Internal Revenue Code 162m

Certain excessive employee remuneration

IRS issued private letter ruling, which raised many questions with regard to application of IRC §162(m) to performance-based compensation
PLR 200804004 9.21.07 (released on 1.28.08)
The provision in the Agreement allowing for payment of performance share or performance unit awards under the Plan upon Executives termination by Company without cause or by Executive with good reason does not meet the exception in section 1.162-27(e)(2)(v) of the regulations that allows compensation to be payable upon death, disability or change of ownership or control. Thus, compensation paid to Executive with respect to performance share or performance unit awards is not payable solely upon attainment of a performance goal, for purposes of section 162(m)(4)(C) of the Code.

IRS Guidance!

Revenue Ruling 2008-13 26 CFR 1.162-27(e) released on 2.21.08
Is compensation payable by a publicly held corporation to a covered employee (within the meaning of 162(m)(3) of the Internal Revenue Code) considered remuneration payable solely on account of attainment of one or more performance goals under 162(m)(4)(C) if the plan or agreement under which the covered employee is paid provides that the compensation will be paid upon attainment of a performance goal and also provides that the compensation will be paid without regard to whether the performance goal is attained in either of the following situations: (i) the covered employees employment is involuntarily terminated by the corporation without cause or the covered employee terminates his or her employment for good reason, or (ii) the covered employee retires.
Ruling confirmed new IRS position on IRC §162(m) published in PLR 200804004 with prospective application
However, IRS provided transition relief for awards with performance period that begins on or after 1.01.09 or compensation paid pursuant to employment agreements in effect on 2.21.08 (for term of agreement, without regard to renewals or extensions)
Commentary

McGuire Woods 2.22.08
Fenwick & West 2.22.08
Jim Hamilton's World of Securities Regulation 2.23.08
Kilpatrick Stockton 2.22.08
Debevoise & Plimpton 2.26.08
Includes discussion of "collateral 409A consequences"
Melbinger's Compensation Blog 2.28.08
Offers possible fixes to problems under new interpretation
Simpson Thacher 3.12.08
Overview of new IRS position on "good leaver" provisions and related transition relief
Weil Gotshal Spring 2008
Includes "action items" for employers to ensure compliance with new IRS interpretation

Internal Revenue Code §162(m)

Citation / Title

Text of code provision

IRC §162(m)(1)

IRC §162(m)(1) General rule

In general - In the case of any publicly held corporation, no deduction shall be allowed under this chapter for applicable employee remuneration with respect to any covered employee to the extent that the amount of such remuneration for the taxable year with respect to such employee exceeds $1,000,000.

IRC §162(m)(2)-(3) Defined terms

IRC §162(m)(2) Publicly held corporation

Publicly held corporation - For purposes of this subsection, the term "publicly held corporation" means any corporation issuing any class of common equity securities required to be registered under section 12 of the Securities Exchange Act of 1934.

IRC §162(m)(3) Covered employee

Covered employee - For purposes of this subsection, the term "covered employee" means any employee of the taxpayer if -

(A) as of the close of the taxable year, such employee is the chief executive officer of the taxpayer or is an individual acting in such a capacity, or
(B) the total compensation of such employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 by reason of such employee being among the 4 highest compensated officers for the taxable year (other than the chief executive officer).

IRC §162(m)(4) Applicable employee remuneration

IRC §162(m)(4)(A) General definition

(4) Applicable employee remuneration - For purposes of this subsection -

(A) In general - Except as otherwise provided in this paragraph, the term "applicable employee remuneration" means, with respect to any covered employee for any taxable year, the aggregate amount allowable as a deduction under this chapter for such taxable year (determined without regard to this subsection) for remuneration for services performed by such employee (whether or not during the taxable year).

IRC §162(m)(4)(B)-(D) Exceptions

(4) Applicable employee remuneration - For purposes of this subsection - ...

(B) Exception for remuneration payable on commission basis The term "applicable employee remuneration" shall not include any remuneration payable on a commission basis solely on account of income generated directly by the individual performance of the individual to whom such remuneration is payable.
(C) Other performance-based compensation - The term "applicable employee remuneration" shall not include any remuneration payable solely on account of the attainment of one or more performance goals, but only if -

(i) the performance goals are determined by a compensation committee of the board of directors of the taxpayer which is comprised solely of 2 or more outside directors,

(ii) the material terms under which the remuneration is to be paid, including the performance goals, are disclosed to shareholders and approved by a majority of the vote in a separate shareholder vote before the payment of such remuneration, and
(iii) before any payment of such remuneration, the compensation committee referred to in clause (i) certifies that the performance goals and any other material terms were in fact satisfied.

(D) Exception for existing binding contracts - The term "applicable employee remuneration" shall not include any remuneration payable under a written binding contract which was in effect on 2.17.93, and which was not modified thereafter in any material respect before such remuneration is paid.

IRC §162(m)(4)(F) Disallowed golden parachute payments

(F) Coordination with disallowed golden parachute payments
- The dollar limitation contained in paragraph (1) shall be reduced (but not below zero) by the amount (if any) which would have been included in the applicable employee remuneration of the covered employee for the taxable year but for being disallowed under section 280G.

IRC §162(m)(4)(G) Excise tax - stock compensation

(G) Coordination with excise tax on specified stock compensation
The dollar limitation contained in paragraph (1) with respect to any covered employee shall be reduced (but not below zero) by the amount of any payment (with respect to such employee) of the tax imposed by section 4985 directly or indirectly by the expatriated corporation (as defined in such section) or by any member of the expanded affiliated group (as defined in such section) which includes such corporation.

// This display the document title in the html page document.write(document.title);