Visiting the Committees

• Publication year: 2017
• Author: Commentary and Updates by the Committees

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, will be giving a webinar on "Qualified Domestic Relations Orders: Avoiding Pitfalls" in Fall 2016.

Quick Point SB 1234 Mandates State-Sponsored Payroll Deposit Retirement Savings Arrangement

In 2012, the California legislature enacted the California Secure Choice Retirement Savings Trust Act (the "Act"), which authorized consideration of a program that would require certain private sector employers with five or more employees not currently offering a retirement savings plan to provide a payroll deposit retirement savings arrangement so that employees could contribute a portion of their salary or wages to a retirement savings program account in the California Secure Choice Retirement Savings Program (the "Program"). Under the Act, the Program is to be administered by the California Secure Choice Retirement Savings Investment Board (the "Board"). Implementation of the Program was subject to the enactment of subsequent legislation. On September 29, 2016, that legislation, SB 1234, was signed by Governor Jerry Brown.

The Act, as amended by SB 1234, imposes its mandate on each "eligible employer," defined as "a person or entity engaged in a business, industry, profession, trade, or other enterprise in the state, whether for profit or not, . . . that has five or more employees." Governmental employers are exempt from the mandate. An "eligible employer" does not include an employer that provides an employer-sponsored retirement plan, such as a defined benefit plan, 401(k) plan, SEP or SIMPLE plan or that offers an automatic enrollment payroll deduction individual retirement account ("IRA").

Under the new law, eligible employers must provide a payroll deposit retirement savings arrangement, which allows eligible employees to make payroll deduction contributions to a retirement savings program, such as an IRA. Automatic enrollment of all eligible employees is required, subject to an employee's right to opt out of the Program. An "eligible employee" generally includes any employee of an eligible employer, with certain limited exceptions. SB 1234 provides for a phased implementation depending on the size of the employer. Employers who have more than 100 eligible employees become subject to the mandate within 12 months after the Program is opened. Smaller employers will have more time before the mandate applies to them.

Before opening the Program, the Board must establish that, among other things, the Program will comply with the Department of Labor's recently finalized regulations that provide for a safe harbor for savings arrangements established by states for non-governmental employees. Compliance with the regulations will allow employers subject to the mandate to avoid having to comply with the Employee Retirement Income Security Act with respect to the payroll deduction IRAs they are required to provide.

- Allison Fay, Newport Beach, CA

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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, Rachel Devenow, at rachel.devenow@snap.com.

Quick Point IRS Reverses its Position on the Character of Termination Fees Paid and Received By an Acquirer Corporation

This fall, the Internal Revenue Service ("IRS") released new guidance regarding the character of termination fees. In Field Attorney Advice 20163701F ("FAA 20163701F") and Chief Counsel Advice 201642035 ("CCA 201642035") respectively, the IRS concluded that Section 1234A of the Internal Revenue Code of 1986, as amended (the "Code") applies to a termination fee paid or received by the acquirer in a failed transaction. In the guidance, the IRS concluded that any gain or loss resulting from the payment or receipt of such fee was capital in nature because the gain or loss was attributable to the termination of a right or obligation to acquire property that would have been a capital asset in the hands of the acquirer (i.e. the target stock).

This guidance represents a reversal of the IRS's prior position in Private Letter Ruling 200823012, where it held that Code Section 1234A did not apply to a termination fee payment received by an acquirer from the target, and thus was taxable as ordinary income to the acquirer.

In CCA 201642035, a domestic corporation (the "Acquirer") and a publicly traded corporation (the "Target"), entered into an agreement in which they undertook a series of steps designed to facilitate the Acquirer's acquisition of the Target's stock. This transaction was intended to occur through the merger of a subsidiary of the Acquirer with and into the Target. However, prior to the consummation of the merger, the Target received a superior offer from another company and terminated the transaction. As a result, the Target paid the Acquirer a one million dollar termination fee, pursuant to the terms of the agreement.

Holding that the receipt of the million dollar termination fee resulted in a capital gain to the Acquirer, the IRS relied on the legislative history of Code Section 1234A, which according to Senate Report Number 105-33, stated that Code Section 1234A was intended to reverse the result in U.S. Freight Co. v U.S., 422 F.2d 887 (Ct. Cl. 1970). In that instance, the court held that the forfeiture of a down payment paid to the shareholders of a target corporation resulted in an ordinary loss to the acquirer corporation.

CCA 201642035 takes a more expansive view of Code Section 1234A, concluding that, although the contract giving rise to the termination fee was between the Acquirer and the Target, rather than the target shareholders as in U.S. Freight Co., the contract provided the Acquirer with a bundle of rights with respect to the Target stock vis-à-vis the Target and such contract is a customary part of the process through which the stock of a publicly held corporation is acquired. Therefore, the IRS holds that Code Section 1234A applies to the receipt of the termination fee payment because the Target stock would have been a capital asset in the hands of the Acquirer and that the payment resulted in a capital gain to the Acquirer.

The IRS relied on the same rationale to conclude in FAA 20163701F that a termination fee paid by an acquirer corporation after it decided to terminate the merger transaction resulted in a capital loss to the acquirer.

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The guidance does not address the character or other tax consequences to a target corporation resulting from the payment or receipt of a termination fee. Therefore, it remains unclear the extent to which Code Section 1234A would impact a target corporation in these instances since payments made or received by a corporation with respect to its own stock are typically non-deductible and non-includible pursuant to Code Sections 118 and 1032. Although this guidance may not be used or cited as precedent, it is nevertheless useful in understanding the thinking and analysis of the IRS with respect to the issues considered.

-David Dalton, San Francisco, CA

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...