This panel, featuring two IRS executives, including the principal author of IRS Notice 2018-68, will help you navigate the changing landscape for equity plans and award agreements after the Tax Cuts and Jobs Act. The group will focus on the recent guidance in Notice 2018-68, as well as key tax issues, opportunities, and pitfalls when designing or modifying an equity plan or award agreement from government, legal, and accounting perspectives.

Featured panelists:

• Catherine Creech, Principal, EY
• Ilya Enkishev, Attorney, Office of Associate Chief Counsel, Tax-Exempt and Government Entities, IRS
• Jeffrey Kroh, Principal, Groom Law Group
• Stephen Tackney, Deputy Associate Chief Counsel, IRS

Index
Overview of Section 162(m) Changes
Tax Act Implications for Financial Reporting, Plan Design and Process
Director Compensation Limit and Recent Guidance
Mitigation Strategies Based on a Deferral Approach
 
 Kathleen Cleary, Education Director, NASPP:  Good afternoon everyone.  Welcome to today's webcast, “Navigating Equity Plan and Award Changes After the Tax Cuts and Jobs Act and IRS Notice 2018-68.”  Our panel today will help you to navigate this changing landscape for equity plans and award agreements after the TCJA and IRS Notice 2018-68. 
 
First, I'll start with introductions.  My name is Kathleen Cleary, and I'm the Education Director for the NASPP.   Today, I'm very happy to welcome Catherine Creech, Principal at EY; Jeffrey Kroh, Principal at Groom Law Group; Ilya Enkishev, Attorney, Office of Associate Chief Counsel, Tax-Exempt and Government Entities for the IRS; and Stephen Tackney, Deputy Associate Chief Counsel for the IRS. 
 
The slide presentation for our webcast today is posted on NASPP.com and you can download the presentation and print out the slides if you'd like.  I will post an archive of today's program within the next day or two and then we'll also post a transcript within the next few weeks.
 
Let's go ahead and dive in to the webcast.  I'll turn it over to Jeff to get us started.
 
Jeffrey Kroh, Principal, Groom Law Group:  Thank you, Kathleen and good afternoon everyone, thank you for being here with us today.  My name is Jeff Kroh, and I'm a principal of Groom Law Group.  After joining Groom in 2005, I've devoted a substantial portion of my practice to advising clients on all types of executive compensation-related issues, including compliance with 162(m).
 
Since 2011, Stephen and I have been teaching a class that covers these topics at Georgetown's Law School in their LLM program.  Just to note, as we go through with our slides today, there will be a few polling questions.  We would certainly appreciate your feedback; it will help us give more directed comments as we go through the presentation.
 
Now I'm going to turn it over to the rest of my panelists to introduce themselves and we'll get started.
Catherine Creech, Principal, EY:  Thank you, Jeff.  This is Cathy Creech and I'm a principal here at Ernst & Young in the National Tax Department.  I work on tax issues related to compensation and benefits, including 162(m).  Our focus is not only on tax compliance but also advising our audit teams on tax issues that relate to financial reporting, including the changes to 162(m).

Ilya Enkishev, Attorney, Office of Associate Chief Counsel, Tax-Exempt and Government Entities, IRS: This is Ilya Enkishev and I've been an attorney at the Office of Chief Counsel since in 2006.  Since 2008, I've been focusing on executive compensation issues including 162(m).
 
Stephen Tackney, Deputy Associate Chief Counsel, IRS:  Hi, this is Stephen Tackney.  I think I've reached the age and the length of government service where I can say I have been there a long time.  But I am a deputy for six different branches and we focus on all aspects of employee benefits.
 
In particular, this year, as you can imagine, the priority has been on implementation of the Tax Cuts and Jobs Act, making sure we have a successful filing season.  In that frame of mind is how we got out this notice, with the idea behind the notice being to address the essential questions that folks needed answered in 2018 as early as possible to be able to manage under the new provisions.
 
It is limited in scope.  We are now turning towards a regulation project, so there will be proposed regulations issued for comment.  They are being looked at as being comprehensive in the sense that they will not be limited merely to the changes by the Tax Cuts and Jobs Act, but if there are other provisions with the 162(m) regulations in need of clarification and we will also be looking at them.  If you have issues in either area that you would like to see addressed—that were not addressed in the notice—please feel free to add those in as comments.  You can see how to submit comments in the Notice, but please don't necessarily limit your comments to the notice if you have other areas you think need clarification.  That can do nothing but help us.  
 
One thing I do have to add for Ilya and I, is that anything we say is just our personal opinion and not necessarily the position of the government.  In particular here, I know it's frustrating sometimes when we can't provide definitive answers, but we're not intending to drop any tea leaves.
 
We're really here to provide what answers we can but also to get input on what may need further clarification and what the priorities are, as we try to work with all the resources we have, both in the benefits area but also in the IRS as a whole, as we’re implementing this rather significant tax legislation.

Overview of Section 162(m) Changes

 Kroh:  Thank you, Stephen.  Kathleen, if we can move to the overview slide.  The Tax Cuts and Jobs Act was enacted on December 22, 2017.  If you were following this legislation as it moved through Congress—starting in early of November of 2017—I'm certain we are all happy today that we're not speaking about changes relating to 409(b) that would have completely changed the tax timing for nonqualified deferred compensation.
 
However, what we did get were significant amendments to 162(m) and I'm sure many panels have spoken and articles have been written on the changes in the law.  We're going to go through those quickly today to try to use the majority of our time to focus on the practical application of these rules and some related questions that arise in connection with these amendments.
 
Slide 4 provides an overview of the 162(m) changes.  At the bottom, you'll see that there are really three main amendments to 162(m).  First, there was an amendment with respect to the expanding definition of covered employee.  Another change was expanding the definition of public company and the third significant change was the elimination of the performance-based compensation exemption, as well as the exemption for commissions. 
 
We will discuss it in more detail later in this webcast, but generally these changes to 162(m) will result in a major limitation on the deductibility of future compensation that is paid to senior management at publicly traded companies.
 
As we will discuss, these changes will impact short and long-term cash bonus and equity compensation programs and likely even the structuring of payments from deferred compensation plans and arrangements.
 
Thankfully, toward the end of the legislative process, a grandfathering rule was added on November 2, 2017, to preserve the original 162(m) rules for certain amounts under a written binding agreement.  However, the application of the grandfathering rule also raises a few questions that we will discuss today.
 
Finally, we intend to cover several practical areas where companies may want to consider changes and we’ll discuss potential design and mitigation strategies.
 
I will turn it over back to Cathy to review the differences between the old and the new rules. 
 
Creech:  Thank you, Jeff, if we can go to slide 5.  Here we've set out a chart summarizing the pre-2017 and post 2017 Tax Act rules under 162(m).  As Jeff said, we're going to spend a lot of our time talking about the notice and the grandfathering rules. I think it's important to focus on these changes, because the implication of being a written binding contract and therefore being grandfathered, is really inextricably tied into how the law changed.
 
