Temporary Eligibility Expansion permits eligible taxpayers to voluntarily reclassify their workers as employees for federal employment tax purposes and obtain relief

Internal Revenue Bulletin: 2012-51
December 17, 2012
Announcement 2012-46
Voluntary Classification Settlement Program — Temporary Eligibility Expansion

Table of Contents

I. PURPOSE
II. BACKGROUND
III. ELIGIBILITY
IV. EFFECT OF THE VCSP TEMPORARY ELIGIBILITY EXPANSION
V. APPLICATION PROCESS
VI. DRAFTING INFORMATION

This document provides notice and information regarding a temporary expansion of eligibility for the Voluntary Classification Settlement Program (VCSP) that will be available through June 30, 2013. The temporary eligibility expansion makes a modified VCSP available to taxpayers who would otherwise be eligible for the current VCSP but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified. Eligible taxpayers that take advantage of this limited, temporary eligibility expansion agree to prospectively treat workers as employees and will receive partial relief from federal employment taxes.
I. PURPOSE

The Internal Revenue Service (IRS) has developed a new, temporary initiative to permit taxpayers who are otherwise eligible for the VCSP, but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified, to apply for a modified version of the VCSP, the VCSP Temporary Eligibility Expansion. The VCSP Temporary Eligibility Expansion is available through June 30, 2013.

Like the VCSP, the VCSP Temporary Eligibility Expansion permits eligible taxpayers to voluntarily reclassify their workers as employees for federal employment tax purposes and obtain relief similar to that obtained through the current Classification Settlement Program (CSP). The VCSP Temporary Eligibility Expansion is optional and provides taxpayers with an opportunity to voluntarily reclassify their workers as employees for future tax periods with limited federal employment tax liability for the past nonemployee treatment. Payment under the VCSP Temporary Eligibility Expansion is higher than the payment under the VCSP, but the benefits are otherwise the same for taxpayers that want to voluntarily reclassify their workers but have not filed all required Forms 1099 for those workers. To participate, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP Temporary Eligibility Expansion, and enter into a closing agreement with the IRS.
II. BACKGROUND

Whether a worker is performing services as an employee or as an independent contractor depends upon the facts and circumstances and is generally determined under the common law test of whether the service recipient has the right to direct and control the worker as to how to perform the services. In some factual situations, the determination of the proper worker classification status under the common law may not be clear. For taxpayers under IRS examination, the current CSP is available to resolve federal employment tax issues related to worker misclassification if certain criteria are met. The CSP permits the prospective reclassification of workers as employees, with reduced federal employment tax liabilities for past nonemployee treatment. The CSP allows businesses and tax examiners to resolve the worker classification issues as early in the administrative process as possible, thereby reducing taxpayer burden and providing efficiencies for both the taxpayer and the government.

In order to facilitate voluntary resolution of worker classification issues and achieve the benefits of increased tax compliance and certainty for taxpayers, workers, and the government, the IRS determined that it would be beneficial to provide taxpayers with a program that allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through normal administrative correction procedures applicable to employment taxes. Accordingly, the VCSP was established on September 21, 2011, through Announcement 2011-64, 2011-41 I.R.B. 503. In response to feedback from taxpayers and taxpayer representatives, the VCSP is modified under Announcement 2012-45, 2012-51 I.R.B. , to (1) permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP; (2) clarify the current eligibility requirement that a taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit; (3) clarify that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or the Department of Labor; and (4) eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

To be eligible under the VCSP, a taxpayer must meet certain requirements, including having consistently treated the workers as nonemployees and having filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years with respect to the workers to be reclassified. Taxpayers that do not qualify under the VCSP because they have not filed all required Forms 1099 for the previous three years requested a similar program. The IRS decided to provide this limited, temporary eligibility expansion through June 30, 2013, to permit taxpayers that have not filed all required Forms 1099 to agree to voluntarily reclassify their workers prospectively and file and furnish any required Forms 1099 with respect to the workers being reclassified for the previous three years.
III. ELIGIBILITY

The VCSP Temporary Eligibility Expansion is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must have consistently treated the workers as nonemployees. The taxpayer cannot currently be under employment tax audit by the IRS. A taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is considered to be under employment tax audit for purposes of the VCSP Temporary Eligibility Expansion if any member of the affiliated group is under employment tax audit. Furthermore, the taxpayer cannot be currently under audit concerning the classification of the class or classes of workers by the Department of Labor or by a state government agency.

A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the class or classes of workers is eligible for the VCSP Temporary Eligibility Expansion if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

In addition, in order to be eligible to participate in the VCSP Temporary Eligibility Expansion, a taxpayer must furnish to the workers and electronically file all required Forms 1099, consistent with the nonemployee treatment, with respect to the workers being reclassified for the previous three years prior to executing the VCSP Temporary Eligibility Expansion closing agreement with the IRS. Taxpayers must electronically file such Forms 1099 in accordance with IRS instructions, which will be provided once the IRS has reviewed the application and verified that the taxpayer is otherwise eligible for the VCSP Temporary Eligibility Expansion, as indicated in Section V, Application Process.

Taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion must submit an application, as indicated below in Section V, Application Process, on or before June 30, 2013.
IV. EFFECT OF THE VCSP TEMPORARY ELIGIBILITY EXPANSION

A taxpayer who participates in the VCSP Temporary Eligibility Expansion agrees to prospectively treat the class or classes of workers identified in the application as employees for future tax periods. In exchange, the taxpayer pays 25 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year if those workers were classified as employees for such year, determined under the reduced rates of section 3509(b); pays a reduced penalty, as discussed below, for unfiled Forms 1099 for the previous three years with respect to the workers being reclassified; is not liable for any interest and penalties on the liability; and is not subject to an employment tax audit with respect to the worker classification of the class or classes of workers for prior years. The taxpayer must certify as part of the VCSP Temporary Eligibility Expansion closing agreement with the IRS that it has furnished to the workers and has electronically filed all required Forms 1099 for the previous three years with respect to the workers being reclassified.

Under the VCSP Temporary Eligibility Expansion, the penalty for unfiled Forms 1099 is graduated, based on the number of required Forms 1099 that were not filed for the previous three years with respect to the workers being reclassified, up to a maximum amount. The worksheet provided with this announcement provides further details regarding how the penalty is calculated.
V. APPLICATION PROCESS

Eligible taxpayers who wish to participate in the VCSP Temporary Eligibility Expansion must submit an application on or before June 30, 2013, for participation in the program using Form 8952, Application for Voluntary Classification Settlement Program (VCSP). However, taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion should write “VCSP Temporary Eligibility Expansion” at the top of Form 8952.

Taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion must complete all parts of Form 8952, with the following modifications:

(1) Taxpayers should put a line through Part V, Line A3, to indicate that Taxpayer has not satisfied all Form 1099 requirements for each of the workers for the 3 preceding calendar years ending before the date of the application; and

(2) Taxpayers should not complete Part IV, Payment Calculation, of Form 8952. Instead, taxpayers should use the worksheet provided in this announcement to calculate their payment under the VCSP Temporary Eligibility Expansion. Taxpayers should attach the completed worksheet provided in this announcement to Form 8952.

Information about the VCSP Temporary Eligibility Expansion and the application is available on http://www.irs.gov. Along with the application, the taxpayer may provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848). The IRS will contact the taxpayer or authorized representative with instructions on how to electronically file Forms 1099 once it has reviewed the application and verified that the taxpayer is otherwise eligible. The IRS retains discretion whether to accept a taxpayer’s application for the VCSP Temporary Eligibility Expansion. The taxpayer must contact the IRS to provide confirmation that the taxpayer has electronically filed Forms 1099 and furnished the forms to the workers being reclassified. The IRS will then contact the taxpayer to complete the process. Taxpayers whose application has been accepted enter into a closing agreement with the IRS to finalize the terms of the VCSP Temporary Eligibility Expansion and must simultaneously make full and complete payment of any amount due under the closing agreement.
VI. DRAFTING INFORMATION

The principal drafter of this announcement is Ligeia M. Donis of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this announcement, contact Ligeia Donis at 202-622-6040 (not a toll-free call).

Internal Revenue Bulletin: 2012-51
December 17, 2012
Announcement 2012-46
Voluntary Classification Settlement Program — Temporary Eligibility Expansion

Table of Contents

I. PURPOSE
II. BACKGROUND
III. ELIGIBILITY
IV. EFFECT OF THE VCSP TEMPORARY ELIGIBILITY EXPANSION
V. APPLICATION PROCESS
VI. DRAFTING INFORMATION

This document provides notice and information regarding a temporary expansion of eligibility for the Voluntary Classification Settlement Program (VCSP) that will be available through June 30, 2013. The temporary eligibility expansion makes a modified VCSP available to taxpayers who would otherwise be eligible for the current VCSP but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified. Eligible taxpayers that take advantage of this limited, temporary eligibility expansion agree to prospectively treat workers as employees and will receive partial relief from federal employment taxes.
I. PURPOSE

The Internal Revenue Service (IRS) has developed a new, temporary initiative to permit taxpayers who are otherwise eligible for the VCSP, but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified, to apply for a modified version of the VCSP, the VCSP Temporary Eligibility Expansion. The VCSP Temporary Eligibility Expansion is available through June 30, 2013.

