Deferred compensation expensing treatment reversed

The IRS recently issued a general legal advice memorandum (GLAM 2022-001) addressing the treatment of deferred compensation expense for purposes of computing a taxpayer’s foreign-derived intangible income (FDII) deduction.

The GLAM provides that for purposes of allocating and apportioning deferred compensation expense under Section 861, expenses that relate to services provided in pre-FDII years—but are deductible in post-Section 250 enactment years—should be allocated to FDII.

Previously, in GLAM 2009-001 the Associate Chief Counsel International (ACCI) concluded, under similar facts, that costs that existed prior to an effective date of certain statutory groupings did not have to be allocated and apportioned to such statutory groupings that exist in the taxable year the deductions are taken into account. The 2009 GLAM dealt with the allocation and apportionment of deferred compensation expense for purposes of computing a taxpayer’s qualified production activity income and the Section 199 deduction. In the 2022 GLAM, the IRS indicated it had reconsidered the prior conclusion in the 2009 GLAM, and determined that GLAM 2009-001 no longer represents the position of the ACCI and is obsolete.

The 2022 GLAM applied general federal income tax principles when arguing that taxpayers must take into account the law in effect for the taxable year the deduction is allowed, irrespective of the fact that the deduction factually relates to gross income that accrued prior the effective date of the classification of gross income in question. According to the IRS, in order to accurately measure the income eligible for a FDII deduction, a taxpayer must use consistent standards for characterizing income and expenses related to that income which is recognized in a taxable year.

Contacts: