Transferor transfers deferred compensation liability, 100% backed by marketable securities (assume tax basis = FMV = liability, to make things easier), to "unrelated" transferee. Not part of larger M&A deal. Tax treatment to both appears hazy at best. To transferor, appears IRS's position is 404 denies deduction, but silent on whether transferor has income from relief of such liability. If weren't for 404, transferor probably has either net g/l of $0. [question continues below]

To transferee, if part of M&A deal, the assumed liability would be capitalized to assets acquired. But here, the only asset being acquired is the "hedging" assets. Economically, transferor is suffering dimunition, and looking at both parties overall, someone will have paid deferred compensation so you'd think a deduction/loss of some kind would inure to someone's benefit. Obviously, that last sentence is irrelevent from a tax law standpoint. Bottom line is no reliable authority for any position. Anyone out there faced this issue, or similar, and if so, what was the position taken? Tax opinion? Strength? Not asking about effects on plan participants. Thx