Visiting the Committees
| Publication year | 2016 |
| Author | Commentary and Updates by the Committees |
Commentary and Updates by the Committees
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.
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 Vice Chair, Michelle McCarthy, at mmccarthy@foxrothschild.com.
The Compensation and Benefits Committee held a quarterly conference call at noon on Tuesday, March 8, 2016. Colleen Hart, a partner with Proskauer, presented a program describing common securities law issues that arise when implementing employee benefit plans, particularly in California. The program provided counsel with guidance on what qualifies as a security, common exemptions from securities laws used in connection with employee benefit plans (with particular emphasis on those in available in California under Section 25102(o) of the California Corporate Securities Law) and registration statements, including Form S-8. The program also covered Section 16 short-swing profit recovery law, executive compensation proxy disclosure rules, and proposed clawback rules under Dodd-Frank.
On April 6, 2016, The U.S. Department of Labor ("DOL") released the final version of the investment advice fiduciary regulations that were proposed last April. The rule is aimed at addressing conflicts of interest in retirement advice by redefining fiduciary investment advice and expanding its application to include investment advice provided to plan sponsors and participants of retirement plans, including 401(k) plans, and individual retirement accounts ("IRAs"). Labor Secretary Thomas Perez indicated that the DOL had received more than 300,000 comments since the proposed version of the rule was release last April and, ultimately, the final rule provides significant concessions to the financial industry.
Under the expanded final rule, it is a fiduciary function to render the following types of investment advice for a fee or other compensation: (1) a recommendation as to the advisability of buying, selling or holding investments; (2) a recommendation as to the advisability of taking a distribution and the investment of the distributed assets; (3) a recommendation as to the management of investments; and, (4) a recommendation on the selection of other persons to provide investment advice or investment management services. Thus, the rule may significantly affect rollovers from 401(k) and other defined contribution plans to IRAs, as the recommendation of a distribution or a rollover to an IRA will now be considered a fiduciary act.
Because the provision of investment advice is a fiduciary function under the final rule, absent a specific exception, receipt by a fiduciary adviser of commissions, revenue sharing or other payments is a prohibited transaction section 406(b) of ERISA. Under the new regulatory scheme, fiduciary advisers will be allowed to receive such "conflicted compensation" only if their compensation arrangement meets the specific requirements of one of the series of prohibited transaction exemptions issued in conjunction with the regulations.
The new set of prohibited transaction exemptions and amendments to existing exemptions are designed to permit receipt of compensation for the covered investment advice, albeit under more narrowly prescribed requirements. Advisers providing such covered investment advice to retirement plan participants and beneficiaries, IRA owners and non-institutional fiduciaries are expected to utilize the "best interest contract" exemption, which has been significantly modified from the original proposal. In essence, the exemption requires giving advice that is in their clients' "best interests" and requires disclosure of any potential conflicts of interest, and limits the fiduciary's remuneration to no more than "reasonable compensation." The adviser must also enter into contracts with clients that acknowledge the adviser's fiduciary status.
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Primarily as a result of the extensive comments, activities such as marketing, investment education, appraisals, employee stock ownership plan valuations and fairness opinions, and advice to health and welfare plans have generally been carved out from the definition of covered investment advice and, thus, are not considered fiduciary functions under the new rule.
Another major concession by the DOL to the retirement community is that the effective date for the final rule has been delayed. The proposed rule called for an eight-month compliance period. The new rule, however, calls for compliance of certain provisions by April 2017, and total compliance by January 1, 2018. Accordingly, we expect to see continued comments and potentially some clarifications or modifications on the final rule in the coming months.
- Michelle McCarthy, Los Angeles, CA
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.
Normally, the Committee holds quarterly meetings via teleconference and interested members of the Tax Section are welcome to participate. In addition, members and other interested parties are welcome to submit articles for Quick Points on Corporate and/or Pass-through topics of general interest to the members of the Taxation Section. If you are interested in speaking at an event, submitting a Quick Point or would like more information regarding upcoming meetings and events, please contact the Committee Chair, Greg Zbylut at gzbylut@gtba.com.
In a case examining when liability attaches to a retailer's rewards program, the Third Circuit Court of Appeals rejected the Tax Court's application of the "all events" test. The case, Giant Eagle, Inc. v. Commissioner of Internal Revenue (3rd Circuit opinion 14-3961), involved a grocery chain's attempt to drive more traffic to its stores.
In the late 1990's, in response to increasing gasoline prices, Giant Eagle revamped the rewards program it began in 1991. Discounts on purchases at Giant Eagle stores were replaced by discounts on gasoline purchases for reward program cardholders. In addition to the discounts, and to drive further traffic to the store, Giant Eagle began adding gasoline stations on its premises.
However Giant Eagle soon found that the program failed to achieve its primary goal - driving traffic into the store. So, in a further response, Giant Eagle revamped its program again, this time to require a minimum $50 purchase to earn points which could be redeemed at the pump. This program had the desired effect of increasing store traffic dramatically.
On its 2006 and 2007 tax returns, Giant Eagle claimed a deduction for the discounts its customers had accumulated, but which were unused at the end of the respective year. Giant Eagle computed its deduction by: 1) ascertaining the total dollar amount spent at its supermarkets on qualifying items; 2) dividing that number by 50 (the minimum purchase amount) to determine the number of outstanding accumulated discounts; 3) multiplying the quotient by $.10 to determine the face value of the discounts; 4) multiplying the discount's face value by the historical redemption rate of discounts in their expiring month; and, 5) multiplying the product obtained in (4), above, by the average number of gallons purchased in a discounted fuel sale. Parts (4) and (5) were based upon historical averages, not actual figures. For 2006 and 2007, the amounts came to $3,358,226 and $313,490, respectively. The Internal Revenue Service ("IRS") disallowed the deductions for both years, and Giant Eagle appealed.
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In the Tax Court, the IRS argued that the claimed deduction did not apply, because the "all events" test (which allows an accrual-basis taxpayer to take an unrealized amount as a deduction, provided that "all the events [] occur which fix the amount of the tax and determine the liability of the taxpayer to pay it") had not been satisfied - the liability, the IRS' argument went, was not fixed until the consumer actually purchased gas. The Tax Court agreed with this presentation, and denied the deduction.
The 3rd Circuit disagreed. The Court found that the rewards program was a unilateral contract formed at checkout. Since the consumer had a reasonable presumption about the redeemability of the earned points and, in fact, anticipated the reward in deciding to shop at Giant Eagle, a liability would have accrued at the time of purchase, not at the time of redemption. The Court acknowledged the three-month limitation on use (points not used in three months expired, a factor the dissent argued required...
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