• Understanding the Initial Guidance on the Executive Compensation Rules under the Emergency Economic Stabilization Act of 2008 (EESA)
  • November 6, 2008 | Authors: Sabino (Rod) Rodriguez; David P. Doyle; Ronald H. Janis; Robert M. Taylor; Susan M. Szafranski
  • Law Firms: Day Pitney LLP - New York Office; Day Pitney LLP - Morristown Office; Day Pitney LLP - New York Office; Day Pitney LLP - Hartford Office; Day Pitney LLP - Morristown Office; Day Pitney LLP - Hartford Office
  • The Treasury Department has issued interim guidance on the executive compensation rules enacted in the Emergency Economic Stabilization Act of 2008 (EESA), including guidance from the Internal Revenue Service (I.R.S.).[1] 

    Tax Rules – EESA § 302:  The I.R.S. released Notice 2008-94[2] with guidance on new Sections 162(m)(5) and 280G(e) of the Internal Revenue Code of 1986, as amended (I.R.C.) (together, the "Tax Rules") limiting deductions, respectively, for compensation over $500,000 and excessive severance, but in each case only if paid to applicable senior executives by a financial institution that sells more than $300 million in "troubled assets" under EESA's Troubled Assets Relief Program (the "TARP") where one or more troubled assets are sold through a trouble asset auction program ("TAAP").[3]  The Tax Rules do not apply to financial institutions that do not sell troubled assets in an EESA TAAP, though some terms defined in the Tax Rules are referenced elsewhere in the interim guidance under TARP.  Section I of this Alert describes the guidance provided under the Tax Rules and notes how they differ from the rules under the Treasury's other interim guidance under TARP.

    Capital Purchase Program (CPP)[4] – EESA §§111(b) The Treasury issued interim final regulations (the "TARP CPP Regs.") under EESA Section 111(b) for participants in the CPP, a TARP direct purchase program pursuant to which the Treasury will purchase senior preferred stock of financial institution issuers in order to increase liquidity in the capital markets.[5]  Section II of this Alert describes the interim guidance in the TARP CPP Regs on the executive compensation rules applicable in a CPP.     

    Trouble Asset Auction Program (TAAP)[6] – EESA §§ 111(a) and (c).  The Treasury issued Notice 2008-TAAP [7] with guidance on the restriction imposed on certain financial institutions from entering into new employment contracts with golden parachute severance provisions under EESA Section 111(c). Section 111(c) applies to financial institutions from which one or more troubled assets are acquired through the TAAP, but only if the aggregate amount of troubled assets acquired (including through TARP direct purchases) exceed $300 million.  Notice 2008-TAAP will apply to taxpayers subject to the Tax Rules, but not to financial institutions who participate only in direct purchases under the TARP, including the CPP.  Section III of this Alert describes the restriction on parachute payments applicable to certain financial institutions that participate in a TAAP. 

    Program for Systemically Significant Failing Institutions (PSSFI) – EESA §111. The Treasury issued Notice 2008-PSSFI indicating that it is developing a third program to provide assistance directly to Systemically Significant Failing Institutions.  The executive compensation guidance in Notice 2008-PSSFI is, in essence, a combination of the rules restricting new golden parachute arrangements (under Notice 2008-TAAP) and the executive compensation rules applicable to the CPP (under the TARP CPP Regs.) except that for purposes of the PSSFI, prohibited "golden parachute payments" will encompass all payments in the nature of compensation to or for the benefit of any covered executive, other than payments under qualified retirement arrangements, in respect of an applicable severance from employment.[8]  Section IV of this Alert describes the executive compensation rules that will become applicable to financial institutions that participate in the PSSFI once that program is developed. 

    Note on CPP Participation:  Financial institutions that participate only in the CPP or whose total TARP sales exceed $300 million but do not include any TAAP sales, will not be subject to the Tax Rules or to Notice 2008-TAAP.  While the Treasury guidance regarding executive compensation applicable to participants in the CPP (as well as to that applicable to the TAAP and PSSFI programs) reference some of the Tax Rules definitions, these executive compensation rules vary from the Tax Rules, especially in the event of an acquisition of financial institutions to whom the Tax Rules are otherwise applicable.   

