(a) In general
Any compensation which is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation.
(b) Nonqualified entity
For purposes of this section, the term "nonqualified entity" means—
(1) any foreign corporation unless substantially all of its income is—
(A) effectively connected with the conduct of a trade or business in the United States, or
(B) subject to a comprehensive foreign income tax, and
(2) any partnership unless substantially all of its income is allocated to persons other than—
(A) foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax, and
(B) organizations which are exempt from tax under this title.
(c) Determinability of amounts of compensation (1) In general
If the amount of any compensation is not determinable at the time that such compensation is otherwise includible in gross income under subsection (a)—
(A) such amount shall be so includible in gross income when determinable, and
(B) the tax imposed under this chapter for the taxable year in which such compensation is includible in gross income shall be increased by the sum of—
(i) the amount of interest determined under paragraph (2), and
(ii) an amount equal to 20 percent of the amount of such compensation.
For purposes of paragraph (1)(B)(i), the interest determined under this paragraph for any taxable year is the amount of interest at the underpayment rate under section 6621 plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.
(d) Other definitions and special rules
For purposes of this section—
(1) Substantial risk of forfeiture (A) In general
The rights of a person to compensation shall be treated as subject to a substantial risk of forfeiture only if such person's rights to such compensation are conditioned upon the future performance of substantial services by any individual.
(B) Exception for compensation based on gain recognized on an investment asset (i) In general
To the extent provided in regulations prescribed by the Secretary, if compensation is determined solely by reference to the amount of gain recognized on the disposition of an investment asset, such compensation shall be treated as subject to a substantial risk of forfeiture until the date of such disposition.
(ii) Investment asset
For purposes of clause (i), the term "investment asset" means any single asset (other than an investment fund or similar entity)—
(I) acquired directly by an investment fund or similar entity,
(II) with respect to which such entity does not (nor does any person related to such entity) participate in the active management of such asset (or if such asset is an interest in an entity, in the active management of the activities of such entity), and
(III) substantially all of any gain on the disposition of which (other than such deferred compensation) is allocated to investors in such entity.
(iii) Coordination with special rule
Paragraph (3)(B) shall not apply to any compensation to which clause (i) applies.
(2) Comprehensive foreign income tax
The term "comprehensive foreign income tax" means, with respect to any foreign person, the income tax of a foreign country if—
(A) such person is eligible for the benefits of a comprehensive income tax treaty between such foreign country and the United States, or
(B) such person demonstrates to the satisfaction of the Secretary that such foreign country has a comprehensive income tax.
(3) Nonqualified deferred compensation plan (A) In general
The term "nonqualified deferred compensation plan" has the meaning given such term under section 409A(d), except that such term shall include any plan that provides a right to compensation based on the appreciation in value of a specified number of equity units of the service recipient.
Compensation shall not be treated as deferred for purposes of this section if the service provider receives payment of such compensation not later than 12 months after the end of the taxable year of the service recipient during which the right to the payment of such compensation is no longer subject to a substantial risk of forfeiture.
(4) Exception for certain compensation with respect to effectively connected income
In the case of a foreign corporation with income which is taxable under section 882, this section shall not apply to compensation which, had such compensation been paid in cash on the date that such compensation ceased to be subject to a substantial risk of forfeiture, would have been deductible by such foreign corporation against such income.
(5) Application of rules
Rules similar to the rules of paragraphs (5) and (6) of section 409A(d) shall apply.
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section.
AMENDMENTS 2018—Subsec. (d)(4). Pub. L. 115–141 substituted "case of a foreign" for "case a foreign" and "been paid" for "had been paid".EFFECTIVE DATE Pub. L. 110–343, div. C, title VIII, §801(d), Oct. 3, 2008, 122 Stat. 3931, provided that: "(1) In general.—Except as otherwise provided in this subsection, the amendments made by this section [enacting this section and amending section 26 of this title] shall apply to amounts deferred which are attributable to services performed after December 31, 2008. "(2) Application to existing deferrals.—In the case of any amount deferred to which the amendments made by this section do not apply solely by reason of the fact that the amount is attributable to services performed before January 1, 2009, to the extent such amount is not includible in gross income in a taxable year beginning before 2018, such amounts shall be includible in gross income in the later of— "(A) the last taxable year beginning before 2018, or "(B) the taxable year in which there is no substantial risk of forfeiture of the rights to such compensation (determined in the same manner as determined for purposes of section 457A of the Internal Revenue Code of 1986, as added by this section). "(3) Accelerated payments.—No later than 120 days after the date of the enactment of this Act [Oct. 3, 2008], the Secretary shall issue guidance providing a limited period of time during which a nonqualified deferred compensation arrangement attributable to services performed on or before December 31, 2008, may, without violating the requirements of section 409A(a) of the Internal Revenue Code of 1986, be amended to conform the date of distribution to the date the amounts are required to be included in income. "(4) Certain back-to-back arrangements.—If the taxpayer is also a service recipient and maintains one or more nonqualified deferred compensation arrangements for its service providers under which any amount is attributable to services performed on or before December 31, 2008, the guidance issued under paragraph (4) shall permit such arrangements to be amended to conform the dates of distribution under such arrangement to the date amounts are required to be included in the income of such taxpayer under this subsection. "(5) Accelerated payment not treated as material modification.—Any amendment to a nonqualified deferred compensation arrangement made pursuant to paragraph (4) or (5) shall not be treated as a material modification of the arrangement for purposes of section 409A of the Internal Revenue Code of 1986."
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