The IRS recently issued Revenue Ruling 2008-13, which clarifies the IRS's new position with
respect to the applicability of the performance-based compensation exception for purposes of Section 162(m) of the Internal Revenue Code and grants transition relief to provide public companies an opportunity to review outstanding compensation plans, agreements and other arrangements in light of the IRS's new position.
This update provides general background information on Section 162(m), summarizes the key highlights from Revenue Ruling 2008-13 and offers practical guidance.
General Background on Section 162(m)
Section 162(m) generally limits a publicly held company's ability to deduct applicable compensation with respect to any "covered employee" to the extent that the amount of that employee's compensation for the taxable year exceeds $1 million, subject to certain exceptions, including an exception for performance-based compensation. For more information on identifying "covered employees" for purposes of Section 162(m), see our June 7, 2007 update, IRS Narrows Definition of "Covered Employees" for Purposes of the $1 Million Limitation on Deducting Executive Compensation.
Effect of Revenue Ruling 2008-13
Compensation Payable on Termination of Employment or Retirement Is Subject to
Section 162(m) Limitation on Deductibility. Revenue Ruling 2008-13 reverses the IRS's prior position in private letter rulings and provides that compensation will not qualify as performance-based compensation under Section 162(m) if a plan, agreement or other arrangement provides that the compensation will be paid, without regard to whether the applicable performance goal is attained, in the event that
- the executive's employment is involuntarily terminated by the company without cause,
- the executive terminates his or her employment for good reason, or
- the executive retires.
Provides Limited Transition Relief for Existing Compensation Arrangements. Revenue
Ruling 2008-13 provides that its holdings will not be applied to disallow a deduction for any compensation that otherwise qualifies as performance-based compensation under Section 162(m) and that is paid under a plan, agreement or other arrangement that has payment terms similar to the terms described in the ruling if either of the following applies:
- The performance period (i.e., the service period to which the performance goal relates) for such compensation begins on or before January 1, 2009; or
- The compensation is paid pursuant to the terms of a contract as in effect (without regard to any future renewals or extensions, including renewals or extensions that occur automatically) on February 21, 2008.
Consider Amending Compensation Arrangements. Public companies should consider amending their compensation arrangements in response to Revenue Ruling 2008-13. Public companies should also consider whether to make any adjustments to their governance and public disclosure planning in connection with these amendments. In particular, management should make this determination as soon as possible to facilitate addressing amendments to new and outstanding compensation plans, agreements and other arrangements at upcoming meetings of boards of directors, committees and other governing bodies. Management should also keep in mind all applicable shareholder approval and reporting and disclosure obligations, including for current and periodic reports (Forms 8-K, 10-Q and 10‑K) and in proxy statements.
This update is only intended to provide a general summary f Revenue Ruling 2008-13. You can read the full text of Revenue Ruling 2008-13 at http://www.irs.gov/pub/irs-drop/rr-08-13.pdf.