ALERT: Senate Passes Legislation that Would Limit Deferral of Offshore Compensation
What follows is an excerpt from a client alert published by Akin Gump’s tax and investment funds practices. To download the full alert click here.
For more information on this alert please contact-
Tax:
- Patrick Fenn 212.872.1040 New York
- Stuart Leblang 212.872.1017 New York
- Bruce Simonetti 212.872.8023 New York
- Kevin Rowe 212.872.8064 New York
- Josh Williams 212.872.8014 New York
Investment Funds:
- Stephen Vine 212.872.1030 New York
- Prakash Mehta 202.887.4248 Washington, D.C.
- Mark Barth 212.872.1065 New York
On October 1, 2008, the Senate passed a bill that would add new Section 457A to the Internal Revenue Code (the “Code”). As discussed below, Section 457A would impose significant restrictions on techniques commonly used by managers of offshore hedge funds to defer fee income. The restrictions would generally apply to deferred compensation attributable to services rendered after 2008.
The Senate bill contains limited transition relief for deferred compensation attributable to services performed before January 1, 2009. Although some aspects of the bill are unclear (particularly with respect to side pockets), the transition relief would generally allow continued deferral of pre-2009 deferred compensation amounts until 2017.
The Senate bill combines the financial sector bailout bill that was rejected by the House on September 29, 2008 with a highly popular package of extensions for expiring tax cuts, which would be partially paid for by Section 457A. Thus, although there have been differences of opinion between the Senate and the House over how the bailout should be structured and the extent to which extensions of tax cuts should be paid for, it seems likely that the combined legislation will pass the House. The House is expected to bring the Senate bill to the floor for a vote on October 3, 2008. Assuming the House passes the bill, the White House has indicated that President Bush will sign the combined legislation.
Because it seems likely that Section 457A will be signed into law in 2008 and will impose significant restrictions on deferred compensation arrangements attributable to services rendered after 2008, we think it may be prudent for fund managers to consider before year end certain planning techniques to take maximum advantage of the transition relief provided in Section 457A and to consider compensation arrangements going forward to address the new challenges posed by Section 457A.