    I. IRS Guidance on Tax Rules for Deduction Limits on Compensation and Golden Parachute   Severance
     
    A. $500,000 Compensation Deduction Cap --New Section 162(m)(5) [9]

    Scope. New I.R.C. § 162(m)(5) limits the deduction for "executive remuneration" and "deferred deduction executive remuneration" paid to a "covered executive" of an "applicable employer"[10] to $500,000 during "applicable taxable years."  These key terms are explained below.  A substantially similar standard is required to be agreed to by a financial institution as a condition to participation in the CPP.[11]

    Key differences from existing I.R.C. § 162(m).  While the new provision tracks the general rule of I.R.C. § 162(m) that limits the deduction for a covered executive's compensation to $1 million, the new law is not limited to public companies or to corporations.  In addition, the exception for performance-based compensation and certain other exceptions to the $1 million deduction cap do not apply to those subject to the new rule.  

    Note: Application in the CPP. While new I.R.C. § 162(m)(5) does not apply directly to financial institutions participating only in a TARP direct purchase program like the CPP, the terms of those programs require the financial institution to agree not to claim a deduction in excess of $500,000 for compensation paid to the five senior executive officers, as the term is defined in the TARP CPP Regs.[12]

    Who Is An Applicable Employer?

    An "applicable employer" is any financial institution selling more than $300 million in troubled assets under the TARP (excluding financial institutions that sell troubled assets only through direct purchases).[13] Troubled assets sold under the TARP by a target financial institution prior to its acquisition by an unrelated financial institution, however, are not aggregated with any assets sold by the acquirer prior to or after the acquisition.[14]

    What About Non-Public Companies?

    A non-public company can be an applicable employer, without regard to the form of the entity, which is not the case under I.R.C. § 162(m) generally.[15] 

    How Are Companies with Common Ownership or in a Controlled Group Treated?

    Two or more persons will be treated as a single "applicable employer" applying the same rules used for qualified retirement plan purposes, i.e., whether they are part of a controlled group of corporations[16] or under common control.[17] 

    Bank Holding Company Example.  The Notice provides the example of a bank holding company that is the sole owner of three banks that individually sell $100 million or more in the TARP auctions over a year, that aggregate over $300 million, constitutes a single applicable employer with the three banks that has sold in excess of $300 million of troubled assets and, thus, the chief executive officer and chief financial officer of the bank holding company and the three other most highly compensated officers of the bank holding company controlled group are each "covered executives."[18] 

    Partnerships, Trusts, Etc.  Determining whether more than $300 million of troubled assets have been sold is made at the level of the selling entity taking into account all entities that are treated as the same employer under the controlled group rules, as noted.  If the selling entity has no employees who are officers (or acting in the capacity of an officer), then the owner of the entity that manages the selling entity's assets is the entity that may be the applicable employer together with any others in the controlled group.[19]

    NOTE:  The TARP CPP Regs. also reference the same existing tax rules for purposes of determining if financial institutions are part of the same control group for purposes of EESA § 111(b). [20]

    What Constitutes Executive Remuneration For An Applicable Year?

    The limitation applies to "executive remuneration" and to "deferred deduction executive remuneration," which terms cover compensation for services rendered in any applicable taxable year that are otherwise deductible (a) in the current taxable year (i.e., whether or not paid currently)[21] or (b) in any subsequent year if attributable to any applicable taxable year.  The deduction for the deferred amount paid in the later year is limited if the sum of the earlier year deductible payment, when added to the deferred amount, exceeds $500,000.[22]  Any earnings on the deferred amount are treated as part of the deferred remuneration.[23] 

    Remuneration Spanning More Than a Year.  To determine when compensation is attributable to any formula any particular year, in the first instance one looks to any formula under an applicable plan or arrangement provided the executive has a legally binding right to the remuneration.[24]  If the payment can be reduced unilaterally by the employer after the services have been performed, it is not subject to a legally binding right unless the reduction requires a condition or the discretion lacks substance.[25] 

    At Risk Pay.  If the executive's right is subject to an obligation to perform substantial future services, and as a consequence is subject to a substantial risk of forfeiture, the remuneration is deemed earned over the applicable period on a pro rata basis, absent formula in a plan or pursuant to a legally binding right, as noted above.[26] 

    How Are The Applicable Tax Years Determined?

    The $500,000 cap applies in the first taxable year in which the employer has sold an aggregate of more than $300 million in troubled assets under the TARP, including sales in prior years (unless all sales were through direct purchases).  Each subsequent year while the TARP authority is outstanding[27] is an applicable tax year, and, in the case of the so-called "deferred deduction executive compensation" the limitation can apply to later years.[28]  The limit with respect to deferred deduction executive remuneration for services performed in an applicable taxable year applies for deductions in all subsequent taxable years (until the deferred deduction executive remuneration for services performed in that applicable taxable year is completely paid).[29]  The applicable tax year is the year of the parent entity in the case of a controlled group.[30]

    Who Are Covered Executives?

