Visiting the Committees

• Publication year: 2015

Visiting the Committees

Commentary and Updates by the Committees

COMPENSATION AND BENEFITS COMMITTEE

The Compensation and Benefits Committee provides a forum for members of the Taxation Section to learn and discuss issues relating to executive compensation, tax-qualified retirement plans, and health and welfare benefit arrangements. Membership in the Committee is open to employee benefit practitioners and Taxation Section members, and the participation of members of the Labor and Employment Law Section is encouraged. The Committee strives to include in discussions high level members of the Internal Revenue Service, U.S. Department of Labor Employee Benefit Security Administration, and California Franchise Tax Board.

Committee Activities

The Compensation and Benefits Committee schedules quarterly conference calls for all members interested in the topics that affect compensation and benefits. Members interested in participating, providing comments, or for more information regarding upcoming meetings and events should contact the Committee Chair, Alison Fay, at alisonfay@boutwellfay.com or Immediate Past Chair, Jeremy M. Pelphrey, at jpelphrey@foxrothschild.com.

Quick Points DOL Issues Press Release Regarding Its Lawsuit Against Greatbanc Trust Company

On June 3, 2014, the U.S. Department of Labor ("DOL") issued a press release announcing the settlement of the DOL's lawsuit against Greatbanc Trust Company ("Greatbanc"). The lawsuit alleged that Greatbanc, acting as trustee of the Sierra Aluminum Co. Employee Stock Ownership Plan ("ESOP"), allowed the ESOP to buy stock from Sierra Aluminum co-founders and top executives at a price that was more than fair market value. The settlement agreement, "Agreement Concerning Fiduciary Engagements and Process Requirements for Employer Stock Transactions," can be found at this URL: http://www.dol.gov/ebsa/pdf/esopagreement.pdf.

Perhaps more interesting than the terms of the settlement, however, is the fact that the settlement agreement was made public. The agreement is legally binding only on Greatbanc; however a DOL press release quotes Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi as saying "[o]thers in the industry would do well to take notice of the protections put in place by this agreement." This unusual move by the DOL is being interpreted as a warning to other ESOP trustees: follow the procedures described in the settlement agreement or risk a determination by the DOL that you breached your fiduciary duty to the ESOP.

The settlement agreement binds Greatbanc to a specific set of due diligence procedures in all future ESOP transactions in which it acts as trustee. One main area of focus is the trustee's process in selecting and overseeing its valuation advisor (the independent advisor who values the company to determine the fair market value of its stock). An additional requirement is that the trustee must document its analysis and understanding of the valuation report produced by the valuation advisor. The settlement agreement also requires Greatbanc to consider a claw-back or other purchase price adjustment post-transaction in the event of significant corporate events or changed circumstances.

While the Settlement Agreement is not legally binding on ESOP trustees other than Greatbanc, many in the ESOP community are treating its requirements as "best practices." Of course, the Settlement Agreement also provides that the Agreement is not intended to specify all of a trustee's fiduciary obligations with regard to an ESOP transaction and that it in no way supersedes the fiduciary requirements of the Employee Retirement Income Security Act of 1974 (ERISA).

- Wendy Gilligan, Folsom, CA

[Page 40]

CORPORATE AND PASS-THROUGH ENTITIES COMMITTEE

The Corporate and Pass-Through Entities Committee focuses on issues faced by corporate taxpayers and provides opportunities for practitioners and corporate tax counsel to maintain a level of expertise in the field of corporate tax law, expand their professional contacts, and serve the profession, the public and the legal system. Membership in the Committee offers practitioners information on developments with respect to corporate and business tax and a greater voice on developments in such legislation.

Committee Activities

The Corporate and Pass-Through Entities Committee held its Spring meeting on April 8, 2015, at the offices of Paul Hastings LLP in Los Angeles and via teleconference. At the meeting, the Committee discussed upcoming events and Amy Lawrence, a tax attorney at Paul Hastings LLP, gave a presentation on corporate inversions, entitled "Burger King / Tim Hortons: Inversion to Canada."

Normally, the Committee holds quarterly meetings via teleconference. If you are interested in speaking at an event, or for more information regarding upcoming meetings and events, please contact Committee Chair, Stephen Turanchik, at stephenturanchik@paulhastings.com.

