Fixing Section 409A: Legislative and Administrative Options
Gregg D. Polsky
University of Georgia Law School
January 31, 2012
Villanova Law Review, Forthcoming
UNC Legal Studies Research Paper No. 1996746
This symposium contribution to the Villanova Law Review describes the legislative calamity that is section 409A of the Internal Revenue Code. Section 409A manages, all at once, to (i) fail to better neutralize the tax treatment of deferred compensation with that of current compensation, (ii) impose significant compliance costs on sophisticated taxpayers, and (iii) provide a dangerous trap for unsophisticated taxpayers.
Ideally, Congress should repeal section 409A and replace it with a system that taxes deferred compensation more neutrally vis-a-vis current compensation. Failing that, Congress should either replace section 409A with a broad grant of authority to the Treasury and IRS to strengthen the constructive receipt and economic benefit doctrines or amend section 409A to limit its scope to employee compensation paid by public companies.
If Congress fails to act, the Treasury should interpret the term “compensation” as used in section 409A to include only compensation paid by public companies to their employees or directors. This arguably counter-textual interpretation of the statute creates the potential for whipsaw of the IRS by nonpublic companies and their employees, but this problem is outweighed by the benefits from cleaning up section 409A.
Number of Pages in PDF File: 15
Keywords: taxation, deferred compensation, nonqualified deferred compensation, section 409A, constructive receipt, economic benefit doctrine, rabbi trusts, deferral
Date posted: February 2, 2012