New IRS Ruling Holds Performance-Based Exception to 162(m) Lost if Incentive Program Guarantees Payment Upon Termination of Employment or Retirement

On February 21, 2008 the Internal Revenue Service (IRS) issued Revenue Ruling 2008-13, which materially limits the performance-based compensation exception to the $1 million deduction limit under section 162(m) of the Internal Revenue Code (Section 162(m)).

Section 162(m) generally limits a public company’s tax deduction for compensation paid to the chief executive officer and its other four most highly paid officers to $1 million per year. This deduction limitation does not apply to qualified performance-based compensation. One of the requirements of qualified performance-based compensation is that the compensation must be paid solely on the attainment of one or more pre-established, objective performance goals.

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