Posted on February 4, 2009 by Joseph M. Wallin

Treasury Announces New Restrictions On Executive Compensation

"Today, the Treasury Department is issuing a new set of guidelines on executive pay for financial institutions that are receiving government assistance to address our current financial crisis.  These measures are designed to ensure that public funds are directed only toward the public interest in strengthening our economy by stabilizing our financial system and not toward inappropriate private gain. The measures announced today are designed to ensure that the compensation of top executives in the financial community is closely aligned not only with the interests of shareholders and financial institutions, but with the taxpayers providing assistance to those companies. "

For the press release, see here.

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Posted on December 23, 2008 by Joseph M. Wallin

The Tax Problem With Using Nonrecourse Loans To Buy Restricted Stock

Executives frequently desire to start their capital gains holdings period with respect to their equity compensation awards immediately upon receipt of the awards.  This generally cannot be accomplished if the executive receives stock options (the exception being the receipt of an immediately exercisable stock option, which is exercised and a Section 83(b) election is filed if the shares are subject to vesting).  

The goal of starting the capital gains holding period upon receipt of an equity compensation award can be accomplished with a restricted stock award provided the stock is fully paid for and vested upon receipt or a Section 83(b) election is filed.  However, if a loan is used to pay for the stock, and the loan is non-recourse, the goal of starting the capital gains holding period may very well be thwarted because the IRS will likely deem the transaction to be the grant of an option--not the receipt of stock--until the note is paid down (and treat the pay down of the note as the exercise of the option, with the tax consequences that accompany that).

Treasury Regulation Section 1.83-3(a)(2) provides as follows: 

 

“In addition, if the amount paid for the transfer of property is an indebtedness secured by the transferred property, on which there is no personal liability to pay all or a substantial part of such indebtedness, such transaction may be in substance the same as the grant of an option. The determination of the substance of the transaction shall be based upon all the facts and circumstances. The factors to be taken into account include the type of property involved, the extent to which the risk that the property will decline in value has been transferred, and the likelihood that the purchase price will, in fact, be paid. See also Sec. 1.83-4(c) for the treatment of forgiveness of indebtedness that has constituted an amount paid.”

 

 

 

 

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Posted on October 20, 2008 by Joseph M. Wallin

Senator Kerry Introduces the Compensation Fairness Act of 2008

Senator Kerry introduced this bill today.  It would repeal the performance-based compensation exception to the $1 million limit on deductibility of executive compensation, which would be a dramatic departure from current law.  The proposed legislation is quoted in full below.

Compensation Fairness Act of 2008 (Introduced in Senate)

S 3675 IS

110th CONGRESS
2d Session

 

To amend the Internal Revenue Code of 1986 to provide for the treatment of certain excessive employee remuneration, and for other purposes.

 

October 1 (legislative day, September 17), 2008

Mr. KERRY introduced the following bill; which was read twice and referred to the Committee on Finance

 

To amend the Internal Revenue Code of 1986 to provide for the treatment of certain excessive employee remuneration, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the `Compensation Fairness Act of 2008'.

SEC. 2. TREATMENT OF CERTAIN EXCESSIVE EMPLOYEE REMUNERATION.

    (a) Inflation Index of Limitation- Section 162(m) of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:
      `(5) INFLATION ADJUSTMENT-
        `(A) IN GENERAL- In the case of any taxable year beginning after 2008, the $1,000,000 dollar amount under paragraph (1) shall be increased by an amount equal to--
          `(i) such dollar amount, multiplied by
          `(ii) the cost of living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting `calendar year 2007' for `calendar year 1992' in subparagraph (B) thereof.
        `(B) ROUNDING- If any amount as adjusted under subparagraph (A) is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of $1,000.'.
    (b) Repeal of Exception for Remuneration Payable on Commission Basis- Section 162(m)(4) of the Internal Revenue Code of 1986 is amended by striking subparagraph (B) and by redesignating subparagraphs (C) through (G) as subparagraphs (B) through (F), respectively.
    (c) Repeal of Exception for Other Performance-Based Compensation- Section 162(m)(4) of the Internal Revenue Code of 1986, as amended by subsection (b), is amended by striking subparagraph (B) and by redesignating subparagraphs (C) through (F) as subparagraphs (B) through (E), respectively.
    (d) Timing for Determination of Certain Covered Employees- Section 162(m)(3)(A) of the Internal Revenue Code of 1986 is amended by striking `as of the close of the taxable year' and inserting `at any time during the taxable year'.
    (e) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