Like the VCSP, the VCSP Temporary Eligibility Expansion permits eligible taxpayers to voluntarily reclassify their workers as employees for federal employment tax purposes and obtain relief similar to that obtained through the current Classification Settlement Program (CSP). The VCSP Temporary Eligibility Expansion is optional and provides taxpayers with an opportunity to voluntarily reclassify their workers as employees for future tax periods with limited federal employment tax liability for the past nonemployee treatment. Payment under the VCSP Temporary Eligibility Expansion is higher than the payment under the VCSP, but the benefits are otherwise the same for taxpayers that want to voluntarily reclassify their workers but have not filed all required Forms 1099 for those workers. To participate, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP Temporary Eligibility Expansion, and enter into a closing agreement with the IRS.
II. BACKGROUND

Whether a worker is performing services as an employee or as an independent contractor depends upon the facts and circumstances and is generally determined under the common law test of whether the service recipient has the right to direct and control the worker as to how to perform the services. In some factual situations, the determination of the proper worker classification status under the common law may not be clear. For taxpayers under IRS examination, the current CSP is available to resolve federal employment tax issues related to worker misclassification if certain criteria are met. The CSP permits the prospective reclassification of workers as employees, with reduced federal employment tax liabilities for past nonemployee treatment. The CSP allows businesses and tax examiners to resolve the worker classification issues as early in the administrative process as possible, thereby reducing taxpayer burden and providing efficiencies for both the taxpayer and the government.

In order to facilitate voluntary resolution of worker classification issues and achieve the benefits of increased tax compliance and certainty for taxpayers, workers, and the government, the IRS determined that it would be beneficial to provide taxpayers with a program that allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through normal administrative correction procedures applicable to employment taxes. Accordingly, the VCSP was established on September 21, 2011, through Announcement 2011-64, 2011-41 I.R.B. 503. In response to feedback from taxpayers and taxpayer representatives, the VCSP is modified under Announcement 2012-45, 2012-51 I.R.B. , to (1) permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP; (2) clarify the current eligibility requirement that a taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit; (3) clarify that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or the Department of Labor; and (4) eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

To be eligible under the VCSP, a taxpayer must meet certain requirements, including having consistently treated the workers as nonemployees and having filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years with respect to the workers to be reclassified. Taxpayers that do not qualify under the VCSP because they have not filed all required Forms 1099 for the previous three years requested a similar program. The IRS decided to provide this limited, temporary eligibility expansion through June 30, 2013, to permit taxpayers that have not filed all required Forms 1099 to agree to voluntarily reclassify their workers prospectively and file and furnish any required Forms 1099 with respect to the workers being reclassified for the previous three years.
III. ELIGIBILITY

The VCSP Temporary Eligibility Expansion is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must have consistently treated the workers as nonemployees. The taxpayer cannot currently be under employment tax audit by the IRS. A taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is considered to be under employment tax audit for purposes of the VCSP Temporary Eligibility Expansion if any member of the affiliated group is under employment tax audit. Furthermore, the taxpayer cannot be currently under audit concerning the classification of the class or classes of workers by the Department of Labor or by a state government agency.

A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the class or classes of workers is eligible for the VCSP Temporary Eligibility Expansion if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

In addition, in order to be eligible to participate in the VCSP Temporary Eligibility Expansion, a taxpayer must furnish to the workers and electronically file all required Forms 1099, consistent with the nonemployee treatment, with respect to the workers being reclassified for the previous three years prior to executing the VCSP Temporary Eligibility Expansion closing agreement with the IRS. Taxpayers must electronically file such Forms 1099 in accordance with IRS instructions, which will be provided once the IRS has reviewed the application and verified that the taxpayer is otherwise eligible for the VCSP Temporary Eligibility Expansion, as indicated in Section V, Application Process.

Taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion must submit an application, as indicated below in Section V, Application Process, on or before June 30, 2013.
IV. EFFECT OF THE VCSP TEMPORARY ELIGIBILITY EXPANSION

A taxpayer who participates in the VCSP Temporary Eligibility Expansion agrees to prospectively treat the class or classes of workers identified in the application as employees for future tax periods. In exchange, the taxpayer pays 25 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year if those workers were classified as employees for such year, determined under the reduced rates of section 3509(b); pays a reduced penalty, as discussed below, for unfiled Forms 1099 for the previous three years with respect to the workers being reclassified; is not liable for any interest and penalties on the liability; and is not subject to an employment tax audit with respect to the worker classification of the class or classes of workers for prior years. The taxpayer must certify as part of the VCSP Temporary Eligibility Expansion closing agreement with the IRS that it has furnished to the workers and has electronically filed all required Forms 1099 for the previous three years with respect to the workers being reclassified.

Under the VCSP Temporary Eligibility Expansion, the penalty for unfiled Forms 1099 is graduated, based on the number of required Forms 1099 that were not filed for the previous three years with respect to the workers being reclassified, up to a maximum amount. The worksheet provided with this announcement provides further details regarding how the penalty is calculated.
V. APPLICATION PROCESS

Eligible taxpayers who wish to participate in the VCSP Temporary Eligibility Expansion must submit an application on or before June 30, 2013, for participation in the program using Form 8952, Application for Voluntary Classification Settlement Program (VCSP). However, taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion should write “VCSP Temporary Eligibility Expansion” at the top of Form 8952.

Taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion must complete all parts of Form 8952, with the following modifications:

(1) Taxpayers should put a line through Part V, Line A3, to indicate that Taxpayer has not satisfied all Form 1099 requirements for each of the workers for the 3 preceding calendar years ending before the date of the application; and

(2) Taxpayers should not complete Part IV, Payment Calculation, of Form 8952. Instead, taxpayers should use the worksheet provided in this announcement to calculate their payment under the VCSP Temporary Eligibility Expansion. Taxpayers should attach the completed worksheet provided in this announcement to Form 8952.

Information about the VCSP Temporary Eligibility Expansion and the application is available on http://www.irs.gov. Along with the application, the taxpayer may provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848). The IRS will contact the taxpayer or authorized representative with instructions on how to electronically file Forms 1099 once it has reviewed the application and verified that the taxpayer is otherwise eligible. The IRS retains discretion whether to accept a taxpayer’s application for the VCSP Temporary Eligibility Expansion. The taxpayer must contact the IRS to provide confirmation that the taxpayer has electronically filed Forms 1099 and furnished the forms to the workers being reclassified. The IRS will then contact the taxpayer to complete the process. Taxpayers whose application has been accepted enter into a closing agreement with the IRS to finalize the terms of the VCSP Temporary Eligibility Expansion and must simultaneously make full and complete payment of any amount due under the closing agreement.
VI. DRAFTING INFORMATION

The principal drafter of this announcement is Ligeia M. Donis of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this announcement, contact Ligeia Donis at 202-622-6040 (not a toll-free call).

AMERICAN TAXPAYER RELIEF ACT-SUMMARY FOR KATHERMAN KITTS CLIENTS READING PLEASURE

Yesterday, the President signed the American Taxpayer Relief Act, which was passed on New Year’s Day. Here is brief summary of selected portions of it, for your review. We can help answer any questions that you may have.

Individual Tax Rates
The Act preserves and permanently extends the Bush-era income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds will be adjusted for inflation after 2013.
The new law, however, does not extend the payroll tax holiday. Effective January 1, 2013, the employee-share of Social Security tax withholding increased from 4.2% to 6.2% (its rate before the payroll tax holiday).

Capital Gains and Dividend Tax Rate
Effective January 1, 2013, the maximum tax rate on qualified capital gains and dividends rises from 15 to 20 percent for taxpayers whose taxable incomes exceed the thresholds set for the 39.6 percent rate (the $400,000/$450,000/$425,000 thresholds discussed above). The maximum tax rate for all other taxpayers remains at 15 percent; and moreover, a zero-percent rate will continue to apply to qualified capital gains and dividends to the extent income falls below the top of the 15- percent tax bracket. Note – The 2010 Affordable Care Act imposes a 3.8% Medicare tax on interest, dividends, capital gains, and other passive income, starting in 2013, and it applies at taxable income over $200,000 for single filers and over $250,000 for joint filers.

Estate and Gift Tax
Federal transfer taxes (estate, gift and generation-skipping transfer (GST) taxes) seem to have been in a constant state of flux in recent years. The Act provides some certainty. Effective January 1, 2013, the maximum estate, gift and GST tax rate is generally 40 percent, which reflects an increase from 35 percent for 2012. The lifetime exclusion amount for estate and gift taxes is unchanged for 2013 and subsequent years at $5 million (adjusted for inflation). The GST exemption amount for 2013 and beyond is also $5 million (adjusted for inflation). The new law also makes permanent portability and some enhancements made in previous tax laws.

Other Act Elements Affecting Individuals
• AMT (Alternative Minimum Tax) – Higher exemptions are made permanent, and indexed for inflation
• IRA distributions to charitable organizations, (for those over age 70) – restored through 2013
• Exclusion for cancellation of debt on principal residence – extended through 2013
• Reduction of itemized deductions for incomes over certain levels, (which was not in place since 2010) – will apply starting in 2013

Business Tax Provisions
Code Sec. 179 business equipment expensing. In recent years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. [This means that you can expense up to $500,000 of equipment or software purchased, so long as you don’t spend more than $2 million in total. Expenditures over the $2 million level reduces the allowable expense amount dollar-for-dollar.] The Act restores the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2 million) and adjusts those amounts for inflation. However, this increase is temporary. The Code Sec. 179 dollar and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively, after 2013. The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be placed in service in a tax year beginning before 2014. Additionally, the Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property as well as qualified restaurant property, as eligible for Code Sec. 179 expensing.

