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Weekly Updates** Consider allocation between U.S. and non-U.S. services.
* U.S. Companies employing NRAs in the United States
** Evaluate in same way as regular USCR employees.
** 183-day treaty exemption is unavailable, because the employer is U.S. treaty resident.
* NRAs who Become USCRs
** Identify any ongoing deferred compensation arrangements for prior U.S. or foreign service.
** Determine if there are likely to be any post2004 accruals or vesting.
** Consider application of section 409A; contact former employer to determine if defects can be remedied.
How to remedy or plan around section 409A when it might otherwise be applicable is a whole other topic, not addressed in this space.
This article highlights only some of the international permutations under section 409A. Since international deferred compensation issues are not a particularly well articulated area of U.S. taxation and treaties to begin with, the potential application of section 409A in this context provides ample fodder for future debates and abundant opportunities for IRS guidance.
(1) All section references are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.
(2) E.g., Rev. Rul. 60-31, 1960-1 C.B. 174, modified by Rev. Rul. 70-435, 1970-2 C.B. 100; Rev. Proc. 71-19, 1971-1 C.B. 698.
(3) Treas. Reg. [section] 1.451-2(a).
(4) Viet v. Commissioner (I), 8 T.C. 809 (1947), acq. 1947-2 C.B. 4; Viet v. Commissioner (II), 8 T.C.M. 919 (1949); Commissioner v. Oates, 207 F.2d 711 (7th Cir. 1953); Commissioner v. Olmstead Inc. Life Agency, 304 F. 2d 16 (8th Cir. 1962); Goldsmith v. United States, 586 F.2d 810 (Ct. Cl. 1978); Martin v. Commissioner, 96 T.C. 814 (1991).
(5) Metcalfe v. Commissioner, 43 T.C.M. 1393 (1982). There is a natural sensitivity to situations involving a controlling shareholder, and the IRS would not issue private rulings in that case. Rev. Proc. 2005-3, 2005-1 I.R.B. 118, [section] 3.01(36). But see Cosale v. Commissioner, 247 F.2d 440 (2nd Cir. 1957), acq. Rev. Rul. 59-184, 1959-1 C.B. 65.
(6) Revenue Act of 1978, [section] 132.
(7) An arrangement that is "funded" for ERISA purposes becomes subject to extensive requirements.
(8) The name comes from the first private letter ruling on the subject (PLR 8113107), issued in 1980 with respect to deferred compensation provided by a congregation for its rabbi. The IRS eventually published a model rabbi trust document in Rev. Proc. 92-64, 1992-2 C.B. 422, to stem the flood of ruling requests for similar treatment.
(9) Joint Committee on Taxation, Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations (JCS-3-03) (February 2003).
(10) Although section 132 of the 1978 Act was not repealed, the statutory provisions and broad grant of regulatory authority are understood to supersede the strictures of section 132 prospectively. Tax Management Educational Institute Roundtable, 23 BNA Tax Management Weekly Report No. 45, at 1756 (November 8, 2004) (TMEI Roundtable).
(11) H.R. Rep. No. 108-755, 108th Cong., 2d Sess. 521 (2004).
(12) Presumably this exception refers to the services of the individual involved, not the collective services of any larger group that might be covered by the plan, but clarification would be helpful. See IRS Notice 2005-1, 2005-2 I.R.B. 274, Q&A-9.
(13) H.R. Rep. No. 108-755, at 525.
(14) [section] 2(a)(10) of November 19, 2004, discussion draft bill; Joint Committee on Taxation Staff, Description of the Tax Technical Corrections Act of 2004, at 4 (November 19, 2004). See TMEI Roundtable, at 1784.
(15) H.R. Rep. No. 108-755, at 518.
(16) Notice 2005-1, Q&A-4.
(17) Notice 2005-1, Q&As 3 and 4.
(18) Barker, O'Brien & Sollee, Executive Employment Agreements Must Comply With Section 409A, BNA Daily Tax Report No. 26, J-11 (February 9, 2005). Split-dollar insurance plans may also be covered. See Bianchi, Anatomy of a Paradigm Shift: An Overview of the Deferred Compensation Provisions of the American Jobs Creation Act of 2004, 33 Tax Management Compensation Planning Journal 31, 44 (2/4/05).
(19) Notice 2005-1, Q&As 3, 7 and 8.
(20) Notice 2005-1, Q&As 4 and 7.
(21) Notice 2005-1, Q&A-4(e).
(22) Notice 2005-1, Q&A-9.
(23) Possible revisiting of this rule was recently suggested by a Treasury official. BNA Daily Tax Report No. 23, G-6 (February 4, 2005).
(24) The only pertinent exception is section 911 with respect to certain foreign earned income and employer-provided housing costs, with relatively low exclusion limits. "Foreign earned income" may not include constructively taxed deferred compensation vesting amounts under section 409A. Cf. I.R.C. [section] 911(b)(1)(B) and Treas. Reg. [section] 1.911-3(e)(4)(i).
