Current Developments in Employee Benefits and Pensions (Part I)

By Deborah Walker, CPA; Stephen LaGarde, J.D.; Hyuck Oh, J.D., CPA


  • The Supreme Court held that regulations should be interpreted using the two-part analysis from Chevron instead of the multifactor analysis from National Muffler.
  • New guidance addresses how 2012 Forms W-2 issued in early 2013 must show the cost of employees’ coverage under employer-sponsored health plans. The reporting is optional for all taxpayers in 2011 and remains optional for small employers in 2012. The IRS also issued guidance on how the cost of coverage may be calculated.
  • High-income individuals may be subject to an increased Medicare tax on their wages and a new Medicare tax on their unearned income beginning in 2013.
  • Proposed regulations address the treatment of stock options and stock appreciation rights under the performance-based compensation exception to the deduction limit for executive compensation under Sec. 162(m).
  • The IRS issued additional guidance on how to remedy certain form and operational failures of nonqualified deferred compensation plans under Sec. 409A.

This article, the first of two parts, covers significant developments in late 2010 and 2011 in employee benefits, including employment taxes, executive compensation, health and welfare benefits, and qualified plans. This part focuses on guidance released and changes to the rules for employment taxes and executive compensation. Part II, in the December issue, will cover guidance released under the health care reform legislation and updates and changes to the rules for qualified retirement plans.

Supreme Court Upholds Regs. That Apply FICA Tax to Medical Residents

On January 11, 2011, the Supreme Court ruled in Mayo Foundation for Medical Education and Research that the Federal Insurance Contributions Act (FICA) tax regulations adopted by Treasury in 2004 are valid as a permissible interpretation of the statute. 1 While the decision ruled on the application of FICA to medical residents, its import will go beyond that because it determined that an IRS regulation, even one issued without a change in statute, should be interpreted using the two-part analysis in Chevron 2 rather than the less deferential multifactor analysis in National Muffler Dealers Ass’n. 3

Sec. 3121(b)(10) provides an exception for services performed in the employ of a school by students who are “enrolled and regularly attending classes” at the school. Prior Treasury regulations construed the student exception to apply only to students whose work for their school is incident to and for the purpose of pursuing a course of study.” The 2004 regulations 4 expanded the exception to categorically exclude a student who performs services as a full-time employee for the school. The 2004 regulations were ad opted by Treasury after the district court deciding Mayo Foundation ruled against the government on whether medical residents were subject to FICA tax. 5 Leaving no doubt as to the application of the new rule to medical residents, the 2004 regulations include a specific example of a medical resident whose normal schedule requires him to perform services for 40 or more hours per week and conclude that the resident is not a student for purposes of the FICA student exception.

The Supreme Court applied the analysis under Chevron , which provides that, in determining whether a regulation is a permissible interpretation of a statute, the initial question is whether Congress directly addressed the precise issue at hand. If not, the analysis calls for the agency’s rule to stand unless it is arbitrary or capricious or manifestly contrary to the statute. The Court decided that the FICA statute does not address the issue at hand—i.e., whether the student exception applies to medical residents who work full time—and then looked to whether the regulations are a reasonable interpretation of the statute. Noting that a focus on the number of a person’s working hours was a “perfectly sensible way” of determining whether an individual was a student and that the “full-time employee” rule would improve the ease of administering the student exception, the Court unanimously held that the regulations were valid as a permissible interpretation of the statute.

Mayo argued that the more critical, less deferential standard of review in National Muffler Dealers Ass’n should apply to the review of the regulations because they were inconsistent with Treasury’s prior position, were issued years after the statute was enacted, and were promulgated after an adverse judicial decision. The Court rejected those arguments, stating that none of the reasons justified a departure from the Chevron analysis.

A Clear Break from the Prior Period

As the IRS announced last year, 6 for tax periods ending before April 1, 2005—the date the 2004 regulations became effective—the IRS will accept the position that medical residents were exempt from FICA tax because of the student exception and began processing timely filed FICA refund claims for those periods.

