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Friday, May 1, 2009

Never Been Any (Good) Reason

Good Reason - In General

Now that the 409A regulations have opened up the door/floodgates (depending on what you may think of as a flood) to the consideration of "good reason' concepts in the law, there are several emerging GR issues affecting non-409A areas. Until 409A, GR was more a colloquial term of use than a term of art - describing a subset of the triggers comprising the "good leaver" notion (for, essentially, non-cause and other acceptable terminations) one sees overseas. As a result, the concept exists in the law itself, and is spreading. Interestingly, there may be the possibility that some of the non-409A uses of GR could circle back to having a practical effect under 409A.

In particular, the ever-expanding use of the definition of Good Reason may be implicating the Law of Unintended Consequences? How? Well, having a "good" GR definition is generally a desirable result. That is to say, a good GR definition may allow you to have a severance or other involuntary-termination plan, may allow you to maintain S-TD status, etc. It has not been the case that having a good GR definition would actually be unpreferable . . . until recently. Below are some TARP/EESA/COBRA convergences for your consideration.*

EESA Does It - Good Reason and the TARP

The possible interaction between the application of the technical GR rules and the new rules regarding when one is covered by the TARP** strikes me as particularly interesting, at least before ARRA. It went like this. Section 280G(e) says that a "golden parachute" is any compensatory payment made to (or for the benefit of) an SEO*** made on account of an "applicable severance from employment" to the extent that certain limits are exceeded. For these purposes, as relevant here, an "applicable severance from employment" was a severance of employment by reason of an involuntary termination of employment. Under Q&A-3(b)(i)(2) of Notice 2008-TARP (catchy name, no?), an involuntary termination of employment generally means a termination from employment due to an independent exercise of the unilateral authority of the employer. Critically, the Notice goes on to say, "In addition, a SEO's voluntary termination from employment constitutes an involuntary termination from employment if the termination from employment constitutes a termination for good reason due to a material negative change in the SEO's employment relationship. See section 1.409A-1(n)(2) of the Treasury Regulations." While the citation to the 409A regs. is a mere "see" cite, it seems hard to imagine, especially given the citation, that the rules don't follow in virtual lockstep.

The same approach was taken in connection with EESA's expansion of the "golden parachute" rules into non-CiC land - the first such expansion of those rules. Thus, Q&A-12(b)(i) of Notice 2008-94 has the same type of GR language. By the way, while we're on topic of 280G, now we have a statute that is roundly criticized for its counterintuitive and unintended effects being used as the springboard for ever-widening regulatory coverage. Here's a shareholder-protection statute that in many cases winds up costing shareholders more money directly, by eliminating deductions, and indirectly, in light of gross-ups in the market. Watch carefully on this one, as a number of contracts protecting executives from parachute taxes may, without more, find their way to protecting them from the new expanded reach of 280G. And one of the injured shareholders may well be the good ol' U.S. of A.! (Gee, why don't we just expand 162(m) while we're at it? Oh, yeah, EESA did that, too.)

Back to the GR analysis specifically, a previous post laments the market's unwillingness to construe, for example, a violation of the compensation provisions of an employment agreement as per se constituting GR. As I previously described there, I believe that a lot of things that should be considered good GR under the regulations, even as written, are being needlessly viewed as bad GR.

Here, though, the foo may well be on the other shoot (no reference to Dave Grohl's band). That's because, here, having GR hurts you, because, by virtue thereof, you have an involuntary termination, which is in turn an applicable severance, which in turn triggers the TARP limitations. Thus, a non-GR provision may not subject one to the TARP limitations. At a minimum, if the basis for the SEO's departure termination by employee does not rise to the level of 409A GR, it seems pretty clear that the resulting payments cannot be subject to the TARP limitations. In this regard, note again the citation to the 409A regs. in the TARP notice.

So, now, let me get this straight. Check out these examples:

- I have a million-dollar exec. The employment agreement provides for the level of comp., and says that any material reduction in that level is GR. I then cut his or her comp by half a mil., and the exec. quits. Result: TARP limits clearly apply.

- Alternatively, The employment agreement provides for the level of comp., and says that any reduction whatsoever in that level is GR. Let's assume for the moment, even though as indicated above I don't think so, that the provision described in the foregoing sentence results in there being a bad GR definition. Then, I jerk the exec. around in a game of chicken and cut his or her comp by couple o' thousand, and it turns out that the exec. indeed quits. Result: TARP limits don't apply?!

- And what if the employment agreement provides that any reduction whatsoever in the level of compensation is GR (again, assume that the result is that the GR definition is considered bad), but the actual reduction is very large and the exec. quits. Has the exec. quit for GR (limits apply) or not (limits don't apply)?

