Useful Resources for Year-End Executive Compensation Tax Planning

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (PDF), signed by President Obama on December 17, extended existing tax rates through 2010. The Act avoided changes that would have caused a flurry of planning activity at year end. Still, this is the last chance for a last-minute consideration of any year-end tax planning considerations.

The subscription service mystockoptions.com recently came out with two helpful web articles:

“What impact does the new 2010 Tax Relief Act have on stock compensation and year-end financial planning?”

“Ten Ideas For Year-End Tax Planning With Stock Options And Company Stock”

I found these articles to be a useful and comprehensive checklist for stock plan professionals – good for issue-spotting, if nothing else (even though some of the links represent content that can’t be viewed without a subscription). The discussion of alternative minimum tax (AMT) rates is especially helpful.

By the way, the new tax law is only 30 pages long. After all the times I have linked to the 800 page-plus Dodd-Frank Act, a 30 page law is a pleasant surprise.

ISS Issues FAQs on Frequency Vote and Other Policies

Last week, the shareholder advisory service ISS issued Frequently Asked Questions on its 2011 compensation policies, including several questions on the frequency vote. As reported in this previous post, ISS is recommending that shareholders vote in favor of an annual Say-on-Pay vote. Mark Borges of Compensia, in his Proxy Disclosure Blog on compensationstandards.com (subscription site), offers some useful observations on the FAQs:

Question No. 2: Would a management recommendation of a two-year or three-year frequency trigger a negative recommendation from ISS on other proxy items? Answer: We have no policy concerning management's recommendation for the say on pay frequency. [Borges] Observations: In other words, during the 2011 proxy season (or, at least, the next four or five months) a recommendation of the board of directors for a biennial or triennial ‘Say on Pay’ vote will not have adverse collateral consequences on other compensation-related proposals (or the election of directors) that are slated for consideration at the annual meeting of shareholders. . ..

Question No. 4: In the event that a company's board decides not to adopt the say on pay vote frequency supported by a plurality of the votes cast, what are the implications in terms of ISS' voting recommendations at subsequent meetings? Answer: This policy has not been determined. The policy will be decided after review of the first year of voting results and after consultation with ISS's clients, and will be included in the policy updates for 2012. [Borges] Observations: . . . While ISS could go in many different directions, I expect that, where a board of directors selects a frequency for future "’Say on Pay’ votes that differs from the frequency supported by a plurality of the votes cast, it will consider that a basis for recommending a "withhold" or "against" vote for compensation committee members (and, potentially, all directors). Of course, the analysis of the board's decision may not always be that straightforward. . . . Ultimately, I suspect that whether ISS considers this important enough to warrant a formal policy will depend less on the vote results themselves, but on how companies respond to those results.

Happy Holidays from Maslon!

Here is the Holiday greeting from Maslon Law Firm - I wanted to share it with all of you. Have a wonderful holiday season, and safe travels!

Image: flikr

 

IRS Employment Tax Audit Program Will Affect Taxation of Executive Compensation

In the past couple of weeks, the IRS began to mail audit notices to companies in its first major study of employment tax practices in 25 years. Even companies that are not targeted right away should be aware of the new program, and the shift it signals in the IRS’s posture toward executive compensation.

Last fall, the IRS announced that it will randomly select 2,000 businesses per year over the next three years for examination of their employment tax practices as part of the Employment Tax National Research Project. The IRS announcement says that the examinations “will be comprehensive in scope”. Over at Bloomberg, reporter Ryan J. Donmoyer confirmed that the examinations will include a detailed review of executive compensation tax practices for the subject companies.

Commentary. If your company is one of the lucky 2,000 selected for examination this year, you obviously have your work cut out for you. But if you don’t get a notice, why should you care about the IRS program? Because it signals a shift in IRS policy toward complex executive compensation taxation issues. Your friendly tax collector is likely to get less friendly when it comes to executive compensation.

Employers structuring executive compensation programs have to deal with the complex and sometimes fuzzy requirements of:

  • Section 409A covering non-qualified deferred compensation; and
  • Section 162(m), the cap on deductibility of some executive compensation of public companies.

Clients have often asked us about the risk of an IRS audit covering these and other executive compensation tax issues. Until now, there was very little evidence that the IRS was targeting these areas.

However, the IRS’s new initiative indicates that there may well be a new focus on compensation tax issues, and the initial 6,000 targeted companies will just be the first step. One of the main goals of the new initiative is “. . . to determine compliance characteristics so IRS can focus on the most noncompliant tax areas.” In other words, expect the IRS to use the information gathered in the study to get more aggressive with a broad range of companies in connection with specific practices under Section 162(m) and Section 409A.

Therefore, executive compensation professionals at public companies (and privately held companies as well) should be reviewing their compliance with executive compensation tax requirements with additional care.