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Current developments (Part I: this two-part article provides an overview of current developments in employee benefits, including executive compensation, welfare benefits and retirement plan requirements. Part I focuses primarily on executive compensation.).


* The AJCA added a new layer of compliance requirements, to avoid present taxation of NQDCs and restrict funding structures for such arrangements; it also added reporting requirements.

* Long-expected changes came in the form of final statutory stock option regulations and SFAS 123R, requiring corporations to begin expensing equity-based compensation.

* IRS guidance dealt with the proper sourcing of compensation performed partly within and outside the U.S., employment tax treatment of payments for employment termination, taxation of transferred partnership interests and salary reduction plans.

In the past year (August 2004-July 2005), dramatic changes have occurred in the benefits practitioner's landscape. This two-part article covers the most significant of these. Part I, below, details fundamental changes to executive compensation under the American Jobs Creation Act of 2004 (AJCA), including the introduction of Sec. 409A and other changes. Part II, in the December 2005 issue, will focus on updates and changes in the taxation of fringe benefits and qualified retirement plans.


Sec. 409A

On Oct. 22, 2004, President Bush signed the AJCA. AJCA Section 885(a) added new Sec. 409A, which significantly alters the tax regime applicable to nonqualified deferred compensation (NQDC), effective Jan. 1, 2005. According to Sec. 409A, amounts deferred under an NQDC plan are included in income when deferred, unless the plan complies with requirements on timing deferral elections, distributions and funding. If a plan fails to comply with Sec. 409A as to a participant, then all amounts deferred by that participant are included in income in the year deferred, or, if later, when no longer subject to a substantial risk of forfeiture. In addition, under Sec. 409A(b) (4), there is an additional 20% tax on the includible amount, plus interest at the underpayment rate plus 1% from the time the amount was first deferred (or when no longer subject to a substantial risk of forfeiture, if later) to the time the amount is included in income.

Sec. 409A complements the existing body of law governing NQDC. Prior law on Sec. 83 transfers of property in connection with the performance of services, and Sec. 451 income timing based on actual or constructive receipt, continues to apply. In addition, Sec. 409A has not changed the timing and amount of deductions associated with NQDC (governed by Secs. 83, 162 and 404(a)(5)).

Sec. 409A is effective for compensation deferrals after 2004. Deferrals earned and vested before 2005 remain subject to prior law, except that amounts deferred under a plan "materially modified" after Oct. 3, 2004 are treated as post-effective-date deferrals subject to Sec. 409A.

Notice 2005-1: To help interpret and implement the necessary changes to plans, the IRS released Notice 2005-1 in late December 2004. (1) The notice provided information on the definition of an NQDC plan for Sec. 409A purposes. Additionally, it offered guidance to help determine which amounts were grandfathered and not subject to the new law, provided transition relief for 2005 and addressed other specific issues, such as the definition of a change in control.

On the definition of deferred compensation, Notice 2005-1 provided an important carve-out for so-called "short-term deferrals." If a plan requires that amounts be paid within 2 1/2 months after the end of the tax year in which they become vested, it does not "defer compensation" for Sec. 409A purposes. The 2 1/2-month period is measured from the end of the employee's or employer's tax year, whichever is later. This exception does not apply if the service provider has a choice on timing payment.

Notice 2005-1 also excludes non-statutory stock options on employer stock from the definition of deferred compensation, if (1) the exercise price is never less than the fair market value (FMV) of the underlying stock at the time of grant, (2) the tax treatment of the option is otherwise subject to Sec. 83 and (3) the option does not provide for income deferral (other than the ability to exercise the option at will). All statutory stock options (e.g., incentive stock options (ISOs) or options under an employee stock purchase plan (ESPP)) are excluded from the definition of NQD C. Additionally, restricted property (i.e., property taxable on substantial vesting) is not considered deferred compensation.

