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Ken Davis

20% additional tax

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Please help me untwist my mind!

The 409A(a)(1)(B) heading says "Interest and additional tax payable with respect to previously deferred compensation."

The detailed rule in 409A(a)(1)(B)(i) says "If compensation is required to included in gross income under subparagraph (A) . . . the tax imposed . . . shall be increased by . . . (II) an amount equal to 20 percent of the compensation which is required to be included in gross income."

So, the heading to 409A(a)(1)(B) refers to "previously deferred compensation," but the detailed rule makes no such reference. And, I can find no such reference in the committee reports (unlike the committee reports' discussion on the interest rule). In fact, the conference committee report states "The amount required to be included in income is also subject to a 20-percent additional tax."

My question is whether the 20% additional tax applies to amounts which arise under the plan for the current year and are included in gross income for the current year, and thus are not "previously deferred compensation."

Thanks,

Ken Davis

Univ. of South Alabama

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The 20% excise tax refers to distributions from plans which are not in compliance with the provisions of 409A and and Regs thereunder.

cf, Corporate Counsel and Journal of Accountancy.

The 20% additional tax, therefore, applies to amounts which become taxable during and are included in gross income for the year (whether or not those amounts are paid) from a plan which is not in compliance.

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The 20% excise tax refers to distributions from plans which are not in compliance with the provisions of 409A and and Regs thereunder.

cf, Corporate Counsel and Journal of Accountancy.

The 20% additional tax, therefore, applies to amounts which become taxable during and are included in gross income for the year (whether or not those amounts are paid) from a plan which is not in compliance.

Yes, I agree. But, does the 20% tax apply to amounts arising under the plan during the current year, or only to amounts which have arisen in past years?

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The 20% is applied to all amounts that are recognized in income due violating 409A. Notice 2007-89 indicates for 2007 that the inclusion date would be as of 12/31/2007 and would include all amounts not previously recognized as income and not subject to a substantial risk of forfeiture. That would include amounts earned in 2007 and all prior years that meet the criteria. Presume the same would be true for 2008.

Always ignore the heading on the sections. They are meant to be informative, but they can't be relied on in a court of law (they aren't controlling).

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