0511DYSONPROVENZANO

44 %
56 %
Information about 0511DYSONPROVENZANO
Entertainment

Published on January 13, 2008

Author: Doride

Source: authorstream.com

Developments in Fringe Benefits & Nonqualified Deferred Compensation Tax Advocacy Workshop AGA-INGAA:  Developments in Fringe Benefits & Nonqualified Deferred Compensation Tax Advocacy Workshop AGA-INGAA Marianna G. Dyson 202.626.5867 mdyson@milchev.com Anthony G. Provenzano 202.626.1463 aprovenzano@milchev.com Washington, D.C. November 7, 2005 Presentation Overview:  Presentation Overview Executive compensation examinations Deduction disallowance for entertainment use of employer’s aircraft Update on section 409A Update: IRS Executive Compensation Audit Initiative:  Update: IRS Executive Compensation Audit Initiative Under its Market Segment Specialization Program, the IRS released on April 13 audit techniques guides for the following executive compensation issues (www.irs.gov): Nonqualified deferred compensation Stock-based compensation 162(m) limits 280G issues Split-dollar issues Fringe benefits Themes in IRS Audit Techniques Guide For Fringe Benefits:  Themes in IRS Audit Techniques Guide For Fringe Benefits Deduction disallowances under sections 274 and 162(m), in addition to the failure to impute and report wage income; Entertainment (e.g., personal travel, club memberships, vacations, and skyboxes); Spousal benefits; Accountable plans under section 62(c) (misuse of corporate credit cards); Loans; Themes in IRS Audit Techniques Guide For Fringe Benefits (cont’d):  Themes in IRS Audit Techniques Guide For Fringe Benefits (cont’d) Meals (executive dining rules, catered events); Post-termination benefits, including the taking or keeping property and participation in discount programs; Use of employer-provided transportation (cars, planes, and chauffeurs); Personal use of other listed property; and Security. Chronology of New Rules Regarding the Personal Use of Business Aircraft:  Chronology of New Rules Regarding the Personal Use of Business Aircraft October 22, 2004 – enactment of the American Jobs Creation Act of 2004 (“AJCA”). October 22, 2004 – effective date of Section 907 of the AJCA limiting deduction for entertainment use of aircraft. May 27, 2005 – release of Notice 2005-45, providing interim guidance on new rules. July 1, 2005 – effective date of interim rules in Notice 2005-45. Statutory Framework:  Statutory Framework General disallowance of entertainment expenses. Code 274(a) bars deductions for goods, services and facilities in connection with the entertainment, amusement, or recreation. Exceptions to disallowance include (among others) - Expense is directly related to or associated with the taxpayer’s trade or business (Code §274(a)(1)(A)) . Expense is treated as compensation to employee or individual (Code § 274(e)(2) (pertaining to employees) and (e)(9) (pertaining to non-employees)). Impact of Section 907 of AJCA Revised § 274(e)(2) and (e)(9) to provide that in the case of a “specified individual,” the exception is limited to the amount treated as compensation to the recipient (and reported on corporate return). Requirements For Treating as Compensation under New Rule:  Requirements For Treating as Compensation under New Rule Where “specified individual” is an employee, deduction limited to the amount treated as wages for payroll tax and reporting purposes. Where “specified individual” is a director or other independent contractor, deduction limited to amount reported as compensation income on a Form 1099-MISC. Amounts that must be recognized by employees or independent contractors must be reported on the corporate income tax return as compensation. Definition of Specified Individuals:  Definition of Specified Individuals Section 274(e) defines “specified individual” as any individual who is subject to the reporting requirements of § 16(a) of the Securities Exchange Act of 1934 or would be subject to those requirements if the taxpayer were publicly traded. Notice 2005-45 applies the entertainment deduction disallowance rules to companies that are not publicly traded. The disallowance provisions apply to use by a specified individual of a party related to the taxpayer within the meaning of § 267(b) or 707(b) of the Code, if the taxpayer provides entertainment use of an aircraft to such specified individual. Definition of Specified Individuals (Cont’d):  Definition of Specified Individuals (Cont’d) The Notice appears to potentially reach the use of corporate aircraft by officers and directors of affiliates of the aircraft owner (to the extent they are not already subject to § 16(a)), thus expanding the scope of the disallowance rule. The Notice fails to address the issue of whether the taxpayer is effectively “credited” with the compensation reported by the related party. The specified individual is treated as the recipient of the entertainment provided to a spouse, family member or another person because of the person’s