Form W-2 Reporting of Health Insurance Coverage Required for 2012

Starting in tax year 2011, the Patient Protection and Affordable Care Act as amended 7 requires employers to report the cost of coverage under an employer-sponsored group health plan. However, to give employers more time to update their payroll systems, in Notice 2010-69 8 the IRS made this requirement optional for all employers in 2011. Thus, the first time that employers will need to report these amounts is on 2012 Forms W-2, Wage and Tax Statements, furnished in January 2013. Notice 2011-28 9 provided further relief for small employers filing fewer than 250 W-2 forms by making the reporting requirement optional for them at least for 2012 and continuing this optional treatment for smaller employers until further guidance is issued. Notice 2011-28 also includes information on how to report, what coverage to include, and how to determine the cost of the coverage.

The 2011 Form W-2 is available for viewing on the IRS website. This is the W-2 that most employees will receive in early 2012. The instructions to the form include the code (DD) to use in Box 12 to report the cost of coverage under an employer-sponsored group health plan for employers that choose to provide this information for 2011.

This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability because the value of the employer contribution to health coverage continues to be excludible from an employee’s income.

Notice 2011-28

Notice 2010-69 made the new reporting requirement generally effective for 2012 Forms W-2 (which employers generally issue in January 2013). As mentioned above, Notice 2011-28 exempts employers who filed fewer than 250 Forms W-2 for the 2011 calendar year from the reporting requirement for 2012.

Notice 2011-28 discusses several calculation methods that employers may use to determine the cost of coverage, in general using the “applicable premium” under COBRA rules. However, the notice does not describe how self-insured plans can calculate that premium (the COBRA regulations are silent on this issue). Employers with self-insured plans may still rely on good-faith compliance with a reasonable interpretation of the statutory requirements in Sec. 4980B.

Because Notice 2011-28 is generally applicable beginning with the 2012 Forms W-2, employers will have to compile the information to comply with this new reporting requirement, taking into account the group health plan in which the employee is enrolled, the benefit package option the employee elects, the coverage tier selected (e.g., self-only, employee plus spouse, family, etc.), and the valuation method chosen. Employers will also need to consider changes in coverage (i.e., elections and COBRA) and changes in the cost of coverage during the 2012 calendar year.

Some of the essential concepts in complying with this new reporting requirement are summarized below.

Applicable employer-sponsored coverage: This means coverage under any group health plan that an employer makes available to the employee and that is excludible from the employee’s gross income under Sec. 106. Applicable employer-sponsored coverage does not include any coverage for long-term care, any coverage under a separate policy that provides dental or vision benefits, or any coverage described in Sec. 9832(c)(1) (e.g., coverage only for accident or disability income insurance, coverage issued as a supplement to liability insurance, liability insurance, workers’ compensation or similar insurance, automobile medical payment insurance, credit-only insurance, etc.). Nor does it include amounts contributed to an Archer medical savings account (MSA) or a health savings account (HSA), or salary reduction contributions to a health flexible spending account (FSA), although special rules apply in determining aggregate reportable cost where the employer offers a health FSA.

Aggregate reportable cost: The aggregate reportable cost generally includes both the portion of the cost paid by the employer and that paid by the employee, regardless of whether the employee paid through pretax or after-tax contributions. The amounts contributed to Archer MSAs and HSAs are excluded, as noted above. Salary reduction contributions to a health FSA are also excluded, but to the extent the amount of a health FSA exceeds the employee’s salary reduction contributions for the year, it is included in the aggregate reportable cost. Employers who provide flex credits or matching contributions will therefore need to be aware of how the employer portion of the health FSA accrues throughout the calendar year, particularly in the context of employee terminations, and if the plan year for the health FSA is not the calendar year (the basis for Form W-2 reporting). The notice makes clear that if the reportable costs for a period change during the calendar year, the changes must be reflected in the reportable costs for the year.

