Mutual fund options

[Guest Philip]

Does anyone think that the new 457(f) regs, shutting down mutual fund options for nonprofits, is a sign that the IRS will be looking at discounted mutual fund options in the for-profit context?

[Guest EAKarno]

In communications with Treasury we have learned that they are aware of abuses in the for-profit sector as well as the not-for-profits. Specifically, they are aware that there are options with floating exercise prices. I expect that their take is that such options either have a readily ascertainable fair market value (the spread) or that they were never options to begin with. New 451 regs are said to be coming soon, so perhaps the issue will be addressed then.

[mbozek]

The IRS has only limited resources to allocate to deferred comp. questions and given the powerful interests on the other side and more pressing tax evasion issues with much higher revenue potential (offshore bank accounts) I think they will wait until the 457 reg issues are decided before committing any more of their limited resources. Also Section 83 has been applied to exclude options for 30 years. The IRS has a history of floating propsed changes and changing their minds, e.g., the split $ regs issued in Jan 2001. Finally people forget that in in Feb 1978 the IRS, on its own, persuaded Treasury to issue proposed regulations that would tax all nonqualified deferred comp. After the uproar Congress enacted IRC 457 limiting deferred comp for govt employees only to prevent the IRS from changing the rules for other groups. Any changes in taxation of options will have to be statutory because of the issues of IRS authority to revise its interpretation of the provisions.

[mbozek]

One clarification to my prior post: The proposed IRS regs only applied to elective contributions, i.e, salary reduction at the option of the employee, not all nqdc. However, it still represented a radical departure from existing law that salary could be deferred prior to the time it was earned.