IRS Stands By Reversal on Performance-Based Compensation Under Section 162(m), Provides Transition Relief


The IRS has issued a revenue ruling that confirms a new position taken in a recent private letter ruling with respect to qualified performance-based compensation under

Section 162(m). The new revenue ruling confirms that if payments can be made under a plan without regard to performance upon an affected executive's termination of employment for reasons other than death, disability or change of control, then no payments under the plan will qualify as performance-based compensation under Section 162(m). The new position potentially affects not only Section 162(m) cash bonus plans, but also stock-based incentives, such as restricted stock, restricted stock units, and performance shares, whose vesting or payment may be contingent on performance.

Section 162(m)

Section 162(m) generally disallows a tax deduction to a publicly held company for annual compensation in excess of $1 million that is paid to a “covered employee” (i.e. the principal executive officer (typically the CEO) or one of the three highest-paid executive officers other than the

principal executive officer or the principal financial officer). Compensation for this purpose generally

includes all remuneration for services performed by the covered employee, whether or not the services were performed during the same taxable year.

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