COBRA applicable premium method: Under this method, the reportable cost for a period equals the COBRA applicable premium for that coverage for that period. The term “applicable premium” means the cost to the plan of the coverage for similarly situated beneficiaries.

Premium charged method: Under this method, the employer uses the premium charged by the insurer for that employee’s coverage for each period as the reportable cost. An employer may use this method only for an employee covered by an insured group health plan.

Modified COBRA premium method: An employer may use the modified COBRA premium method with respect to a plan only where it subsidizes the cost of COBRA or where the actual premium charged by the employer to COBRA-qualified beneficiaries for each period in the current year is equal to the COBRA applicable premium for each period in a prior year. Under this method:

  • An employer who subsidizes the cost of COBRA may use the “reasonable good-faith estimate” of the COBRA premium it uses as the basis for the subsidized premium to determine the reportable cost; and
  • An employer who uses the prior year’s applicable premium may use that premium to determine the reportable cost.

High Earners Will Pay Additional Medicare Taxes Beginning in 2013

PPACA added two new provisions to the Code that will impose additional Medicare taxes on higher-income individuals beginning in 2013. First, the employee portion of the Medicare tax will increase by 0.9% of wages in excess of a threshold amount. 10 Second, a 3.8% Medicare tax will be imposed on the lesser of unearned income or the individual’s modified adjusted gross income over a threshold amount. 11 The threshold for both provisions is $250,000 in the case of a joint return, $125,000 in the case of a married individual filing separately, and $200,000 in any other case.

Additional 0.9% Medicare Tax on Wages over the Threshold

For years other than 2011, FICA im poses a tax on employers generally equal to 6.2% of each employee’s covered wages up to the taxable wage base (e.g., $106,800 in 2011) for old-age, survivors, and disabil ity insurance (OASDI tax). It also imposes a tax equal to 1.45% of each employee’s covered wages for hospital insurance (HI, or Medicare tax). After 1993, the cap on covered wages was eliminated for Medicare tax purposes, so the Medicare tax applies to the employee’s total covered wages. In addition to the employer, each employee is subject to the same OASDI and Medicare tax, for a total OASDI tax equal to 12.4% of the employee’s covered wages up to the wage base and a total Medicare tax equal to 2.9% of the employee’s covered wages, uncapped. For 2011, the employee’s portion of the OASDI tax was reduced to 4.2%, but the other employer and employee rates remained the same. The employer is responsible for withholding the employee portion of the OASDI and Medicare tax from the employee’s wages.

Withholding of the higher Medicare tax is slightly different from standard Medicare withholding. The employer is obligated to withhold the additional 0.9% Medicare tax only on the individual’s wages in excess of $200,000 (disregarding any wages received by the spouse). To the extent that any of the additional Medicare tax is not collected by this additional employer withholding, the individual is obligated to pay the tax. As explained by the Joint Committee on Taxation:

Thus, the employer is only required to withhold on wages in excess of $200,000 for the year, even though the tax may apply to a portion of the employee’s wages at or below $200,000, if the employee’s spouse also has wages for the year, they are filing a joint return, and their total combined wages for the year exceed $250,000.

For example, if a taxpayer’s spouse has wages in excess of $250,000 and the taxpayer has wages of $100,000, the employer of the taxpayer is not required to withhold any portion of the additional tax, even though the combined wages of the taxpayer and the taxpayer’s spouse are over the $250,000 threshold. In this instance, the employer of the taxpayer’s spouse is obligated to withhold the additional 0.9-percent HI tax with respect to the $50,000 above the threshold with respect to the wages of $250,000 for the taxpayer’s spouse. 12

The 0.9% Medicare tax that is owed but not subject to withholding by the employer must be taken into account by the individual in determining estimated tax payments.

3.8% Medicare Tax on Unearned Income

Sec. 1411 also becomes effective for tax years beginning after December 31, 2012, imposing a new 3.8% Medicare tax on unearned income for individuals whose modified adjusted gross income (MAGI) exceeds the threshold amounts described above. The tax is 3.8% of the lesser of the “net investment income” for the year or the amount by which the MAGI for the year exceeds the threshold amount. Individuals whose MAGI does not exceed the threshold amount are not subject to the tax, and individuals whose MAGI exceeds the threshold amount are subject to the tax only to the extent they have net investment income.

