960(a)(1).

We appreciate your consideration of this comment and would be pleased to clarify any points or answer any questions.

Sincerely,

Anthony Provenzano
Miller & Chevalier Chartered
Washington, DC

cc:
William McNally, Attorney, Internal Revenue Service
Amber Salotto, Attorney Advisor, Department of Treasury

FOOTNOTES

1 All references herein to “sections” are to the Code, as amended.

2 85 Fed. Reg. 35,746 (June 11, 2020).

3 Notice 2019-09, 2019-04 I.R.B. 403 (Dec. 31, 2018).

4 See also “Joint Explanatory Statement of the Committee of Conference (“Joint Statement”), p. 348.

5 Notice, Q/A — 39(a).

6 Id. See also Notice, Q/A — 13(b)(2)(D)(iii).

7 See also Prop. Reg. §§ 53.4960-2(c)(1)-(2) (“Remuneration that is a regular wage within the meaning of § 31.3402(g)-1(a)(1)(ii) is treated as paid on the date it is actually or constructively paid and all other remuneration is treated as paid on the first date on which the remuneration is vested. . . . Remuneration is vested if it is not subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B). . . .”). The Timing Rule is also described in the Notice. See Notice 2019-09, Q/A — 13.

8 Prop. Reg. § 53.4960-2(c)(2).

9 Examples in Q/A — 13 and Q/A — 39 of the Notice illustrate the application of this rule.

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Miller & Chevalier Chtd
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-39186
  • Tax Analysts Electronic Citation
    2020 TNTF 192-32
    2020 EOR 11-60
  • Magazine Citation
    The Exempt Organization Tax Review, Nov. 2020, p. 593
    86 Exempt Org. Tax Rev. 593 (2020)
Copy RID