July 2015


Capital Planning and Stress Testing Rule Proposal

On July 17, the Federal Reserve Board proposed a rule to modify its capital planning and stress testing regulations. The proposed changes would take effect for the 2016 capital plan and stress testing cycle.

Key aspects of the proposal include:

  • Delaying implementation of supplementary leverage ratio to the 2017 cycle;
  • Removing the requirement to calculate the tier 1 common ratio (because the common equity tier 1 ratio will be fully phased in and generally requires more capital); and
  • Delaying indefinitely the use of the Advanced Approaches RWA in the stress testing process.

Comments on the proposal are due by September 24.

The Federal Reserve noted that it is considering a broad range of other issues related to the capital plan and stress testing rules; however, any other modifications will be undertaken through a separate rulemaking and will take effect no earlier than the 2017 cycle.



Senate Finance Committee Releases Bipartisan Tax Working Group Reports

On July 8, the Senate Finance Committee released reports from the five tax reform working groups. The reports offer policy options and recommendations for ‎the Committee to consider as part of comprehensive tax reform, focusing on the areas of: 1) Individual Income Tax; 2) Business Income Tax; 3) Savings & Investment; 4) International Tax; and 5) Community Development & Infrastructure.

The Business Income Tax report discusses current U.S. tax dynamics, including the fact that the U.S. currently has the highest top corporate tax rates of any OECD country (39.1%, relative to a median of 25%) but that the U.S. is not among the highest tax collectors (measured by tax revenue collected as a percentage of GDP). The report notes that there is a fair amount of consensus for lowering the top tax rate and broadening the tax base, but there are a number of obstacles to such an approach.

The Business Income Tax report includes a table showing Selected Tax Expenditures with Corporate Estimates of at Least $10 Billion, FY 2014-2018. The table has 15 entries, including the following insurance-related items:

  • Exclusion of investment income on life insurance and annuity contracts ($13.9 billion); and
  • Special treatment of life insurance company reserves ($15.4 billion).


IRS Chief Counsel Advice re. 409(A) Correction in Vesting Year

In a memorandum dated April 14, 2015, the IRS Chief Counsel responded to the following inquiry:

Does the correction of a failure to comply with section 409A(a) of the IRC applicable only to compensation subject to a substantial risk of forfeiture avoid income inclusion under section 409A if the correction is made before the compensation vests but during the service provider’s taxable year in which it vests?

In this matter, an executive entered into a retention agreement with his employer. Under the retention agreement, if the executive remained with the company for three years a retention bonus would vest. The retention bonus was an amount set to be paid in installments for the subsequent three anniversaries; however, in violation of 409(A), it included a right (in the employer’s sole discretion) to pay the entire amount on the first payment date (i.e., an acceleration of the deferred compensation payments). Prior to the vesting date (but in the same taxable year as the vesting date), the company recognized that the terms violated 409(A) and amended the agreement to remove the company’s discretion to accelerate the payment.

The IRS concluded that such a correction, made before the vesting date, did not avoid the income taxation and associated penalties. The IRS primarily pointed to the following language in Section 409A(a)(1)(A)(i):

If at any time during a taxable year a nonqualified deferred compensation plan (I) fails to meet the requirements of section 409A(2), (3) and (4) or, (II) is not operated in accordance with such requirements [(section 409A failure)], all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in the service provider’s gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.

In summary, the IRS noted that the plan failed to meet the requirements of section 409(A) from the execution date and continued through Year 1, Year 2, and through part of Year 3. However, since the amount remained subject to a substantial risk of forfeiture at the end of Year 1 and Year 2, the amount includible in income for those years was reduced to zero. Since the entire deferred amount was vested at the end of Year 3, the entire deferred amount was includible in the executive’s income for Year 3.


Tax Court Rules that Welfare Benefit Plans Constituted Compensatory Split Dollar Arrangements

On July 13, the U.S. Tax Court ruled in favor of the IRS against petitioners that had used a purported welfare benefit plan to provide death, medical, and disability benefits for participating employees. The IRS found, and the Tax Court agreed, that the arrangements constituted compensatory split dollar arrangements. As such, the Tax Court ruled that the premiums paid by the employers were non-deductible and that the participants received economic benefits under sec. 1.61-22(d)-(g).

One of the underlying plans did not include life insurance protection; in that instance, the Tax Court still found that the payments to the welfare benefit plan were not “ordinary and necessary business expenses under section 162(a)” and were, therefore, not deductible. The Tax Court characterized that payment as a dividend by the employer.

In determining whether or not the IRS properly assessed penalties, the Tax Court ruled that the transactions at issue were “substantially similar to the transactions identified as listed transactions in IRS Notice 2007-83.”