Promise to pay compensation secured by a letter of credit ruled currently taxable under sec. 83.

• Author: Kautter, David
• Position: Brief Article

In IRS Letter Ruling 9331006, the Service ruled that benefits provided under an arrangement established as a supplemental retirement plan were currently taxable to the participants under Sec. 83 when the employer purchased an irrevocable standby letter of credit to secure the payments.

The proposed arrangement was established to pay benefits under a nonqualified supplemental retirement plan. It was to provide a target benefit to a select group of management employees on their retirement or death. The employer corporation planned to secure the benefits by transferring to the participants nonnegotiable, nontransferable participation certificates, which were to be secured by irrevocable standby letters of credit.

In general, Sec. 83(a) provides that if a taxpayer performs services in exchange for property, the property's fair market value (FMV) will be includible in the service provider's income in the year in which the property is substantially vested (or on transfer if a Sec. 83(b) election is made). The underlying regulations provide that the term "property" includes real and personal property...