New Code § 457A - Deferred Compensation From Offshore Entities

As part of the Emergency Economic Stabilization Act of 2008 (H.R. 1424) (the "Act"), Congress added new § 457A to the Internal Revenue Code of 1986, as amended (the "Code"). Section 457A was prompted by a perceived need to curb deferral of income inclusion for popular fee arrangements currently used by offshore hedge funds. When a service recipient is not tax indifferent, a tension typically will exist between a service provider's interest in deferring income and a service recipient's need for a current deduction for that income payment. This tension not only serves to limit abuses in the deferral of income but provides somewhat offsetting tax revenue in the form of a deferred deduction matching a deferred inclusion. Section 457A was enacted to prevent certain deferrals of inclusion when service recipients, like offshore hedge funds, are tax indifferent, eliminating the offsetting need for a current deduction.¹