ABA Tax Section Comments on Proposed Exec Comp Regs

ABA Tax Section Comments on Proposed Exec Comp Regs

American Bar Association Section of Taxation

The American Bar Association Section of Taxation has submitted comments on proposed regulations (<a href="/lr/resolve//2bpr4">REG-122180-18</a>) to implement the amendments made by the Tax Cuts and Jobs Act to <a href="/research/federal/usc26/162#cnq9-0000089" resolve="/lr/resolve//cnq9#cnq9-0000089">section 162(m)</a>, which limits the deduction for specified employee remuneration in excess of $1 million for federal income tax purposes. The tax section suggests that final regs provide that the extension of an exercise period for a stock option or stock appreciation right will not be considered a material modification for purposes of the grandfather rule in the TCJA. The regs should also provide that any amount that otherwise would have been paid if the stock option or stock appreciation right had been exercised on the last date that it could have been exercised before the extension of the exercise period will remain subject to <a href="/research/federal/usc26/162#cnq9-0000089" resolve="/lr/resolve//cnq9#cnq9-0000089">section 162(m)</a> as in effect before the TCJA. Section members ask that Treasury and the IRS clarify that all amounts subject to <a href="/research/federal/usc26/409A" resolve="/lr/resolve//cq5q">section 409A</a>, the payment of which has been delayed either in operation or as a result of a plan provision because they are not deductible under <a href="/research/federal/usc26/162#cnq9-0000089" resolve="/lr/resolve//cnq9#cnq9-0000089">section 162(m)</a>, may be paid out by December 31, 2020, (or a later date established in the final regs), without resulting in an impermissible acceleration of a payment under <a href="/research/federal/usc26/409A" resolve="/lr/resolve//cq5q">section 409A</a> or a material modification for purposes of the grandfather rule in the TCJA. The tax section seeks confirmation and further guidance on the scope of the right in the current <a href="/research/federal/usc26/409A" resolve="/lr/resolve//cq5q">section 409A</a> rules to prospectively discontinue imposing plan and operational delays, independent of the broader relief described in the preamble to the proposed regs. Section members suggest that Treasury and the IRS provide a period of at least one year after the final regs under <a href="/research/federal/usc26/162#cnq9-0000089" resolve="/lr/resolve//cnq9#cnq9-0000089">section 162(m)</a> are published to make any amendments to nonqualified deferred compensation plans under <a href="/research/federal/usc26/409A" resolve="/lr/resolve//cq5q">section 409A</a>. Under the proposed regs, if a publicly held corporation is a partner in a partnership, compensation subject to the <a href="/research/federal/usc26/162#cnq9-0000089" resolve="/lr/resolve//cnq9#cnq9-0000089">section 162(m)</a> limit would include the corporate partner’s distributive share of the partnership’s deduction for any compensation it paid for services performed by a covered employee of the corporation. If the final regs retain that partnership rule, the tax section suggests that it apply only to payments that are deductible (subject to applicable limits) at the partnership level. Section members also suggest that final regs clarify the breadth of that partnership rule, including the partners to which it applies, whether it treats a partner as employing the employees directly, and if so, whether it applies this treatment for all tax deduction purposes. The tax section notes that, under the partnership rule, <a href="/research/federal/usc26/162#cnq9-0000089" resolve="/lr/resolve//cnq9#cnq9-0000089">section 162(m)</a> can apply differently to (i) a group in which the publicly held corporation owns an interest in a partnership that directly employs the covered employee and (ii) a group in which the publicly held corporation owns an interest in a partnership that in turn owns an interest in a corporation that employs the covered employee, even if the groups are otherwise similar. The tax section submitted two proposals for addressing that apparent disparity while noting that both seem to have limited legal support in most situations and might create other complications.

The American Bar Association Section of Taxation has submitted comments on proposed regulations (REG-122180-18) to implement the amendments made by the Tax Cuts and Jobs Act to section 162(m), which limits the deduction for specified employee remuneration in excess of $1 million for federal income tax purposes.

The American Bar Association Section of Taxation has submitted comments on proposed regulations (REG-122180-18) to implement the amendments made by the Tax Cuts and Jobs Act to section 162(m), which limits the deduction for specified employee remuneration in excess of $1 million for federal income tax purposes. The tax section suggests that final regs provide that the extension of an exercise period for a stock option or stock appreciation right will not be considered a material modification for purposes of the grandfather rule in the TCJA. The regs should also provide that any amount that otherwise would have been paid if the stock option or stock appreciation right had been exercised on the last date that it could have been exercised before the extension of the exercise period will remain subject to section 162(m) as in effect before the TCJA. Section members ask that Treasury and the IRS clarify that all amounts subject to section 409A, the payment of which has been delayed either in operation or as a result of a plan provision because they are not deductible under section 162(m), may be paid out by December 31, 2020, (or a later date established in the final regs), without resulting in an impermissible acceleration of a payment under section 409A or a material modification for purposes of the grandfather rule in the TCJA. The tax section seeks confirmation and further guidance on the scope of the right in the current section 409A rules to prospectively discontinue imposing plan and operational delays, independent of the broader relief described in the preamble to the proposed regs. Section members suggest that Treasury and the IRS provide a period of at least one year after the final regs under section 162(m) are published to make any amendments to nonqualified deferred compensation plans under section 409A. Under the proposed regs, if a publicly held corporation is a partner in a partnership, compensation subject to the section 162(m) limit would include the corporate partner’s distributive share of the partnership’s deduction for any compensation it paid for services performed by a covered employee of the corporation. If the final regs retain that partnership rule, the tax section suggests that it apply only to payments that are deductible (subject to applicable limits) at the partnership level. Section members also suggest that final regs clarify the breadth of that partnership rule, including the partners to which it applies, whether it treats a partner as employing the employees directly, and if so, whether it applies this treatment for all tax deduction purposes. The tax section notes that, under the partnership rule, section 162(m) can apply differently to (i) a group in which the publicly held corporation owns an interest in a partnership that directly employs the covered employee and (ii) a group in which the publicly held corporation owns an interest in a partnership that in turn owns an interest in a corporation that employs the covered employee, even if the groups are otherwise similar. The tax section submitted two proposals for addressing that apparent disparity while noting that both seem to have limited legal support in most situations and might create other complications.

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ABA Tax Section Comments on Proposed Exec Comp Regs