Bonus depreciation. Bonus depreciation of business equipment is one of the most important tax benefits available to businesses, large or small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off 100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available but was reduced to 50 percent. The Act extends 50 percent bonus depreciation through 2013. The Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property.

While not quite as attractive as 100 percent bonus depreciation, 50 percent bonus depreciation is valuable. For example, a $100,000 piece of equipment with a five-year MACRS life would qualify for a $55,000 write-off: $50,000 in bonus depreciation plus 20 percent of the remaining $50,000 in basis as “regular” depreciation, with the half-year convention applied in the first and last year.

Bonus depreciation also relates to the passenger vehicle depreciation dollar limits under Code Sec. 280F. This provision imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business and for each succeeding year. Because of the new law, the first-year depreciation cap for passenger automobile/truck placed in service in 2013 is increased by $8,000.

Bonus depreciation, unlike Code Sec. 179 expensing, is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation. Code Sec. 179 expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100 percent.

Research Tax Credit. The research tax credit was restored for 2012 and extended through 2013.

If you have any questions, please contact us.

IRS Patrol – IRS Announces New Voluntary Worker Classification Settlement Program; Past Payroll Tax Relief Provided to Employers Who Reclassify Their Workers as Employees

Original caption: Farm, farm workers, Mt. Will...

Worker or Contractor that is the question

If you or your clients think there might be an issue with the classification of  employees – that is, are your workers independent contractors or not, now is the time to look into correction.

WASHINGTON – The Internal Revenue Service  launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

  • • Consistently have treated the workers in the past as nonemployees,
  • • Have filed all required Forms 1099 for the workers for the previous three years
  • • Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Full details, including FAQs, are available on the Employment Tax pages of IRS.gov, and in Announcement 2011-64, posted [September 21, 2011].

Another Dreaded IRS Reporting Requirement Gets Interim Guidance Today. Health Coverage Reporting Requirement on Form W2

obama postcard

IRS

By Stacie Clifford Kitts, CPA

Well here it is, guidance on more reporting requirements.  If you are an employer providing health insurance coverage for your employees, Good For You.  And….. now the IRS wants to track it.  So add this to the long list of other reporting requirements dear business owners.  If you file 250 or more W2′s, starting in 2012 you will need to report employee health insurance premiums on Form w2.  Employers with less than 250 W2′s are exempt until further notice.  I guess there is always a small sliver of a silver lining.


WASHINGTON — The Internal Revenue Service today issued interim guidance to employers on informational reporting on each employee’s annual Form W-2 of the cost of the health insurance coverage they sponsor for employees. The IRS is also requesting comments on this interim guidance. The IRS emphasized that this new reporting to employees is for their information only, to inform them of the cost of their health coverage, and does not cause excludable employer-provided health coverage to become taxable; employer-provided health coverage continues to be excludable from an employee’s income, and is not taxable.

The Affordable Care Act provides that employers are required to report the cost of employer-provided health care coverage on the Form W-2. Notice 2010-69, issued last fall, made this requirement optional for all employers for the 2011 Forms W-2 (generally furnished to employees in January 2012). In today’s guidance, the IRS provided further relief for smaller employers (those filing fewer than 250 W-2 forms) by making this requirement optional for them at least for 2012 (i.e., for 2012 Forms W-2 that generally would be furnished to employees in January 2013) and continuing this optional treatment for smaller employers until further guidance is issued.

Using a question-and-answer format, Notice 2011-28 also provides guidance for employers that are subject to this requirement for the 2012 Forms W-2 and those that choose to voluntarily comply with it for either 2011 or 2012. The notice includes information on how to report, what coverage to include and how to determine the cost of the coverage.

The 2011 Form W-2, prior IRS Notice 2010-69 deferring the reporting requirement for 2011, and Notice 2011-28 containing the new guidance are available on IRS.gov.

IRS Patrol: IRS Releases Draft W-2 Form for 2011; Announces Relief for Employers (Optional Reporting of the Cost of Health Coverage in 2011)

 

Engraving of the U.S. Treasury building in 1804.

engraving of the US Treasury building in 1804

 

Stacie says:  Doesn’t good news come in three’s?  Well here is good news number two for the day – the IRS announced that it will defer the new requirement for employers to report the cost of coverage under an employer-sponsored group health plan.  The reporting is now optional in 2011.

WASHINGTON — The IRS today issued a draft Form W-2 for 2011, which employers use to report wages and employee tax withholding. The IRS also announced that it will defer the new requirement for employers to report the cost of coverage under an employer-sponsored group health plan, making that reporting by employers optional in 2011.

The draft Form W-2 includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan.  The Treasury Department and the IRS have determined that this relief is necessary to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with the new reporting requirement. The IRS will be publishing guidance on the new requirement later this year.

Although reporting the cost of coverage will be optional with respect to 2011, the IRS continues to stress that the amounts reportable are not taxable. Included in the Affordable Care Act passed by Congress in March, the new reporting requirement is intended to be informational only, and to provide employees with greater transparency into overall health care costs.

IRS Presents: Four Steps to Follow If You Are Missing a W-2

Getting ready to file your tax return?  Make sure you have all your documents before you start. You should receive a Form W-2, Wage and Tax Statement from each of your employers.  Employers have until February 1, 2010 to send you a 2009 Form W-2 earnings statement. If you haven’t received your W-2, follow these four steps:

1. Contact your employer If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed.  If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.  After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

2. Contact the IRS If you do not receive your W-2 by February 16th, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, city and state, including zip code, Social Security number, phone number and have the following information:

  • Employer’s name, address, city and state, including zip code and phone   number
  • Dates of employment
  • An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2009. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return You still must file your tax return or request an extension to file by April 15, even if you do not receive your Form W-2. If you have not received your Form W-2 by April 15th, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.

4. File a Form 1040X On occasion, you may receive your missing W-2 after you filed your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X, and instructions are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

  • Form 4852, Substitute for Form W-2, Wage and Tax Statement (PDF 29K)
  • Form 1040X, Amended U.S. Individual Income Tax Return (PDF 123K)
  • Instructions for Form 1040X (PDF 43K)  

Guidance – Payroll Form 944 Rev Proc 2009-51 – Know Who is Eligible to File Annual Form Rather Than Quarterly

Revenue Procedure 2009-51 sets forth the procedures for employers who are eligible to file Form 944, Employer’s Annual Federal Tax Return, to request to file Form 944 instead of Forms 941, Employer’s Quarterly Federal Tax Return, for tax years beginning on or after January 1, 2010. In addition, this revenue procedure sets forth the procedures for employers who previously were notified to file Form 944 to request to file Forms 941 instead for tax years beginning on or after January 1, 2010.

Revenue Procedure 2009-51 will be published in Internal Revenue Bulletin 2009-45 on November 9, 2009.

Federal Minimum Wage Increases to $7.25

Posted by The United States Department of Labor on their web site at The federal minimum wage.

The federal minimum wage for covered, nonexempt employees is $5.85 per hour effective July 24, 2007; $6.55 per hour effective July 24, 2008; and $7.25 per hour effective July 24, 2009.

The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA), which is administered and enforced by the U.S. Department of Labor (DOL) Employment Standards Administration’s Wage and Hour Division. Many states also have minimum wage laws.

In cases where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.

The FLSA contains some exceptions (or exemptions) from the minimum wage requirement. Some exceptions apply to specific types of businesses and others apply to specific types of work. It also provides for the employment of certain individuals at wage rates below the minimum wage. See subminimum wages.

Wages required by FLSA are due on the regular payday for the pay period covered. Deductions made from wages for such items as cash or merchandise shortages, employer-required uniforms, and tools of the trade, are not legal to the extent that they reduce the wages of employees below the minimum rate required by FLSA or reduce the amount of overtime pay due under FLSA.

The FLSA does not provide for wage payment or collection procedures for an employee’s wages or commissions in excess of those required by the FLSA. However, some states do have laws under which such claims may be filed.

Federal employees are subject to additional rules enforced by the Office of Personnel Management

It should also be noted that there are a number of employment practices that the FLSA does not regulate. For example, FLSA does not require:

vacation, holiday, severance, or sick pay;
meal or rest periods, holidays off, or vacations;
premium pay for weekend or holiday work;
pay raises or fringe benefits; and
a discharge notice, reason for discharge, or immediate payment of final wages to terminated employees.

COMPLIANCE ASSISTANCE MATERIALS
BASIC INFORMATION

Employment Law Guide – Minimum Wage and Overtime Pay - Describes the statutes and regulations administered by DOL that regulate minimum wage and overtime pay.

Questions and Answers About the Minimum Wage – Answers questions ranging from “how often does the minimum wage increase” to “who ensures that workers are paid at least the minimum wage?”

Minimum Wage Laws in the States – Provides a clickable map that tells you what the minimum wage laws are in each state.

Chapter 30 – Wage and Hour Division’s Field Operations Handbook (PDF) – Discusses records, minimum wages, and the payment of wages.

Filing a complaint – DOL’s Wage and Hour Division manages complaints regarding violations of the various laws and regulations it administers. To file a complaint concerning one of these laws, contact your nearest Wage and Hour Division office or call the Department’s Toll-Free Wage and Hour HelpLine at 1-866-4-US-WAGE.

