Visiting the Committees

JurisdictionUnited States,Federal,California
CitationVol. 25 No. 4
Publication year2016
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, Michelle McCarthy, at mmccarthy@ foxrothschild.com or Vice Chair, Colleen Hart, at chart@proskauer.com.

Michelle McCarthy, a partner with Fox Rothschild LLP, gave a webinar on "Qualified Domestic Relations Orders: Avoiding Pitfalls" in Fall 2016.

Quick Points IRS Releases Proposed Regulations To Clarify Section 409A Provisions

The Internal Revenue Service ("IRS") recently issued proposed Treasury Regulations ("Proposed Regulations") (81 FR 40569) that would clarify certain provisions of the final regulations under Section 409A of the Internal Revenue Code of 1986, as amended ("Section 409A") (TD 9321, 72 FR 19234). The Proposed Regulations also would expand the anti-abuse provisions of proposed rulemaking issued in December 2008 with respect to income inclusion under Section 409A ("Proposed Income Inclusion Regulations") (73 FR 74380).

The Proposed Regulations under Section 409A are subject to a 90-day comment period ending on September 20, 2016, and would become applicable on or after the date of publication in the Federal Register as final rules. While not effective until adopted in final form, the Proposed Regulations may be relied on immediately.

The Proposed Regulations discuss a variety of distinct issues under Section 409A. Some of the more significant provisions in the Proposed Regulations include the following:

  • Proposed Modifications of Income Inclusion Regulations. The Proposed Regulations would clarify and modify the Proposed Income Inclusion Regulations by, among other things, clarifying that a "prior year" correction changing the time and form of payment of unvested deferred compensation will not be permitted under Section 409A absent a reasonable, good faith basis to conclude that the original provision failed to comply with Section 409A and the correction is necessary for Section 409A compliance.
  • Modification of the Rules Applicable to Amounts Payable Following Death. The Proposed Regulations would clarify that to the extent a beneficiary is entitled to a payment due to a service provider's death, payment may be made under Section 409A upon the death of the beneficiary. Further, the Proposed Regulations would extend the period for timely paying amounts triggered upon the death of a service provider (or a beneficiary) to the period beginning on the date of death and ending on December 31 of the first calendar year following the year in which the death occurs.
  • Authorization of Delay of Short-Term Deferrals to Avoid Violating Federal Securities Laws or Other Applicable Laws. The Proposed Regulations would provide that payments that would otherwise be made after the end of the applicable 2½ month short-term deferral period may still qualify as short-term deferrals if the service recipient reasonably anticipates that making the payment would violate Federal securities laws or other applicable law.

-Colleen M. Hart, Joshua M. Miller and Daniel T. Rothberg, Los Angeles, CA

[Page 67]

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

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 greg@gaztaxlaw.com.

Quick Point IRS Introduces Proposed Regulations To Restrict Use Of Family Limited Partnerships

This summer, the Internal Revenue Service ("IRS") took a swipe at one of its most disliked entities - family limited partnerships ("FLPs") - by proposing new regulations designed to severely limit abusive tactics. Long used as an estate planning device, FLPs have held a wide variety of assets including closely-held businesses, stocks, and real estate.

FLPs are frequently used to transfer closely-held, family-run business at a steep discount, the argument being that the characteristics inherent to FLPs - limited partnership shares which convey no control over the FLP, the family-only nature of the partners, and the personal nature of the underlying assets - significantly reduce the marketability of limited partnership shares, and thus the assets of the partnership should be discounted. These discounts also reduce the value of the FLP's underlying assets for gift tax purposes when its shares are given to family members during the FLP creator's life and for estate tax purposes following the creator's death.

The IRS has tried for many years to get FLPs under control and curb abuses - for example, parties frequently transfer stocks and other marketable securities into the FLP and then transfer interests in the FLP at a discount - but until now, the IRS's only weapon was Internal Revenue Code ("Code") section 2704, which, while helpful, did little to stop abuse. In August, the IRS issued new, proposed regulations which would limit the usefulness of the FLP as an estate planning device.

If and when finalized, the proposed regulations would:

  • Treat as an additional transfer the lapse of voting and liquidation rights for transfers made within three years of death of interests in a family-controlled entity, thereby eliminating or substantially limiting the lack of control and minority discounts for these transfers;
  • Eliminate any discount based on the transferee's status as a mere assignee and not a full owner and participant in the entity;
  • Disregard the ability of most nonfamily owners to block the removal of covered restrictions unless the nonfamily member has held the interest for more than three years, owns a substantial interest in the entity, and has the right, upon six months' notice, to be redeemed or bought out for cash or property, not including a promissory note issued by the entity, its owners, or anyone related to the entity or its owners;
  • Disregard restrictions on liquidation that are not mandated by federal or state law in determining the fair market value of the transferred interest; and,
  • Clarify the description of entities covered by the regulations to include limited liability companies and other entities and business arrangements, as well as corporations and partnerships.

Should these proposed regulations become final, the FLP as an estate planning device many of the gift and estate tax planning benefits of FLPs would cease to exist or be significantly restricted. In addition, other asset transfers to partnerships might also endure additional scrutiny.

-Gregory A. Zbylut, Beverly Hills, CA

[Page 68]

ESTATE AND GIFT TAX COMMITTEE

The Estate and Gift Tax Committee is comprised of attorneys throughout the State of California who devote a significant portion of their practice to understanding the evolving areas of estate and gift tax planning, drafting, compliance, and controversy work. One of the primary functions of the Committee is to provide valuable, informative, high quality continuing education programs on behalf of the Taxation Section.

If you are interested in becoming a member or submitting a topic to speak or write on, please contact the Estate and Gift Tax Committee Chair, Wayne Johnson, at wrj@wrjassoc.com.

Committee Activities Call for E&G Articles

California Tax Lawyer, the Taxation Section's official publication, is sent free to members of the Section. The journal is designed to keep tax lawyers and other tax professionals apprised of the latest developments in the field, as well as up-to-date on the activities of the Section. To receive a subscription, you need only join the Section.

Anyone can submit an article to the Editors for consideration for publication in California Tax Lawyer. Submissions are typically due February 15, May 15, August 15, and November 15. If you are interested in submitting on article on any Estate & Gift Tax topic, please contact Wayne Johnson, the Committee's Chair, at wrj@wrjassoc.com for more information. Also, please read these guidelines on the Taxation Section website before submitting your article.

Call for Speakers and Topics

Throughout the year, the Estate & Gift Tax Committee is asked to make video and live presentations on various topics of interest to estate and gift tax practitioners. These include presentations made and the State Bar's Annual...

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