This is a follow-up to our February 18, 2008 Client Alert regarding a private letter ruling, PLR 200804004, that reversed the position taken by the IRS in two prior private letter rulings regarding circumstances under which compensation may qualify as performance-based compensation exempt from the Section 162(m) US$1 million deduction limitation. Under PLR 200804004, the IRS held that compensation payable under a performance-based incentive plan would not be treated as performance-based compensation exempt from the Section 162(m) deduction limitation because an executive covered under such plan also had an employment agreement that provided for the payment of his performance-based compensation in the event of his termination of employment for "good reason" or "without cause."
Because of the hue and cry raised by practitioners regarding PLR 200804004, particularly about the effect upon the deductions taken by public companies in prior years and related financial accounting issues, proxy disclosure issues and the impact upon performance-based awards under current programs, the IRS released Revenue Ruling 2008-13 very late in the day on Thursday, February 21. This ruling reaffirms the holding in PLR 200804004 (and expressly makes that holding applicable to other taxpayers), but then provides limited transition relief for plans under which the performance period begins on or before January 1, 2009, or for compensation paid pursuant to an employment contract that was in effect on February 21, 2008 (determined without regard to any extensions including automatic or "evergreen" renewal provisions). Such relief, although welcomed, is not as expansive as many companies and their legal counsel were urging. Instead, as noted above, the ruling specifically confirms the position taken by the IRS in PLR 200804004 and extends that position to all taxpayers.
Moreover, it should be noted that Rev. Rul. 2008-13 clearly provides that the transition relief does not extend to other Section 162(m) issues or to other provisions of the Code. Therefore, we continue to advise that companies should (i) review their performance-based programs, employment agreements and severance plans; (ii) decide whether revisions are necessary for either or both Section 162(m) and Section 409A purposes; and (iii) make any appropriate adjustments in a timely fashion.