    Under the Tax Rules, the term "covered executive" means  (i) the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) (or an individual acting in either of those capacities) of the applicable employer and (ii) the three highest compensated officers of the applicable employer (including the entire controlled group) other than the CEO or CFO, in each case taking into account only individuals employed during the taxable year that includes any portion of the TARP authorities period.  For a public company subject to the Securities Exchange Act of 1934 ("Exchange Act"), the determination of the three highest compensated officers is determined under the shareholder disclosure rules, except that the measurement period for purposes of determining the high three officers for an applicable taxable year is that taxable year and not total compensation for the last completed fiscal year as under the Exchange Act rules.  For private employers and noncorporate entities, rules analogous to the Exchange Act disclosure rules are to be applied. [31]  

    NOTE:  Under the Tax Rules, once an employee is a covered executive for any applicable taxable year, the executive is a covered executive for all subsequent applicable taxable years.  If the financial institution is acquired, the acquirer will not automatically become an applicable employer; however, if the target was an applicable employer at the time, a covered executive of the target will continue to be a covered executive for the rest of the TARP authorities period if employed by the controlled group of which target is a member, regardless of whether acquirer is an applicable employer and regardless of whether the target covered executive is a covered executive of the acquirer.  Post-acquisition, no new executives of target will be a covered executive merely because of such termination, unless he or she is a covered executive of acquirer.[32] 

    NOTE:  Unlike the Tax Rules, the TARP CPP Regs. use the term "senior executive officers" (the "SEOs") of financial institutions in applying the restrictions imposed under EESA § 111.  See discussion in Section II below.

    B. "Golden Parachute" Severance Deduction Cap - New Section 280G(e) [33]

    Prior to amendment by EESA § 302(b), I.R.C. § 280G denied a deduction for "excess parachute payments" made to any executive and imposed a 20% excise tax of such amount on the executive under I.R.C. § 4999, where such payments were conditioned on a change in control of the employer.  New I.R.C. § 280G(e) expands the definition of a "parachute payment" to include severance payments made to a covered executive of an applicable employer participating in the TARP.  The terms "applicable employer," "applicable taxable year" and "covered executive" have the same meaning as in new I.R.C. § 162(m)(5) imposing the $500,000 compensation deduction limit, discussed above in Section I.A of this Alert.  New I.R.C. § 280G(e) is effective for applicable severance payments made during an applicable taxable year with respect to severances, but only if occurring during the TARP authorities period.[34] 

    What Is An "Involuntary Termination?"

    The term "applicable severance" is any severance from employment of a covered executive by reason of an involuntary termination of the executive by the employer or in connection with a bankruptcy, liquidation, or receivership of the employer.[35]  An "involuntary termination" results from the independent exercise of unilateral authority to terminate services, other than due to the covered executive's implicit or explicit request, where the covered executive was willing and able to continue performing services.[36]  An involuntary termination may include failure to renew a contract if the covered executive was willing and able to execute a new one on substantially similar terms, and can include a termination for good reason due to a material negative change in the covered executive's employment relationship.[37]  An involuntary termination can exist even when the covered executive has voluntarily terminated, if the facts and circumstances indicate that the executive was aware that he or she would have been terminated involuntarily.[38]

    What Constitutes An "Excess Parachute Payment" For Purposes Of § 280G(e)?

    A "parachute payment" means any payment in the nature of compensation to or for the benefit of a covered executive if the aggregate present value of such payments equals or exceeds an amount equal to 3 times the covered executive's base amount.  An "excess parachute payment" is any parachute payment in excess of the base amount.[39]  Put simply, the base amount is the five year average of the executive's W-2 compensation from the applicable employer.  The payment must be made during an applicable taxable year on account of an applicable severance from employment during the TARP authorities period.[40]  The payment must not have been payable even if no applicable severance from employment had occurred (including amounts that would otherwise have been forfeited due to severance from employment and amounts that are accelerated on account of the applicable severance from employment).[41]  But amounts paid to a covered executive under a tax-qualified retirement plan are not payments for this purpose.  It is important to recognize that for this purpose, a payment on account of an applicable severance from employment includes amounts that are accelerated as a result of the applicable severance from employment applying the same rules presently used under Section 280G generally.[42]

    What Are The Consequences Of An Excess Parachute Payment?

    No deduction is allowed for the excess parachute payment and an excise tax equal to 20% of the excess parachute payment is imposed on the covered executive.