FACT SHEETS
Coverage Under the Fair Labor Standards Act (FLSA) – Provides general information about those covered by the FLSA.

Hours Worked Under the Fair Labor Standards Act (FLSA) - Provides general information concerning what constitutes compensable time under the FLSA.

Youth Minimum Wage – FLSA – Answers a variety of questions about the minimum wage, including the subminimum wage.

Minimum Wage, Recordkeeping, and Child Labor Requirements of U.S. Law – Provides general information concerning federal minimum wage, recordkeeping and child labor requirements that apply to foreign commercial vehicle operators and their helpers who work in United States territory.

E-TOOLS
Comprehensive FLSA Presentation (Microsoft® PowerPoint®)
elaws Fair Labor Standards Act (FLSA) Advisor – Addresses key wage and hour topics, including minimum wage requirements.

POSTERS
Fair Labor Standards Act (FLSA) Minimum Wage Poster – Describes the requirement that every employer of employees subject to the FLSA’s minimum wage provisions must post a notice explaining the Act. (Español) (Chinese)

RECORDKEEPING
Every covered employer must keep certain records for each non-exempt worker. The Fair Labor Standards Act (FLSA) requires no particular form for the records, but does require that the records include certain identifying information about the employee and data about the hours worked and the wages earned. For a listing of the basic records that an employer must maintain, see the FLSA recordkeeping fact sheet.

Prior to paying an employed person the subminimum wage, as allowed under certain provisions of the FLSA, employers may have to apply for a certificate from the U. S. Department of Labor. See the form instructions page for additional information.

APPLICABLE LAWS AND REGULATIONS
The Fair Labor Standards Act (FLSA) – Establishes minimum wages, overtime pay, record keeping, and child labor standards for private sector and government workers.
29 CFR Part 531 – Regulations on wage payments under the FLSA.

RELATED TOPICS AND LINKS
State Labor Offices – When the state laws differ from the federal Fair Labor Standards Act (FLSA), an employer must comply with the standard most protective to employees.
State Labor Laws

DOL CONTACTS*
Employment Standards Administration (ESA) Wage and Hour Division 200 Constitution Avenue, NWRoom S-3502 Washington, DC 20210 Contact WHD Tel: 1-866-4USWAGE (1-866-487-9243) TTY: 1-877-889-5627Local Offices

For questions on other DOL laws, please call DOL’s Toll-Free Help Line at 1-866-4-USA-DOL. Live assistance is available in English and Spanish, Monday through Friday from 8:00 a.m. to 8:00 p.m. Eastern Time. Additional service is available in more than 140 languages through a translation service. Tel: 1-866-4-USA-DOL TTY: 1-877-889-5627
*Pursuant to the U.S. Department of Labor’s Confidentiality Protocol for Compliance Assistance Inquiries, information provided by a telephone caller will be kept confidential within the bounds of the law. Compliance assistance inquiries will not trigger an inspection, audit, investigation, etc.

State map

States with minimum wage rates higher than the Federal

American Samoa has special minimum wage rates

States with no minimum wage law

States with minimum wage rates the same as the Federal
States with minimum wage rates lower than the Federal

IRS Tips For Recently Married Taxpayers

If you have recently gotten married or plan to get married in the near future, the IRS has some tips to help you avoid stress at tax time.

1) Notify the Social Security Administration – Report any name change to the Social Security Administration, so your name and SSN will match when you file your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site at http://www.socialsecurity.gov/, by calling 800-772-1213 or at local offices.
2) Notify the IRS – If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from the IRS website IRS.gov or order it by calling 800–TAX–FORM (800–829–3676).

3) Notify the U.S. Postal Service – You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence.
4) Notify Your Employer – Report any name and address changes to your employer(s) to ensure receipt of your Form W-2, Wage and Tax Statement after the end of the year.
5) Check Your Withholding – If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status.

6) The IRS Withholding Calculator will even provide you with a new Form W-4, Employee’s

Withholding Allowance Certificate you can print out and give it to your employer so they can withhold the correct amount from your pay.
Links:
IRS Withholding Calculator
Form 8822, Change of Address

Now is a Good Time to Check Your Withholding to Avoid a Tax Surprise

With 2009 nearly half over, the Internal Revenue Service reminds individual taxpayers there is no better time to check their 2009 federal income tax withholding levels to make sure they do not face any surprises when returns are due next spring.
The Making Work Pay Credit lowered tax withholding rates this year for 120 million American households. However, particular taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is withheld: multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers and pensioners.
Failure to adjust your withholding could result in potentially smaller refunds or may cause you to owe tax rather than receive a refund next year. So far in 2009, the average refund amount is $2,675 and 79 percent of all returns received a refund.
Because retirees typically have withholding from their pension payments, pension plan administrators or pension payors should be aware of the optional adjustment procedure for pension withholding announced in Notice 1036-P, Additional Withholding for Pensions for 2009.
Social security beneficiaries, supplemental security income recipients, disabled veterans and railroad retirees that receive this year’s one-time $250 economic recovery payment should be aware that the Making Work Pay credit will be reduced by the $250 payment amount. They may also want to review their withholding.
The IRS withholding calculator on IRS.gov can help a taxpayer compute the proper tax withholding. The worksheets in Publication 919, How Do I Adjust My Withholding?, can also be used to do the calculation. If the result suggests an adjustment is necessary, the taxpayer should submit a new Form W-4, Withholding Allowance Certificate, to his or her employer or adjust the amount of quarterly tax paid.
In addition, the IRS reminds unemployed workers that the first $2,400 of unemployment benefits they receive during 2009 are tax-free for federal income tax purposes. People who expect to receive more than that should consider having tax withheld from their benefit payments in excess of $2,400. Use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end.
Taxpayers should visit IRS.gov for more information about how to adjust federal income tax withholding. The Web site also has details on various tax incentives in the American Recovery and Reinvestment Act as well as downloadable forms and publications. Free tax forms and publications are also available by calling 1-800-TAX-FORM (1-800-829-3676).
Links:
The Making Work Pay Credit
Notice 1036-P, Additional Withholding for Pensions for 2009
IRS withholding calculator
Publication 919, How Do I Adjust My Withholding?
Related News Releases and legal guidance
Publication 4766, Making Work Pay Credit and Form W-4 Withholding Certificate

Highlights of the American Recovery and Reinvestment Act of 2009

Congress has approved and the President has signed new economic recovery legislation, the American Recovery and Reinvestment Act of 2009. The IRS is implementing tax-related provisions of this new program as quickly as possible.
Here are some key highlights:
Money Back for New Vehicle Purchases. Taxpayers who buy certain new vehicles in 2009 can deduct the state and local sales taxes they paid.

Increased Transportation Subsidy. Employer-provided benefits for transit and parking are up in 2009

Up to $2,400 in Unemployment Benefits Tax Free in 2009. Individuals should check their tax withholding.

Net Operating Loss Carryback. Small businesses can offset losses by getting refunds on taxes paid up to five years ago. Information on the carryback, an expanded section 179 deduction and other business-related provisions is now available.

COBRA: Health Insurance Continuation Subsidy. The IRS has extensive guidance for employers, including an updated Form 941, as well as information for qualifying individuals.

Notice 2009-27 is guidance provided under section 3001 of the American Recovery and Reinvestment Act of 2009 relating to the premium reduction for individuals who were involuntarily terminated and are electing COBRA continuation coverage under the group health plan of their former employer. Notice 2009-27 will appear in IRB 2009-16 dated April 20, 2009.

First-Time Homebuyer Credit Expands. Homebuyers who purchase in 2009 can get a credit of up to $8,000 with no payback requirement.

Enchanced Credits for Tax Years 2009, 2010. Details available on the earned income tax credit, additional child tax credit and American Opportunity Credit, a new higher education benefit.
Payroll Checks Increase This Spring. The Making Work Pay Tax Credit will mean $400 to $800 for many Americans. The IRS has issued new withholding tables for employers.

$250 for Social Security Recipients, Veterans and Railroad Retirees. The Economic Recovery Payment will be paid by the Social Security Administration, Department of Veterans Affairs and the Railroad Retirement Board.

