Barker & O'Brien: Correcting § 409A Failures

Rosina B. Barker & Kevin P. O’Brien (both of Ivins, Phillips & Barker, Washington, D.C.) have published 409A Failures: Correcting With and Without Notice 2008-113, 124 Tax Notes 557 (Aug. 10, 2009).  Here is the abstract:

Deferred compensation plans under § 409A are minefields of potential mistakes. Tax penalties for plan failures are harsh. This report explores how to correct failures in plan operation, both with and without the IRS program in Notice 2008-113. First, in Part One, we detail how to correct failures ‘‘by the book’’ under the notice, and point out some tax surprises hidden within it.

In Part Two, we explore how to correct failures when the notice’s program is unavailable. We suspect these will be legion. The IRS might not think that correction outside the notice is permitted. If this is their view, we do not agree. The IRS’s narrow view appears based on the notice’s underlying and, we believe, mistaken theory of § 409A. We set forth a better view of § 409A, one more consistent with the statute and regulations, and based on traditional concepts of income receipt. On the basis of this preferred view, we explore how § 409A operational failures might be corrected using rescission doctrine, the longstanding rule of Couch v. Commissioner, and other theories of income receipt derived from the case law. The difference between these two opposing theories of § 409A will underlie this and no doubt other disputes about § 409A compliance and administration for years to come.