Similarly, Notice 2005-1 does not consider a stock appreciation right (SAP,.) plan to be a deferred compensation plan, if it (1) is granted on stock of the service provider's employer and such stock is traded on an established securities market, (2) provides only for the transfer of that stock on exercise, (3) pays an amount based solely on the appreciation of the value of the employer stock over the FMV as of the grant date (thus, the SAP, contains no built-in gain) and (4) contains no provisions further deferring the amounts received on exercise of the SAR. However, the IRS provided a greater exemption from Sec. 409A for pre-existing SAR programs.

Specifically, the exercise of a SAR granted under a plan in existence on Oct. 3, 2004 will not be considered an NQDC arrangement as long as the SAR. provides only for appreciation above the FMV of the stock at grant, and the plan does not provide for income deferral other than through the ability to exercise the SAR at will.

Funding: Sec. 409A not only changes the requirements for unfunded NQDC plans, but also disallows funding techniques for securing the payment of deferred compensation to executives. Under Secs. 83 and 402(b), NQDC is includible in gross income to the extent the employer secures payment by placing assets beyond the reach of its creditors. However, employers may place assets in a "rabbi trust" (subject to the claims of the employer-grantor's general creditors in the event of the employer's bankruptcy), without resulting in income recognition to the employee until distribution.

Some employers secured the payment of deferred compensation by providing that assets would be placed beyond the reach of creditors if its financial condition deteriorated. This technique was designed to prevent taxation of the deferred amounts until, based on certain financial criteria, payment was unlikely to be made. Under Sec. 409A(b)(2), a plan that includes such a provision is treated as though it has transferred the amounts to the employee, usually resulting in immediate tax liability. (2)

Another technique that some employers used to secure the payment of deferred compensation was locating a trust outside of the U.S., preferably in a country in which creditor access would be complicated by local laws. Sec. 409A(b)(3) provides that a trust located outside the U.S., regardless of whether it is subject to the claims of creditors, is treated as though the amounts were transferred to the service provider. Importantly, this rule does not apply if substantially all of the services that gave rise to the deferred compensation were performed outside the U.S., in the same jurisdiction in which the assets are located.

The application of the funding restrictions are complicated by a proposed technical correction currently before both the House Ways and Means Committee and the Senate Finance Committee. (3) Under section 2(ii) of each bill, the correction would provide that Sec. 409A applies to trusts after 2004. This contrasts with the current statute, which applies to deferrals after 2004 and not to any contributions before that date or earnings on such contributions. The technical correction would allow a 90-day transition period to enable taxpayers to conform current operation to the rules.

Reporting Obligations

The AJCA added a reporting obligation for deferred compensation. Effective for amounts deferred after 2004, service recipients are required to include information on deferrals on Forms W-2 (for employees) and 1099-MISC (for independent contractors), if such forms are otherwise required to be filed. This requirement also applies to income attributable to amounts deferred after 2004. Amounts deferred before 2005 and earnings on those amounts need not be reported. (4)

Entertainment Use of Business Aircraft

Taxpayers that furnish officers, directors, 10% owners or other specified individuals with the use of aircraft or other assets in connection with personal entertainment, amusement or recreation activities must comply with deduction limits that were made part of Sec. 274 by AJCA Section 907, effective for expenses incurred after Oct. 22, 2004. Sec. 274(e), as amended, provides that the deduction of unreimbursed company expenses related to the personal entertainment of "specified individuals" is disallowed to the extent that they exceed the amount treated as compensation to such specified individuals. (5) On May 27, 2005, the IRS issued Notice 2005-45, (6) which explains how to apply this limit to the costs that a business may deduct when an executive uses the company's aircraft for entertainment travel.

Notice 2005-45 clarified that the IRS will apply the expenses disallowed by the AJCA to all of the expenses of maintaining and operating the aircraft. All fixed and operating costs must be taken into account in determining the expenses disallowed. As provided by the notice, the expenses include, but are not limited to, depreciation, fuel costs, salaries, meal and lodging expenses of flight personnel, take-off and landing fees, maintenance, on-board refreshments, hangar fees and amounts deductible under Sec. 179. In the case of chartered and leased aircraft, all costs associated with the charter or lease payments will be subject to the disallowance rules.

