Recently, the Internal Revenue Service issued proposed regulations under Code Section 162(m). The proposed regulations clarify certain requirements with respect to the performance-based compensation exemption from Section 162(m)’s $1 million deduction limit otherwise applicable to compensation paid to certain public company executives. In addition, the regulations clarify the scope of the transition relief from the general application of Section 162(m) available to a corporation that becomes publicly held. These proposed regulations are intended to clarify the application of the existing Section 162(m) regulations.

Individual Limitation on Maximum Number of Shares

Under the existing regulations, compensation attributable to stock options or stock appreciation rights qualify for the performance-based compensation exemption if: (1) the option or grant is made by the compensation committee; (2) the plan under which the option or right is granted states the maximum number of shares with respect to which options or rights may be granted during a specified period to any employee; and (3) under the terms of the option or right, the amount of compensation the employee can receive is based solely on an increase in the value of the stock after the grant date.