The purpose of determining that you have a grandfathered arrangement is to say, "Well, I'm going to apply old law to that deduction."  If there's something that would have been deductible under the old 162(m) law, it could continue to be deducted in the future under 162(m) if it's paid under a written binding contract. 
 
The first change is the expansion of the definition of publicly traded company.  To be included for purposes of 162(m) in the first place, you have to be paid by an employer that's in the control group of a publicly traded company.
 
Old law defined a public company as one who was required to register their common securities under Section 12 of the Securities Exchange Act.  Now, that definition has expanded and applies to any public issuer including those entities who register their common shares.  It also includes certain types of foreign private issuers and others who are subject to SEC reporting under Section 15(d) of the Exchange Act.
 
The exact language of the statute is “required to report under Section 15(d)”.  We won't be able to get into all the details around that, but suffice it to say that might be an area where we would potentially hope to see some guidance in the future as to exactly what that means, because there are questions there.
 
As Jeff has already alluded to, the major change in 162(m) is to eliminate the exemption for performance-based compensation as well as the exemption for postemployment pay.  Under old 162(m), many types of incentive plans would meet the exemption under performance-based compensation, so even if the awards were above a million dollars, they could still be deducted.  The deduction limit also did not apply to things that were paid after a covered employee terminated from employment.
 
The definition of covered employees has expanded to include the CFO.  Under prior law, the CFO was not included in the control group. 
 
Going down to the next box, the covered employee definition now includes any individual who's previously been a covered employee, even after they no longer hold the position.  This is sometimes referred to as the “always and forever rule”.  If you are subject to 162(m) and you are a covered employee, you will continue to be covered in the future. 
 
The final change, that Jeff has already alluded to, is the exception from the new rules for amounts paid under a written binding contract in effect on November 2, 2017.  That's the magical date.  There are some other transition rules still in the regulations that were not explicitly overruled by the 2017 Tax Act including, for example, exceptions for IPOs. I know that's an area where the notice also asks for comments.
 
If we can go to the next slide, Stephen already mentioned that Notice 2018-68 was intended to address those issues that were deemed to be most important. I would say from our perspective, it definitely did that.  We have other questions around 162(m), but there are two immediate interpretive questions that most of our clients needed answers for.
 
The written binding contract rule went into effect on 11/2/2017, and to the extent that companies already have promises out there, they have been planning to take the tax deductions for those promises. They need to understand whether those amounts are grandfathered or not, so that grandfather analysis is really key to preserving future tax deductions.
 
The second question is “Who are the covered employees under the expanded definitions?” Even under old law, 162(m) was a somewhat unique provision because we were combining both SEC definitions and tax definitions. You looked to the SEC rules to determine who your covered employees were.
 
However, as expanded under the Tax Cuts and Jobs Act, it is clear that even if an officer is not on a summary compensation table, because the SEC doesn’t require the company to prepare a summary compensation table, that individual may now be a covered employee and subject to the deduction limits.  We have departed a bit from just who is on the proxy; the notice points us in some directions where we may get a few surprises around who a covered employee might be.
 
Jeff, I'll turn it over to you to drill down a little bit further on the notice and those two topics.
 
Kroh:  Thank you, Cathy.  If we move to the next slide, “Notice 2018-68 Grandfather Rule”, as we mentioned, this rule is critically important to preserving the deductibility of equity awards and deferred compensation in place before November 2, 2017.
 
Let's review the standard.  It is important to point out that this is the same standard that was used in 1993, when 162(m) was added to the code.  Compensation is grandfathered if it is payable under a written binding contract in effect on November 2, 2017, that has not been materially modified and only to the extent the company is obligated under applicable state law to pay the compensation under such contract if the employee performed services or satisfies the applicable vesting conditions.
 
Importantly, this rule allows a company to grandfather amounts of nonqualified deferred compensation under traditional deferred compensation arrangements in SERPs.  Why is this so important?  It allows a company to preserve the deductibility of these non-qualified amounts because such amounts were often designed to be paid following a covered employee’s separation from service, which would be deductible under the old rules. 
 
A few of the questions that we're still running into are how to determine the amount under these types of plans that is grandfathered, whether it be a defined contribution or a defined benefit type of program.  One issue to consider is whether earnings on grandfathered amounts would also be grandfathered if the company has the right to prospectively freeze or terminate the plan.  There are a few examples in the notice that seem to address this issue in different ways.  At least one example clearly provides the grandfathering for earnings.
 
Tackney:  Just to give some commentary, I think the main point of the grandfathering is if the company was bound as of November 2^nd to pay an amount and couldn't get out of it, provided that the only other condition that could be applied is that the employee completed services subject to that one type of condition, then the grandfathering would apply.  That's the basic reasoning of the grandfathering provision. 
 
With earnings, we have two examples.  If you have unfettered discretion to terminate the plan and pay it out, then you weren't ever bound to pay those earnings, because you could have at any point just terminated the plan and just paid the earnings out.
 
We also say where you don't have the ability to do that, for instance you have to pay earnings through separation from service, then the earnings are grandfathered.  I think the questions we've gotten are in the grey area in between where it is not completely unfettered but it's not completely bound.  There are other conditions under which the plan can be terminated.
 
We're taking all of that commentary and comparing it and looking at what potential clarifications would be needed.  Again, I think the main concept is, “Could I [the employer] have gotten out of paying this amount or could I not have gotten out of paying this amount?” 
 
Kroh:  That's very helpful, Stephen, thank you.  Continuing on this slide, the notice also provides guidance regarding what it means to materially modify a contract that tracks the prior existing 162(m) regulations.  A material modification occurs when the contract is amended to increase the amount of compensation payable to the employee.  If modified, the contract is treated as a new contract entered into as of the date of the material modification.
 
Importantly here, the deferral or acceleration of a payment generally will not be treated as a material modification so long as the amount is either discounted or increased respectively to account for the time value of money.  For example, any additional amount paid as a result of the deferral must be based on either a reasonable rate of interest or a predetermined actual investment.
 
Finally, how does the concept of negative discretion fit into this grandfathered analysis?  Negative discretion is often referred to as the compensation committee's discretion to unilaterally reduce or eliminate the payment of awards.  This discretion was often included in annual bonus and multi-year performance-based equity awards or cash bonus awards.  If included in an award, unless this discretion to reduce the payment of the award is not enforceable under applicable state law, such performance award would not be considered a written contract and thus not be grandfathered even if it was granted prior to November 2, 2017.
 
As you can imagine, each state is likely to address the enforceability of this discretion differently based on all the facts and circumstances.  However, a few of the concepts that companies are considering for this purpose—legal concepts as well as factual—would be the express and implied contract principles to avoid illusory promises.  Some factors that are helpful to consider are, “How often was the discretion exercised?”  “Are there any limits on the company's ability to exercise this discretion?”
 