Notice 2005-45 also provides that an employer-provided aircraft includes an aircraft owned, leased or chartered by the employer. Additionally, the disallowance is reduced by both the amount the specified individual includes in income and any amount the specified individual reimburses the employer for the flight.

Notice 2005-45 applies to expenses incurred after June 30, 2005. The IRS will not challenge a reasonable method of determining disallowed expenses incurred between Oct. 22, 2004 and July 1, 2005. Taxpayers whose tax year ended after Oct. 22, 2004 and before May 28, 2005 (e.g., calendar-year taxpayers) may apply the disallowance for that year against expenses incurred in the first tax year ending after May 27, 2005.

Withholding on Statutory Stock Options

AJCA Section 261 amended Secs. 3121(a) and 3306(b) to exclude from FICA and FUTA wages any remuneration with respect to statutory stock options (e.g., ISOs and options under an ESPP); it also revised Secs. 421(b) and 423(c) to not require income tax withholding on a disqualifying disposition. In response, Treasury withdrew the November 2001 proposed amendments to the regulations, which would have required a contrary result. (7)

Equity-Based Compensation


On Aug. 2, 2004, Treasury and the IRS released final regulations providing guidance on ISOs. (8) Except for a few clarifications and modifications, the final regulations are essentially the same as the proposed regulations issued June 9, 2003, (9) which reorganized and updated the previous proposed, temporary and final regulations, as well as provided other guidance. The final regulations were effective on Aug. 3, 2004, but transition rules permitted reliance on the 2003 proposed regulations and the old guidance.

Specifically, for ISOs and ESPPs granted before June 10, 2003, taxpayers may rely on the 1984 proposed regulations, the 2003 proposed regulations or the final regulations, until Jan. 1, 2006 or, if earlier, the first regularly scheduled shareholders' meeting occurring six months after Aug. 3, 2004. For options granted after June 9, 2003 and before the earlier of Jan. 1, 2006, or the first regularly scheduled shareholders' meeting occurring six months after Aug. 3, 2004, taxpayers can rely on the 2003 proposed regulations or the final regulations. If a taxpayer relies on the 2003 proposed regulations during this period, it has to follow all the provisions of those regulations; all options granted during the reliance period must be treated consistently.

Financial Accounting Treatment of Share-Based Payments

Benefits practitioners must work with clients to help them understand the accounting changes made for share-based payments. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which requires all companies to recognize compensation expense equal to the fair value of share-based payments (e.g., stock options and restricted stock) granted to employees.

Public companies' (excluding small business issuers') financial statements must reflect SFAS 123(R) as of the start of the first fiscal year beginning after June 15, 2005. Thus, the effective date for calendar-year public companies is Jan. 1, 2006, although early adoption is permitted. (10) The financial statements of a small business issuer (i.e., a company with less than $25 million revenue and that meets certain other requirements) or nonpublic company must comply with SFAS 123(R) as of the start of the first fiscal year beginning after Dec. 14, 2005.

The fair value of share-based payments is computed at the grant date and is not remeasured, except for liability awards. In the absence of an observable market price, companies must use a valuation technique based on established principles of a financial economic theory that encompasses all the pertinent factors of an award (e.g., volatility, expected terms, market conditions, etc.)

Compensation expense will be recognized over the requisite service period (which is almost always the same as the vesting period). An award that contains a cliff vesting schedule results in compensation expense recognized ratably over the service period. An award with a graded vesting schedule can be expensed either on a ratable or an accelerated basis.

SFAS 123(R) requires companies to estimate forfeitures on the grant date. In subsequent periods, companies will adjust their earlier estimates when information becomes available that suggests that actual forfeitures will differ. Companies that revise their forfeiture estimates would record the effects of the revisions as a cumulative effect of a change in accounting estimate in the period in which the revisions occur.