relationship to the specified individual, and all entertainment costs are allocable to the specified individual. Overview of Expense Allocation Methodology :  Overview of Expense Allocation Methodology Methodology in Notice 2005-45 is punitive Methodology does not focus on incremental cost associated with entertainment use of aircraft by a specified individual, but forces proportional allocation. Methodology ignores other business reasons for operating aircraft carrying specified individual Calculating Expenses Attributable to the Entertainment Use of an Aircraft:  Calculating Expenses Attributable to the Entertainment Use of an Aircraft All expenses attributable to the maintenance and operation of an aircraft must be aggregated for the taxable year. Total expenses are then divided by either occupied seat hours or occupied seat miles flown to determine the cost of each occupied seat hour or mile for the year. The taxpayer may choose the occupied seat hours or occupied seat miles, but must use the chosen method consistently for all usage for the taxable year. The cost per occupied seat hour or mile may be calculated for each aircraft, and aircraft with similar profiles may be aggregated. The amount disallowed under the new rules equates to the cost of each occupied seat hour or mile flown by the specified individual for entertainment purposes, less the sum of the amount treated as compensation and the amount reimbursed for each specified individual and each flight. Calculation Observations:  Calculation Observations Occupied seat methodology versus a flight-by-flight rule The Notice’s method for allocating expenses appears to skew allocation of expenses to flights that are more heavily occupied, as opposed to a flight-by-flight rule. Example: Assume that an aircraft only took two trips in a taxable year to the same location and back. On one trip, the CEO flies alone on the aircraft. On the other trip, the CEO and eight family members fly for personal purposes. The allocation method allocates 9/10ths of the expenses to the latter flight, subjecting them to disallowance. Entertainment and Entertainment Facility – Open Questions:  Entertainment and Entertainment Facility – Open Questions Notice 2005-45 fails to address the following: The definition of “entertainment” used in Notice 2005-45 is vague and relies on an old regulatory definition that fails to specifically reference personal use of aircraft. The Notice fails to clearly define the meaning of “entertainment facility.” The Notice suggests that there is some personal use that is not entertainment, but fails to offer examples of personal flights that do not constitute entertainment. The Notice fails to offer any insight into when certain activities or the usage of certain facilities will change into entertainment use. Broad Scope of Notice’s Rules Regarding Types of Aircraft:  Broad Scope of Notice’s Rules Regarding Types of Aircraft Notice 2005-45 makes clear that the ownership of the aircraft is not relevant in applying new rules. The cost of leased or chartered aircraft is subject to the disallowance rules, unless otherwise excepted. The disallowance rules also apply to aircraft operated on a regular schedule and personal flights provided for bona fide, business-oriented activity security concerns under the special rule of Treas. Reg. § 1.132-5(m). Broad Scope of Rules - Expenses Subject to Deduction Disallowance:  Broad Scope of Rules - Expenses Subject to Deduction Disallowance Fuel costs Pilots salaries Maintenance and other personnel costs Meals and lodging costs of flight personnel On-board refreshments, amenities, or gifts Hangar fees Depreciation and section 179 amounts Charter costs, including amounts paid for flight time, waiting time, fuel, and overnight costs Lease payments under aircraft lease arrangements The following fixed and variable operating expenses are subject to the deduction disallowance: Special Rules for Deadhead Flights:  Special Rules for Deadhead Flights A “deadhead flight” is when an aircraft returns empty from a flight after discharging passengers or traveling empty to pick up passengers.” A deadhead flight is deemed to have the same number and character of occupied seat miles or hours as the leg or legs of the trip on which passengers are aboard (“mirror treatment”). Uncertainties exist regarding the application of the mirror treatment rule for trips where there is no one-to-one match. For example, it appears that this mirror treatment may not apply if the aircraft flies on to a different destination to pick up a business traveler, or if the aircraft picks up a business traveler when it drops off the executive. Section 409A Presentation Overview:  Section 409A Presentation Overview Background Deadlines under new proposed regulations New rules under proposed regulations -- 10 things you need to know What you should be doing in 2005 Section 409A - Background:  Section 409A - Background Four main areas