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Spring
2008
Major Shift in Treatment
of Performance-Based Executive Compensation Toughens
compliance Requirements for public companies
In a major change
to executive compensation tax regulations, the IRS has
decided to make a January 28, 2008 private letter ruling
(PLR) applicable to a broad group of taxpayers, with
certain provisions in place to ease transition. PLR
200804004 states that a specific instance of executive
compensation was not performance-based, and was therefore
limited to the $1,000,000 cap on tax-deductible executive
compensation as defined in Code Sec. 162(m).
Essentially, the
PLR makes clear the requirements for compensation to
be labeled as performance-based. In the ruling, the
letter decided that any provision for payment (whole
or partial), even if goals were not met, disqualified
eligibility for tax exemption. Therefore, as applicable
to Code Sec. 162(m), for certain executives of publicly
traded companies, any compensation over the $1,000,000
threshold is no longer tax deductible, whereas it may
have been previously if it was labeled performance-based
while including provisions for award regardless of meeting
performance goals. The conditions affected by the PLR
include conditions providing the compensation even if
performance goals are not met when the executive is
terminated other than for cause, or the executive for
“good reason.”
Presence of these
conditions for payment when performance goals are not
met will now remove tax-exempt privileges to performance-based
compensation. The PLR further clarifies examples of
tax-eligibility and compensation, including allowances
for payment of compensation in specific, non-goal conditional
situations, including death or change of ownership.
Additionally, the IRS is allowing compensation to be
taxed by the previous laws for performance periods that
start before January 1, 2009, and most contracts in
effect as of February 22, 2008.
These tax changes
can potentially carry large consequences for the tax
liabilities of public corporations and alter payment
structures for executives. Careful planning will allow
adherence to new standards while maximizing tax savings
without requiring a reduction in compensation.
Consult your local
CB&H tax representative today to learn more about
how this ruling may impact your company’s tax
liability.
FOR MORE INFORMATION, PLEASE CONTACT:
Gil Weiner
gweiner@cbh.com
404.254.3642
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Bekaert & Holland, L.L.P.
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