Creech:  Jeff, could I jump in here?  There's been a lot of discussion around negative discretion and I'm curious to hear from Ilya and Stephen on this.  Everybody needs to internalize this is in their own way.  When I look at the plan or the grant—because sometimes you’ve got a lot of different documents—you've got to figure out exactly what language is governing the piece of compensation you’re looking at.
 
When I look at all that language, do I have a scenario where if I'm the executive, and I do what the contract tells me to do, am I going to get paid?  For example, it might be unvested but may still be grandfathered because as of 11/2/17, I had to work for three more years and then I'd be paid.  You might even have the ability to reduce, but only based on specific targets, so it's sort of like vesting requirements.
 
If I promise Jeff $100 for working three more years, and only if we hit this EPS target, in my mind, that’s still a grandfathered arrangement.  They’re all written binding contracts because if he does those things, Jeff is going to get the $100 in my example.
 
The question then really becomes more around whether I have some other unfettered maybe undefined discretionary ability to say, "You did all the things I told you to, Jeff, but I'm not going to pay you the $100?"  I'm curious Ilya and Stephen, if you think I've got that right. 
 
Enkishev:  I think you have that right, it does come down to the applicable law and what the corporation is obligated to pay the executive if the executive performs the required services or meets the vesting conditions.  If the contract provides, you will get—and I'm going to use small numbers—$5 if you sell five widgets and you sell five widgets in 2018, then you're going to get the $5.  If there are certain limitations on negative discretion, certainly we'll take a look at the applicable law and how it will treat the negative discretion limitations.
 
I think if the contract says the corporation may exercise negative discretion and reduce the amount paid but not below a certain amount, certainly the floor is grandfathered.  There could be a matrix or another example of the limitation on negative discretion, and certainly we'll take a look at that.
 
It could be that if you sell 10 widgets, you will get at least $7 or maximum of $10; obviously the $7 is grandfathered.  We will just take a look at all the documents together—because we know that in real life they all reference each other—and see how applicable law will treat the negative discretion.  I think what you've laid out, Cathy, is exactly right.
 
Tackney:  The only two tweaks I would add are that it’s not whether the company says, "We intend to pay them."  The standard is, if you didn’t pay them, could they require you to pay them under the state law?  We're really looking at what are you legally required to pay, not what you intend to pay or do pay.
 
The other issue is just a reminder that since this is a deduction, the burden will be on the taxpayer to show they're entitled to the deduction.  If, in fact, application of the grandfather rule is necessary to get the deduction, we'll be there ready to see what people give to justify the deduction.  But the initial burden is going to be on the taxpayer.
 
Kroh:  Great, thank you.  Let's move on to the next slide, the definition of a covered employee.  The new 162(m)(3) provides an expanded definition of covered employee as including an employee who is the CFO of a publicly held corporation at any time during the taxable year.  This term also includes an employee whose total compensation for the taxable year is required to be reported to shareholders by reason of such employee being one of the three highest compensated officers for the taxable year, other than the CEO and CFO.
 
Importantly, the Notice clarifies that similar to the CEO and CFO, there's no year-end requirement for the three highest compensated officers.  As a result, an officer of a publicly-held corporation can be a covered employee even when disclosure of their compensation is not required under the SEC rules.  The determination of the amount of compensation used to identify the three most highly compensated officers is made consistent with the instructions in the SEC rules and used to create the summary compensation tables.
 
There is a cross-reference that we're still using the same compensation the SEC does, but there's one example in the notice that identifies an officer who terminates mid-year.  Although not required to be disclosed on a summary compensation table, this officer is still required to be included as a covered employee based on being one of the three highest compensated officers for the taxable year.
 
I'll lay out an example here and certainly we’ll get Steven and Ilya’s input.  We have a CEO and a CFO in a tax year and then we also have—let's call them Officers A, B, C, who are the three highest compensated officers as of the end of that taxable year.  We also have Officers D, E, and F who left midyear and regardless of the date of their leaving, they would've been the three highest compensated officers for that taxable year.
 
If we think about it, the SEC has rules that would require the CEO and CFO to be included in the summary comp table.  In the example, the Officers A, B, and C would also be included in that summary comp table and due to a special rule on the SEC side, we would also include D and E, the two more of the officers that would've been included but they left midyear. 
 
The one officer who's not included in the summary comp table is Officer F.  That person, according to the IRS notice would be still one of the top three officers for that tax year and would be considered a covered employee, although they were not included in the summary comp table.
 
Enkishev:  That's exactly right, Jeff.  It is the three highest compensated employees for the taxable year.  We don’t anticipate that this will be a burden to create a summary compensation table assuming that F is going to be on there, because you do have to figure out whether D and E are going to be on there and checking one more person is fairly simple.
 
Tackney:  This is also based on some flush language that was added as part of these changes and focuses not on the people who are on the compensation table, but those who would be on the comp table if the reporting had applied to them.
 
Let's look at everybody who is there as if the reporting applied to everyone and then you would take the highest three from that pool, which would include people who left midyear.  That's how we end up with your true high three, not just your high three employees at the end of the year.
 
Creech:  That flush language is there, we definitely see that, and I think our first reaction to it was, “OK, we're going to pull in companies who are publicly held, who are not required to file a proxy (like the foreign private issuers), which is one reason that many of them now are subject to 162(m).  Earlier private letter rulings said they weren’t because they didn’t have any covered employees, but now it doesn’t matter whether or not you file a proxy.
 
I would just offer up one slight plea to think about whether you have to interpret that language specifically, only because thus far within this many months of trying to look at 162(m), I have been surprised at the fact patterns that are coming.
 
For the professionals who are trying to apply it, you have to get in the room with your tax professionals, your securities law professionals, your finance people.  You also have to ask yourself, “Would anybody else have been on the table?”  That's a hard thing for the tax people who tend to drive these projects.
 
Tackney:  In identifying D and E, it would seem there's probably an F, G, and H that were also being calculated at the same time.  I think what we're trying to say is we don’t think there's such a cliff between D and E and the possible F, Gs and Hs of the world.  It would seem that you would have a list of those folks and it's merely a process of making sure you keep F to compare to A, B, and C, to find out if F actually made more money than A, B, and C.
 
Creech:  Well, more money in the accrual concept that's used on the proxy, yes.
 
Tackney:  Right, but again, what we're saying is when you were figuring out that D and E were actually D and E, it seems you would also have some other folks that you need to be doing that same exact calculation for, and it just happened to end up being F, G and H that year.
 
Creech:  In theory, I hear what you're saying.  I guess I'm just offering up—and we'll think about this some more in practicality—when sometimes you're looking at this in hindsight, it's a little bit harder to do.
 
Tackney:  That would seem more of a transition issue to me, to change your process, than it would be a permanent issue.
 
