Davis Polk & Wardwell Newsflash

IRS Gives Relief on Application of New 162(m) Performance-Based Compensation Rules

February 26, 2008

In a step that has been anticipated since the release of private letter ruling (PLR) 200804004 (see our Newsflash dated January 31, 2008), on February 21 the Internal Revenue Service (IRS) issued Revenue Ruling 2008-13, which clarifies the application of the IRS's interpretation of the requirements for performance-based compensation under Code Section 162(m).

Rev. Rul. 2008-13, which unlike a PLR applies to all taxpayers, confirms the new IRS position (reversing the position taken by the IRS in two earlier PLRs) that compensation is not performance-based, for purposes of Section 162(m), if the compensation is payable without regard to whether the performance goal is attained, in connection with the termination of the covered employee’s employment involuntarily without cause or voluntarily for good reason, or in a voluntary retirement.

While this position will necessitate review and in all likelihood changes to existing award documents, as well as employment agreement provisions that affect awards outstanding at the time employment terminates, the IRS has provided transition relief for existing award provisions. Rev. Rul. 2008-13 provides that its holding will not be applied to compensation if (i) the applicable performance period begins on or before January 1, 2009, or (ii) the compensation is paid pursuant to the terms of an employment contract as in effect on February 21, 2008, but without regard to any future renewals or extensions of the contract.

If you have any questions regarding this newsflash, please call your Davis Polk contact.

Davis Polk & Wardwell