April 10, 2008 / Law Alert

IRS Limits Scope of IRC Section 162(m) Performance-Based Compensation Deduction

The IRS issued Revenue Ruling 2008-13 to clarify what constitutes "performance-based" compensation under Internal Revenue Code Section 162(m). Under prior guidance, an executive could receive a performance award (either cash or equity) upon involuntary termination without cause, termination for good reason, or retirement, without regard to whether performance goals were actually met. In Revenue Ruling 2008-13, the IRS reversed its position, holding that such an award will not be treated as performance-based compensation under Code Section 162(m). This ruling puts many executive compensation plans and employment agreements at risk in light of the new restrictions on deductions for non-performance-based compensation that exceeds $1 million.