Geez - so if I intentionally insert a "bad" GR provision, I may get out of the TARP restrictions, at least under certain circumstances? While ARRA may make much of these particular potential results moot, the lesson here may well be that the expanded use of concepts like GR could have unexpected results which could be worth watching. As Spock might have said (and may shortly again be saying, thanks to J.J. Abrams), "Fascinating."

Good Reason and COBRA

The rules governing the new COBRA premium subsidy also make use of the GR concept, and pretty clearly borrow from the 409A authority. Notice 2009-27 sets forth what is an involuntary termination for these purposes, and, after identifying a number of controlling principles, adds, "In addition, an employee-initiated termination from employment constitutes an involuntary termination from employment for purposes of the premium reduction if the termination from employment constitutes a termination for good reason due to employer action that causes a material negative change in the employment relationship for the employee. . . . The determination of whether a termination is involuntary is based on all the facts and circumstances." Sound familiar? Unlike the TARP rules, however, there is no express cross-reference to the 409A regs., presenting a possible argument that divergent meaning and effect should be given to the two sets of rules.

And, particularly in the COBRA context, there is reason for an extremely liberal interpretation of the GR rules. Is the IRS really going to want to make the argument that an employee's termination does not trigger eligibility for the COBRA subsidy, based on fine distinctions such as those surmised above with respect to the TARP rules?

Never Been Any Reason and Head East

So all of this somehow caused one-hit wonder Head East's old song to ring in my head. Y'know - "Never Been Any Reason." Sorry, I couldn't help it.

Anyway, it turns out some of the lyrics seem almost apropos to the 409A/TARP/EESA/COBRA thicket. Try these:

You've been talking in circles
Since I've been able to cry
There's never been any reason
For never telling me why, yeah, yeah

Save my life
I'm going down for the last time

. . . .

You never give me no answer
You never tell me the truth

. . . .

Save my life
I'm going down for the last time

In Closing . . .

This is just the type of thing that happens when new concepts are applied outside of their natural habitat. I worry, for example, that people are going to use the definition of "nonqualified deferred compensation plan" in 409A, where the term was used in a provision that permits deferrals (so long as compliant) had the effect of permitting deferral, in new provisions that flat-out prohibit deferral (can you say "457A"?). Similarly, I remember when some in Congress looked at 162(m), saw a cool little rule, and proposed extending it to all companies, public and private alike. These new concepts become almost like playthings in the hands of those looking for the next regulatory extension. To paraphrase Jack in Tim Burton's Batman, where do they get those wonderful toys?

A silver lining here is that expanded use of what had been 409A GR concepts could bring with it countervailing pressures on inclinations from the regulators to interpret 409A's GR provisions aggressively. At some point, it may start to be the case that the regulators might as well take the most "bad" GR position, as doing so could confer possibly unintended flexibility under other provisions or could otherwise be undesirable from a regulatory perspective. Be careful what you wish for. It reminds me of the IRS's early - and I'd say Pyrrhic - success in Comm'r v. LoBue, 351 U.S. 243 (1956), where, because of the particular posture of the case, the IRS wound up winning the point that a deeply discounted option was taxable on exercise, as opposed to grant. Practitioners have commonly cited to the case, possibly giving the IRS some agita in the 83 context, in trying to make the pro-taxpayer argument (before 409A, anyway) that a discount option should be respected as such. (Or how about the PBGC's expansive view of what's a controlled group, in the September 26, 2007 letter from the PBGC Appeals Board, where the PBGC tried to take tax principles used for a certain type of situation and apply those principles (even purporting to be analyzing tax law as such) in the context of other types of situations? Wouldn't it be something if anyone started to take the PBGC's position seriously, and took 162 deductions for management-related expenses of investment funds. I suspect that the IRS might not be happy. See, e.g., Rev. Rul. 2008-39.)

The regulators may have won a battle with the treatment of GR that they wrought under 409A, but, as fans of W.W. Jacobs' The Monkey's Paw have long been taught, be careful what you wish for . . . .****

* By the way, while we're on the topic of cross-pollenization, did you like the way they inserted substantive 409A analysis into the 457A discussion of Notice 2009-8 in Q&A-27(b) thereof, relating to back-to-back arrangements?

** I really want credit for this - back in the mid-80s, in the context of a transaction, I named a plan designed to retain assets attributable to a seller's plan as the Transferred Assets Retirement Plan, so that I could talk about being "covered" by the "TARP."

*** I like "an SEO" rather than "a SEO" - as you'll see from one of the quotes from Treasury in the text of this post, Treasury disagrees on this mission-critical point. I guess they think it's a "see-yo" (sounds like a Chili Peppers song to me) rather than an "ess ee oh."

**** I wonder if this is the world's most famous dangling preposition, in the same vein that "to boldly go" from Star Trek (two Trek references in one post!) might be the world's most famous spit infinitive.

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