Treatment of "interest" accrued on nonqualified deferred compensation.

• Author: Josephs, Stuart R.

The Ninth Circuit's decision in Albertson's, Inc., 12/30/93, rev'g 95 TC 415 (1990), was discussed in the Tax Clinic item, "Deducting Interest in Deferred Compensation Arrangements," TTA, Mar. 1994, at 156, and the Tax Trends item, at 182. The following reactions of Federal government personnel should also be noted.

Proposed legislation

The Daily Tax Report of Mar. 1, 1994 (at G-6) indicated that interest under a nonqualified deferred compensation plan would not be deductible by an employer until it is includible as income by the employee under a bill (S. 1877) introduced on February 28 by Senate Finance Committee member David Pryor.

According to Pryor, the court's ruling that these additional amounts were not subject to the timing restrictions of Section 404, and therefore immediately deductible, "if allowed to stand, will result in an unintended indefensible and unmanageable tax loophole."

"This loophole is created by the court's apparent departure from the matching principal [sic]. The result may be to create an investment vehicle that allows a current deduction for accrued interest against taxable income with no corresponding inclusion in the income of the employee until it is paid many years down the road ....

" ... [T]his favorable tax treatment was never intended for non-qualified deferred compensation arrangements which are generally for high paid individuals and not subject to non-discrimination rules to protect employees at all income levels."

The justice Department petitioned Feb. 14 for rehearing of the Albertson's case in the Ninth Circuit .... The ruling cannot be appealed to the U.S. Supreme Court because at present there is no conflicting ruling from another Circuit Court.

According to Pryor, "further judicial developments could take years to resolve .... Congress has many compelling reasons to act now to clarify the law and no reason to stand idly by."

One reason cited by Pryor is that the ruling, as is, has the "potential to cost the U.S. Treasury billions of dollars for a preferential tax regime that was never intended by Congress." The impact of the court decision has been estimated at a $1 billion annual revenue loss, according to DOJ.

... [F]ellow Senate Finance Committee member David Boren supported Pryor's effort and ... planned to cosponsor the bill.

Boren said that tax writers should continue to look for an appropriate mechanism to address this issue, pension...