On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107, "Share Based Payment" (SAB 107). SAB 107 does not change any of SFAS 123(R)'s requirements, but, rather, discussed the SEC staff's expectations in selecting assumptions for valuing options and other payments and the interaction of SFAS 123(R) with existing SEC guidance. SAB 107 included (but was not limited to) staff expectations about share-based payment transactions with nonemployees; valuation methods (and underlying assumptions); capitalization of the compensation cost related to share-based payment arrangements; accounting for income tax effects of share-based payment arrangements on adoption of SFAS 123(R); modification of employee share options before adoption of SFAS 123(R); and necessary disclosures in management's discussion and analysis in financial statements after adoption of SFAS 123(R).

Golden Parachute Guidance

In August 2004, the IRS published Rev. Rul. 2004-87, (11) providing guidance on the application of Sec. 280G to companies in bankruptcy, through four examples. The ruling explains how to determine if a change in control or ownership has occurred and how to satisfy the shareholder approval requirements.

Rev. Rul. 2005-39 (12) explained that to determine stock ownership for purposes of deciding whether a shareholder is a disqualified individual subject to the Sec. 280G golden parachute rules, shares of unvested restricted stock for which an individual made an election under Sec. 83(b) are considered outstanding. In addition, such stock is deemed outstanding for purposes of analyzing whether a change in control (i.e., a change in stock ownership, in effective control or in ownership of a substantial portion of a company's assets) has occurred.

In addition to such guidance, a recent court case dealt with counting stock ownership for purposes of determining whether a change in control occurred. In Yocum, (13) the Court of Federal Claims sided with the Service in ruling that a change-in-ownership calculation could not exclude ownership when shareholders owned shares of both corporations. The court rejected the "overlapping shareholder" approach that the taxpayer applied to argue that no change in control had occurred in a joint venture setting. The tax year in question, 1997, was prior to the issuance of new proposed regulations (14) (2002) and final regulations (15) (2003), which prohibited the use of overlapping shareholders to argue that no change in control had occurred. The court said that the statute and legislative history, as well as the 1989 proposed regulations, could not be construed to permit the use of this approach. (16)

Compensation Sourcing

In the last year, the IRS issued both proposed and final regulations that address the proper sourcing of compensation for personal services performed partly within and partly without the U.S. (split compensation). The final regulations (17) adopted, with amendments, the proposed regulations released on Aug. 6, 2004, (18) replace previously proposed regulations published on Jan. 21,2000 (old proposed regulations) (19) and are effective for tax years beginning after July 14, 2005.

Both the new proposed and the final regulations use a facts-and-circumstances basis for sourcing split compensation performed by (1) persons other than individuals and (2) individuals who are not employees. Individual employees use the time basis to source all split compensation (other than certain listed fringe benefits). The employee counts the total number of days worked during the tax year and ratably allocates the year's compensation to each of these days. Amounts allocated to days worked in the U.S. are considered U.S. source. Amounts allocated to days worked outside the U.S. are foreign source. The final regulations give employees the option of using periods other than full tax years if it can be shown to the IRS's satisfaction that this approach is more appropriate.

An individual sources split compensation paid in the form of certain listed fringe benefits using a geographic location (defined separately for each fringe benefit to which this basis applies). The listed fringe benefits are housing, education, local transportation, tax reimbursement, hazard pay and moving expense reimbursements. The fringe benefit must be reasonable and substantiated. All other fringe benefits are sourced using the time basis. The most notable nonlisted fringe benefits are home leave, location and mobility premiums and cost-of-living allowances.

The final regulations allow an employee to use a facts-and-circumstances basis if it is shown to be more appropriate. This may occur, for example, when an employee's compensation is tied to the performance of specific actions, rather than earned ratably over a specific period.

The final regulations prescribe source rules for "multi-year compensation" (such as stock option income). Multi-year compensation is compensation included in income for one tax year, but attributable to a period that includes two or more tax years. It is sourced on the time basis and applied to the entire period to which the compensation is attributable (determined based on all the facts and circumstances).

Importantly, Regs. Sec. 1.861-4 (b)(2)(ii)(G), Example 6, applies the time basis for stock option income to the period between the grant and vesting dates, rather than between the grant and exercise dates. The example specifically disregards the days worked between the vesting and exercise dates. This allocation method conforms to the newly proposed basis for allocation in the Organisation for Economic Co-operation and Development (OECD) model treaty, (20) but will likely be a significant departure from the method used by most taxpayers.

