Making Your Section 409A List and Checking it Twice: Year-end Deadline for Amending Agreements Providing for Certain Severance Payments Contingent on Employee Action

Posted by T. Mark Edwards on December 07, 2012

Section 409A of the Internal Revenue Code (the “Code”) governs deferred compensation arrangements and requires such arrangements to comply with very specific rules to avoid the imposition of additional taxes (at the rate of 20%), interest and penalties on the deferred compensation payable to covered employees and other service providers.  With certain exceptions described briefly below, compensation arrangements providing for severance payments, such as severance agreements or policies, employment agreements and change in control agreements, are subject to Section 409A of the Code.

The IRS takes the position that the timing of the payment of Section 409A covered severance benefits based upon when the employee signs a release or other required agreement is a Section 409A violation.  The IRS has issued guidance (Notice 2010-80) that provides transition relief by permitting employers to correct certain documents that condition payment upon employee action, such as execution of a release or other agreement by the employee and the timing of the payment is based on the date the employee executes the release or other agreement, provided the correction is made no later than Dec. 31, 2012.

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Board Governance: Identifying and Understanding a Risk

Posted by Gardere Wynne Sewell LLP on August 03, 2011

There is no question over the last few years that risk management has been an increasing topic of discussion for boards of directors and the subject of legislative and regulatory actions.  A board of directors, along with management, is faced with the task of identifying, assessing and managing risks, whether general to business, industry-specific or unique to the company.  Add in an ever-changing landscape of risks on each front and it is a daunting task.

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You Need to Be Focused on Fringe Benefits and Reimbursement Arrangements

Posted by T. Mark Edwards on July 27, 2011

Does your public company reimburse employees’ business or moving expenses?  Provide company vehicles, achievement awards, safety awards, education assistance, tuition reimbursements, company credit cards or other fringe benefits or expense reimbursements?  Reward employees with gift cards?  If so, you should be aware the Internal Revenue Service is focused on fringe benefits as part of its efforts to close the “tax gap”.

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IRS Provides Additional Guidance on Reporting Uncertain Tax Positions

Posted by Gardere Wynne Sewell LLP on March 25, 2011

Beginning January 1, 2010, certain corporate taxpayers became required to file IRS “Schedule UTP,” where taxpayers must disclose tax positions for which the taxpayer or a related entity has recorded, or in some cases not recorded, a reserve on its financial statements. 

The IRS recently published responses to a set of “frequently asked questions” with respect to Schedule UTP.  These FAQs supplement the information contained in the IRS’s 2010 instructions (PDF) and the other guidance previously issued on Schedule UTP.

The FAQs provide guidance on the following issues relating to the completion of Schedule UTP:

  • Whether Schedule UTP requires a tax position to be disclosed if the corporation did not record a reserve on its financial statements because the corporation was “highly certain” of its tax position for purposes of FIN 48.  The FAQs make clear that the FIN 48 threshold also satisfies Schedule UTP, meaning that such a position does not need to be disclosed.
  • Whether a tax position must be disclosed on Schedule UTP if the corporation records a reserve in an audited financial statement for such tax position because it expects to take such tax position in a return, but later eliminates the reserve in a subsequent interim financial statement issued before the filing of the return.  The FAQs provide that if the subsequent interim financial statement is unaudited, then disclosure is required.  However, if the subsequent interim financial statement is audited before the tax position is taken in a return, then the corporation does not need to report the tax position.
  • Whether a tax position must be disclosed on Schedule UTP if a return includes a net operating loss (NOL) or credit carryforward that includes a pre-2010 tax position for which a reserve has been recorded.  The FAQs make clear that the use of a NOL or credit carryover in a post-2009 return does not have to be reported in this circumstance.
  • Whether interest and penalties must be included in determining the size and ranking of a tax position recorded on Schedule UTP.  The FAQs provide that the size of a tax position is the amount of the reserve recorded for that position.

In addition to the above, the FAQs also set forth additional guidance from the IRS on changes to its policy of restraint that the IRS announced in Announcement 2010-76 (PDF).  In summary, the FAQs focus on how the changes to the policy of restraint apply to requests for documents during all stages of the administrative process of determining the correct tax liability and well as with respect to discovery requests after the filing of a Tax Court petition.

OUR TAKE:  The FAQs provide help understanding certain murky areas of previously published guidance.  As such, the FAQs may help some companies from exaggerating their tax risk profile.  However, like any new tax form, as both taxpayers and the IRS gain additional experience with Schedule UTP, it is likely that further guidance will be necessary.