“Net investment income” is defined as the following after reduction for allocable deductions:

  • Passive trades and businesses: Gross income derived from a trade or business that is a passive activity within the meaning of Sec. 469 (regarding passive activity losses and credits) or is a trade or business of trading in financial instruments or commodities as defined in Sec. 475(e)(2) (together, passive trades and businesses).
  • Other nonbusiness passive income: Gross income from interest, dividends, annuities, royalties, and rents, other than that derived in the ordinary course of a trade or business that is not a passive trade or business.
  • Disposition of property: Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property, other than property held in a trade or business that is not a passive trade or business.

Under this definition, the capital gain from the sale of a principal residence that exceeds the amount excludible from tax under Sec. 121 (i.e., $250,000, or $500,000 if married filing jointly) would be net investment income. Notably, income that results from a retirement plan distribution is carved out and does not constitute net investment income. The carve-out applies to distributions from qualified plans, including IRAs.

As with the additional 0.9% Medicare tax on wages above the threshold amount, the 3.8% Medicare tax on unearned income would need to be taken into account by the individual in determining estimated tax payments, and the tax is not deductible for purposes of computing federal income tax.

Proposed Sec. 162(m) Regs. Clarify Performance-Based Equity Compensation Exception

On June 24, 2011, the IRS issued proposed regulations under Sec. 162(m) clarifying the scope of the performance-based compensation exception. 13 The proposed regulations clarified that qualified performance-based compensation attributable to stock options and stock appreciation rights (SARs) must specify the maximum number of shares for which options or rights may be granted to each individual employee. The proposed regulations also clarified the application of the transition rule for taxpayers that are not publicly held corporations and then become publicly held corporations.

Per-Employee Limit on Options and SARs

Sec. 162(m) denies a corporate tax deduction for compensation payable by publicly held corporations to certain covered employees in excess of $1 million. This deduction limit does not apply to qualified performance-based compensation. In the case of stock options or SARs, the equity plan must, among other requirements, state the maximum number of shares for which options or SARs may be granted during a specified period to any employee. 14

The proposed regulations clarified that if a plan states an aggregate maximum number of shares that may be granted but does not contain a specific per-employee limitation on the number of options or SARs that may be granted, any compensation attributable to the stock options or SARs granted under the plan would not be qualified performance-based compensation. 15 This clarification is effective June 24, 2011. 16

Transition Rule for Newly Public Companies

Existing regulations under Sec. 162(m) contain a special transition rule for companies that become publicly held. 17 Under this transition rule, compensation from the exercise or vesting of stock options, SARs, and restricted stock granted under a plan or agreement that existed before a company becomes publicly held is excluded from the $1 million threshold under Sec. 162(m), if the grant occurs before the end of a reliance period. 18 The reliance period can extend over three years. 19

The proposed regulations clarified that this exception does not apply to other types of equity compensation, such as restricted stock units or phantom stock. 20 As a result, restricted stock units and phantom stock granted by a company that becomes publicly held will not be deductible if settled or paid after the company becomes publicly held. This clarification is effective on or after the date the final regulations are published. 21 Taxpayers that expect to be affected by this limitation should consider planning opportunities now.

More Sec. 409A Correction Guidance Issued

The IRS issued more guidance on the correction of certain form and operational failures of nonqualified deferred compensation plans under Sec. 409A. The new guidance, Notice 2010-80, 22 modifies earlier Notices 2008-113 and 2010-6.

Prior Guidance

Notice 2008-113 23 updated and, for periods beginning on or after January 1, 2009, replaced prior guidance providing relief for certain Sec. 409A operational failures. If all the eligibility requirements are met, corrections are available for these operational failures:

  • Early payments and failed deferrals;
  • Failure to delay distribution of deferred compensation;
  • Excess deferrals; and
  • Discounted stock options and stock appreciation rights.