    What If An Applicable Severance Payment Under Section 280G(e) Is Also A Change In Control Parachute Payment Under Section 280G?

    The Tax Rules provide that if a payment treated as a parachute payment under new I.R.C. § 280G(e) is also a parachute payment under existing Section 280G on account of a change in control, then new rules do not apply to the payment.[43]

    NOTE:  Notwithstanding the foregoing provision in the Tax Rules, in the case of covered executives of  a financial institution participating in a direct purchase program (including the CPP and the PSSFI) subject to EESA § 111(b)  that is acquired during the TARP authorities period while the Treasury has debt or equity securities of the financial institution, the restriction on parachute payments in the case of the CPP (and on severance payments generally under the PSSFI) will continue to apply to the covered executives for one year following the acquisition without regard to whether or not the executive is an SEO of the acquirer.  This suggests that Section 280G(e) also will apply in the event of an applicable severance of employment, rather than Section 280G without regard to Section 280G(e).[44]  See discussion in Section II, below.

    II. TARP Capital Purchase Program  (CPP)

    A. New Bank Equity Purchases to Strengthen Capital Structures to Facilitate Lending in the Capital Market

    The CPP provides the standardized terms under which equity capital is to be provided directly to financial institutions.  Under the TARP CPP Regs., as a condition to participating in the CPP, the financial institution must become subject to more stringent executive compensation rules in respect of its senior executive officers (SEOs) [45] during the time the Treasury holds equity or debt securities of the issuer.  A term sheet for the Senior Preferred Stock to be purchased was released together with the announcement of the terms of the program.[46]

    B. CPP Executive Compensation Rules [47]

    The TARP CPP Regs. provide that a participating financial institution must meet certain executive compensation standards with respect to its SEOs,[48] including the following while the Treasury holds an equity or debt position in the financial institution acquired under the CPP:

    i. Inappropriate Risk Incentives [49]

    To ensure that incentive compensation for senior executives does not encourage unnecessary and excessive risks, including both long-term as well as short-term risks that threaten the value of the financial institution, the TARP CPP Regs. require that:[50]

    (1)  within 90 days after a direct purchase under the CPP, the compensation or similar committee must review the SEO incentive compensation arrangements with the financial institution's senior risk officers, or other personnel acting in a similar capacity;

    (2)  thereafter, such committee must meet at least annually with such risk personnel to review the relationship between the financial institution's risk management policies and practices and the SEO incentive compensation arrangements; and

    (3)  such committee must certify[51] that it has completed the reviews required by (1) and (2) above, and should identify and limit any features in the SEO incentive arrangements to ensure that the SEOs are not encouraged to take risks that are unnecessary or excessive.

    ii. Clawback of Bonus/Incentive Compensation[52] 

    The TARP CPP Regs. require a clawback of any bonus or incentive compensation paid to a SEO based on financial statements or any other performance metric criteria that are later proven to be materially inaccurate.

    The TARP CPP Regs. note that this requirement differs from Section 304 of Sarbanes-Oxley[53] in that it extends to the three most highly compensated executive officers in addition to the CEO and CFO; applies to both public and private financial institutions; is not exclusively triggered by an accounting restatement; does not limit the recovery period, and covers not only material inaccuracies relating to financial reporting, but also material inaccuracies relating to other performance metrics used to award bonuses and incentive compensation.  

    iii. No Parachute Payments[54] 

    The TARP CPP Regs. prohibit making any golden parachute payment to a senior executive.

    Note that this is the only provision in the legislation that actually prohibits a payment to a senior executive; the others impose a penalty, largely on the financial institution.

    The TARP CPP Regs. cross reference the definition of "golden parachute payment" under the Tax Rules, and other terms are substantially identical to the Tax Rules,[55] except that the payments at issue are only payments to SEOs and only those during the time the Treasury owns debt or equity securities acquired under the CPP and not for the TARP authorities period.  Note that in determining whether a parachute payment is payable, the acceleration rules applicable to Section 280G generally are applicable, which can result in a parachute payment even where cash severance would not exceed 3 times the SEO's base amount.[56]

    Special Rules in Merger and Acquisition Transactions. If a financial institution (target) that had participated in the CPP is acquired by an unrelated entity (acquirer) in any form, the acquirer is not subject to these provisions (i.e., EESA §111(b)) merely as a result of the acquisition.[57]  However, the TARP CPP Regs. provide that any SEOs of target prior to the acquisition continues to be subject to EESA § 111(b)(2)(C) (restriction on new golden parachute agreements) until after the first anniversary of the acquisition.

