In a new report, Democratic staff members of the Senate Finance Committee take aim at what the report calls “tax avoidance strategies,” including non-qualified deferred compensation (NQDC) plans.
The document, “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions,” says that “the tax code should treat all taxpayers fairly and not include rules that allow executives and management employees to receive favorable tax treatment of their compensation that is not available to all employees.”
The report notes that a number of lawmakers have introduced legislation rolling back the NQDC rules, including a tax reform discussion draft from former House Ways and Means Committee Chairman Dave Camp (R-Mich.) under which all compensation deferred under a NQDC plan would be included in gross income for the taxable year of vesting. The report notes that when estimated as a part of Camp’s tax reform plan, this NQDC proposal would raise $9.2 billion over 10 years by “stemming the practice.”
The report’s authors note that current law includes limits on the ability of employees to defer income through qualified retirement plans, such as 401(k) plans, and ask why, from a “fairness perspective,” the tax code “lift[s] those limits for the highly paid and allow[s] them to defer income over and above the limits to which most rank-and-file employees are subject?” They explain that some have already proposed limiting the permitted amount of NQDC (e.g., with a cap of $1 million).
The report explains that under Code Section 162(m), subject to a number of limitations, compensation paid to certain senior executives in excess of $1 million is nondeductible by the employer. However, if an employee’s compensation is deferred until retirement when the employee is no longer a senior executive, the compensation will not be subject to the $1 million cap. “Policymakers also should explore closing this abusive loophole,” the report recommends.
In addition to “avoiding income taxes by deferring compensation,” the report also takes on using “collars” to avoid paying capital gains taxes, using wash sales to time the recognition of capital income, using derivatives to convert ordinary income to capital gains or convert capital losses to ordinary losses, and using derivatives to avoid constructive ownership rules for partnership interests, among other things.