Corporate Securities Law Blog

The California Franchise Tax Board has announced that it will not appeal a recent court ruling that a fee levied on limited liability companies is an unconstitutional tax. The FTB plans to issue a notice April 14 addressing how protective refund claims filed by taxpayers will be handled. The deadline for filing a refund claim for the 2003 tax year is April 15, 2008.

(This is an update to our February 14, 2008 blog post.)

On January 25, 2008, the Internal Revenue Service ("IRS") released Private Letter Ruling ("PLR") 200804004. This new PLR has apparently reversed an important position that served as guidance to public companies and practitioners regarding the tax deductibility of certain performance-based pay under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). For background, Code Section 162(m) generally limits the ability of public companies from deducting compensation in excess of $1 million paid to certain executive officers. However, compensation that meets the requirements of "performance-based compensation" is exempt from the $1 million limit under Code Section 162(m). Generally, compensation qualifies as performance-based only if it is payable when predetermined performance objectives are actually achieved in accordance with performance criteria that has been approved by shareholders. The regulations under Code Section 162(m) provide that compensation does not fail to qualify as performance-based merely because compensation is payable upon death, disability or a change in ownership or control.

Employers must furnish employees who exercised incentive stock options ("ISOs") or sold or otherwise transferred shares acquired under an employee stock purchase plan ("ESPP") during 2007 with a detailed information statement by January 31, 2008.

A requirement that corporations additionally file such information in a return with the Internal Revenue Service ("IRS") was added in 2006.  However, because regulations providing guidance on this new reporting requirement have yet to be issued, the obligation to file an information return with the IRS has been temporarily waived.  The IRS still plans to issue regulations regarding the reporting requirement and the regulations may be effective retroactively to January 1, 2007.  Note, however, that employers must continue to supply employees with the required information statements.

For further information and sample information statements, please contact Dawn Moehn at (213) 617-4246

In Notice 2007-49, the IRS indicated how it will define "covered employee" for purposes of Internal Revenue Code §162(m)'s annual limit of $1,000,000 on deducting compensation of public company officers in light of the September 8, 2006 amendments to Item 402 of Regulation S-K.

The September 8, 2006 amendment to the SEC executive compensation disclosure rules (i) added the "principal financial officer" as a "named executive officer" by reason of position, and (ii) reduced from four to three the number of other executives treated as "named executive officers" by reason of compensation. Companies must comply with the amended disclosure rules for fiscal years ending on or after December 15, 2006. However, §162(m) applies only to the chief executive officer, and does not apply to the chief financial officer, by reason of the executive's position. Also, §162(m) applies to officers other than the CEO only to the extent the SEC requires disclosure of their compensation.

Notice 2007-49 states the term "covered employee," for purposes of §162(m), will apply to the principal executive officer and the three highest compensated officers (other than the principal executive officer and principal financial officer). Accordingly, the term "covered employee" does not include those individuals for whom disclosure is required under the SEC executive compensation disclosure rules on account of the individual being the principal financial officer.

For further information, please contact David Paik or Martin Smith.

ANY TAX ADVICE HEREIN WAS NOT INTENDED OR WRITTEN BY THE AUTHOR TO BE USED, AND IT CANNOT BE USED BY ANY RECIPIENT, FOR THE PURPOSE OF AVOIDING ANY TAX PENALTIES THAT MAY BE IMPOSED ON ANY PERSON. THERE IS NO LIMITATION IMPOSED ON A RECIPIENT HEREOF BY THE AUTHOR HEREOF ON DISCLOSURE OF THE TAX TREATMENT OR TAX STRUCTURE OF ANY TRANSACTION. EXCEPT WITH PRIOR WRITTEN CONSENT OF THE AUTHOR, NOTHING HEREIN MAY BE USED OR REFERRED TO IN PROMOTING, MARKETING OR RECOMMENDING A PARTNERSHIP OR OTHER ENTITY, INVESTMENT PLAN OR ARRANGEMENT TO ANY PERSON.

Yesterday the IRS published its long-awaited final Treasury regulations under Section 409A of the Internal Revenue Code ("409A"), all 397 pages. These regulations are significant because employers with arrangements and plans governed by 409A must have both operational and document compliance by December 31, 2007. This means arrangements and plans that were previously reviewed and/or amended to comply with the proposed regulations will have to again be reviewed to determine whether a subsequent amendment is necessary by December 31, 2007. The arrangements and plans in question include traditional non-qualified deferred compensation plans, bonus arrangements, certain equity based arrangements, employment agreements, severance arrangements and more.  The final regulations can be found here.

The IRS just issued Notice 2006-79, which provides transition relief from the December 31, 2006 deadlines of IRC 409A.  Specifically, this Notice provides further transition relief by:

On May 2, 2006, we reported that the Mexican Tax Administration Service ("SAT") issued a three-month suspension of taxpayer's external auditor's license to certify financial statements.  In Mexico, taxpayers of a certain size are required to submit electronically certain financial and tax information to the SAT.  An independent certified public accountant ("CPA") must include a declaration with this information regarding the tax compliance of its client.  This includes transfer pricing and contemporaneous documentation which the CPA must retain in its files.

China claims that more than 50% of foreign companies which have invested in China are currently reporting losses as the result of aggressive transfer pricing.  China has improved its tax sophistication and enforcement over the last several years and plans to increase the number of its audits to ensure that these companies are reporting an appropriate amount of tax. 

This past week, Symantec Corp., the maker of Norton AntiVirus software, received a $1 billion tax assessment for improper transfer pricing. The IRS alleges Symantec undervalued a license agreement with its Irish subsidiary. This result is especially unfortunate because it could have been avoided through an Advance Pricing Agreement ("APA") with the IRS.

After the Organization for Economic Cooperation and Development criticized Mexico for an inadequate number of transfer pricing audits, Mexico agreed to correct the problem.  In 2004, Mexico's Finance Ministry split the Central Administration for International Fiscal Audits ("CAIFA") into two offices. The new office of the Central Administration for Transfer Pricing Audits ("CAT") is dedicated to improving and increasing transfer pricing enforcement. The CAT is fulfilling Mexico's promise by examining the restructurings undertaken by a number of companies who have sought to shift the functions and risks of their Mexican operations to lower tax jurisdictions in Europe.