Notice 2010-6, 24 released in January 2010, provides methods for taxpayers to voluntarily correct certain types of failures to comply with the document requirements of Sec. 409A. Notice 2010-6, in part, modifies Notice 2008-113. The notice provides retroactive relief as well. If a plan document failure is corrected on or before December 31, 2010, the plan may be treated as corrected as of January 1, 2009, for purposes of applying relief in the notice.

Notice 2010-80

Notice 2010-80 makes the following changes to prior guidance:

  • Linked plans: Clarifies that the types of plans eligible for relief under Notice 2010-6 include a nonqualified plan linked to a qualified plan or another nonqualified plan, provided that the linkage does not affect the time and form of payments under the plans.
  • Stock rights: Expands the types of plans eligible for relief under Notice 2010-6 to include certain stock rights that were intended to comply with the requirements of Sec. 409A rather than be exempt from the requirements of Sec. 409A(a).
  • Method of correction: Provides an additional method of correction under Notice 2010-6 for certain failures involving payments at separation from service dependent on service provider actions (e.g., a requirement to submit a release of claims or similar document) and provides transition relief for failures that were in effect on or before December 31, 2010.
  • Information reporting: Provides relief from certain information reporting for both service providers and service recipients.

Taxpayers may rely on Notice 2010-80 for the modifications to Notice 2008-113 for tax years beginning on or after January 1, 2010, and for the modifications to Notice 2010-6 for tax years beginning on or after January 1, 2009.

Final Rules for Shareholder Votes on Pay and Golden Parachutes

Newly finalized rules to implement the provisions of the Dodd-Frank Act 25 that require shareholders to be given nonbinding votes on the compensation of executives went into effect generally on April 4, 2011. 26

The act requires shareholders to be given separate advisory votes to (1) approve the compensation of executives (the “say-on-pay” vote), (2) determine the frequency of the say-on-pay vote, and (3) approve golden parachute agreements in the context of mergers and acquisitions. The final rules adopt the rules substantially as they were proposed, with some modifications.

Say-on-Pay Vote

The act requires that at least once every three years, a proxy or consent for an annual or other meeting of shareholders for which compensation must be disclosed under the commission’s proxy rules must include a separate resolution for the shareholders to approve the compensation of executives. The vote is advisory and nonbinding on the issuer and its board of directors. The final regulations clarify that the vote is required for annual meetings at which proxies will be solicited for the election of directors, or a special meeting in lieu of such annual meeting, and is required at least once every three calendar years. A say-on-pay vote is required for the first such annual or other meeting of shareholders that occurs on or after January 21, 2011.

Smaller reporting companies are not required to provide a compensation discussion and analysis (CDA) by virtue of the new rule but, according to the rule’s preamble, may wish to include a supplemental disclosure on their executive compensation arrangements in connection with the new say-on-pay vote. To facilitate the transition, the final rule provides a two-year temporary exemption for the smaller reporting companies, by which they will not be required to conduct a say-on-pay vote until the first annual or other meeting of shareholders that occurs on or after January 21, 2013.

Going forward, the new rule requires that the CDA address whether and how the issuer’s compensation policies and decisions have taken into account the results of the most recent say-on-pay vote.

Frequency of Say-on-Pay Vote

The act also requires that a separate resolution be provided at least once every six years for the shareholders to determine whether the say-on-pay vote will occur every one, two, or three years. As with the say-on-pay vote itself, the vote on frequency is advisory and nonbinding, is required only for annual meetings at which proxies will be solicited for electing directors, and is required for the first annual or other meeting of shareholders that occurs on or after January 21, 2011. The final rule clarifies that the frequency vote is required at least once during the six calendar years following the prior frequency vote, and the issuer must provide shareholders with four choices: one year, two years, three years, or abstain. (Related amendments are made to the rule governing the form of proxies to allow these choices.) A new item on the Form 8-K will require disclosure of the issuer’s decision on the frequency vote.

