IRS Issues Guidance on Complying with TARP and 409A

Notice 2009-92 provides that, subject to certain conditions, a financial institution that has received financial assistance under the Troubled Asset Relief Program (TARP) that complies with an advisory opinion of the Special Master determining that it is necessary to change the time or form of payment of compensation to a service provider of the TARP recipient, or to condition payment upon a TARP-related condition such as the prior repayment of some or all of the financial assistance, or both, will not result in a failure to comply with the requirements of § 409A(a) of the Internal Revenue Code. 

The agency said the notice applies only to TARP recipients and the service providers of such TARP recipients and only to the extent that the compensation paid by the TARP recipient to the service provider is addressed by an advisory opinion of the Special Master issued after September 30, 2009. The Treasury Department and the IRS intend to amend the regulations under  409A to incorporate guidance set forth in the notice.

The IRS explained that to render a favorable advisory opinion, the Special Master may determine that changes to a compensation arrangement, including the time and form of payment, are necessary for the arrangement, or payments under the arrangement, to be consistent with the purposes of the Emergency Economic Stabilization Act of 2008 (EESA) or TARP, and otherwise consistent with the public interest. The Special Master may also determine that a payment must be subject to certain TARP-related conditions, such as the prior repayment of some or all of the financial assistance received by the TARP recipient.

The Special Master and TARP recipients have raised the issue of the application of 409A(a) to such changes in the time and form of payment of a compensation arrangement and of the tax consequences under that section of adherence to conditions that may apply. The IRS said “the application of 409A(a) in these circumstances would produce a disincentive for TARP recipients to comply with the Special Master’s advisory opinions and act in accordance with the public interest, severely diminishing the Special Master’s ability to fulfill his intended role and damaging the entire TARP program.”

According to the notice, the Treasury and the IRS determined that guidance permitting a TARP recipient to comply with an advisory opinion of the Special Master without triggering adverse tax consequences under 409A(a) is necessary and appropriate.