    Deferred Payment May Be Permitted: While the interim guidance does not directly address the issue, the prohibition would not appear to extend to "payments" deferred to a period after the Treasury no longer holds the securities.  The terms of any deferral would have to be drafted with care, especially to the extent the parachute payment results from the acceleration of amounts not otherwise payable at the time of termination or if a tax gross up might become applicable at the future date.[58] 

    iv. Foregoing Deduction for SEO Compensation Over $500,000

    The TARP CPP Regs. also impose a requirement that the financial institution agree not to take a tax deduction for executive compensation in excess of $500,000 for each SEO, without regard to whether the financial institution is subject to the Tax Rules, which do not apply if the financial institution is involved solely in direct purchases of troubled assets.[59] 

    This condition is not required by the EESA, but is imposed under the regulations.  It applies only while the Treasury holds an equity or debt position in the financial institution acquired under the CPP and the dollar limitation and the remuneration for the taxable year are prorated for the portion of the taxable year that the Treasury holds an equity or debt position in the financial institution under the CPP.

    C. CPP Closing Conditions on Executive Compensation

    The term sheet released by the Treasury describing the Senior Preferred Stock and Warrants requires as a condition to the closing of a CPP, that the financial institution and its SEOs must modify or terminate all benefit plans, arrangements and agreements (including golden parachute agreements) to the extent necessary to be in compliance with these terms following the closing and for so long as the Treasury holds any of the financial institution’s equity or debt securities.  As an additional condition to closing, they must also grant the Treasury a waiver releasing the Treasury from any claims that they may otherwise have as a result of the issuance of any regulations which modify the terms of benefits plans, arrangements and agreements to eliminate any provisions that would not be in compliance with the executive compensation and corporate governance requirements of EESA § 111 and any related guidance or regulations issued on or prior to the date of the CPP investment.

    Alert describing the TARP CPP and related application process,  which must be completed by November 14, 2008. [60]

    III. Restrictions on New Golden Parachutes – EESA § 111(c)

    The Treasury's interim guidance in Notice 2008-TAAP sets out the manner in which EESA § 111(c) prohibition on new golden parachute agreements is to be applied in the case of financial institutions from which one or more troubled assets are acquired through the Troubled Assets Auction Program (TAAP), but only where the aggregate amount of assets acquired (including through direct purchases) exceed $300 million. The prohibition, thus, applies to any financial institution subject to the Tax Rules.  The notice uses substantially the same definitions, though largely without cross reference to the Tax Rules.[61] 

    What is a "new" contract?  Notice 2008-TAAP defines a "new employment contract" to include any material compensatory contract (including any plan, agreement, or arrangement, whether or not written) entered into on or after the date when EESA § 111(c) applies to the  financial institution.[62]  For this purpose, if a contract is materially modified, it is treated as a new contract and a contract is materially modified if it increases the amount of compensation, accelerates the date vesting occurs, or accelerates payments, applying existing rules in regulations under I.R.S. Section 162(m).[63]

    IV. Program for Systemically Significant Failing Institutions (PSSFI) – EESA § 111 

    The Treasury's interim guidance in Notice 2008-PSSFI[64] sets out the manner in which the executive compensation rules of EESA § 111 will be applied to a new direct purchase program still being developed to be called Program for Systemically Significant Failing Institutions (PSSFI). The executive compensation guidance in Notice 2008-PSSFI combines of the rules restricting new golden parachute arrangements discussed in Section III of this Alert (Notice 2008-TAAP ) and the executive compensation rules applicable to the CPP discussed in Section II of this Alert (TARP CPP Regs) except that for purposes of PSSFI, prohibited "golden parachute payments" encompass all payments in the nature of compensation to or for the benefit of any covered executive other than payments under qualified retirement arrangements. [65]

    NOTE:  To the extent all severance-related payments are prohibited under the PSSFI, this would be a more stringent rule than provided for in current FDIC regulations for troubled banks, which prohibit a troubled holding company, bank or thrift from making golden parachute payments, though they include an exception for severance payments upon involuntary termination and change of control where the payment does not exceed 12 months salary. [66] 

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    [1]  Div. A of Pub. Law No. 110-343 (EESA), enacted October 3, 2008.  For a copy of the EESA, click here.  For a Day Pitney Alert with a brief overview of the Executive Compensation aspects of EESA, click here. 