Creech:  I think now maybe what you're saying is part of your process as tax people, auditors and finance people is that you need to make sure who else is potentially on list. 
 
Tackney:  Well, I would say the file that has the F, G, and Hs of the world in it, possibly needs to get to the people.
 
Kroh:  That's a very important point Cathy mentioned.  It's going to be important for all of us going forward to really—on a year-by-year basis—determine not in hindsight after years have gone by, but to really keep this list current each year.  One of the other highlighted points on the notice is that once you're a covered employee on this list, now you're always a covered employee.  That means that once an employee is identified as covered for a publicly-held company in a taxable year beginning after 2016, such employee will be treated as covered employee for all years going forward.
 
That's a slightly different list, using the 2017 old rules to define who is a covered employee.  Those are the first group who are always going to be covered employees on the list, and then going forward in 2018—we would be assuming a calendar year company—we're going to be using the new rules in 2018 and going forward.  With that, I'll turn it back over to Cathy.
 
Tackney:  Can I make a really quick comment?  We've pointed out, but I don’t know if there are any exceptions for it, to remember that to be a covered employee, you need to be an officer.
 
If you have a particular non-officer who gets a huge commission or something, you're worried about that bump.  On the other hand, if you're hiring an officer and providing a rather significant hiring bonus or some other bump for one year, once you’re in it, you’re always in it, even though that may be the only year than they're in the DEF category, (or whatever you want to call it).  Now they're in it forever.
 
Creech:  That's exactly right.  We're cognizant of that and have actually pointed out to clients who had that scenario come up, that they need to be officers.  It's not just that you're highly paid, but in a large company you've got a bigger group of officers, and because you're using the SEC definition of comp, which is a bit more on an accrual concept versus the tax concept, we look at things like hiring bonuses.
 
I’m working with a client that is moving their headquarters.  They’re encouraging people—because of some mergers and acquisitions—to move.  There are going to be significant, taxable, compensatory moving expenses and perquisites, so they're really having to look at whether this is going to cause somebody who's number six to become number five.
 
Enkishev:  Or someone who's going to be number 20 for the rest of their career becomes number five for one year.
 
Creech:  That would be even harder.  Well, if that weren't enough for us to worry about, let's talk about more interpretative questions that we think are left for future guidance.  We already alluded to the scope of the definition of a public company at the beginning.  If you are required to file under 15(d) of the Securities Exchange Act, then you are now a public company.  This picks up certain types of debt filers, and clients have asked us whether they are actually required to file, because under other rules, filing is suspended or not applicable for certain periods.  If you have to be a publicly held company, a public issuer in the year of the deduction, that raises some interesting questions about whether you're going to “pop in” to public company status, or fall out.  Those particular companies will be very interested in hearing some guidance on that.
 
Enkishev:  Yes, that's exactly right.  I'm not going to reveal any tea leaves or previews of coming attractions, but this is an issue that's on the radar.  Just as a sub-issue, there are SEC rules that say you suspend this 15(d) filing or reporting obligation automatically if you don’t meet certain requirements on your first taxable year.
 
There is also an SEC rule that says if you don’t meet the reporting obligation in the middle of the year, you're able to suspend, but you have to affirmatively file a form with the SEC to suspend, it's not an automatic suspension.  I just wanted to throw that in as a sub-issue.
 
Creech:  That's great, thank you, Ilya.
 
Enkishev:  But no tea leaves.
 
Tackney:  Other than to say we are very grateful to be working with the SEC and that we are open to everyone's comments on the various patterns that they're seeing and their views.  We do fact check the representations of how the SEC will work with our SEC colleagues.  Sometimes it's a little bit troubling that you guys don’t quite agree which is always kind of a fun situation.
 
Creech:  I'm going to assume you mean you guys in a broad sense.  Steven is looking at me.
 
Tackney:  I'm just saying sometimes we receive comments on how the SEC's rules work, and then we ask the SEC and they say, “Well, that's not exactly how our rules work.”  But yes, we are definitely working with them to make sure as we work towards comprehensive regulations, that we've covered all these.
 
The top thing, to be honest, when you hook a tax code provision to an SEC provision is we have to deal with not only their current rules but what happens if they change their rules? We, of course, saw how they changed the identification of the officers required to be disclosed.  In addition, how do we write rules that may accommodate any further changes to these types of procedures?  It's going to be a challenge.
 
Creech:  Right, I think in that same category with foreign private issuers—I am a tax professional, not a securities law professional—there are multiple types of foreign private issuers.  There are some that the analysis seems more straightforward.  There are others for whom a market is made in their equities by another financial institution.  Do they become a foreign private issuer now subject to 162(m)?  Those are the sorts of questions that we're getting. 
 
Enkishev:  Yes, I think that's exactly right.  There are different types of foreign private issuers and the market is going to divide them into three categories.  One, where they're just traded on the over-the-counter market with no disclosure obligations and then there's a third level in which they're trading on a U.S. national exchange raising capital.  It does come down to what the code says, the definition of a publicly-held corporation and how appropriate it is to pull in a foreign private issuer, depending on which level they're at, in one of the three levels.  It's on the radar.
 
Creech:  Good.  Maybe I'll tick through these other issues a bit more quickly and then Ilya and Steven, I’ll turn it over to you all to see if you have other comments.  Mergers and going private transactions, there are questions around how 162(m) will apply.
 
There were some private letter rulings under old 162(m) that once you no longer had the proxy requirement or a summary compensation table, 162(m) no longer applied to you.  If the question is whether that analysis would still continue, for the audience I'll tell you Ilya is not providing an answer.
 
Tackney:  Well, I will say there is legislative history looking at identifying covered employees.  It talks about still having covered employees for a delisted corporation.  Query for those who provide us comments how they can be covered employees if in fact you're not subject to 162(m) because you wouldn’t be disclosing them.
 
Creech:  We had the same question.  But we also noticed that in the notice there is certainly an example of a transaction and the company continues to be publicly held and so there is not a gap in being a public company.
 
Other types of questions that are coming up, how will the deduction limit apply in the future to payments that are partially grandfathered and partially not.  You get a lump sum, that might be easier but if you're getting a stream of payments and you had a grandfathered piece of a supplemental pension and a non-grandfathered piece, how do you calculate that? 
 
Tackney:  It would be, by the way, great to get the initial reaction.  I would think that everybody will want FIFO, I want my grandfathered amounts out first, but it would great to get comments to confirm that in the sense that if people are using 72 or other types of calculation methods for whatever reason, we'd hate to hear that it's actually burdensome to do.  Any comments we can get on that would be great.
 