The compensation-sourcing provisions of a number of U.S. income tax treaties have mitigated sourcing issues for those treaty countries, and the regulations will not affect those treaty rules. However, expatriates in other countries could be significantly affected; the final regulations will likely increase the recordkeeping burden for services performed in all countries. The final regulations could result in a material and continuous cost to a company's program. Companies should ensure that stock option tracking systems are in place and that they can monitor the employment history of mobile employees.

Employment Contract Payments

Rev. Ruls. 2004-109 (21) and 2004-110 (22) clarified that payments by employers to employees made in connection with employment contracts are "wages" for purposes of FICA, FUTA and Federal income tax withholding. The specific situations addressed in the rulings include signing bonuses and cancellation payments. Both rulings modify longstanding IRS positions on these issues.

Rev. Rul. 2004-109 involved bonuses paid by a baseball club to an individual for signing a contract and reporting to spring training, and by an employer to a group of collectively bargained employees for ratifying a new collective bargaining agreement. In both situations, the bonuses were not contingent on performing future services. The ruling concluded the bonuses were subject to employment taxes and income tax withholding, because they "are part of the compensation the employer pays as remuneration for employment." The ruling also revoked two prior rulings (23) with contrary holdings.

In Rev. Rul. 2004-110, an employer and employee agreed to cancel an employment agreement before the end of the contract period. The employer paid the employee, who agreed to relinquish his contract rights. The ruling concluded that the payment was taxable to the employee as ordinary income, and not as a payment for property (capital gain). It also concluded the payment was subject to employment taxes and income tax withholding. The ruling modifies and supersedes two previous rulings (24) holding that similar payments were not subject to employment taxes and income tax withholding.

Because these rulings revoke and/or modify prior rulings, they do not apply to certain payments under agreements entered into before Jan. 12, 2005, such as signing bonuses, sign-on fees or other amounts paid in connection with an employee's initial employment, or payments made before that date for cancellation of an employment contract.

Transfers of Partnership Interests for Services

In May 2005, Treasury and the IRS released proposed regulations on the taxation of transfers of equity partnership interests for the performance of services. (25) The Service also issued Notice 2005-43, (26) containing a proposed revenue procedure with guidelines for valuing transferred partnership equity interests.

The guidance covers both capital and profits interests in a partnership. (27) Transfers of capital interests have generally been treated as property transfers subject to Sec. 83, but the treatment of profits interests was not as clear. The IRS issued Rev. Procs. 93-27 (28) and 2001-43, (29) which allow profits interests to be treated as nontaxable at transfer to the recipient and the partnership if such interests met certain requirements.

The proposed regulations provide that all partnership interests transferred for the performance of services are taxable under Sec. 83. The interest's FMV is includible in the service provider's income in the year in which the interest becomes substantially vested. The partnership's deduction for the partnership interest must comply with the timing rules of Sec. 83(h) and Regs. Sec. 1.83-6. The proposed regulations also provide that the partnership recognizes no gain or loss on the transfer of the partnership interest in connection with the performance of services for that partnership. Service providers may elect under Sec. 83(b) to include the value of the partnership interest in income at the time of transfer, rather than later on vesting.

Notice 2005-43 provides a proposed revenue procedure under which the partnership interest's value is its liquidation value, if the partnership complies with the safe-harbor's administrative requirements. The liquidation value is the amount that would be paid to the holder if the partnership sold its assets for cash and liquidated. For profits interests, the liquidation value is zero; thus, if the safe harbor applies, there would be no income on the transfer of the profits interest, similar to the existing treatment under Rev. Procs. 93-27 and 2001-43. However, the partnership and partners must meet strict safe-harbor requirements to apply the liquidation value, including a binding agreement among all partners to use liquidation value for all valuation purposes. Neither the proposed regulations, nor the notice, may be relied on until the issuance of final regulations.