As with the say-on-pay vote, smaller companies are given a two-year exemption by which they are not required to conduct a frequency vote until the first annual or other meeting of shareholders that occurs on or after January 21, 2013. Companies should consult their legal counsel to address these rules.

Golden Parachute Compensation Vote

The act also requires that, in any proxy or consent solicitation materials for a shareholder meeting to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all of the assets of an issuer, any agreements regarding compensation based on the transaction (golden parachutes) between the person making the solicitation and any named executive officer of the issuer must be disclosed and subject to a separate advisory vote of the shareholders. Similar requirements apply to an acquiring issuer, which in seeking shareholder approval of the transaction must disclose the golden parachute arrangements it has with its named executive officers and the named executive officers of the target company and provide the shareholders with a separate advisory vote. The regulations make clear that a separate advisory vote would not be required for golden parachute compensation that was previously subject to a shareholder say-on-pay vote.

A new disclosure table in merger proxies and certain other SEC filings is used to present the golden parachute compensation. Amounts subject to a single or double trigger must be identified, and issuers must describe any material conditions or obligations (e.g., noncompete, nonsolicitation, and confidentiality agreements), their duration, and provisions regarding waiver or breach. A description of the specific circumstances that trigger payment must also be provided, along with the form of payment (e.g., lump-sum or periodic payments, their duration, etc.). Notably, in calculating payment amounts in connection with a transactional filing, the issuer’s stock price is its average closing price per share over the first five business days following the public announcement of the transaction, distinct from the price used in the annual meeting proxy statement.

The new golden parachute requirements are effective for filings on or after April 25, 2011. Unlike the say-on-pay and frequency votes, there is no temporary exemption from the golden parachute disclosure and voting requirements for smaller reporting companies. As explained in the rule’s preamble, investors in smaller reporting companies have just as much interest in golden parachute compensation as investors in other issuers, and in light of the extraordinary nature of the transactions involved, no exemption is warranted. Companies should consult legal counsel when applying these provisions.

Taxpayers Have Constructive Receipt of Income Despite Restrictions on Shares

The Eleventh Circuit joined other circuits in holding that restricted shares paid as the proceeds of a business sale were includible in income in the year the shares were placed into escrow for the benefit of the selling partner, even though the shares could not be fully withdrawn for nearly five years, were subject to restrictions on sale, and were forfeitable if the individual partner breached an employment agreement, voluntarily quit, or was terminated for cause or poor performance.

In Fort, 27 the Eleventh Circuit addressed the 2000 sale of Ernst & Young’s information technology consulting business to Cap Gemini, in which the selling partners received shares of Cap Gemini stock as proceeds of the sale. Under the deal as structured, one-fourth of each partner’s shares were sold to cover income taxes arising as a result of the transaction, and the remaining three-fourths of the shares were placed in an individual account in each partner’s name. The transaction agreement explicitly stated that the parties would treat the sale as a capital gain transaction and that gains from receiving the restricted shares would be reportable in full by each partner as income for 2000.

Various restrictions applied to the shares. They could not be withdrawn immediately from the accounts. For nearly five years after the closing, a partner could sell only portions of the restricted shares, and only at designated times. The shares were also subject to forfeiture if the partner breached his or her new employment agreement, voluntarily quit, or was involuntarily terminated for cause or poor performance. Nonetheless, the partners were given dividend and voting rights in their shares. The dividends were not subject to forfeiture and could be withdrawn after they were declared. The partners were also considered the beneficial owners of their restricted shares. Due to the restrictions, the shares had been valued for tax purposes at 95% of the closing price of Cap Gemini stock on the closing date.

Danny C. Fort, the plaintiff partner in the case, reported the gross proceeds from the transaction on his 2000 income tax return as agreed. By 2003, however, the value of the shares had declined substantially, and he was terminated as part of a downsizing. Fort, like several other former partners, filed an amended federal income tax return for 2000 claiming that no income was realized from the restricted shares that year. The IRS provided Fort with a tax refund of over $300,000.

