Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has provided interim guidance on the application of Code Sec. 457A to nonqualified deferred compensation plans of nonqualified entities. Code Sec. 457A, which was added by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343), provides that any compensation that is deferred under a nonqualified entity's nonqualified deferred compensation plan is includible in gross income when there is no substantial risk of forfeiture of the rights to the compensation. However, deferred compensation is not includible in gross income if its amount is not determinable, in which case additional taxes apply at the time the amount of the compensation becomes determinable and is includible in gross income. A nonqualified entity includes a foreign corporation unless substantially all of its income is effectively connected with the conduct of a U.S. trade or business or is subject to a comprehensive foreign income tax; and a partnership (foreign or domestic) unless substantially all of its income is allocated to certain U.S. persons and exempt organizations. Code Sec. 457A applies to deferred amounts that are attributable to services performed after December 31, 2008.

  The interim guidance:

  defines a nonqualified deferred compensation plan, including special rules for equity appreciation rights and a short-term deferral exception;

  defines substantial risk of forfeiture, including special rules for stock rights and enforcement of forfeiture conditions;

  defines short-term deferral;

  defines nonqualified entities, including rules for determining whether an entity is a foreign corporation or a partnership, whether substantially all of a foreign corporation's income is subject to a comprehensive foreign income tax or is effectively connected with the conduct of a trade or business in the U.S.; when a foreign person is eligible for the benefits of a comprehensive income tax treaty; allocations of partnership income; coordination with Code Sec. 882; and the timing of the determination;

  provides rules for determining amounts includible in income;

  provides rules governing deferred amounts that are not determinable; and

  coordinates Code Sec. 457A with Code Sec. 409A, including rules governing amounts that are attributable to services performed before 2009.

Effective Dates

  Until further guidance is issued, taxpayers may rely on the rules in this notice effective from October 3, 2008. Further guidance that would expand the coverage of Code Sec. 457A will be prospective and will not apply to a service provider's tax years beginning before the issuance of that guidance.

  In addition, if a deferred amount would not be subject to Code Sec. 457A solely because it is attributable to services performed before 2009, then to the extent the deferred amount is not included in gross income in a tax year beginning before 2018, the deferred amount is includible in gross income in the later of (a) the last tax year beginning before January 1, 2018 or (b) the first tax year in which there is no substantial risk of forfeiture of the right to the amount deferred. The guidance also provides detailed rules for determining periods of service to which the compensation is attributable.

Comments Requested

  The IRS anticipates issuing additional guidance with respect to Code Sec. 457A. Comments are requested on the topics addressed in this interim guidance, and any other issues arising under Code Sec. 457A, particularly (i) whether and to what extent a limitation on benefits provision or exchange of information program is relevant to the determination of what is a comprehensive income tax treaty; (ii) the extent to which a reimbursement arrangement with respect to a domestic taxpayer service recipient and a nonqualified entity that has agreed to share or reimburse the domestic taxpayer service recipient's compensation costs should result in the domestic taxpayer service recipient also being treated as a nonqualified entity; (iii) the potential scope of the exception to the definition of substantial risk of forfeiture that may be provided by regulations relating to the single investment asset; and (iv) the proper treatment of trusts that are partners in a partnership and beneficiaries of these trusts for purposes of allocating partnership income.

Notice 2009-8,
2009FED ¶46,237

Other References:

 
Code Sec. 457A

  CCH Reference - 2009FED ¶21,539.01

  Tax Research Consultant

  CCH Reference - TRC COMPEN: 15,350