Employment Tax and Disregarded Entities

For wages paid on or after January 1, 2009, single member/single owner limited liability companies (LLCs) that have not elected to be treated as corporations may be required to change the way they report and pay federal employment taxes and wage payments. On Aug. 16, 2007, changes to Treasury Regulation Section 301.7701-2 were issued. The new regulations state that the LLC, not its single owner, will be responsible for filing and paying all employment taxes on wages paid on or after Jan. 1, 2009.
A limited liability company is an entity formed under state law. For federal tax purposes, an LLC with more than one owner may be classified as if it were a partnership or a corporation. For federal tax purposes, an LLC with one owner is referred to as an entity disregarded as separate from its owner, or a “disregarded entity,” unless an election is made for it to be treated as a corporation. If the owner is an individual, a single member LLC is treated as a sole proprietorship for federal income tax purposes, and the owner is subject to taxes under the Self-Employment Contributions Act (SECA). If the owner is not an individual, a single member LLC is treated as a branch or division of the owner.
For wages paid before Jan. 1, 2009, disregarded entities follow the guidance under Notice 99-6 and choose how they want to file and pay their employment taxes using either the name and EIN assigned to the LLC or the name and EIN of the single member owner. The new regulations make Notice 99-6 obsolete for wages paid on or after January 1, 2009; employment taxes must be reported and paid in the name and EIN of the LLC.
An LLC may secure an EIN by applying online at IRS.gov or by filing Form SS-4, Application for Employer Identification Number.
The regulations changes are not retroactive. The owner of a disregarded entity remains responsible for paying employment taxes on wages paid before Jan. 1, 2009 and the LLC is responsible for paying employment taxes on wages paid beginning Jan. 1, 2009.
The examples in the regulations clarify the treatment of a disregarded entity for purposes of employment tax on wages paid on or after Jan. 1, 2009.
LLCA is an eligible entity owned by individual A and is generally disregarded as an entity separate from its owner for federal tax purposes. However, LLCA is now treated as an entity separate from its owner for purposes of employment and certain excise taxes. LLCA has employees and pays wages as defined in Internal Revenue Code (IRC) Sections 3121(a), 3306(b), and 3401(a).
LLCA is an employer and is subject to all provisions of law and regulations, including penalties that apply to employers. Thus, LLCA is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes under IRC Sections 3402, 3403, 3102(b), 3111, and 3301, respectively. LLCA must file the applicable employment tax forms, such as Form 941, Employer’s Quarterly Employment Tax Return, Form 940, Employer’s Annual Federal Unemployment Tax Return; file Forms W-2 with the Social Security Administration and furnish them to LLCA’s employees, and make timely employment tax deposits.
A is not, however, an employee of LLCA for purposes of employment tax because LLCA is treated as A’s sole proprietorship for income tax purposes. A is self-employed for purposes of the tax on self-employment income. This means that A is subject to tax under IRC Section 1401 on his net earnings from self-employment with respect to LLCA’s activities. As a sole proprietor, A is entitled to deduct trade or business expenses paid or incurred through LLCA’s activities, including the employer’s share of employment taxes imposed under sections 3111 and 3301, on A’s Form 1040, Schedule C, Profit or Loss for Business (Sole Proprietorship).
These changes in the regulations do not change income tax treatment for a disregarded entity or other LLCs, or employment and/or excise tax treatment for LLCs classified as partnerships or corporations.
The new regulations also state that otherwise disregarded entities are treated as the responsible parties for reporting and paying certain excise taxes that accrued after Jan. 1, 2008, including those reported on Forms 720, Quarterly Federal Excise Tax Return; 730, Monthly Tax Return for Wagers; 2290, Heavy Highway Vehicle Use Tax Return; and 11-C, Occupational Tax and Registration Return for Wagering; excise tax refunds or payments claimed on Form 8849, Claim for Refund of Excise Taxes; and excise tax registrations on Form 637, Application for Registration (For Certain Excise Tax Activities).

Execessive Compensation and Golden Parachute Payments

Section 162(m)—Excessive Compensation
Section 280G—Golden Parachute Payments

Notice 2008-94

I. PURPOSE
This notice provides guidance on certain executive compensation provisions of the Emergency Economic Stabilization Act of 2008, Div. A of Pub.Law No. 110-343 (EESA), which was enacted on October 3, 2008. Section 302 of EESA added new §§ 162(m)(5) and 280G(e) to the Internal Revenue Code.

Section 162(m) generally limits the deductibility of compensation paid to certain corporate executives and § 280G provides that a corporate executive’s excess parachute payments are not deductible and imposes (under § 4999) an excise tax on the executive for those amounts.

New §§ 162(m)(5) and 280G(e) provide additional limitations on the deductibility of compensation paid to certain executives by employers who sell “troubled assets” in the “troubled assets relief program” included in EESA.

Section 162(m)(5) generally reduces the $1 million deduction limitation to $500,000 for certain taxable years and provides that certain exceptions to the deduction limitation, including the exception for performance-based compensation, are not applicable. Section 280G(e) generally expands the definition of a parachute payment to include certain payments made contingent on severance from employment.

II. BACKGROUND RELATING TO EESA EXECUTIVE COMPENSATION PROVISIONS

Section 101(a) of EESA authorizes the Secretary of the Treasury to establish a Troubled Assets Relief Program (TARP) to “purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and policies and procedures developed and published
by the Secretary.” Section 120 of EESA provides that the TARP authorities terminate on December 31, 2009, unless extended upon certification by the Secretary of the Treasury to Congress, but in no event later than two years from the date of enactment (October 3, 2008) (the TARP authorities period). Thus, the TARP authorities period is the period from October 3, 2008 to December 31, 2009 or, if extended, the period from October 3, 2008 to the date so extended, but no later than October 3, 2010.

EESA includes two sections that directly address executive compensation. Section 302 of EESA enacted tax provisions as amendments to §§ 162(m) and 280G that address compensation paid to certain executive officers employed by financial institutions that sell assets under TARP. This notice addresses these tax provisions.

Section 111 of EESA subjects certain financial institutions that sell assets to the Treasury Department to specified executive compensation standards. In 2 the case of a direct purchase the standards under section 111(b) of EESA include: (a) limits on compensation that exclude incentives on senior executive officers of financial institutions to take unnecessary and excessive risks that threaten the value of the financial institution during the period that the Treasury Department holds an equity or debt position, (b) recovery of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate, and (c) a prohibition on making any golden parachute payment to any of its senior executive officers during the period that the Treasury Department holds an equity or debt position. In the case of a financial institution that has sold assets under TARP in sales that are not solely direct purchases and the amount sold (including direct purchases) exceeds $300 million in the aggregate, the financial institution is prohibited under section 111(c) during the TARP authorities period from entering into any new employment contract with a senior executive officer that provides a golden parachute in the event of involuntary termination from employment, bankruptcy filing, insolvency, or receivership. See Interim final regulations issued by the Treasury under section 111(b) of EESA at 31 CFR part 30, Notice 2008-PSSFI under section 111(b) of EESA, and Notice 2008-TAAP under section 111(c) of EESA.

III. SECTION 302(a) OF EESA ADDING NEW § 162(m)(5)

A. Section 162(m) Background 3 Section 162(m) generally limits the otherwise allowable deduction for compensation paid or accrued with respect to a covered employee of a publicly
held corporation to no more than $1 million per year.

Section 162(m)(3) defines a covered employee as (1) the chief executive officer of the corporation (or an individual acting in such capacity) as of the close of the taxable year, or (2) one of the four most highly compensated officers for the taxable year (other than the chief executive officer) required to be reported to the shareholders under the Securities Exchange Act of 1934 (the Exchange Act).

In 2006, the Securities and Exchange Commission amended the rules related to executive compensation disclosure. In response to the 2006 amendment, the Treasury Department and the Service issued Notice 2007-49, 2007-1 C.B. 1429, which provides that “covered employee” means any employee who is (1) the principal executive officer (or an individual acting in such capacity) defined by reference to the Exchange Act or (2) among the three most highly compensated officers for the taxable year (other than the principal executive officer or the principal financial officer), again defined by reference to the Exchange Act.

Section 1.162-27(c)(2) of the Treasury Regulations provides that the individual must meet the criteria of chief executive officer or be among the highest compensated officers as of the last day of the taxable year in order to be a covered employee. If an individual is a covered employee for a taxable year, then a deduction limit applies to all compensation not explicitly excluded from the deduction limit, 1 A corporation is treated as publicly held if it has a class of equity securities that is required to be registered under section 12 of Securities Exchange Act of 1934. 4 regardless of whether the compensation is for services as a covered employee and regardless of when the compensation was earned. The $1 million limit is reduced by excess parachute payments (as defined in § 280G) that are not deductible by the corporation. Under § 162(m) as in effect prior to the amendment included in EESA, the following types of compensation generally are not subject to the deduction limit and are not taken into account in determining whether other compensation exceeds $1 million:

(1) remuneration payable on a commission basis;
(2) remuneration payable solely on account of the attainment of one or more performance goals if certain outside director and shareholder approval requirements are met (“performance-based compensation”);
(3) payments to a tax-qualified retirement plan (including salary reduction contributions);
(4) amounts that are excludable from the executive’s gross income; and
(5) any remuneration payable under a written binding contract that was in effect on February 17, 1993 and that was not materially modified thereafter. Because remuneration generally does not include compensation for which a deduction is allowable after a covered employee ceases to be a covered employee, the deduction limit does not apply to compensation that is deferred until after termination of employment.

B. Section 302(a) of EESA: Amendment adding § 162(m)(5) Section 302(a) of EESA amended § 162(m) to add § 162(m)(5), which reduces the deduction limit to $500,000 in the case of “executive remuneration” and “deferred deduction executive remuneration.” This limit applies only to certain employers (an “applicable employer”) for remuneration paid to certain 5 executives (“covered executives) during certain taxable years (an “applicable taxable year”). Employers covered under § 162(m)(5) are not limited to publicly held corporations (nor even to corporations). The exception for performance based compensation and certain other exceptions do not apply in the case of executive compensation covered under § 162(m)(5). Q&A-1 and &A-2 of this notice provide guidance on when an employer is an applicable employer, Q&A-3 provides guidance on when a taxable year is an applicable taxable year, Q&A-4 provides guidance on the determination of who is a covered executive, Q&A-5 provides guidance on mergers and acquisitions, Q&A-6 provides guidance on executive remuneration, and Q&A-7 through Q&A-10 provide guidance on deferred deduction executive remuneration.