A BILL

IN THE SENATE OF THE UNITED STATES

S. 3675
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Posted on February 22, 2008 by Joseph M. Wallin

IRS Issues Ruling Limiting Section 162(m) Performance Pay Exception

The IRS has issued guidance in the form of a revenue ruling (Rev. Rul. 2008-13) clarifying that for purposes of the performance pay exception under Section 162(m), which generally limits the deductibility of certain executive compensation to $1 million per year, if an executive would receive a performance payment upon termination without "cause" or if they quit for "good reason", or upon retirement, such payments do not qualify for the exception for performance based pay.

Under § 162(m)(4)(C) and § 1.162-27(e), compensation is not considered applicable employee remuneration, and thus is not subject to the $1,000,000 limit in § 162(m)(1), if it satisfies the requirements for “qualified performance-based compensation.” Among these requirements is that the compensation is payable “solely” on account of the attainment of one or more performance goals. Under § 1.162-27(e)(2)(v), compensation is not performance-based if the facts and circumstances indicate that the employee would receive all or part of the compensation regardless of whether the performance goal is attained. Section 1.162-27(e)(2)(v) provides further that compensation does not fail to be qualified performance-based compensation merely because the plan allows the compensation to be payable upon death, disability, or change of ownership or control.

The ruling is effective prospectively only.

Pursuant to § 7805(b)(8), the holdings in this revenue ruling will not be applied to disallow a deduction for any compensation that otherwise satisfies the requirements for qualified performance-based compensation under § 162(m)(4)(C) and § 1.162-27(e) and that is paid under a plan, agreement, or contract that has payment terms similar to the terms described in this revenue ruling if either (i) the performance period for such compensation begins on or before January 1, 2009 or (ii) the compensation is paid pursuant to the terms of an employment contract as in effect (without respect to future renewals or extensions, including renewals or extensions that occur automatically absent further action of one or more of the parties to the contract) on February 21, 2008.

 

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Posted on October 9, 2007 by Joseph M. Wallin

SEC Issues Staff Observations in the Review of Executive Compensation Disclosure

The SEC issued its "Staff Observations in the Review of Executive Compensation Disclosure" today.  This guidance grows out of the SEC's review of the executive compensation disclosures of 350 public companies, and gives a summary of the types of comments the SEC gave on various companies' compensation disclosures, and why it gave those comments.  John W. White, the Director of the SEC's Division of Corporation Finance, also gave a speech today in which he discussed CD&A disclosures.  You can view a text of the speech here.

Highlights of the staff observations on CD&A include, among other things:

  • Focus on the how and why of decisions that were made;
  • Emphasize material items, and de-emphasize immaterial items;
  • Spend less time explaining mechanical procedures and lengthy statements on philosophy and more on how key decisions were made; flip the order--explain how the analysis resulted in the decisions made;
  • Presentation matters--consider the order in which items are presented and how they are presented; and
  • Consider adding tables that aren't required if they elucidate material issues.

 The SEC guidance is helpful and worth reading.

 

 
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Posted on August 10, 2007 by Joseph M. Wallin

SEC Issues Compliance and Disclosure Interpretations

The SEC has issued compliance and disclosure interpretations, updated as of August 8, under Items 402 (Executive Compensation) and 404 (Transactions with Related Persons).  You can view the 402 guidance here.  You can view the 404 guidance here.
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