IRS Provides 162(m) Guidance Regarding Performance Awards
 
February 25, 2008
 

On February 21, 2008, the IRS published Revenue Ruling 2008-13, which provides guidance for identifying performance-based compensation for purposes of Section 162(m). It also clarifies some open issues raised by the IRS private letter ruling issued on January 25, 2008, which we previously discussed in the February 11, 2008, edition of this bulletin.

The revenue ruling clarifies that compensation that is automatically paid to an executive under a performance based plan upon the employee’s termination without cause or for good reason or upon the executive’s voluntary retirement does not meet the performance-based exception to Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code). In addition, the revenue ruling provides a grace period or relief for performance periods that begin on or before January 1, 2009, and for existing employment agreements.

Specifically, the IRS ruled that a deduction will be permitted for any compensation that otherwise satisfies the requirements for qualified performance-based compensation (under Section 162(m)(4)(C) of the Code and Section 1.162-27(e) of the Treasury Regulations) and that is paid under a plan, agreement or contract that has payment terms similar to the terms 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 renewals or extensions that occur automatically absent further action of one or more of the parties to the contract) on February 21, 2008. The IRS indicated that “performance period” refers to the period of service to which the performance goal applicable to such compensation relates.

http://www.irs.gov/pub/irs-drop/rr-08-13.pdf