Q-1: What is an applicable employer under § 162(m)(5)?

A-1: (a) General definition. An “applicable employer” is any financial institution that is an employer from whom one or more troubled assets are acquired under TARP, but only if the aggregate amount of the assets acquired exceeds $300 million. The assets that are counted for the $300 million threshold include assets that are acquired under TARP in accordance with section 101(a) of EESA. However, if the only such acquisitions from a financial institution are through a direct purchase, the financial institution is not an applicable employer. (For special rules with respect to employers that sell assets through a direct purchase, see section 111(b) of EESA, Interim final regulations issued by the 6 Treasury under section 111(b) of EESA at 31 CFR part 30, and Notice 2008-PSSFI under section 111(b) of EESA.)

(b) Controlled group rules. For purposes of § 162(m)(5), including the determination of whether the aggregate amount of assets acquired from an employer exceeds $300 million, two or more persons who are treated as a single employer under § 414(b) (employees of a controlled group of corporations) and § 414(c) (employees of partnerships, proprietorships, etc., that are under common control) are treated as a single employer. However, for purposes of applying the aggregation rules to determine an applicable employer, the rules for brother sister controlled groups and combined groups are disregarded (including disregarding the rules in § 1563(a)(2) and (a)(3) with respect to corporations and the parallel rules that are in § 1.414(c)-2(c) of the Treasury Regulations with respect to other organizations conducting trades or businesses). See Q&A-4 of this notice regarding the determination of a covered executive in a controlled group, and see Q&A-5 of this notice for special rules where a financial institution has acquired another financial institution through an acquisition.

(c) Example. Bank holding company X is the sole owner of banks A, B, and C. In December of 2008, bank A sells $150 million of assets under a TARP auction purchase. In February of 2009, bank B sells $100 million of assets under a TARP auction purchase. On August 14, 2009, bank C sells $100 million of assets under a TARP auction purchase. Bank holding company X, along with banks A, B, and C, plus any other entity that is treated as the same employer under the rules described in paragraph (b) of this Q&A-1, constitute a single 7applicable employer that has sold in excess of $300 million of assets under a TARP auction purchase. As provided in Q&A-4 of this notice, the chief executive officer and chief financial officer of bank holding company X and the three other most highly compensated officers of the bank holding company X controlled
group are “covered executives.”

Q-2: Can a corporation that is not publicly traded, or an entity that is not a corporation, be an “applicable employer”?

A-2: (a) General rule. Yes. An applicable employer for purposes of § 162(m)(5) is not limited to a publicly traded corporation or even to the corporate business form. Thus, an entity, whether or not publicly traded, is an applicable employer if the entity is described in Q&A-1 of this notice regardless of whether the entity is a corporation, a partnership (or taxed as a partnership for federal tax purposes), or a trust.

(b) Special rule for partnerships, grantor trusts, and similar entities. In the case of a partnership, grantor trust, or similar entity, the determination of whether more than $300 million of assets has been sold is generally made at the level of the selling entity (taking into account all entities that are treated as the same employer under the controlled group rules described in Q&A-1(b) of this notice). However, if the selling entity has no employees who are officers (or acting in the capacity of an officer), then the owner of the entity that manages the selling entity’s assets is the entity that may be the applicable employer (along with all 8 entities that are treated as the same employer as the selling entity under the controlled group rules described in Q&A-1(b) of this notice).

Q-3: What is an applicable taxable year to which the $500,000 deduction limit imposed by § 162(m)(5) applies?

A-3: Section 162(m)(5) does not apply to an employer unless, during a taxable year of the employer that includes any portion of the TARP authorities period, the aggregate amount of the troubled assets acquired under TARP from the employer in that taxable year, when added to the amount acquired from the employer under TARP for all preceding taxable years, exceeds $300 million (unless all such acquisitions are through a direct purchase. If the condition in the preceding sentence is satisfied, then § 162(m)(5) applies to that taxable year and to any subsequent taxable year of the employer that includes any portion of the TARP authorities period. (See Q&A-10 regarding the applicability of § 162(m)(5) to deferred deduction executive compensation after the TARP authorities period.) If the entities that are treated as a single applicable employer under the controlled group rules described in Q&A-1(b) of this notice do not have the same taxable year, the relevant taxable year is the taxable year of the parent entity in the controlled group.

Q-4: Who is a covered executive under § 162(m)(5)?

A-4: (a) General definition. A “covered executive” means an individual described in the following sentence who is employed by a financial institution that 9 is an applicable employer at any time during an applicable taxable year. Covered executives are limited to: (i) the chief executive officer (CEO) and the chief financial officer (CFO) (or an individual acting in either of those capacities) of the applicable employer during the taxable year that includes any portion of the TARP authorities period, and (ii) the three highest compensated officers of the applicable employer (including the entire controlled group) other than the CEO or CFO, taking into account only employees employed during the taxable year that includes any portion of the TARP authorities period (the high three officers).
(b) Determination of high three officers. For corporations that are subject to the Exchange Act (as defined in section III.A. of this notice), the high three officers are determined on the basis of the shareholder disclosure rules under the Exchange Act with one difference. In accordance with the Exchange Act disclosure rules, the term “officer” means those “executive officers” whose compensation is subject to reporting under the Exchange Act. For the purpose of determining the high three officers, compensation is defined as it is in the Exchange Act disclosure rules to include total compensation without regard to whether the compensation is includible in an executive officer’s gross income. However, unlike the Exchange Act disclosure rules that determine the high three officers by reference to total compensation for the last completed fiscal year, the measurement period for purposes of determining the high three officers for an applicable taxable year is that taxable year.
(c) Application to private employers and noncorporate entities. Rules analogous to the rules in paragraphs (a) and (b) of this Q&A-4 apply to employers that are not subject to the Exchange Act disclosure rules, including employers whose stock is not publicly traded and employers that are not corporations.
(d) Time period as a covered executive. If an employee is a covered executive with respect to an applicable employer for any applicable taxable year, the executive is a covered executive for any subsequent applicable taxable year, including being a covered executive in any later taxable year for purposes of the special rule for deferred deduction executive remuneration (described in Q&A-10 of this notice). (See Q&A-5 of this notice for special rules that apply in connection with an acquisition.) Q-5: How do the rules apply in connection with an acquisition, merger, or reorganization?

A-5: (a) Special rules for acquisitions, mergers, or reorganizations. In the event that a financial institution (target) that sold troubled assets under TARP is acquired by an entity that is not related to target (acquirer) in an acquisition of any form, the troubled assets sold under TARP by target prior to the acquisition are not aggregated with any assets sold by acquirer prior to or after the acquisition. For this purpose, acquirer is related to target if stock or other interests of target are treated (under § 318(a) other than paragraph (4) thereof) as owned by acquirer. 11 If, after an acquisition, troubled assets of target are sold by acquirer’s controlled group (including target in the case of a stock acquisition), those assets must be aggregated with any assets sold by acquirer, whether prior to or after the acquisition, for purposes of determining whether acquirer is an applicable employer. If target was an applicable employer at the time of the acquisition, acquirer will not become an applicable employer merely as a result of the acquisition. Further, if target was an applicable employer at the time of the acquisition, a covered executive of target will continue to be a covered executive during the TARP authorities period if he or she is employed by the controlled group of which target is a member, regardless of whether acquirer is an applicable employer and regardless of whether the target covered executive is a covered executive of the acquirer. However, if, after an acquisition, a target covered executive ceases employment with the controlled group of which target is a member, no new executive of target will be a covered executive merely because of such termination, unless such executive is a covered executive of acquirer.
(b) Example. In 2008, financial institution A sells $100 million of troubled assets under TARP and financial institution B sells $350 million of troubled assets under TARP. In January 2009, financial institution A acquires financial institution B in a stock purchase transaction, with the result that financial institution B becomes a wholly-owned subsidiary of financial institution A. In February 2009, financial institution A sells an additional $100 million of its troubled assets under TARP, and in March 2009 financial institution B (when it is 12 a wholly owned subsidiary of A) sells an additional $150 million of troubled assets. Neither the sale of troubled assets by financial institution A nor the sale of troubled assets by financial institution B are solely through direct purchases. Based on the rules in paragraph (a) of this Q&A-5, financial institution A is not an applicable employer as a result of the acquisition of B, or as a result of the assets sold in February 2009, because the $350 million of troubled assets sold by financial institution B prior to the acquisition are not aggregated with the troubled assets sold by financial institution A’s controlled group prior to and after the acquisition of financial institution B. However, financial institution A becomes an applicable employer in March 2009 when the amount of troubled assets sold by financial institution A’s controlled group (without regard to the sales by financial institution B prior to the acquisition of B by A) total $350 million. Further, because 2009 is an applicable taxable year with respect to financial institution B, the officers of financial institution B who are covered executives on the date financial institution B was acquired continue to be covered executives during any subsequent applicable taxable year that includes any portion of the TARP authorities period, as long as they are employed by financial institution A’s controlled group. Similarly, the CEO, CFO, and high three officers of financial institution A become covered executives in 2009 when financial institution A becomes an applicable employer.
Q-6: What constitutes executive remuneration to which the $500,000 limit imposed by § 162(m)(5) applies?