[Page 41]

Quick Points Pilgrim's Pride - Is the Abandonment of a Security an Ordinary or Capital Loss? The 5th Circuit Weighs in on an Appeal from the Tax Court

In 1998, Gold Kist, Inc. ("Gold Kist"), of which Pilgrim's Pride was a successor-in-interest, entered into a contract to sell its agribusiness unit to Southern States Cooperative ("Southern States"). To facilitate the purchase, Southern States obtained a bridge loan, which was secured by a commitment letter between Southern States and Gold Kist. The letter contained a clause allowing Southern States to require Gold Kist to purchase certain securities. Southern States ultimately invoked the clause, and Gold Kist purchased the securities, paying $98.6 million.

In 2004, the parties began negotiations for Southern States to repurchase the securities. Gold Kist wanted $31 million, but Southern States only offered $20 million. Rather than take the considerably lower offer, Gold Kist opted to abandon the securities entirely, based upon the assumption that the resulting $98.6 million loss would: a) be an ordinary loss; and, b) generate more than $20 million in tax savings. Gold Kist effectuated the abandonment by a letter in which it stated it "irrevocably abandons, relinquishes, and surrenders all of its rights, title and interest" in the securities and deducted the loss as an ordinary loss on its 2004 tax return.

By 2009, Pilgrim's Pride was in bankruptcy, and the Internal Revenue Service ("IRS") issued a deficiency notice for the 2004 return, alleging that the abandonment of the securities resulted in a capital loss. Pilgrim's Pride challenged the IRS' arguments.

At trial, the parties arguments focused on the character of the loss under Internal Revenue Code ("IRC") § 165(g). The Tax Court then issued a sua sponte order asking for briefing on whether or not IRC § 1234A(1) applied instead. After briefing, the Tax Court ultimately found that the loss was a capital one.

On appeal, the Fifth Circuit noted that the plain language of IRC § 1234A(1) — which requires capital loss treatment for any loss "attributable to the cancellation, lapse, expiration, or other termination of — (1) a right or obligation . . . with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer" — does not apply, because no "right or obligation" is terminated. The IRS argued that there are "inherent" rights and obligations in stock ownership, but the Court found that argument far too attenuated: "Congress does not legislate in logic puzzles..." In addition, reading such an interpretation into IRC § 1234A(1) would make IRC § 1234A(2) superfluous, an illogical result. Nor did IRC § 165(g) apply, as the IRS argued in the alternative, because the stocks, when abandoned were worth at least $20 million, the price Southern States was willing to pay. As a result, the securities were not "worthless," as required under IRC § 165(g).

- Gregory A. Zbylut, Glendale

Fifth Circuit Rejects IRS' Attempt to Reduce Taxpayer's Section 965 Deduction Based on Back-Dated Accounts Receivables

From 2003 to 2006, United States ("U.S.") corporations were authorized, in certain circumstances, to elect a onetime 85% dividends-received deduction on dividends received from their controlled foreign corporations (each such corporation, a "CFC"). Under Internal Revenue Code ("IRC") § 965, an electing taxpayer was required to reduce the amount of the dividends-received deduction for any increase in the amount of the CFC's related party debt during a prescribed period (specifically, the period from October 2004 through the end of the tax year when the dividend was paid).

During its 2006 tax year, BMC Software, Inc., a U.S. corporation ("BMC"), received a $721 million dividend from a CFC. BMC elected the one-time dividends-received deduction under IRC § 965 for its 2006 tax year and claimed an 85% deduction on the $721 million dividend. The Internal Revenue Service ("IRS") subsequently audited BMC's 2005 and 2006 tax returns and determined that, during those years, BMC overpaid royalties to the CFC that made the dividend. To account for the overpaid royalties, BMC elected under Treasury Regulations ("Treas. Reg.") § 1.482-1(g)(3) to treat the overpaid amounts as account receivables (i.e. amounts owing from the CFC to BMC) dating back to the time of overpayment. The accounts receivable treatment was documented in a closing agreement with the IRS in 2007 (the "Closing Agreement").

After signing the Closing Agreement, the IRS asserted that BMC's newly created account receivables for the 2005 and 2006 tax years were related-party debt for purposes of IRC §965. The IRS argued that the increased related-party debt reduced the amount of the allowable dividends-received deduction and thereby asserted a tax liability attributable to the allegedly disallowed portion of the deduction. In BMC Software Inc. v. Commissioner, 141 T.C. No. 5 (2013), the Tax Court held in favor of the IRS.

On March 13, 2015, the Fifth Circuit reversed the Tax Court. The...