    The I.R.S. has issued three other notices related to EESA transactions in addition to the guidance discussed here: (A) I.R.S. Notice 2008-100 (October 14, 2008), which addresses the treatment of securities acquired by the Treasury under the Troubled Assets Relief Program (the "TARP") Capital Purchase Program (the "CPP") (see infra discussion in note 5) in a loss corporation for purposes of  the limitation on losses under I.R.C. § 382 and the loss carryover in acquisitions I.R.C. § 381, (B) I.R.S. Notice 2008-101 (October 14, 2008), which clarifies that no amount furnished by the Treasury to a financial institution pursuant to the TARP under EESA will be treated as Federal Financial Assistance within the meaning of section 597, relating to the taxation of banks and building and loan associations and (C) Notice 2008-83 (September 30, 2008), providing that losses and deductions attributable to loans or bad debts of a bank (as defined in I.R.C. § 581), including any deduction for a reasonable addition to a reserve for bad debts, that are otherwise allowable after the date of an ownership change under I.R.C. § 382 would not be treated as built-in losses or deductions attributable to a pre-change period.  The latter notice can have substantial impact in accelerating the time deductions are allowed for bad loan losses in the acquisition of a troubled bank.   

    [2]  I.R.S. Notice 2008-94 (October 14, 2008) (hereinafter Notice 2008-94), which can be relied upon immediately.  Any further guidance will be prospective to the extent that it is more restrictive.  For a copy of Notice 2008-94, click here.

    [3]  EESA § 302.  Authorization for TARP is found in EESA §§ 101(a)(1) and 101(c)(5).  For the TAAP authority thereunder, see infra note 6 .  

    [4] EESA §§ 101(a)(1), 101(c)(5), 111(b) and 113(c).  EESA 113(c) authorizes the Treasury to make direct purchases of troubled assets  in cases where the Secretary of the Treasury determines that auctions or reverse auctions are not feasible or appropriate, and the purposes of EESA are best met through direct purchases.

    [5]  See interim final regulations at 31 C.F.R. § 30 (2008) pursuant to EESA §§ 101(a)(1), 101(c)(5) and 111(b) (hereinafter "TARP CPP Regs.").  For a copy of the TARP CPP Regs., click here.   For a discussion of the TARP CPP Regs., see infra discussion in Section II, beginning at note 46.

    [6] EESA § 113(b) authorizes the Treasury to use market mechanisms to purchase troubled assets, including auctions and reverse auctions.  The related executive compensation rules are found in EESA § §  111(b) and (c). 

    [7]  Treas. Notice 2008-TAAP (October 14, 2008) (hereinafter Notice 2008-TAAP) pursuant to EESA §§ 101(a)(1), 101(c)(5) and 111(c).  See infra text discussion in Section III.  For a copy of Notice 2008-TAAP, click here. 

    [8]  Treas. Notice 2008-PSSFI (October 14, 2008) (hereinafter Notice 2008-PSSFI). For a copy of 2008-PSSFI, click here.  See infra discussion at Section IV of this Alert.   

    [9]   EESA § 302(a).

    [10]  Notice 2008-94 at Q&A-1 and Q&A-2 of the notice provide guidance on when an employer is an applicable employer.

    [11]   See infra discussion at note 59.

    [12]  See supra discussion in notes 5 and 7 and in Section II of this Alert.

    [13]   Notice 2008-94 at Q&A-1(a).

    [14]  Notice 2008-94 at Q&A-5(a).  For this purpose, the acquirer is related to target if stock or other interests of target are treated as owned by the acquirer under I.R.C. § 318(a) (other than § 318(a)(4) related to ownership of options).

    [15]  Notice 2008-94 at Q&A-2.

    [16]  I.R.C. § 414(b).  Notice 2008-94, Q&A-2 provides that for purposes of applying the aggregation rules to determine an Applicable Employer, the rules for brother-sister controlled groups and combined groups are disregarded, including disregarding the rules in I.R.C. § 1563(a)(2) and (a)(3) with respect to corporations and the parallel rules that are in Treas. Reg. § 1.414(c)-2(c) with respect to other organizations conducting trades or businesses.

    [17]  I.R.C. § 414(c) dealing with employees of partnerships, proprietorships, etc., that are under common control. Notice 2008-94 at Q&A-2. 

    [18]  Notice 2008-94 at Q&A-3.

    [19]  Notice 2008-94 at Q&A-2(b).