A-6: (a) General definition. For the purposes of the § 162(m)(5) $500,000 deduction limit, except as provided in paragraph (b) of this Q&A-6, executive remuneration means applicable employee remuneration, as determined under § 162(m)(4), but without regard to the following subparagraphs of § 162(m)(4): (B) (remuneration payable on a commission basis), (C) (performance-based compensation), or (D) (exception for existing binding contracts). Under § 162(m)(4), applicable employee remuneration for a year is based on the year in which the remuneration is deductible (whether or not the remuneration is paid in that year or is includible in the employee’s income in that year). For example, payments that are deductible by the employer in an applicable taxable year, but are paid to the covered executive by the 15th day of
the third month after the end of that year (as described in § 1.404(b)-1T, Q&A- 2(b)(1) of the Treasury Regulations), are executive remuneration for that applicable taxable year.
(b) Remuneration only for the applicable taxable year. The $500,000 deduction limit in § 162(m)(5)(A) applies to executive remuneration and deferred deduction executive remuneration attributable to services performed by a covered executive during an applicable taxable year. Under this rule, payments of remuneration that are deductible in an applicable taxable year for services performed by the covered executive in a prior taxable year are not treated as executive remuneration for purposes of § 162(m)(5). (See Q&A-7 through Q&A- 10 of this notice for rules related to deferred deduction executive remuneration.)

Q-7: How does the $500,000 deduction limitation imposed by § 162(m)(5) apply with respect to deferred deduction executive remuneration?

A-7: (a) General rule. No deduction is allowed for any taxable year for deferred deduction executive remuneration for services performed during any applicable taxable year by a covered executive, to the extent that the amount of the deferred deduction executive remuneration exceeds $500,000, minus the sum of: (i) the executive remuneration for that applicable taxable year, plus (ii) the portion of the deferred deduction executive remuneration for such services
taken into account in a preceding taxable year. Under this rule, the unused portion (if any) of the $500,000 limit for the applicable taxable year that has not been taken into account (and so is unused) is carried forward until the year in which the deferred deduction executive remuneration allocable to that applicable taxable year is otherwise deductible, and the remaining unused limit is then applied to the payment of the deferred deduction executive remuneration. (b) Examples. (1) Covered executive A is paid $400,000 in salary by an applicable employer in 2009 (an applicable taxable year) and A obtains a legally binding right attributable to services performed in 2009 to receive a payment of $250,000 in 2015. The full $400,000 in cash salary is deductible under the $500,000 limit in 2009. In 2015, the employer’s deduction with respect to the $250,000 is limited to $100,000, which represents the unused portion of the $500,000 limit from 2009 (and no deduction will be allowed for the remaining $150,000).15 (2) Covered executive B is paid $400,000 salary by an applicable employer in 2009 (an applicable taxable year) and B obtains a legally binding right attributable to services performed in 2009 to be paid $250,000 in 2010 (which is also an applicable taxable year), and B is paid $500,000 in salary in 2010. Accordingly, the employer’s deduction in 2010 for the $250,000 payment made in 2010 (attributable to services performed in 2009) is limited to $100,000. The entire $500,000 of salary earned in 2010 is deductible in 2010 (assuming other deduction requirements are satisfied).

Q-8: What is “deferred deduction executive remuneration” for purposes of § 162(m)(5)?

A-8: Deferred deduction executive remuneration means remuneration that would be executive remuneration for services performed by a covered executive in an applicable taxable year but for the fact that the deduction is allowable in a subsequent taxable year (determined without regard to § 162(m)(5)). The amount paid as deferred deduction executive remuneration is taken into account, without distinction between the amount deferred in the taxable year in which the services were performed and earnings thereon.

Q-9: How are the services to which deferred deduction executive remuneration is allocable determined?

A-9: (a) Period during which services are performed. For purposes of the $500,000 limit on the deductibility of deferred deduction executive remuneration 16 under § 162(m)(5)(A), the period during which the services are performed by a covered executive to which the remuneration is allocable is determined in accordance with this Q&A-9. (See Q&A-7 of this notice regarding the application of the deduction limits to deferred deduction executive remuneration.)

(b) Services to which deferred deduction executive remuneration is allocable. (1) General rule: Remuneration allocable to a service period based on plan formula. If an employee obtains a legally binding right to remuneration under a plan, agreement, or arrangement (plan) and that plan provides for benefit payments under a formula that relates to a specific period of service in a year (such as relating to compensation paid during that period), the deferred deduction executive remuneration is generally allocable to that specific period. To the extent that, based on the terms of the plan, deferred deduction executive remuneration is not allocable to services performed in a particular taxable year, then the remuneration generally is for services performed during the taxable year in which the employee obtains the legally binding right to the remuneration.

(2) Legally binding right. Deferred deduction executive remuneration is not allocable to a period prior to the date the employee is employed by the employer and obtains a legally binding right to the remuneration. An employee does not have a legally binding right to remuneration to the extent that compensation may be reduced unilaterally or eliminated by the employer or other person after the services creating the right to the remuneration have been performed. However, if the facts and circumstances indicate that the discretion to reduce or eliminate the remuneration is available or exercisable only upon a 17 condition, or the discretion to reduce or eliminate the compensation lacks substantive significance, then the employee has a legally binding right to the remuneration. For this purpose, remuneration is not considered subject to unilateral reduction or elimination merely because it may be reduced or eliminated by operation of the objective terms of the plan, such as the application of a nondiscretionary, objective provision creating a substantial risk of forfeiture. (See §§ 1.409A-1(b)(1) and 31.3121(v)(2)-1(b)(3)(i) of the Treasury Regulations for additional rules regarding when an employee obtains a legally binding right to remuneration.)

(3) Substantial risk of forfeiture. To the extent that an employee’s right to remuneration is subject to a substantial risk of forfeiture (as determined in accordance with the rules under § 1.409A-1(d) of the Treasury Regulations) in the form of a requirement to continue to perform substantial future services for the employer, the remuneration generally is for services performed over the period of time that the employee is required to continue to perform substantial future services for the employer and is allocated to that period on a pro rata basis, unless the remuneration is allocable to a different period under the rule in paragraph (b)(1) of this Q&A-9. If the substantial risk of forfeiture lapses early (such as due to death or disability), then the allocation is prorated over the period from when the employee obtained the legally binding right to the payment to the date that the substantial risk of forfeiture lapses. The only substantial risk of forfeiture taken into account for purposes of this paragraph (b)(3) is a requirement that the employee perform substantial future services. Any other 18 condition related to the purpose of the remuneration that may constitute a substantial risk of forfeiture is disregarded.

(c) Examples. (1) Employee A obtains on January 1, 2006 a legally binding right to be paid $400,000 at the end of December, 2010, but only if A continues to be employed on the date of payment. In this case, a pro rata portion of the remuneration is for services performed during 2006, 2007, 2008, 2009, and 2010 ($80,000 per year). If 2009 and 2010 are applicable taxable years for A’s employer and A is a covered executive in those years, then, for purposes of the $500,000 deductible limitation for 2009 and 2010, $80,000 of the $400,000 paid in 2010 would be deferred deduction executive remuneration allocable to services rendered in 2009 and $80,000 of the $400,000 paid in 2010 would be allocable to services rendered in 2010.

(2) Employee B obtains a legally binding right in 2008 to receive a payment of $100,000 in 2012 (without regard to continued employment) in the event that an asset is sold by that date for a price at or above a specified dollar amount, which, under the circumstances is a substantial risk of forfeiture. The risk of forfeiture is disregarded and the $100,000 payment is for services performed in 2008. The $100,000 payment made in 2012 is deferred deduction executive remuneration allocable to 2008 and is subject to the 2008 $500,000 deduction limitation.

(3) Employee C obtains on December 31, 2008 a legally binding right to be paid on February 1, 2011 an amount equal to 10 percent of employee C’s salary during the period from January 1, 2009 through December 31, 2010, and 19 employee C’s salary is $400,000 for each of 2009 and 2010. Under the terms of the plan in this case, the remuneration is allocable pro rata to services performed in 2009 and 2010, so that half of the $80,000 payment made on February 1, 2011 is for services performed in 2009 and the other half is for services performed in 2010.

(4) Employee D obtains on December 31, 2008 a legally binding right to be paid on January 1, 2015 an amount equal to 20 percent of D’s highest annual salary times the number of years of service completed by D before January 1, 2011, but only if D remains employed through December 31, 2010. Employee D remains employed through December 31, 2010 and has an annual salary of $400,000 in 2009 and $450,000 in 2010. Accordingly, Employee D receives a payment of $180,000 on January 1, 2015 (20 percent times 2 years of service times $450,000, D’s highest annual salary). Under the terms of the plan in this case, under the rule in paragraph (b)(1) of this Q&A-9, the remuneration allocable to services performed in 2009 is $80,000 (20 percent of Employee D’s annual salary in 2009 times 1 year of service). The remuneration allocable to services performed in 2010 is $100,000 (20 percent of $450,000, times 2 years of service, reduced by the remuneration allocable to services performed in 2009).

(5) Employee E obtains on December 31, 2008 a legally binding right to be paid $400,000 on February 1, 2011 (without any requirement of continued employment). Under these facts and circumstances, the remuneration is not allocable to services performed in a period of time after December 31, 2008, so 20 that the $400,000 paid on February 1, 2011 is for services performed during the taxable year that includes December 31, 2008.

(6) Employee F obtains on December 31, 2008 a legally binding right to acquire stock (a stock option) with an exercise price equal to the fair market value of the stock on December 31, 2008 (without any requirement of continued employment in order to be able to exercise the right and retain the shares). The remuneration is not allocable to services performed in a period of time after December 31, 2008, so that the remuneration resulting from exercise of the stock option is for services performed in the taxable year that includes December 31, 2008.