affected by new rules Deferral elections (initial and subsequent) Timing of distributions Acceleration events (payments, vesting, plan termination) Funding arrangements Reporting requirements Section 409A - Background:  Section 409A - Background Section 409A - Background:  Section 409A - Background Proposed effective date – when are the rules effective? Proposed regulations generally effective for tax years on or after 1/1/07 Will not affect applicability of any other guidance – e.g., Notice 2005-1 or interim guidance Good faith compliance – choice between Notice 2005-1 or proposed regulations Section 409A - Deadlines:  Section 409A - Deadlines Original December 31 deadline Amend plan Administer opt-in, opt-out election Obtain distribution election Terminate pre-2005 grandfather Coordinate with payroll Section 409A - Deadlines:  Section 409A - Deadlines Deadlines under proposed regulations – a mixed bag Notice 2005-1 generally remains in effect through 2006 Certain transition relief extended through 2006 Certain transition relief will cease on 12/31/05 Section 409A - Deadlines:  Section 409A - Deadlines Good news - transition relief extended through 2006 Plan amendments Good-faith compliance period Note: Exercise of discretion by employer or employee that causes plan to violate 409A – not good faith Employer exercise effects the whole plan Employee exercise effects employee only Section 409A - Deadlines:  Section 409A - Deadlines Good news - transition relief extended through 2006 New payment elections Applies to time and form of payment Note: Blackout in 2006 -- relief does not permit deferral of amounts otherwise payable in 2006 or acceleration of amounts paid in 2006 Section 409A - Deadlines:  Section 409A - Deadlines Good news - transition relief extended through 2006 Time and form of payment controlled by qualified plan election Caveat: Constructive receipt rules still apply Substitution for discounted options and SARs Caveat: Cancellation and re-issuance may not result in exchange for cash or vested property in 2006 Section 409A - Deadlines:  Section 409A - Deadlines Bad news - transition relief not extended Initial elections – no carryover of “March 15” rule Opt-out rule for cancellation of deferrals and termination of participation – shuts down in 2005 Termination of grandfathered plans – shuts down in 2005 Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations Overview of new proposed regulations Scope of 409A remains very broad Rules, rules and more rules Squeaky wheels got the grease “Pencils down” aspect -- many items not covered or not fully developed 10 important developments Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations #10: No blanket exception for foreign plans and arrangements – only limited, complicated exceptions Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations #9: Exception for short-term deferral rule retained in proposed regulations Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations #8: New rules governing modification and extension of stock options and SARs Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations #7: No blanket exception for severance or separation pay – only limited exceptions for severance, separation pay, post-retirement taxable fringe benefits Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations #6: Additional flexibility for late initial elections for certain mid-year awards, multi-year incentive pay, and golden handshake payments Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations #5: Some relief for 401(k) spillover and wrap plans but maybe less than meets the eye re wrap plans. Likely difficult to keep plans “linked.” Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations # 4: Additional flexibility for combination of distribution events and for certain permitted delays Section 409A – Proposed Regulations:  Section 409A – Proposed Regulations #3: Additional flexibility under second election rules that will allow switching from annuity/installment to lump sum Section 409A - Proposed Regulations:  Section 409A - Proposed Regulations #2: Plan can give employer right to terminate plan and make distributions, subject to certain limitations Section 409A - Proposed Regulations:  Section 409A - Proposed Regulations #1: New focus on employment and severance agreements. Many agreements will constitute a “bag of snakes” with promises of severance, deferred compensation (delayed payments of bonuses, equity, etc.) These agreements will be difficult to renegotiate. Section 409A What Employers Should Be Doing:  Section 409A What Employers Should Be Doing Review inventory of affected plans and plan design in light of guidance By 12/31/2005: Consider opt-outs and termination of grandfathered plans (need for amendments) Review modifications to grandfathered items and stock rights Obtain irrevocable elections for compensation and payments in 2006 Consider submitting comments

Add a comment

Related presentations