Significant Miscellaneous Items

"Double Dip" Reimbursement Arrangements

Rev. Rul. 2004-98 (30) held that employers that allow employees to pay for qualified parking expenses on a pre-tax basis cannot "reimburse" employees for the same expenses on a tax-favored basis. The ruling takes aim at a widely marketed scheme to abuse the Sec. 132(f) exclusion of qualified parking expenses. Essentially, the idea resembles the cafeteria plan "double dip," condemned in Rev. Rul. 2002-3. (31) The employer institutes a charge for employee parking on its premises and allows employees to elect a salary reduction (or reduces their pay unilaterally). It then pays a "reimbursement" equal to the reduction. The payment is supposedly excluded from gross income under Sec. 132 (f). The problem with this reasoning, as Rev. Rul. 2004-98 points out, is that the employee has not actually paid for parking. In a proper pre-tax parking or mass transit program, the employee reduces pay, incurs an expense and then receives back the out-of-pocket cost in the form of a tax-free reimbursement. Here, the crucial middle step is omitted. In the absence of a real expense, there is nothing to reimburse.

To avoid the need for another ruling to address a variation on the same theme and to put potential promoters (and clients) on notice, Rev. Rul. 2004-98 states that its conclusion applies to any arrangement:

Where (1) an employee's salary (and gross income) is reduced in return for a non-taxable benefit, and (2) the employer "reimburses" the employee for some or all of the cost of the non-taxable benefit and excludes the reimbursement from the employee's salary (and gross income) even though that cost was paid by the employer and not the employee.

Use-It-Or-Lose-It Rule

Notice 2005-42 (32) relaxed the unpopular "use-it-or-lose-it" rule for healthcare and dependent-care flexible spending arrangements (FSAs). The notice was a product of Congressional pressure to eliminate this rule, which is based in regulatory interpretations of Sec. 125(d)(2)(A) (precluding cafeteria plans from providing for deferred compensation). The notice permits employers to amend their Sec. 125 cafeteria plans to provide for a 2 1/2-month grace period immediately following the end of each plan year, during which employees can use healthcare (or dependent care) FSA balances remaining from the previous year to pay for healthcare (or dependent care) expenses incurred during the grace period. As stated in the notice, "[t]he effect of the grace period is that the participant may have as long as 14 months and 15 days (the 12 months in the current cafeteria plan year plus the grace period) to use the benefits or contributions for a plan year before those amounts are 'forfeited' under the 'use-it-or-lose-it' rule."

Employers can amend their cafeteria plans to take advantage of the grace period option for the current and subsequent plan years. To implement a grace period for the current plan year, the employer must amend the cafeteria plan document before the end of the current plan year (Dec. 31, 2005 for calendar-year plans).

The use-it-or-lose-it rule will continue to apply to any unused benefits remaining at the end of the grace period. However, the notice specifies "[a]s under current practice, employers may continue to provide a 'run-out' period after the end of the grace period, during which expenses for qualified benefits incurred during the cafeteria plan year and grace period may be paid or reimbursed."


In the December 2005 issue, Part II will focus on retirement plan developments and planning.

For more information about this article, contact Ms. Walker at or Mr. Haberman at

Authors' note: The authors thank Robert Davis, Elizabeth Drigotas, Diane McGowan, LaDana Edwards and Tom Veal for their valuable contributions to this article.

Deborah Walker, CPA


Deloitte Tax LLP

Washington, DC

Michael Haberman, J.D., LL.M.

Tax Senior

Deloitte Tax LLP

Washington, DC

(1) Notice 2005-1, IRB 2005-2, 274. Proposed regulations were issued as we went to press; see REG 158080-04 (9/29/05).

(2) The transfer of property will not result in immediate taxation if the amount remains substantially nonvested for Sec. 83 purposes. Thus, if the transferred assets remain subject to a substantial risk of forfeiture and are nontransferable (as defined in Kegs. Sec. 1.83-3), the amounts set aside will not be taxed until the individual vests in such amounts.

(3) H 3376, 109th Cong., 1st Sess. (2005); and S 1447, 109th Cong., 1st Sess. (2005).