Creech:  Thank you, and you have already asked for comments about the IPO transition role, it's in the regulations.  It's not affirmatively overturned by the 2017 Tax Act, but we understand that the changes in the law could be a reason to re-think other calls that were made in the regulations.  That would also perhaps include questions around what the appropriate control group is.  Since 162(m) applies on a control basis, it does only apply to corporations.  But because the regulations include a 1504 standard of control groups, control partnerships would not be in under that 1504 definition.  That leads to some different results for public companies who have partnership entities in their otherwise affiliated group who may be employers paying compensation.
 
Then finally, other questions around whether there is really any need for special rules for global officers whose comp is paid partially for services in the U.S. and partially for services outside of the U.S.  On the latter, we have assumed that because 162(m) is under Section 162, we are still looking at what is the ordinary and necessary business expense of the U.S. entity filing a U.S. tax return.  I think now we're ready for a polling question, Kathleen, if you want to introduce that?
 
Cleary:  Yes.  This is everybody's chance to participate and let your colleagues attending this webcast know where your company stands.  The polling question is, “My company or most significant client (if applicable) has determined that some or all of our equity grants are binding contracts under the Tax Cuts and Jobs Act.”
 
The answers you can choose from are: "Yes, they are," "No, we did not meet the binding contract rule" or that you're still deciding.  I'll give you just a few seconds to indicate your response and then I'll show everyone the polling results, so you’ll have an idea where your colleagues on this particular webcast stand.
 
Looks like just about everybody has voted.  For our participants today, please know that no one sees your name when you enter a response, so you can comfortably say “No, we're still thinking about it” and you don’t have to feel self-conscious.  All right, I am going to close the poll and share the results with you, which you should be seeing on the screen now.  It looks like the majority is still deciding.  Panelists, do you have any comments?
 
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Tax Act Implications for Financial Reporting, Plan Design and Process

 
Creech:  I guess I'll say I'm not surprised on the “still deciding” part simply because I think this leads us into the next topic about the financial impact of the law changes on existing grants.  Some of the SEC guidance gives many public companies a longer period of time to make their final determinations as to how they're going to treat future compensatory payments for current financial reporting.  That is ending, and I would expect people are going to need to come to a final decision in the third and definitely within the fourth quarter of this year.
 
If we go to the next slide, we've been talking about financial reporting, tax returns.  As tax professionals, we tend to think of these issues as issues that are going to be handled on the corporate tax return.  Do you get a deduction on the 1120, or not?  Of course, that is what the Internal Revenue Service will examine and as Steven points out, taxpayers have the burden of proof to show they're entitled to the deduction.  That's where those discussions will take place.  Before that occurs, however, for reporting purposes, public companies will have deferred tax assets established for existing awards, which means that there will be essentially a positive asset.  The company does not take a deduction until they actually pay out the compensation, but when they do pay out the compensation and have that liability, there will be a value of the tax deduction.
 
If you have, for example, $100 that you've been assuming you were going to get a full deduction for, but you're not going to be getting that deduction because it exceeds the million-dollar limit and it's not grandfathered, then the deferred tax asset for that award must be written down.  That's part of the process people have been doing now, and that is why determining whether compensation arrangements are grandfathered is important now, because you have to determine those basic concepts for purposes of financial reporting.
 
Another point we wanted to make here is when we're talking about written binding contracts and whether you have something under a written binding contract, I think most clients are very focused on is this, something that would've been performance-based in the past. Therefore, if we continue to operate it as a performance-based plan, it would continue to be deductible in the future if it's a written binding contract.
 
However, there are other scenarios where even if a written binding contract wasn’t issued under a performance-based plan, you might expect to continue to get a deduction.  That might be for any company that’s treated as a newly public issuer under the law, or a foreign private issuer who wasn’t subject to 162(m) previously.
 
We have grants to CFOs, because the CFO was not in the group of covered employees previously.  To the extent that there’s a written binding contract for your CFO, it would be important to identify, because it may still continue to be deductible.
 
There may be grants that continue to meet the performance-based exception we’ve talked about.  The final category would be grants that pay post-employment or after an individual would otherwise fall off the proxy.  If we go back and apply old law, the covered employees were only limited to the people who were there on the last day of the year and it didn’t cover an employee who was no longer there.
 
Those are the categories of written binding contracts that we want to focus on.  If we go to the next slide and just talk a little bit more about operation and design, I think Steven and Ilya have already given us a sense of one good operational approach.  That is, we need to have a current list in our file as tax professionals as to who all the potential covered employees might be during the year, something to prove that you’ve identified the proper covered employees.  I think you’re going to need to be able to show that there wasn’t the proverbial person F, to go back to Jeff’s example, who doesn’t appear on the proxy, but otherwise was one of the top three highest individuals in the past.
 
This process is going to be important.  Obviously, analyzing the scope of the grandfathering provisions and your existing grants, as our conversation has illustrated, these outcomes are very fact specific.  They do depend on the actual words on the page, in the plan, in the grant, in employment letters, in any other communications that form the legal basis of the grant.
 
Another issue that’s coming up quite a bit is what about future changes?  Do we risk a material modification?  We’re starting to get a lot of questions, and Jeff, you’re shaking your head at me as well, around what constitutes a material modification.  Are we doing something that does increase the compensation to be paid or not?
 
Questions around, should performance standards be modified in the future?  Should the compensation committee be modified in the future?  These are things that companies maybe considering more from an HR, compensation planning purpose, because they’re no longer required to be wedded to all of the process-oriented rules that running a performance-based plan imposed upon them in the past.
 
That being said, I think it’s really important to go back to the grandfathering and remember, if you really want to keep grandfathering on performance-based comp, you have to continue to operate it that way.  Don’t change your compensation committee yet.  Make sure that you’ve got a good outside director comp committee administering those plans until they lapse.
 
If we want to go to the next slide, Jeff, I’ll turn it back over to you.
 
Kroh:  Thank you, Cathy.  This next slide drills down a little further on this, the operation and design, and identifies some potential areas we may be considering for change.  Certainly, as we realize going forward the cost of the equity awards, other bonuses, and LTIP type awards that are over $1 million when combined with salary for that year, the cost will increase by the amount equal to the company’s tax rate.
 
A few things as we move forward, what are some of the areas for change or consideration for change?  One, performance criteria.  Is there likely a wider array of performance criteria that may be used to measure performance going forward?  Often, under the old 162(m) rules, the performance criteria were limited to objective measures that were set forth in the plan and approved by shareholders every five years.  Now, this opens up the universe of types of performance metrics that we could be using.
 
There’s more discretion for who is on the compensation committee.  As Cathy had mentioned, a broader description for the compensation committee to adjust awards both up and down, or down depending on the company performance against the goals that may be adjusted as a result of business events, for example.  Under the prior rules, there was only that negative.  The potential to reduce an award, but you can never increase an award.  That requirement is no longer applicable.
 
Companies may consider reviewing the membership of their compensation committee. Certainly after the outstanding or anything that could be grandfathered, we want to keep our comp committee of outside directors until that happens.  The overall process may also be considered where companies may consider changing the overall timing and process of awards.
 
