26 U.S.C. § 457A — Nonqualified deferred compensation from certain tax indifferent parties

(a) In general: If a "nonqualified entity" defers paying someone under a nonqualified deferred compensation plan, that compensation is included in the person's gross income as soon as there is no substantial risk that the right to it will be forfeited. This is often earlier than under the normal deferred-comp timing rules.

(b) Nonqualified entity: This term covers two kinds of payers:
(1) A foreign corporation^*, unless substantially all of its income is either (A) effectively connected with a U.S. trade or business^*, or (B) subject to a "comprehensive foreign income tax."
(2) A partnership^*, unless substantially all of its income is allocated to people other than (A) foreign persons whose share of that income is not subject to a comprehensive foreign income tax, and (B) organizations that are tax-exempt under this title.

(c) Determinability of amounts of compensation: If the amount of compensation is not yet knowable at the point it would normally have to be included in gross income under (a):
(1)(A) it is instead included once it becomes knowable, and
(1)(B) the tax for that year is increased by two extra amounts: (i) interest calculated under (2), plus (ii) 20 percent of the compensation amount.
(2) Interest, step by step: Figure out what the underpayments would have been if the deferred compensation had instead been included in gross income back when it was first deferred (or, if later, when it stopped being at substantial risk of forfeiture). Calculate interest on those underpayments at the section 6621 underpayment rate plus 1 percentage point. That is the extra interest owed.

(d) Other definitions and special rules:
(1) Substantial risk of forfeiture: (A) In general, a person's right to compensation is at substantial risk of forfeiture only if it depends on that person (or someone else) performing substantial future services. (B) Exception for gain on an investment asset: if regulations allow, and compensation is based solely on gain from disposing of an "investment asset," the compensation is treated as at risk of forfeiture until that asset is actually disposed of. (ii) An "investment asset" is a single asset that an investment fund^* acquired directly, that the fund does not actively manage (and no related person actively manages), and where substantially all the gain (other than this deferred pay) goes to the fund's investors. (iii) This special rule does not combine with the coordination rule in paragraph (3)(B) below.
(2) Comprehensive foreign income tax: A foreign country's income tax counts as "comprehensive" if either (A) the person qualifies for benefits under a comprehensive income tax treaty between that country and the U.S., or (B) the person shows the Secretary^*, to the Secretary's satisfaction, that the country has a comprehensive income tax.
(3) Nonqualified deferred compensation plan: (A) This has the meaning given in section 409A(d), but also includes any plan giving a right to pay based on the appreciation of a set number of equity units. (B) Exception: pay is not treated as "deferred" here if the person actually receives it within 12 months after the end of the tax year in which the risk of forfeiture ended.
(4) Exception for effectively connected income: If a foreign corporation's income is taxable under section 882, this section does not apply to compensation that would have been deductible against that income, had it been paid in cash on the date the forfeiture risk ended.
(5) Certain rules from section 409A(d), paragraphs (5) and (6), apply here too.

(e) Regulations: The Secretary must issue regulations needed to carry out this section's purposes, including regulations that can disregard a substantial risk of forfeiture when necessary to serve those purposes.