The IRS later sued to recover the amount, claiming that the refund was in error because Fort had constructively received income from the restricted shares in 2000. The district court agreed and granted summary judgment in favor of the federal government. Fort appealed to the Eleventh Circuit Court of Appeals, arguing that he did not receive income from the restricted shares in 2000.

Reviewing the case de novo, the court examined the basic rules regarding the constructive receipt of income. It explained that a cash-basis taxpayer must pay tax in the tax year in which the income is actually or constructively received. Under Treasury regulations, a taxpayer constructively receives income when “it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time.” 28 Conversely, income is not constructively received “if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.” 29 The more control a taxpayer has over the income, the court explained, the more likely he or she has constructively received the income. Whether the shares or assets are held in escrow is relevant to—but not necessarily dispositive of—the issue. According to the court, a taxpayer will still realize income if he or she “possesses sufficient indicia of control” over assets that are held in escrow.

The court looked to a 1943 case involving Charlie Chaplin 30 in which shares that were escrowed in 1928 could be released to Chaplin only when he subsequently delivered “photoplays” to the company in later years. Chaplin argued that the shares were not income until they were released to him, but the Ninth Circuit took a different view. Applying the same reasoning to Fort, the Eleventh Circuit similarly concluded that Fort had sufficient indicia of control over the restricted shares to constitute income in 2000. Looking to other courts that had addressed the same transaction, the court characterized the restrictions as “merely a deferral of consumption, not taxation.”

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.



1 Mayo Found. for Med. Educ. and Research, 131. S . Ct . 704 ( 2011).

2 Chevron U.S.A. Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837 (1984).

3 National Muffler Dealers Ass’n, 440 U.S. 472 (1979).

4 Regs. Sec. 31.3121(b)(10)-2(d)(3)(iii).

5 Mayo Found. for Med. Educ. and Research, 282 F. Supp. 2d 997 (D. Minn. 2003).

6 IR-2010-25 (3/2/10).

7 The Patient Protection and Affordable Care Act, P.L. 111-148, and the Health Care and Education Reconciliation Act of 2010, P.L. 111-152, were signed into law by President Barack Obama on March 23 and 30, 2010, respectively. In this article, these two acts are collectively referred to as PPACA.

8 Notice 2010-69, 2010-44 I.R.B. 576.

9 Notice 2011-28, 2011-16 I.R.B. 656.

10 Sec. 3101(b)(2).

11 Sec. 1411.

12 Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress (JCS-2-11), p. 342 (March 1, 2011).

13 REG-137125-08.

14 Regs. Sec. 1.162-27(e)(2)(vi).

15 Prop. Regs. Secs. 1.162-27(e)(2)(vi)(A); e(2)(vii), Example (9); and (e)(4)(iv).

16 Prop. Regs. Sec. 1.162-27(j)(2)(vi).

17 Regs. Sec. 1.162-27(f)(1).

18 Regs. Sec. 1.162-27(f)(3).

19 Regs. Sec. 1.162-27(f)(2)(iv).

20 Prop. Regs. Sec. 1.162-27(f)(3).

21 Prop. Regs. Sec. 1.162-27(j)(2)(vi).

22 Notice 2010-80, 2010-51 I.R.B. 853.

23 Notice 2008-113, 2008-2 C.B. 1305.

24 Notice 2010-6, 2010-3 I.R.B. 275.

25 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, P.L. 111-203.

26 SEC Release Nos. 33-9178 and 34-63768 amending 17 C.F.R. parts 229, 240, and 249 (1/25/11).

27 Fort, No. 10-13053 (11th Cir. 4/19/11).

28 Regs. Sec. 1.451-2(a).

29 Id.

30 Chaplin, 136 F.2d 298 (9th Cir. 1943).



Deborah Walker is a tax partner, Stephen LaGarde is a tax senior manager, and Hyuck Oh is a senior tax staff at Deloitte Tax LLP in Washington, DC. For more information about this article, contact Ms. Walker at

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