We typically would have goals set in the first 90 days, and then a committee meeting to meet and certify the achievement of the goals following the end of the performance period.  That certainly could be considered good corporate governance up to this point.  Going forward, is that still the process we will continue to use now that it’s no longer required under the 162(m) rules?
 
Finally, as the number of covered employees and related cost are increasing, there is likely to be greater scrutiny from the proxy advisory firms such as ISS.  For example, companies may wish to consider how such firms will react to wholesale changes in this area or to the well-established process for granting awards.
 
Those are just a few of the areas that we would think are going to begin to be considered by companies as we move away from the old 162(m) rules.
 
If we can move to the next slide, this identifies a few more changes that companies may be considering in connection with the changes to the 162(m) rules.  Essentially, now that we have the guidance on what constitutes a material modification, many companies are considering deleting or removing the sections in equity compensation and bonus programs that were otherwise required to satisfy the performance-based compensation exemption under the old rules, including, for example, the individual annual limit on stock options and SARs.
 
Before making any changes to the plan or underlying awards, it’s important to consider whether such change requires shareholder approval based on the terms of the existing plan or applicable stock exchange listing requirements.  Often, that will depend on how material these changes are to the plan, especially a change, for example, of removing an individual limit. Shareholder approval may be advisable.  One question after the Tax Act of 2017 taking effect is whether certain types of equity awards will be preferred.  Because compensation from options and SARs is no longer exempt, companies may be leaning toward or preferring the ability to structure the year of income inclusion and the corresponding deduction by using restricted stock or RSUs.  In addition, we have seen a rebound in companies that desire to implement a retirement vesting feature.  As we know, that type of a feature under the old rules would result in the award no longer being performance-based comp.  Now that the exemption for performance-based comp is no longer applicable, companies are coming back to the idea of providing retirement vesting. 
 
On the far end of the spectrum, we’ve heard of companies even considering alternatives to traditional stock-based equity programs.  For example, a company may prefer to use profit interest in its partnerships in place of options or SARs of the parent company.
 
Creech:  Jeff, I guess I’ll jump in here.  We’re cognizant that we are talking to stock plan professionals, but another type of equity that is contemplated for tax purposes is a profits interest governed by 93-27 and 2001-43.  These are equity interests in a partnership that are provided at a zero-liquidation value.
 
Economically, they feel and look like an appreciation right.  If you follow the formula that’s provided in the IRS guidance, they are not taxable upon transfer.  The individual becomes a partner in that partnership for which they receive the interest.  Therefore, their income is taxable as a partner.
 
Now, you may say, “Well, how does that help you on 162(m)?”  Because nobody is getting a deduction for the allocation of income under a partnership.  But effectively, it could be an interesting planning device because you are allocating away income that would otherwise be allocated to the other partners when you allocate it to the service provider who also is a partner.  Now, this may be getting a bit esoteric and it does depend upon the structure and depends upon having a partnership.  It also depends upon being able to explain to your shareholders that you’re giving assets of the enterprise, effectively an interest in those assets to service providers.  There are a lot of contingencies around that.
 
Tackney:  There’s also still a number of grey areas in the actual IRS guidance.  One I will point out that folks tend to skip over is that the guidance is explicit, it’s for a partner in the partnership for whom they’re performing services.  That’s the entity providing the profit interest.  You may be providing services and they may provide you a profit interest in another entity, and we don’t necessarily have explicit guidance on that type of treatment.  That’s still in the “at your own risk” territory.
 
Kroh:  The last major bullet on this slide is one of the most common areas for discussion and consideration as well, and that is whether to defer equity or other comp to a future year after separation in which the executive will not be earning or will earn less than a million dollars.  It’s this planning or structuring payments concept.  Although this may not be helpful for our super high earners that are already at a million dollars per year post employment, it may be very helpful for many other executives that a deferral structure could save the company millions in deductions over time.
 
Tackney:  I’ve been surprised in two areas that I believe we’ve not yet received formal requests.  One is if you’re currently paying a lump sum at separation from service, including the ongoing with your non-grandfathered amounts and you ultimately wanted to pay them over time to get some type of deduction if the executive wasn’t already receiving a million dollars a year, that would be difficult, if not impossible, under 409(a).  It would require deferral for at least five years.  We’ve not been asked for that yet, although I had anticipated we would be.
 
The other one is there is some relief in the 409(a) regulations, though again it was based on the old 162(m) rule that would have allowed you to defer to separation from services what would otherwise be deductible.  That is not relevant necessarily for new 162(m) money that will never become deductible.
 
It’s also not clear, so I’m curious that we haven’t gotten a formal request yet whether you can split and apply the 162(m) relief under 409(a) to your grandfathered money, but not apply it to your new 162(m) money.  You can look forward to hearing from folks about what would be administrable and what would help them in those two areas.
 
Creech:  I would say, Steven, we’re really just now starting to get those kinds of questions because I think there are a lot of clients who are absorbing all the things they needed to absorb under the 2017 Tax Act looking at these issues.  Earlier today, I had a conversation with a client who was pointing out to me that the 162(m) changes almost create a disincentive to promote from within, because when you do that and somebody goes from number six to number five, they now are a covered employee, and over time, the grandfathered awards will wear away.
 
To the extent that they have been accruing SERPs, deferred comp, et cetera, the deduction limitation immediately kicks in for that person.  We were tossing around some ideas on how to handle that and I think not promoting from within is not likely to be a good business decision.  They were wondering if there was something they could do to have an acceleration of a payout or changes of a payout.  This was purely hypothetical, but I think as people start to contemplate those scenarios, hopefully we’ll get some more opportunity to provide comments and ask for guidance.
 
Tackney:  My other question is, “How long in the complication of identifying or not identifying compensation is the current $210,000 going to be worth getting the million dollars deducted?”  When you have a much longer list than five covered employees because people have come in and out, or you’ve done mergers and acquisitions, how much is it worth preserving that $1 million a year that’s actually worth $210,000 and that it’s not indexed?  So that’s all it’s ever going to be worth.  To me, it’ll be interesting when people start saying it’s just not worth it.
 
Kroh:  Great.  Moving on to the next polling question, Kathleen?
 
Cleary:  Alright.  “My company or clients (if applicable) have already taken steps to change the equity plan design or process in light of the 2017 Tax Act amendments to Section 162(m).”  This is just a yes or a no and there’s no wrong answer, just go ahead and select yes or no.
 
Okay, in the interest of time, I’m going to go ahead and close the poll and share the results.  You should all be seeing the results now, it looks like a pretty commanding majority is no.
 
Kroh:  That’s what we would expect at this point.  We haven’t seen many clients moving forward with making changes, especially not prior to August when the IRS released the notice.
 