    [20]  See TARP CPP Regs., supra note 5 , at Q&A-1 and -11 and in Section II of this Alert.  However, for purposes of applying the aggregation rules to determine whether EESA § 111(c) (restriction on new golden parachute agreements) and EESA § 111(b) apply, each notice provides that the rules for brother-sister controlled groups and combined groups are disregarded (including the rules in I.R.C. §§ 1563(a)(2) and (a)(3) with respect to corporations and the parallel rules that are in Treas. Reg. § 1.414(c)-2(c) with respect to other organizations conducting  trades or businesses). Similarly, these rules apply under the TAAP.  See Notice  2008-TAAP, supra note 7 , at Q&A-1(b).

    [21] Remuneration is determined as provided in existing I.R.C. § 162(m)(4), but without regard to the exceptions for commissions, performance-based compensation, and pre-February 17, 1993 contracts.  See Notice 2008-94 at Q&A-6(a) and (b). 

    [22]  Notice 2008-94 at Q&A-7.

    [23]  Notice 2008-94 at Q&A-8.

    [24]  Notice 2008-94 at Q&A-9(b).

    [25]  Notice 2008-94 at Q&A-9(b)(2).

    [26]  Q&A-9(b)(3) of Notice 2008-94 includes several examples and substantial future services is the only risk of forfeiture allowed to be considered, using the rules in Treas. Reg. § 1.409A-1(d). 

    [27]   Under EESA § 120, the Treasury's authority to purchase and insure troubled assets terminates on December 31, 2009, but can be extended to no later than October 3, 2010, and the "TARP authorities period" extends from date of enactment to the actual termination date.  Notice 2008-94, Section II.

    [28]  Notice 2008-94 at Q&A-3.

    [29]  Notice 2008-94 at Q&A-10.

    [30]  Id.

    [31]  Notice 2008-94 at Q&A-4.  See supra discussion in note 27 for the TARP authorities period.

    [32]  Notice 2008-94 at Q&A-5.  See supra discussion in note 14.  

    [33]   EESA § 302(b).

    [34]  See supra discussion in note 27 for the TARP authorities period.

    [35]  Notice 2008-94 at Q&A-11.

    [36]  Notice 2008-94 at Q&A-12.

    [37]  See Treas. Reg. § 1.409A-1(n)(2).

    [38]  Id.

    [39]  Notice 2008-94 at Q&A-13, -14 and -15.  The "base amount" for a covered executive has the same meaning set forth in I.R.C. § 280G(b)(3) and Treas. Reg. § 1.280G-1 and Q&A-34, except that references to "change in ownership or control" are treated as referring to an "applicable severance from employment."  Put simply, the base amount is the five year average of the executive's W-2 compensation from the applicable employer. The limit imposed by new I.R.C. § 280G(e) only applies to remuneration paid in an applicable taxable year, determined in the same manner as under new I.R.C. § 162(m)(e).  Notice 2008-94, Q&A-17.  See supra discussion in notes 28-30.

    [40]  Notice 2008-94 at Q&A-13(a).

    [41]  Id.  See Treas. Regs. § 1.280G-1, at Q&A-24(b) rules regarding the determination of the amount that is on account of an acceleration.  Note that for purposes of I.R.C. § 280G(e), the exclusions under § 280G(b)(2)(C) (payments under certain contracts entered into within 1 year of the change); § 280G(b)(4) (payment of amount determined to be reasonable compensation); § 280G (b)(5) (exceptions for small business corporations); and § 280G(d)(5) (treatment of affiliated groups) do not apply.

    [42]  Notice 2008-94 at Q&A-13(c) and (b).  For rules on the value of amounts deemed to be accelerated, see Treas. Reg. § 1.280G-1, Q&A-24(b)

    [43]  Notice 2008-94 at Q&A-16.

    [44]  TARP CPP Regs., supra note 5 , at Q&A-11.  The PSSFI also provide for the one-year extension in the case of an acquisition, but for this purpose the golden parachute payment extends to all severance.  Notice 2008-PSSIF, supra note 8, at Q&A-11. 

    [45] An SEO means a "named executive officer" as defined in Item 402, Regulation S-K (17 C.F.R. § 229.402) and "executive officer" has the meaning in Exchange Act Rule 3b-7 (17 C.F.R. § 240.3b-7). The terms Principal Executive Officer (PEO) and Principal Financial Officer (PFO) have replaced CEO and CFO.  For the three most highly compensated executive officers, the TARP CPP Regs. state that "until the compensation data for the current fiscal year are available, the financial institution should make its best efforts to identify the three most highly compensated executive officers for the current fiscal year." Analogous rules to the Exchange Act rules are to apply to financial institutions that are not subject to the federal securities laws. TARP CPP Regs., supra note 5 , at Q&A-2(a) and (b).

