IRS Notice 2007-100
On December 3, 2007 the IRS issued Notice 2007-100 explaining the terms and extent of its correction program for unintentional operational failures under Code Section 409A. This is an important program since certain violations may avoid the draconian penalties otherwise applicable under 409A (note there are no exceptions for de minimis violations under 409A). Groom Law Group wrote a memorandum summarizing the Notice.
House of Representatives Report on Conflicts of Interest Among Compensation Consultants
In December 2007, the House of Representatives Committee on Oversight and Government Reform prepared a report on conflicts of interest among compensation consultants, at the request of Chairman Henry A. Waxman, which expresses concern regarding financial conflicts of interest for consultants when they provide both executive compensation advice and other services to the same corporate client. Among other things, the report concludes that compensation consultant conflicts of interests are pervasive, fees earned by consultants for other services often far exceed those earned for advising on executive compensation and a possible correlation between the extent of a consultant’s conflict of interest and the level of CEO pay.
Economic Substance Doctrine
On October 25, 2007, SB 2242, the Heartland, Habitat, Harvest and Horticulture Act was introduced. The bill, if adopted, would amend the Trade Act of 1974 and the IRC of 1986. While primarily directed toward conservation, alternative energy and tax relief for farmers, the bill would also seek to codify a form of the judicially created doctrine known as the economic substance doctrine.
A specific form of this doctrine has been around since the 1950s and, apart from this codification effort, tax lawyers have long had to address the possible application of this doctrine to various transactions, including virtually all of the recent leveraged COLI cases. We are tracking this bill due to questions regarding how such a new statute would apply to any transaction in which the presence of federal tax benefits are material, such as the tax free death benefit and the inside buildup of COLI/BOLI plans.
Presumably there would be less concern for transactions being impacted by such codification where the tax benefits have been specifically and explicitly authorized by Congress (e.g., 101(j)).
Risk Based Capital Standards: Advanced Adequacy Framework – Basel II
On December 7, 2007 the OCC, FDIC, FRB and OTS collectively issued a final rule titled Risk Based Capital Standards: Advanced Adequacy Framework – Basel II. The final rules requires some banks and permits others to adopt a new risk-based capital adequacy framework involving an internal ratings based approach to calculate regulatory credit risk capital and advanced measurement approaches to calculate regulatory operational risk capital requirements. The final rules explain the criteria for banks to operate under the new framework and become effective April 1, 2008.
EEOC Moves to Protect Retiree Health Benefits
On December 26, 2007 the EEOC published final rules relating to the interplay between the Age Discrimination in Employment Act (ADEA) and Retiree Health Benefits. The final rules are intended to provide clarification so that employers may create, adopt, and maintain a wide range of retiree health plan designs without violating ADEA. The rules provide an exemption to address concerns that the ADEA may create an incentive for employers to eliminate or reduce such benefits.
Ad Hoc LRA – January 15, 2008
IRS Form 8925 for Reporting Employer-Owned Life Insurance
The final IRS reporting form for post-PPA/COLI BPA purchased COLI and BOLI plans is required for 2007 and must be attached to the policyholder’s tax return. The form asks about the total number of covered lives and whether the consent requirements were satisfied for PPA/COLI BPA -covered policies.
It is our understanding that the form must only be included for purchases made after the effective date of PPA/COLI BPA (August 17, 2006). Most IRC Section 1035 exchanges effected after the date of enactment should be exempt from filing the form as well.