(4) For this purpose, amounts are "deferred" when there is a legally binding right to the compensation, without regard to whether (1) the amounts are earned and vested and (2) a plan in existence on Oct. 3, 2004 has been materially modified; see Notice 2005-1, note 1 supra, Q&A-28. Thus, some amounts not considered grandfathered for Sec. 409A purposes are nevertheless not required to be reported, because they are deemed pre-2005 deferrals for reporting purposes. There are two exceptions to the reporting obligation; see Q&A-26. First, although these requirements apply to both account-balance plans and non-account-balance plans, amounts deferred under the latter are not required to be reported until they are readily ascertainable (within the meaning of Sec. 3121(v)). Second, there is a de minimis exception for deferred compensation that applies if the aggregate amount of deferrals under all deferred compensation plans for an individual employee does not exceed $600; see Q&A-27. Sec. 6041 provides a general de minimis exception; payments of less than $600 need not be reported on Form 1099.

(5) See Karliusky and Orbach, "The AJCA's Domestic Business Provisions," 36 The Tax Adviser 148 (March 2005).

(6) Notice 2005-45, IRB 2005-24, 1228; for a discussion, see Ebner, Tax Clinic, "Maximizing the Deduction for Personal Use of an Aircraft," 36 The Tax Adviser 522 (September 2005).

(7) See REG-142686-01 (11/14/01).

(8) TD 9144 (8/3/04).

(9) REG-122917-02 (6/9/03).

(10) Public companies with June, July or August fiscal year-ends must have adopted SFAS 123(R) with interim financial statements for the quarter beginning July 1, 2005. Similarly, public companies with September, October or November fiscal year-ends must have adopted SFAS 123(R) with interim financial statements for the quarter beginning Oct. 1, 2005.

(11) Rev. Rul. 2004-87, IRB 2004-32, 154.

(12) Rev. Rul. 2005-39, IRB 2005-27, 1.

(13) Ronald H. Yocum, Fed. Cl., No. 03-84T, 7/1/05.

(14) REG-209114-90 (2/20/02).

(15) TD 9083 (10/14/03).

(16) The IRS only recently released guidance rejecting the overlapping shareholder approach to determining changes in ownership under the 1989 proposed regulations; see IRS Letter Ruling (TAM) 200415003 (4/9/04).

(17) TD 9212 (7/13/05).

(18) REG-208254-90 and REG-136481-04 (both dated 8/6/04).

(19) REG-208254-90 (1/21/00).

(20) See 2005 OECD Model Tax Convention on Income and on Capital, Commentaries, Art. 15, par. 12-12.15.

(21) Rev. Rul. 2004-109, IRB 2004-50, 958.

(22) Rev. Rul. 2004-110, IRB 2004-50, 960.

(23) Rev. Ruls. 58-145, 1958-1 CB 360 and 74-108, 1974-1 CB 248.

(24) Rev. Ruls. 55-520, 1955-2 CB 393 and 58-301, 1958-1 CB 23.

(25) REG-105346-03 (5/24/05); for a discussion, see Cantrell, Personal Financial Planning, "Partnership Interest for Services Regs. Offer Estate Planners a 'Bona Fide' Solution," 36 The Tax Adviser 636 (October 2005).

(26) Notice 2005-43, IRB 2005-24, 1221.

(27) A capital interest in a partnership gives the holder rights to a share of the proceeds from the partnership assets in a hypothetical wind-up of the partnership. A profits interest has been defined by the IRS as an interest that is not a capital interest in a partnership. Usually, a profits interest gives the holder a right to some portion of income of the partnership earned after the interest has been transferred.

(28) Rev. Proc. 93-27, 1993-2 CB 343.

(29) Rev. Proc. 2001-43, 2001-2 CB 191.

(30) Rev. Rul. 2004-98, IRB 2004-42, 664.

(31) Rev. Rul. 2002-3, 2002-1 CB 316.

(32) Notice 2005-42, IRB 2005-23, 1204.
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Author:Haberman, Michael A.
Publication:The Tax Adviser
Date:Nov 1, 2005
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