September 2008

Careful Planning Required to Avoid an 80% Tax Rate Under IRC Sec. 409A

By Robert M. Jason

In yet another example of the lunacy of the tax laws as they apply to compensation for personal services, it is possible that the advance payment made to talent might be subject to a 40% penalty — 20% under Sec. 409A of the Internal Revenue Code of 1986, as amended (IRC), and 20% under the laws of those states, such as California, that have conformed to Sec. 409A. This could push the effective marginal tax rate on the advance to over 80%. Needless to say, this result is disastrous, and extreme care must be taken not to run afoul of the rules.

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