Actually, we were recommending not to make any changes prior to that point for fear of having any sort of change be a material modification, which we’re attempting to avoid in order to retain our grandfathering for those awards that could otherwise be grandfathered.
 
I think this was the result we were expecting.  But I think in the next few years, whether that’s the next cycle of going in for more shares, let’s say in equity plans or potentially other reasons to make changes, these types of changes being the changes we discussed on the prior slides, may be considerations for more streamlining the plan, for example, removing some of those older performance-based comp provisions.
 
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Director Compensation Limit and Recent Guidance

 
Kroh:  If we move forward, the next slide introduces the last topic for our program today, the director compensation limit and some recent guidance.  I’d like to launch a polling question on this first, and I’ll cover the material briefly and then move on to some mitigation strategies.
 
Cleary:  Okay, “Does your company or your most significant client (if applicable) have a director compensation limit in its equity plan?  And if so, what type?”  The answer selections answers are, “No, we don’t have a director comp limit”; “Yes, we have a limit.  It’s based on a multiple of the director’s annual pay”; or “Yes, we have a limit and it’s a fixed number of shares or value.”  You should be seeing the poll and you can enter your selection.  This will level set where we’re starting with this issue, Jeff.  It looks like about half of our listeners have responded, so if you haven’t entered a selection, please do and then we can show the results.  Okay, I’m going to close out the poll and share the results with you.  Looks like the responses for A and C are pretty close.
 
Kroh:  It looks as if we have some plans that still do not have a limit at all.  This is certainly with respect to plans that would cover directors, and then we have C being, yes, we have a limit and there's a fixed number of shares or value.
 
The reason we asked this question first is that a recent Delaware Supreme Court decision from December, 2017 with the Investor BankCorp case, seems to cover and make clear that when directors exercise discretion and make decisions on their own compensation under broad or general parameters in an equity plan, the shareholder ratification defense will not be available.  That was the decision in that case, so just to lay out a little bit of the background.
 
There were some unfavorable facts in that case, very large grants to the directors I think that potentially may have swayed the decision here.  But in this situation, the shareholders alleged that the directors breached their fiduciary duty by awarding themselves excessive compensation and that the directors filed a motion to dismiss on the basis that the complaint failed to state a claim due to the assertion that the shareholder ratification defense applied.
 
Essentially, if a court sustains the directors shareholder ratification defense, then the shareholders are required to prove that the directors setting their own compensation is not protected by the business judgment rule which courts have given broad deference to director decisions in the absence of evidence of corporate waste.
 
Alternatively, if a court rejects the bank directors’ shareholder ratification defense then the directors must show that the setting of their own compensation meets the entire fairness standard, and this would likely require the bank to demonstrate that the process for setting the compensation was appropriate and in good faith, and that the amount of compensation fell within the competitive market practice.  This would involve a fact intensive discovery process likely at the next stage of litigation, which would mean it would survive that motion to dismiss.
 
In the Investor BankCorp case, the court denied the directors' motion to dismiss and rejected the shareholder ratification defense because the directors retained broad discretion to set their own compensation under the equity plan, and that discretion did not include a specific limit on the director compensation.  Generally, this decision casts some doubt as to whether this shareholder ratification defense will be permitted other than in a case of a shareholder approval of a specific director complement in the value, a number of shares or value of shares provided, or a formulaic limit of some type is approved.
 
With other potential changes being implemented to the equity plans in the next few years, this would be another one of those items that companies may be considering either going to a more specific limit for purposes of director comp or providing some sort of formula that would put an upper limit, actually to allow for the shareholder ratification defense, and for companies to be able to have less risk.  The best thing that would inform this decision is how good is our process from a company perspective with making our director comp awards, and what is our appetite for shareholder derivatives suits in this area?
 
Moving on to the next big topic, the mitigation strategies based on deferral approaches, as well as a few other highlights we wanted to go through.
 
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Mitigation Strategies Based on a Deferral Approach

 
Creech:  Jeff, I will jump in here and maybe we'll just spend just a few minutes on this, then leave some time for questions.  You might want to be teeing up your questions while we summarize here.
 
We spent a lot of time on the webcast today talking about the legal standards, the technical standards, compliance and financial reporting.  That's probably where 95 percent of all of our energy has been spent thus far on 162(m), making sure we understand the new law, the implications and how to apply it in our particular factual circumstances.
 
Looking forward, as we've already alluded to, we don't really have a lot of control over who our covered employees are, they are who they are based on the SEC standards.  Are there other ways to try to mitigate the impact of this million-dollar deduction limit?  People who are covered by it will tend to grow over time.
 
Deferral is obviously one topic that we have discussed and are thinking about whether we can utilize some of those 409(a) exceptions or provide some meaningful comments to Ilya, Stephen and the IRS on how those regulations might be changed or provide guidance to use them more effectively.
 
In terms of design, we are already starting to see clients re-thinking their assumptions around the edges on how they pay people.  For example, is there now a disincentive against lump sums to the extent that they are going to be significant amounts versus paying a severance of $2 million when someone leaves?  Would you prefer to spread that out and what does that look like?  Do we need to be re-thinking how those plans work, and how we spread payments out?  Is there now perhaps a preference towards compensation where the tax event is a little bit more predictable, versus an option or appreciation right where the timing of the taxation depends on an employee action?  What about going back to things like restricted stock because it’s taxable when it vests, or taxable with an 83(b) election?  The company is going to give up the deduction on the gain in that situation.  To the extent that you have individuals who are already in excess of the million-dollar limit, that deduction is gone in any event, so those sorts of designs make sense.
 
I think just the elimination of the performance-based compensation exception is starting to cause clients to really take a closer look at their structure and ask questions that they didn't ask before.  We see that particularly with multinational clients and top executives who are performing services, perhaps both in and outside of the U.S.  Maybe not as much thought had gone into, who is their employer?  Do they have an employer in the U.S.?  Did they have an employer outside of the U.S.?  Is there compensation actually being deducted on a U.S. tax return or not? We see a lot more of those questions now being asked.
 
Anything else on mitigation strategies that you think we've left out, Jeff, or should we move to questions?
 
Kroh:  I think we can move on to questions.  Just one point to highlight though, we did cover it but it seems even more important that we are keeping track of who our covered employees are on a year by year basis, and making sure we are capturing everybody we need to.  Recreating this list in hindsight, as we pointed out on this webinar, would be very difficult.
 
Tackney:  This is often an accumulative list and will get longer year by year.  I think that is going to be a significant change.  Not now, but five, ten years from now having to be able to show whether someone was at one point over the prior 10 years a covered employee, it will be interesting how that will all end up being administered.
 
Kroh: Great.  Well, we're ready for questions.
 
Tackney:  One thing I do want to say, though, before we get to questions, is to thank a colleague who is not here, Tom Shelton, and also Ilya. I think you can see they have really dived into this quite heavily and worked incredibly hard on this particular guidance and on all the issues leading up to the regulation.
 