(7) Employee G obtains on January 1, 2009 a legally binding right to acquire stock (a stock option) over the next 10 years with an exercise price equal to the fair market value of the stock on January 1, 2009, but the stock option can be exercised only after the employee has continued his or her employment for three more years (through December 31, 2011). The employee exercises the right in 2014 resulting in income of $210,000. In this case, the payment of
$210,000 is allocable to services performed from January 1, 2009 through December 31, 2011, of which $70,000 is allocable to services rendered in 2009, $70,000 is allocable to services rendered in 2010, and $70,000 is allocable to services performed in 2011.

Q-10: How long does the limit imposed by § 162(m)(5) apply?

A-10: While the limit imposed by § 162(m)(5) only applies to remuneration for services performed in an applicable taxable year, the limit with respect to deferred deduction executive remuneration for services performed in an applicable taxable year applies for deductions in all subsequent taxable years (until the deferred deduction executive remuneration for services performed in that applicable taxable year is completely paid).

IV. SECTION 302(b) OF EESA ADDING NEW § 280G(e)
A. Section 280G Background

Section 280G, as in effect prior to the addition of § 280G(e) made by section 302(b) of EESA, provides that certain payments in excess of certain limits, referred to as “excess parachute payments,” are not deductible by a corporation. In addition, § 4999 imposes an excise tax on the recipient of any excess parachute payment equal to 20 percent of the amount of such payment. Subject to certain exceptions, § 280G(b)(2) defines a “parachute payment” as any payment in the nature of compensation to (or for the benefit of) a disqualified individual that is contingent on a change in the ownership or effective control of a corporation or on a change in the ownership of a substantial portion of the assets of a corporation (“acquired corporation”) if the aggregate present value of all such payments made or to be made to the disqualified individual equals or exceeds three times the individual’s “base amount.” Section 280G(b)(3) defines the individual’s base amount as the average annual compensation payable by the acquired corporation and includible in the individual’s gross income over the five taxable years of such 22 individual preceding the individual’s taxable year in which the change in ownership or control occurs. A disqualified individual is any individual who is an employee, independent contractor, or other person specified in Treasury regulations who performs personal services for the corporation and who is an officer, shareholder, or highly compensated individual of the corporation.

B. Section 302(b) OF EESA: Amendment of § 280G Section 302(b) of EESA amended § 280G by expanding the definition of a parachute payment to include certain severance payments made to a covered executive of an applicable employer participating in TARP. As defined in §280G(e)(2)(B), an applicable severance from employment is any severance from employment of a covered executive: (1) by reason of an involuntary termination of the executive by the employer or (2) in connection with a bankruptcy, liquidation, or receivership of the employer.
New § 280G(e) is effective for payments made during an applicable taxable year with respect to severances occurring during the TARP authorities period.

Q-11: Who is subject to the special rules in § 280G(e)?

A-11: The special rules in § 280G(e) apply to any covered executive of an applicable employer who has a severance from employment during an applicable taxable year that is treated as an “applicable severance from employment,” as defined in Q&A-12 of this notice. For purposes of § 280G(e), the terms “applicable employer,” “applicable taxable year,” and “covered executive” have 23 the same meaning as under § 162(m)(5) (as those terms are described in Q&A-1through Q&A-4 of this notice, and taking into account the special rule in Q&A-5 of this notice). However, § 280G(d)(5) (treatment of affiliated groups) and other provisions do not apply.

Q-12: What is an applicable severance from employment of a covered executive for purposes of § 280G(e)?

A-12: (a) Applicable severance from employment defined. An applicable severance from employment means any covered executive’s severance from employment with the applicable employer: (1) by reason of involuntary termination of employment with an entity that is an applicable employer or (2) in connection with any bankruptcy, liquidation, or receivership of an entity that is an applicable employer. (b) Involuntary termination. (i) An involuntary termination from employment means a severance from employment due to the independent exercise of the unilateral authority of the applicable employer to terminate the covered executive’s services, other than due to the covered executive’s implicit or explicit request, where the covered executive was willing and able to continue performing services. An involuntary termination from employment may include the applicable employer’s failure to renew a contract at the time such contract expires, provided that the covered executive was willing and able to execute a new contract providing terms and conditions substantially similar to those in the expiring contract and able to continue providing such services. In addition, a 24 covered executive’s voluntary termination from employment constitutes an involuntary termination from employment if the termination from employment constitutes a termination for good reason due to a material negative change in the covered executive’s employment relationship. See § 1.409A-1(n)(2) of the Treasury Regulations. (ii) A severance from employment by a covered executive is by reason
of involuntary termination even if the covered executive has voluntarily terminated employment in any case where the facts and circumstances indicate that absent such voluntary termination the applicable employer would have terminated the covered executive’s employment and the covered executive had knowledge that he or she would be so terminated. (See § 280G(e)(2)(C)(ii)(III).)

Q-13: What is a “parachute payment” for purposes of § 280G(e)?

A-13: (a) General definition. For purposes of § 280G(e), a “parachute payment” means any payment in the nature of compensation to (or for the benefit of) a covered executive made during an applicable taxable year on account of an applicable severance from employment during the TARP authorities period if the aggregate present value of such payments equals or exceeds an amount equal to three times the covered executive’s base amount. (See Q&A-14 of this notice for a definition of an excess parachute payment.)

(b) Payment on account of an applicable severance from employment. A payment on account of an applicable severance from employment means a payment that would not have been payable if no applicable severance from employment had occurred (including amounts that would otherwise have been forfeited due to severance from employment) and amounts that are accelerated on account of the applicable severance from employment. (See § 1.280G-1, Q&A-24(b) of the Treasury Regulations for rules regarding the determination of the amount that is on account of an acceleration.) Further, for purposes of §280G(e), the exclusions under § 280G(b)(2)(C) (payments under certain contracts entered into within 1 year of the change); § 280G(b)(4) (payment of amount determined to be reasonable compensation); § 280G (b)(5) (exceptions for small business corporations); and § 280G(d)(5) (treatment of affiliated groups)do not apply.

(c) Excluded amounts. Payments on account of an applicable severance from employment do not include amounts paid to a covered executive under a tax-qualified retirement plan.

(d) Base amount defined. For purposes of § 280G(e), the “base amount” for a covered executive has the meaning set forth in § 280G(b)(3) and § 1.280G-1, Q&A-34, of the Treasury Regulations, except that references to “change in ownership or control” are treated as referring to an “applicable severance from employment.”

Q- 14: What is an “excess parachute payment” for purposes of § 280G(e)?

A-14: For purposes of § 280G(e), an excess parachute payment is any parachute payment (as defined in Q&A-13 of this notice) in excess of the base amount allocated to the payment.26

Q-15: What are the consequences of an excess parachute payment?

A-15: (a) General rule. No deduction is allowed for an excess parachute payment. Further, a tax equal to 20 percent of the excess parachute payment is imposed on a covered executive who receives an excess parachute payment.

(b) Example. In 2008, which is an applicable taxable year for the employer, a covered executive has an applicable severance from employment. The covered executive’s base amount is $1 million and the covered executive receives a lump sum payment of $5 million on account of an involuntary termination of employment. The lump sum payment qualifies as a parachute payment since the amount of the lump sum payment ($5 million) is not less than three times the covered executive’s base amount (3 times $1 million equals $3 million). The amount of the excess parachute payment is equal to $4 million ($5 million payment less the covered executive’s $1 million base amount). Thus, under § 280G(e), the $4 million excess parachute payment is not deductible by the applicable employer. Further, the $4 million excess parachute payment is subject to a 20 percent tax payable by the covered executive.

Q-16: What if a payment treated as a parachute payment under § 280G(e) is also determined to be a parachute payment under § 280G without regard to § 280G(e)?

A-16: If a payment treated as a parachute payment under § 280G(e) is a parachute payment under § 280G on account of a change in control without regard to § 280G(e), then § 280G(e) does not apply to the payment.
Q-17: To which years does the deduction limit imposed by § 280G(e) apply?

A-17: The limit imposed by § 280G(e) applies to remuneration paid in an applicable taxable year. (See Q&A-3 of this notice for additional information, including the definition of an applicable taxable year.)

REQUEST FOR COMMENTS

The Treasury Department and the Service anticipate issuing additional guidance with respect to §§ 162(m)(5) and 280G(e). The Treasury Department and the Service request comments on the topics addressed in this notice. All materials submitted will be available for public inspection and copying.

Comments may be submitted to Internal Revenue Service,

CC:PA:LPD:PR (Notice 2008-94), Room 5203, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Couriers Desk at 1111 Constitution Avenue, NW, Washington, DC 20224, Attn:CC:PA:LPD:PR (Notice 2008-94), Room 5203. Submissions may also be sent electronically via the internet to the following email address:
Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2008-94) in the subject line.

EFFECTIVE DATE
Until further guidance is issued, taxpayers may rely on the rules in this notice for purposes of §§ 162(m)(5) and 280G(e) effective from October 3, 2008 (the date of enactment of EESA). Further guidance will be prospective to the extent that it is more restrictive.

CONTACT INFORMATION
For further information regarding this notice, contact Ilya Enkishev of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities) at (202) 622-6030 (not a toll-free call).

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