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IRS To Review Executive Compensation Taxation Issues

by Mike Godfrey,, Washington

19 November 2003

Executive compensation was the topic of discussion for the November edition of the Tax Talk Today webcast, co-sponsored by the IRS, which detailed its plans to ensure that America’s executives stay on the right side of the taxation law.

In order to keep abreast of how executives are compensated, the IRS has set up new compliance teams which are to review 24 sample cases, focusing on eight primary areas of concern. These will include: nonqualified deferred compensation; stock-based compensation; the million dollar cap under Section 162(m) of the code on deductible compensation; golden parachutes; split dollar life insurance; family limited partnerships and transfers of compensatory options to family limited partnerships; a listed transaction that requires disclosure; and fringe benefits.

According to Cate Livingston Fernandez, chief of the Executive Compensation Branch of the IRS, these are “basic compliance” laws which have not been reviewed for a number of years. She told the conference, that perhaps “it’s something that folks have forgotten about, but it's something that we think is important.”

However, the view of the tax professionals on the initiative was somewhat mixed. Mary Hevener, a partner at the Washington, D.C., law firm Baker and McKenzie, referred to the list as “extraordinarily comprehensive.”

“It picks up about everything but cash salary and nondeferred bonuses, so it certainly is a comprehensive list”, Hevener observed, adding that: "I do think that in my experience you're likely to find that some of the eight topics are not going to be particularly relevant to some of the taxpayers in the LMSB group.

Offshore employee leasing for example, will be a topic that “is not going to be particularly relevant or a shelter that a lot of larger companies have engaged in”, she argued.

In 2002, the median annual compensation for the CEOs of the largest 100 companies in the United States was more than $33 million. According to Fortune Magazine, since 1980 the average CEO pay has increased by 442% when adjusted for inflation. However, Keith Jones, Director of Field Specialists for the IRS' Large and Mid-size Business Division, assured listeners that “the dollar value and the size of the package is not a tax administration issue, that's clearly a corporate governance (matter). Our role and our issues are with regard to following the tax law.”

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