I just want to give a shout-out to my folks, they are the ones who really dig into all of your comments and suggestions and questions, so again, a shout-out to them.
 
Cleary:  Thanks, Stephen and just a reminder to our listeners, if you have comments, please submit them to the IRS.  I do have a couple of questions coming in.  If for any reason we don't get to your question, I will follow up with you after this webcast is completed.
 
Let's start with this one that came in earlier, "Does the presence of the typical language in grant documents on its own result in the awards not being grandfathered?  Will there be more clarity provided by the IRS on this point, typical negative comp committee discretion?" Does that pose an issue?
 
Creech:  Well, I am reading in to the question that the concern is there's a lot of fairly common language that says the comp committee cannot increase performance-based pay but may exercise negative discretion to reduce it.  Taking that at face value, I think that's often in the plan document and then you need to look at the underlying grants to determine whether they have incorporated that or whether perhaps the grant has.  We commonly see this language, that negative discretion will be utilized only in certain circumstances and maybe it provides more definitive standards for what the negative discretion would be.
 
In that scenario, speaking for myself, I may conclude that it is a binding contract because it's only if certain events occur that the compensation committee could reduce the award. It's harder to talk about it in a vacuum, not with reference to particular plans and awards.
 
I think unless legal counsel can tell you if that's all you've got, the award can't be reduced under state law, then you do need to look hard at it.  In those scenarios, sometimes we find that there may be a hesitation to come to that conclusion because perhaps the negative discretion has been utilized in the past.  Perhaps the compensation committee would be surprised to learn that they didn't have the discretion that they might have thought that they had to reduce.  There are all sorts of factors we've been looking at to try and come to a conclusion on this.
 
Cleary:  Thank you, Cathy.  And for this participant, if that doesn't answer your question please email me and I will get you some further clarification.
 
Tackney:  The one thing I wanted to add because there was a request for IRS guidance, for good or for bad, the standard is written binding contract and that's actually not in the code but the statutory provision.  Once you hear binding contract that's contract law.  Contract law is state law.
 
There's not a lot more guidance we can provide other than that's the law we will look at in determining this.  If there is more guidance, given that constraint that we can provide, we are certainly open to looking at that.  But that's kind of difficult, given the 51 regimes we will be dealing with to bring out definitive answers in our guidance.
 
Cleary:  Stephen, similar to that topic, the state that we’re referring to, is that the state of incorporation or the state of the employee's residence?
 
Tackney:  This is not always clear, but it's going to be the state that governs the contract that is the grant to the executive.  If the executive sued, whose law would apply if they try to enforce the grant?  Sometimes it's clear, but we definitely have heard sometimes even that question is not entirely clear.
 
Cleary:  That is helpful, Stephen, thank you.  Let's see, here's a couple more.  If two public companies merge and one entity has a stub tax year, for the executives that were covered employees during that stub year, also are they covered employees in the combined new entity?  Do they get two $1 million deduction limits?
 
Enkishev:  Let me answer this one.  Each taxable year gets a million dollars.  One of the fact patterns in the notice actually originated from a question, whether I have a 12-month period and I have two taxable years, a short one and then a subsequent taxable year, and the combination of time is 12 months.  Do I just get one million for the entire 12 months or do I get a million for each taxable year?
 
The statute is clear.  You get a million for each taxable year.  With respect to the covered employee question, the new 162(m) has a provision that if you were a covered employee of a predecessor corporation you would be a covered employee of the new corporation.  The publicly held corporation is actually taking the deduction.
 
We are aware of the issue and we hope to incorporate and to answer that question in forthcoming guidance, just exactly what kind of corporate transactions can occur and how the predecessor publicly held corporation will apply.
 
I hope I've answered a part of the question and we will try to answer this question in forthcoming guidance.
 
Cleary:  Great, thank you, Ilya.  Again, for this participant, feel free to email me if you need further clarification and we'll make sure that you get an answer.
 
I think we have time for one more question and for the others we won’t get to, I will reach out to you afterwards. "What about accelerating and divesting of an otherwise grandfathered award, would that cause it to lose the grandfathering?"
 
Enkishev:  We are aware of the issue.  We know that there is a benefit to accelerated vesting and to just think, for example, if I have to provide services for 12 months in order to exercise an option, and that exercise period is going to be two years following my 12 months of service.  Let's say I worked for six months and my employer says, oh, you’re doing such a great job, you are vested now.  There is a benefit to having those extra six months of an exercise period.  The question, of course, is whether that modification of an option—if that benefit is material enough.  We are aware of the issue.  We are looking at it and hopefully we can address it in forthcoming guidance.
 
Creech:  There is guidance in the existing regulation albeit under the performance-based comp exception, that acceleration of vesting or a deferral isn't a material modification.  That guidance, at least in prior private letter rulings, is also relied upon to say that if it wasn't a material modification for that purpose, it also wasn't a material modification for the written binding contract or the IPO transition period.
 
Enkishev:  That is actually exactly right.  I was actually writing something on it today, so glad you are here.  But, yes, after you met the performance goal, you can accelerate the vesting and that's not going to be modification.
 
Creech:  It's not an increase in comp, right?
 
Enkishev:  It's not increasing comp, that is correct.
 
Cleary:  Perfect, thank you.  It looks like we can squeeze in one more question.  "Does it matter to the grandfather analysis if the comp committee has never exercised their negative discretion in the past?"
 
Enkishev: That would actually depend on the applicable law.  If the applicable law takes in to account prior course and dealing of the comp committee, that could be relevant.  If the comp committee had the power to exercise negative discretion in old plans for the past 25 years, and the applicable law says you can take past course in dealing into account, and the comp committee has never exercised negative discretion ever, then it could be that under the law that the comp committee might not be able to exercise negative discretion or it could be limited.  But it will depend on applicable law.
 
Cleary:  Great, thank you, Ilya.  All right, I am going to go ahead and wrap up the webcast.  I hope everyone got the information that they needed on the tax cuts and Notice 2018-68.
 
I know there are still a couple of outstanding questions, I will follow up with you afterwards.  Also, please feel free to email me at any time if you have additional questions.  I can pull in one of our expert panelists and get you the information that you need.
 
If you missed any part of the webcast, I noticed that some people did come in late, so if you need to listen to the beginning or any particular section or maybe all of the webcast again to get your questions answered, I will be posting an archived version in the next day or two. You will find it where you found the link for this live webcast.  We will also post a transcript in a few weeks. 
 
I just want to say a big thank you to Cathy, Jeff, Stephen and Ilya for all their time preparing for and presenting this webcast today, I really appreciate it.
 
Thanks to our audience for joining us today.  I hope you will join us on December 4th for our annual tax reporting webcast.  Please feel free to send me any questions and also please forward any comments you might have to the IRS.
 
Thank you, everyone, that concludes our webcast for today.
 
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