IRS Provides Procedures for Deferred Compensation.

Sec. 404(a)(11) was added to the Code by the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98), effective for tax years ending after July 22, 1998. Sec. 404(a)(11) provides that, for purposes of determining under Sec. 404 whether employee compensation is deferred compensation and when deferred compensation is paid, no amount is treated as received by the employee or paid until it is actually received by the employee. Sec. 404(a)(11) overturns Schmidt Baking Co., 107 TC 271 (1996), in which the court held that a Sec. 83(a) income inclusion event on securitization of vacation and severance pay benefits with a letter of credit constituted receipt of those benefits by employees in determining whether an employer's deduction for the benefits was subject to Sec. 404.

IRSRRA '98 provides that a taxpayer changing its method of accounting to comply with Sec. 404(a)(11) for its first tax year ending after July 22,1998 will be treated as making a change initiated by the taxpayer with IRS consent. The change will be made with a Sec. 481 adjustment taken into account ratably over a three-tax-year period beginning with the first tax year ending after July 22, 1998.

A taxpayer changing its method of accounting for its first tax year ending after July 22, 1998 to comply with Sec. 404(a)(11) must follow the automatic change in accounting method provisions of Rev. Proc. 98-60, with the following modifications:

1. The scope limitation in Rev. Proc. 98-60, Section 4.02, does not apply. However, if the taxpayer is under examination, before an Appeals office or before a Federal court for any income tax issue, the taxpayer must provide a copy of Form 3115, Application for Change in Accounting Method, to the examining agent(s), Appeals officer or government counsel (as appropriate) when it files the copy of the Form 3115 with the IRS National Office. The Form 3115 must contain the name(s) and telephone number(s) of the examining agent(s), Appeals officer or government counsel.

2. The Sec. 481(a) adjustment period generally is three tax years (as opposed to the four tax years specified in Rev. Proc. 98-60, Section 5.04(1)).

3. A taxpayer that, on or before May 28, 1999, files its original Federal income tax return for its first tax year ending after July 22,1998, may comply with the filing requirement in Section 6.02(2)(a) of Rev. Proc. 98-60, or with the following filing requirement. The taxpayer must complete and file a Form 3115 in duplicate. The original must be attached to the taxpayer's amended Federal income tax return for the taxpayer's first tax year ending after July 22, 1998. This amended return must be filed no later than July 27, 1999. A copy of the Form 3115 must be filed with the National Office (at the address specified in Section 6.02(6) of Rev. Proc. 98-60), no later than when the taxpayer's amended return is filed.

4. Section 7 of Rev. Proc. 98-60 does not apply; a taxpayer does not receive audit protection in connection with this change.

NOTICE 99-16, IRB 1999-13