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October 15,  2008

Federal Headlines

IRS Issues Guidance on Executive Compensation Changes Made by Recent Legislation (Notice 2008-94)

 

The IRS has issued guidance on recent statutory changes made to the treatment and deductibility of executive compensation and excess parachute payments. The Emergency Economic Stabilization Act of 2008 (EESA) (P.L. 110-343) added Code Secs. 162(m)(5) and 280G(e), which impose stricter limits on the deductibility of compensation paid to executives by employers that are financial institutions that sell troubled assets as part of the Troubled Assets Relief Program (TARP) authorized by EESA. The newly issued guidance, which is in a question-and-answer format, provides definitions for the terms used in the new provisions, clarifies how the rules should be applied, and illustrates the concepts discussed through the use of examples.

Deduction Limitation

 

Code Sec. 162(m) generally limits the deduction for compensation paid to certain executives and officers of publicly held corporations to $1 million per year. The $1-million limit does not take into account certain compensation, such as commissions, performance-based compensation, qualified retirement plan payments, excludable income, and certain amounts paid under pre-February 18, 1993, written binding contracts. EESA added Code Sec. 162(m)(5), which provides a $500,000 deduction limit for "executive remuneration" and "deferred deduction executive remuneration" paid by applicable employers to certain covered executives in an applicable tax year.

 

An "applicable employer" is defined in Code Sec. 162(m)(5)(B) as an employer that is a financial institution from whom one or more troubled assets are acquired under the TARP, but only if the aggregate amount of assets acquired exceeds $300 million. The guidance clarifies that an applicable employer for purposes of the new $500,000 limit is not confined to a publicly traded corporation or to a corporate business form. The guidance further explains how the aggregation rules should be applied in determining who is an applicable employer, how to determine who is a covered executive in a controlled group situation, and what special rules apply when a financial institution has acquired another financial institution through an acquisition.

 

A "covered executive" is defined in Code Sec. 162(m)(5)(D) as: (1) the chief executive officer (CEO) or the chief financial officer (CFO) (or an individual acting in either of those capacities) of the applicable employer, or (2) one of the three highest compensated officers of the applicable employer, other than the CEO or CFO. The newly issued guidance describes how the three highest compensated officers are determined.

 

"Executive remuneration" and "deferred deduction executive remuneration" are broadly defined, for purposes of the $500,000 limit, in Code Sec. 162(m)(5)(E) and Code Sec. 162(m)(5)(F). A major portion of the guidance is devoted to providing further detail on what constitutes executive remuneration and deferred deduction executive remuneration and how the $500,000 deduction limit is imposed on such remuneration.

 

The guidance clarifies that executive remuneration for purposes of the $500,000 limit differs from employee remuneration for purposes of the $1-million limit in that commissions, performance-based compensation, and amounts paid under pre-February 18, 1993, written binding contracts would be included. Since deferred deduction executive remuneration is defined in terms of services performed in an applicable tax year, the guidance sets forth how such services are determined. This includes a description of how deferred deduction executive remuneration is allocable to particular services and to particular time periods, as illustrated by several examples.

Parachute Payment Limitation

 

Code Sec. 280G generally provides that excess parachute payments are not deductible by a corporation and that the recipient of an excess parachute payment must pay an excise tax on such amount. A parachute payment is compensation paid to disqualified individuals, including officers, shareholders, and highly compensated individuals who provide personal services to a corporation. Payment of such compensation must be contingent on a change in the ownership or control of the corporation or on a change in the ownership of a substantial portion of the corporation's assets. EESA added Code Sec. 280G(e), which expands the definition of a parachute payment to include certain severance payments made to a covered executive of an applicable employer participating in the TARP.

 

Code Sec. 280G(e)(2)(B) defines an "applicable severance from employment" as any severance from employment of a covered executive: (1) by reason of an involuntary termination of the executive by an employer, or (2) in connection with a bankruptcy, liquidation, or receivership of the employer. The guidance provides greater detail on what constitutes applicable severance from employment by further defining an involuntary termination for this purpose. The guidance also describes what constitutes a payment on account of an applicable severance from employment and provides an example on how to compute an excess parachute payment in this situation.

