<nobr>Dec 23, 2005</nobr>

Tax Corrections Affecting Nonqualified Deferred Compensation and
"Definition of Child" Included in Gulf Opportunity Zone Act Signed By President

The President on December 21, 2005 signed into law the Gulf Zone Opportunity Act of 2005 (H.R.4440) ("GOZA") providing hurricane reconstruction aid and relief. The Act also provided a number of tax technical corrections including, among other things, provisions affecting nonqualified deferred compensation ("NQDC") and revisions to the uniform definition of child (cf. Working Families Tax Relief Act of 2004).

An explanation of both changes appears below and in Technical Explanation of the Revenue Provisions of H.R.4440, The "Gulf Opportunity Zone Act of 2005 as Passed by the House of Representatives and the Senate;" Joint Committee on Taxation; JCX-88-05; Dec. 16, 2005 pp. 89 and 90. Click here for JCX-88-05.

Members are advised to review the Joint Tax Committee Technical Explanation and the bill for other tax technical corrections as well. Click here for H.R.4440.

ERIC has been extensively engaged on both NQDC and, for some time, in seeking a change to the uniform definition of child. With regard to the uniform definition of child, ERIC met several times with senior congressional staff to secure clarifying changes requested by ERIC members. Please review this provision and let us know whether it resolves the issues of concern. For the earlier ERIC Issue Brief on uniform definition of child click here.

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Gulf Zone Opportunity Act of 2005
Reproduced from JCX-88-05

TITLE IV – TAX TECHNICAL CORRECTIONS

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Nonqualified deferred compensation plans (Act sec. 885).−
The provision clarifies that the additional tax and interest under the nonqualified deferred compensation provision of the Act are not treated as payments of regular tax for alternative minimum tax purposes. The provision also clarifies that the application of the rule providing that certain additional deferrals must be for a period of not less than five years is not limited to the first payment for which deferral is made. The provision also clarifies that Treasury Department guidance providing a limited period during which plans can conform to the requirements applies to plans adopted before January 1, 2005. The provision also clarifies that the effective date of the funding provisions relating to offshore trusts and financial triggers is January 1, 2005. Thus, for example, amounts set aside in an offshore trust before such date for the purpose of paying deferred compensation and plans providing for the restriction of assets in connection with a change in the employer's financial health are subject to the funding provisions on January 1, 2005. Under the provision, not later than 90 days after the date of enactment of this provision, the Secretary of the Treasury shall issue guidance under which a nonqualified deferred compensation plan which is in violation of the requirements of the funding provisions relating to offshore trusts and financial triggers will be treated as not violating such requirements if the plan comes into conformance with such requirements during a limited period as specified by the Secretary in guidance. For example, trusts or assets set aside outside of the United States that would otherwise result in income inclusion and interest under the provision as of January 1, 2005, may be modified to come into conformance with the provision during the limited period of time as specified by the Secretary.

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Amendment Related to the Working Families Tax Relief Act of 2004
Uniform definition of child (Act secs. 201, 203 and 207).−The provision makes conforming amendments, consistent with those enacted with respect to various other provisions, for purposes of health savings accounts, the dependent care credit, and dependent care assistance programs. Under the conforming amendments, an individual may qualify as a dependent for these limited purposes without regard to whether the individual has gross income that exceeds an otherwise applicable gross income limitation or is married and files a joint return. In addition, such an individual who is treated as a dependent under these conforming amendment provisions is not subject to the general rule that a dependent of a taxpayer shall be treated as having no dependents for the taxable year of such individual beginning in such calendar year.

The provision clarifies Code section 152(e) to permit a divorced or legally separated custodial parent to waive, by written declaration, his or her right to claim a child as a dependent for purposes of the dependency exemption and child credit (but not with respect to other child related tax benefits). By means of the waiver, the noncustodial parent is granted the right to claim the child as a dependent for these purposes. The provision clarifies that the waiver rules under the uniform definition of qualifying child operate as under prior law.

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