    [46]  For a copy of the TARP CPP Regs., see supra note 5 .  For a Day Pitney Alert on the Capital Purchase Program, click here.

    [47]  Note that the rules applicable to the future Program on Systemically Significant Failing Institutions include both the requirements for and the TARP CPP Regs., supra note 5, but are more stringent on golden parachutes  (see Notice 2008-PSSIF, supra note 8). 

    [48]  See supra note 45.  TARP CPP Regs., supra note 5, at Q&A-2. 

    [49] EESA § 111(b)(2)(A).

    [50] TARP CPP Regs., supra note 5, at Q&A-3 and -4.

    [51] See TARP CPP Regs., supra note 5, at Q&A-5, which provides that the certification should include a statement similar to the following: "The compensation committee certifies that it has reviewed with senior risk officers the SEO incentive compensation arrangements and has made reasonable efforts to ensure that such arrangements do not encourage SEOs to take unnecessary and excessive risks that threaten the value of the financial institution." The certification should be included in a public company's Compensation Discussion and Analysis (Item 402(b) of Regulation S-K (17 C.F.R. § 229.402) and a  private financial institution should file the certification with its primary regulatory agency.  Id.

    [52] EESA § 111(b)(2)(B).

    [53] Section 304 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) (Pub. Law No. 107-204), requires the forfeiture by a public company CEO and CFO of certain amounts any bonus, incentive-based compensation, or equity-based compensation received and any profits from sales of the company's securities earned during the twelve-month period following a materially non-compliant financial report.

    [54] EESA § 111(b)(2)(C). See discussion at note 39 supra for the calculation of a parachute payment.

    [55] TARP CPP Regs., supra note 5, at Q&A-9.  See supra discussion at Section I.B.

    [56] See supra text at note 42 for a discussion of the treatment of accelerated amounts and the related authority in note 42.  See supra discussion in note 27 for the TARP authorities period.

    [57] For this purpose, an acquirer is related to target if stock or other interests of target are treated (under 26 U.S.C. §  318(a) other than paragraph (4) thereof) as owned by acquirer.  The same rule applies for purposes of financial institutions engaged in more than $300,000 of troubled asset auction sales under Notice 2008-TAAP (supra note 6, at Q&A-5).  See supra discussion in note 14 (for a discussion of the Tax Rules in this context).

    [58]  See supra discussion at note 56 with respect to accelerated amounts.  The terms of the deferred payment also would have to comply with the provisions of I.R.C. § 409A if the amount is not subject to a substantial risk of forfeiture.  If the financial institution under the CPP were also covered by the Tax Rules as a result of participation in the TAAP (or under the PSSFI, if that program is developed) the deferral may be prevented by the prohibition on new employment agreements under EESA § 111(c) to the extent applicable to the financial institution.  See Notice 2008-TAAP, supra note 7, and infra text in Sections III and IV.

    [59] TARP CPP Regs., supra note 5, at Q&A-10.  See discussion of the Tax Rules at Section I.A of the text.  For this purpose, during the period that the Treasury holds an equity or debt position in the financial institution acquired under the CPP: (i) the financial institution (including entities in its controlled group) is treated as an "applicable employer," (ii) its SEOs are treated as "covered executives," and (iii) any taxable year that includes any portion of that period is treated as an "applicable taxable year," each as defined in I.R.C. § 162(m)(5), except that the dollar limitation and the remuneration for the taxable year are prorated for the portion of the taxable year that the Treasury holds an equity or debt position in the financial institution under the CPP.  Id.

    [60] For a copy of the term sheet click here.  For a Day Pitney Alert describing the TARP CPP and related application process,  which must be completed by November 14, 2008, click here.

    [61]  See Notice 2008-TAAP, supra note 7, at Q&A-1 (financial institutions to which it applies), Q&A-2 (who is an SEO), and Q&A-3 (what is a golden parachute).

    [62] Notice 2008-TAAP at Q&A-4.  For this purpose, a contract that is renewed is treated as entered into on the date of the renewal to the extent provided in Treas. Reg. § 1.162-27(h)(1)(i).

    [63]  Id. For this purpose, Treas. Reg. § 1.162-27(h)(1)(iii)(A) and (B) apply for purposes of determining what constitutes a material modification.

    [64]Notice 2008-PSSFI, supra note 8. 

    [65] Notice 2008-PSSFI, supra note 8.

    [66] 12 C.F.R. §§ 359.1(f)(2) and 359.  (These regulations were adopted under authority granted by the Crime Control Act of 1990.  12 C.F.R. § 359.2).