Effective Date

 

Until further guidance is issued, taxpayers may rely on the rules provided in this notice for applying Code Secs. 162(m)(5) and 280G(e), effective from October 3, 2008. Any further guidance on these issues will be applied prospectively to the extent that the guidance is more restrictive.

Request for Comments

 

The IRS and the Treasury Department anticipate issuing additional guidance with respect to Code Secs. 162(m)(5) and 280G(e). Thus, the IRS and the Treasury Department request comments on the topics addressed in this notice.

Notice 2008-94, 2008FED ¶46,621

Other References:

 

Code Sec. 162

 

CCH Reference - 2008FED ¶8636.0252

 

CCH Reference - 2008FED ¶8636.2763

 

Code Sec. 280G

 

CCH Reference - 2008FED ¶15,152.035

 

CCH Reference - 2008FED ¶15,152.15

 

Tax Research Consultant

 

CCH Reference - TRC COMPEN: 12,350

CCH Reference - TRC COMPEN: 30,050

 

Guidance Provided for Loss Corporations Whose Instruments are Acquired by Treasury (Notice 2008-100)

 

The IRS has provided guidance regarding the application of Code Sec. 382 to loss corporations whose instruments are acquired by the Treasury Department under the Capital Purchase Program (CPP) pursuant to the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). The IRS and Treasury intend to issue regulations regarding the application of Code Sec. 382 with respect to the CPP; however, taxpayers may rely on this guidance until additional guidance is issued. With respect to any shares of stock of a loss corporation acquired by Treasury pursuant to the CPP, either directly or upon the exercise of an option, the ownership represented by such shares on any date on which they are held by Treasury will not be considered to have caused Treasury's ownership in the loss corporation to have increased over its lowest percentage owned on any earlier date. Such shares are generally considered outstanding for purposes of determining the percentage of loss corporation stock owned by other five-percent shareholders on a testing date. However, for purposes of measuring shifts in ownership by any five-percent shareholder on any testing date occurring on or after the date on which the loss corporation redeems shares of its stock held by Treasury that were acquired pursuant to the CPP, the shares so redeemed will be treated as if they had never been outstanding.

 

In addition, for all federal income tax purposes, any preferred stock of a loss corporation acquired by Treasury pursuant to the CPP, whether owned by Treasury or another person, will be treated as stock described in Code Sec. 1504(a)(4). Further, for all federal income tax purposes, any warrant to purchase stock of a loss corporation that is acquired by Treasury pursuant to the CPP, whether held by Treasury or another person, will be treated as an option, not as stock.

Notice 2008-100, 2008FED ¶46,622

Other References:

 

Code Sec. 382

 

CCH Reference - 2008FED ¶17,115.40

 

Tax Research Consultant

 

CCH Reference - TRC NOL: 33,050

Payments Under TARP Not Provision of Federal Financial Assistance Under Code Sec. 597 (Notice 2008-101)

 

Unless and until contrary guidance is issued, no amount furnished by the Department of the Treasury to a financial institution pursuant to the Troubled Asset Relief Program (TARP) established under the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) will be treated as the provision of federal financial assistance within the meaning of Code Sec. 597. Any future contrary guidance will not apply to transactions with the Department of the Treasury, or to securities issued by financial institutions to the Department of the Treasury, prior to the publication of that guidance, or to securities issued pursuant to written binding contracts entered into prior to that date. No inference should be drawn from this guidance regarding the treatment of any other program or payments under Code Sec. 597.

Notice 2008-101, 2008FED ¶46,623

Other References:

 

Code Sec. 597

 

CCH Reference - 2008FED ¶23,811.10

 

Tax Research Consultant

 

CCH Reference - TRC CCORP: 30,054

Obama and McCain Unveil Economic Plans

 

Presidential candidates Sens. Barack Obama, D-Ill. and John McCain, R-Ariz., laid out short-term economic growth plans shortly before they face off at their last debate of the campaign season on October 15. Declaring that the U.S. faces "an immediate emergency that requires urgent action," Obama on October 13 outlined his economic stimulus package at a political rally in Toledo, Ohio. "We need to pass an economic rescue plan for the middle class and we need to do it now," Obama asserted.

 

The Democratic presidential candidate said his plan would stabilize the faltering financial system, provide relief to families and communities, and help homeowners facing foreclosure. "It's a plan that begins with one word that's on everyone's mind, and it's spelled J-O-B-S," Obama said.

