Last week, I blogged on a helpful Revenue Ruling from the IRS on Code Section 457A. My partner Michael Falk reminds me that the language in the proposed Code Section 409B in the proposed Tax Reform Act of 2014 is almost identical to the language in Section 457A. Thus, if it became law, new Section 409B would effectively eliminate deferred compensation and stock options for all U.S. taxpayers. Yes, that’s right, stock options (and SARs) too. Unlike 409A or 457A, proposed Section 409B defines deferred compensation to include “any plan that provides a right to compensation based on the appreciation in value of a specified number of equity units of the service recipient or stock options,” extending its intended reach to stock options, SARs, and potentially, certain other stock-based compensation awards.
No one expects Congress to pass any significant tax reform this year. However, this is how bad ideas get hatched. Remember, much of the American Jobs Creation Act of 2004, which gave us 409A, and the Dodd-Frank Act (and the Sarbanes-Oxley Act before it), came from previously proposed legislation that remained on the “wish list” of some Congressman or governmental agency (i.e., IRS) until a crisis occurred and everyone agree to rush through a massive piece of legislation (without study) to address it.
It is even more worrisome that that the proposed Tax Reform Act of 2014 and Code Section 409B were proposed by Dave Camp, the Republican Chairman of the House Committee on Ways and Means. Eliminating the ability to defer compensation (and award stock options or SARs) generally would increase and accelerate income tax revenues. It also would decrease corporate deductions, but the proposed Tax Reform Act of 2014 also provides for corporate tax rates more consistent with the rest of the world [lower], so deductions would be less valuable.