(25) I.R.C. [section] 401(a). An intriguing question is whether governmentally sponsored social security-type schemes could constitute deferred compensation for purposes of section 409A. This question was answered in the negative in outstanding proposed regulations regarding deductions for contributions to certain qualified-type foreign plans under section 404A(Prop. Reg. [section] 1.404A-l(e)). This conclusion seems appropriate for the section 409A context as well.
(26) I.R.C. [section] 402(d).
(27) Section 83 deals with transfers of "property" in connection with the performance of services, where "property" is defined as real and personal property other than either money or an unfunded and unsecured promise to pay money or property in the future. "Property" also includes a beneficial interest in assets, including money, which are transferred or set aside from the claims of creditors of the transferor, for example, in a trust or escrow account. Employee trusts and annuity plans are taxed under section 83 in coordination with sections 402(b) and 403(c). Treas. Reg. [subsection] 1.833(e) and -8.
(28) "Highly compensated" employees are defined in section 414(q): loosely speaking, a 5-percent owner or a person having compensation in excess of $95,000 (and also being in the top 20 percent of employees ranked by compensation, if elected). The applicable coverage rules are sections 410(b)(10) and 401(a)(26).
(29) I.R.C. [section] 414(q)(8).
(30) Q&A-4(e) says "there is no deferral of compensation merely because the value of the property ... is not includible in income (under [section] 83) in the year of receipt by reason of the property being nontransferable and subject to a substantial risk of forfeiture, or is includible in income (under [section] 83) solely due to a valid election under [section] 83(b).... For purposes of this paragraph, a transfer of property includes the transfer of a beneficial interest in a trust or annuity plan, or a transfer to or from a trust or under an annuity plan, to the extent such a transfer is subject to [section] 83, [section] 402(b) or [section] 403(c)." Notice 2005-1, part I.B. in referring to a different exception for nonstatutory stock options, says "[t]his exception is consistent with the further exception covering transfers of restricted property, as the taxation of transfers of nonstatutory stock options and transfers of restricted property generally both are governed by [section] 83." (Emphasis added.)
(31) I.R.C. [section] 409A(a)(1)(A)(i); Notice 2005-1, Q&A-1.
(32) Section 83 only covers actual transfers of restricted property. Q&A-4(e) of Notice 2005-1 makes clear that plans under which a service provider obtains a legally binding right to receive property in a future year may be a nonqualified deferred compensation plan covered by section 409A.
(33 Compare TMEI Roundtable, at 1777.
(34) The priority between these funding rules and the distribution/ acceleration/election constructive receipt rules requires clarification, though presumably the amounts will not be taxed twice.
(35) See note 14 supra.
(36) The same issue could arise for section 83 restricted property, to the extent the IRS decides, as permitted by statute, to bring "other arrangements" within the funding rules.
(37) Treasury Department Technical Explanation, Art. 18, [paragraph] 3.
(38) See Treasury Department Technical Explanation to the 1996 United States Model Income Tax Convention (September 20, 1996), Art. 18.
(39) Cook v. United States, 288 U.S. 120 (1933); Snap-On Tools, Inc. v. United States, 26 Cl. Ct. 1045 (1992). Compare S. Rep. No. 100-445, 100th Cong., 2d Sess. (Aug. 3, 1988), to accompany S. 2238 (Technical Corrections Act of 1988), [section] 112(aa).
(40) Notice 2005-1, Q&A-23 provides transition relief during 2005, but only with respect to a section 401(a) qualified plan.
(41) What constitutes a "pension" for treaty purposes has been addressed in a number of IRS private letter rulings. These establish that a payment will be treated as a "pension" if: (i) the employee has been employed by the same employer for five years or, if less, has attained age 62 (or was first employed by the employer after reaching age 60) (see, e.g., PLRs 9644050, 9644051, 9541043, and 9041041); (ii) the payment is made on account of death or disability, paid as part of a series of substantially equal payments over the employee's lifetime, or made after the employee attains age 55; and (iii) the payment is made either after separation from service or on or after the employee attains age 70-1/2 (see, e.g., PLRs 9644050 and 9644051). For this purpose, "separation from service" precludes employment with a related employer for five years. See PLRs 9644050, 9644051, and 9041041. These rulings generally have not expressly required that a plan be nondiscriminatory. These criteria were generally included in the commentary to Treasury's 1996 Model Income Tax Convention, but Treasury added a requirement that a plan, "alone or in combination with other comparable plans" be nondiscriminatory. Whether this indicates a change in policy is unclear. See Treasury Department Technical Explanation to 1996 United States Model Income Tax Convention Treaty, Art. 18, [paragraph] 1. See also 2003 US-UK Income Tax Convention, Art. 3(0) (definition of"pension scheme") and Art. 18(5)(d) (U.S. Competent Authority must agree that U.K. pension scheme "generally corresponds" to U.S. pension scheme; accompanying notes appear to limit equivalent treatment to U.K. qualified plans).
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