 

McCain outlined his economic plan on October 14 in Blue Bell, Pennsylvania. The Republican presidential contender said his proposals would provide tax cuts for job creation and for protecting life savings.

Obama Plan

 

Under Obama's short-term stimulus plan, the IRS would mail out a second round of checks to middle-class taxpayers who earn less than $250,000 annually. His plan would also extend, expand and end the tax on unemployment benefits.

 

Other tax-related proposals would:

 

(1) Give U.S. businesses a new tax credit for each new employee hired over the next two years;

 

(2) Eliminate all capital gains taxes on investments in small businesses and start-up companies;

 

(3) Provide an additional tax incentive through 2009 to encourage new small business investment; and

 

(4) Allow penalty-free withdrawals of up to $10,000 from IRA or 401(k) accounts through 2009.

McCain Plan

 

The McCain proposal, entitled the Pension and Family Security Plan, would:

 

(1) Suspend rules requiring investors to begin to sell off their IRAs and 401(k) accounts at age 70 1/2;

 

(2) Cut the tax rate for withdrawals from tax-preferred retirement accounts to 10 percent; and

 

(3) Reduce the capital gains tax on stocks purchased and held for more than one year --from a rate of 15 to 7.5 percent.

 

McCain also proposed to increase the amount of capital losses that can be deducted from ordinary income in tax years 2008 and 2009, from $3,000 to $15,000. "We should ... not penalize Americans who are forced to sell investments in today's tough markets," McCain asserted.

 

The GOP presidential candidate also proposed to reduce the federal business tax rate from 35 percent to 25 percent, and called for the elimination of all taxes on unemployment benefits, saying the U.S. government should not impose a tax burden on those who can least afford it.

 

By Paula Cruickshank, CCH News Staff.

State Headlines

New York City --Property Tax: NYC Industrial, Commercial Abatement Program Adopted

 

New York City Mayor Michael Bloomberg has signed a local law establishing the Industrial and Commercial Abatement Program (ICAP), which provides property tax abatements for varying periods of up to 25 years for eligible industrial and commercial buildings that are built, modernized, rehabilitated, expanded, or otherwise physically improved. The local measure parallels state property tax provisions that were enacted earlier this year. (TAXDAY, 2008/07/11, S.24)

 

To be eligible for commercial new construction benefits, applicants may build anywhere in New York City except in Manhattan, south of the centerline of 96th Street and north of Murray, Frankfort, and Dover Streets. To be eligible for commercial renovation benefits, applicants may be expanding, modernizing, or otherwise improving an existing structure anywhere in the City except in Manhattan, between the centerline of 59th Street and the centerline of 96th Street. In Manhattan, benefits are available for renovation in three areas, although the benefits depend on the area in which the project is located: the Garment Center District; an area in lower Manhattan bounded generally by Murray Street, South Street, Battery Place and West Street; and the remainder of Manhattan below 59th Street.

 

The abatement base used to determine the amount of the abatement is the amount by which the post-completion tax on a building or structure exceeds 115% of the initial tax levied on the building or structure. The initial tax is determined by multiplying the final taxable assessed value, without regard to any exemptions, shown on the assessment roll with a taxable status date immediately preceding the issuance of the first building permit by the initial tax rate. The initial tax rate is the final tax rate applicable to the assessment roll with a taxable status date immediately preceding the issuance of the first building permit. If no permit was required, the initial tax and the initial tax rate will be determined based on the assessment roll with a taxable status date immediately preceding the commencement of construction.

 

Applicants must make a minimum required expenditure (MRE) equal to at least 30% of the taxable assessed value of the project in the year of the issuance of the building permit or, if no permit is required, the start of construction. The MRE must be made no later than four years from the date of the issuance of the first building permit for the project, or, if no permit is required, the start of construction. ICAP also provides an additional tax abatement benefit for industrial construction projects that meet a higher MRE of 40%.

 

No tax abatement benefits will be allowed for utility property, which includes all property used by a utility in the ordinary course of business, as well as land and buildings owned by a utility. A property may be subject to varying abatement schedules, depending on the percentage of the property that is dedicated to retail purposes.

NYC Intro. No. 822, Laws 2008, effective retroactively to July 1, 2008;

Notice, New York City Department of Finance, October 10, 2008.

 
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