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IRS Revenue Ruling Confirms and Extends 162(m) Ruling, with Transition Relief

    Client Alerts
  • February 29, 2008

A recent EmployNews article (link) highlighted an IRS private letter ruling (PLR) that reversed the position taken in prior PLRs and ruled that any payment under an arrangement intended to qualify for the performance-based compensation exception to the $1 million compensation deduction limit under Section 162(m) of the Internal Revenue Code would not qualify for the exception if the arrangement included the possibility that the executive would receive payment regardless of satisfaction of the performance goal if he was terminated without cause or quit for good reason.  The PLR sent shockwaves throughout the executive compensation and accounting communities. Though PLRs are directed only to the taxpayer requesting it, the IRS last week released Revenue Ruling 2008-13, which confirmed that the position in the PLR is the IRS’s current position on the issue and extends the ruling in the PLR to include the possibility of payment on an executive’s voluntary retirement.


Perhaps most importantly for many publicly-traded companies for which this new position may be an issue, the IRS stated in the Revenue Ruling that its holdings will not be applied to disallow a deduction for any compensation that otherwise satisfies the qualified performance-based compensation requirements and is paid under an arrangement that has payment terms similar to those described in the revenue ruling if either (i) the performance period for such compensation begins on or before January 1, 2009, or (ii) the compensation is paid pursuant to the terms of an employment contract as in effect (without respect to future renewals or extensions, including automatic renewals or extensions) on February 21, 2008.


As we advised just a few weeks ago with respect to the PLR, publicly-traded companies should review their incentive plans, employment agreements and other arrangements to assure that payments intended to be performance-based and covered by the 162(m) exception will not otherwise be made in the event of an executive’s termination without cause or for good reason, and, based on the new Revenue Ruling, in the event of an executive’s voluntary retirement.  Further, such companies should begin reviewing current arrangements in anticipation of performance periods beginning in 2009 and beyond as well as provisions of employment agreements with renewal or extension provisions to which the Revenue Ruling may apply.