The Compensation Committee Handbook, 4th Edition

CHAPTER 8 Tax Rules and Issues

This chapter discusses relevant and important tax law, rules, and related issues that compensation committees need to know in order to properly structure and administer executive compensation arrangements. It does not present all of the rules and issues that compensation committees will face. However, it does present those common issues that arise when dealing with executive employment and compensation arrangements. Accordingly, this chapter will provide compensation committees with a working knowledge of relevant tax law and tax-related issues.

This chapter is divided into the following topics:

• Overview and brief background of U.S. federal tax law
• Major U.S. tax laws affecting executive compensation
• Other relevant U.S. tax law affecting executive compensation

Overview

When dealing with tax law issues, it is important to distinguish between the various taxing regimes, which generally can be broken down into the following:

• U.S. federal tax law
• State tax law
• Local tax law
• International tax law

Of course, most tax issues presented to compensation committees will concern U.S. federal tax law. However, the other taxing authorities will also need to be taken into account. Thus, in many cases compensation committees will need to consult their tax advisors for all tax effects (and in some cases, appropriate local and/or expert counsel).

The compensation tax issues encountered by compensation committee members generally concern the following questions: ...