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TAX CLINIC

Tax year 1: CIC on June 30, 2022 transferred within a few days of the CIC compensation and the timing of their
Sec. 404(a)(5) governs the deduction date. Target historically deducted RSU deductibility for either party to the
timing of nonqualified deferred com- payments in the year the shares were M&A under the facts given.
pensation, that is, compensation that transferred, due to the volatile nature of
is earned and vests in one year and is the stock’s value. Therefore, the RSUs Other limits and factors to
paid in a subsequent year. However, can be deducted on Buyer’s Sept. 30, consider for public companies
if the compensation payment is made 2022, return. When considering the deduction of
within 2½ months after the end of the compensation payments in a public
employer’s tax year in which the services Tax year 3: Year end company transaction, tax advisers must
creating the right to such compensa- Sept. 30, 2023 acknowledge possible additional limits
tion are performed, it may not have to Restricted stock awards transfer shares on the compensation deductions that are
be treated as deferred compensation. to employees that are subject to vesting outside of the scope of this item but are
Instead, Temp. Regs. Sec. 1.404(b)-1T conditions. Sec. 83 governs the deduction noted briefly below.
provides that the employer’s method timing of restricted stock, which depends Sec. 280G limits employer compen-
of accounting may apply to determine upon whether the property is vested or sation deductions for compensation paid
the deduction timing of the short-term unvested at the time of the grant. If an to an individual in connection with a
deferral payment. employee makes a Sec. 83(b) election at CIC transaction. The limitation applies
Here, the transaction bonuses vested the time of the grant, the company can when a disqualified individual — an
and were fixed and determinable on take a deduction at the time of the grant. officer, 1% shareholder, or highly com-
the CIC date and were paid within If a Sec. 83(b) election is not made, then, pensated individual — receives such
one week following the CIC; therefore, under Regs. Sec. 1.83-6(a)(1), an employ- payments that exceed three times the
under the short-term deferral rule, Tar- er can take the compensation deduction at disqualified individual’s average base
get’s method of accounting can be ap- vesting for the shares included in the em- compensation for the five years preced-
plied to determine the deduction timing ployee’s compensation in the employer’s ing the year of the CIC transaction.
of the payment. tax year in which or with which ends the (Private companies can take advantage
Target routinely deducted bonus pay- employee’s tax year in which the amount of a shareholder vote process that would
ments in the year of accrual, when such was reported as compensation. eliminate these negative tax impacts, but
amounts were fixed and determinable Here, vesting accelerated for the re- such a “cleansing” vote is unavailable to
at year end and paid within 2½ months stricted stock on the CIC date, and the public companies.)
after the end of the employer’s tax year stock was transferred within a few days In addition, Sec. 162(m) limits
in which the services creating the right of the CIC date. No Sec. 83(b) elections employer tax deductions on certain
to such compensation were performed. were made at grant. Therefore, the re- excessive employee remuneration (com-
Therefore, the transaction bonuses stricted stock can be deducted on Buyer’s pensation over $1 million per covered
can be deducted on Target’s June 30, Sept. 30, 2023, return (the employer’s tax employee per tax year).
2022, return. year covering Dec. 31, 2022, and the end From Karen Field, J.D. (Karen.Field@
of the employee’s tax year in which the rsmus.com), Washington, D.C.; Michelle
Tax year 2: Year end shares were included in the employee’s Borman, J.D. (Michelle.Borman@rsmus
Sept. 30, 2022 income). .com), Chicago; and Chloe Webb, J.D.,
RSUs represent a promise to pay a The table “Summary of Transaction LL.M. (Chloe.Webb@rsmus.com), Kan-
share or cash in the future. RSUs can be Payments” shows these three types of sas City, Mo.
designed to comply with the Sec. 409A
requirements or to be exempt from Sec. Summary of transaction payments
409A under the short-term deferral
exception discussed above. If the plan is
Compensation type Deduction timing
under the short-term deferral rule, the
employer’s method of accounting applies Transaction bonuses Target’s June 30, 2022, return
to determine the deduction timing.
In a stock transaction, the target’s RSUs Buyer’s Sept. 30, 2022, return
tax attributes are generally retained.
Restricted stock Buyer’s Sept. 30, 2023, return
Here, vesting accelerated for the RSUs
on the CIC date, and the shares were

16 April 2023 The Tax Adviser