On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (the "Act") into law. Among other provisions, the Act adds Section 409A ("Inclusion in Gross Income of Deferred Compensation Plans") to the Internal Revenue Code of 1986, as amended (the "Code"). Section 409A of the Code tightens the tax laws regarding nonqualified deferred compensation plans and other individual and group arrangements deferring recognition of compensation for federal income tax purposes.

The new legislation is a consequence of: (1) a sense of uncertainty concerning the standards governing nonqualified deferred compensation arrangements and (2) in light of recent corporate scandals, the perceived abuses concerning such arrangements. However, Section 409A does not replace other doctrines previously used to regulate nonqualified deferred compensation arrangements, such as the constructive receipt doctrine, the economic benefit doctrine and the provisions of Section 83 relating generally to transfers of property in connection with the performance of services.

On December 20, 2004, the Department of Treasury and the Internal Revenue Service issued Notice 2005-1. This notice provides initial guidance interpreting the provisions of Section 409A, including the incorporation of certain transition relief. Additional guidance is expected to be released in 2005 and thereafter. Until additional guidance is issued, taxpayers are required to base their positions on good faith, reasonable, interpretations of the statute and its purpose.