rr-08-13.pdf

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Part I

Section 162(m)—Excessive Compensation

26 CFR 1.162-27(e)

Rev. Rul. 2008-13

ISSUE
Is compensation payable by a publicly held corporation to a covered employee
(within the meaning of § 162(m)(3) of the Internal Revenue Code) considered
“remuneration payable solely on account of attainment of one or more performance
goals” under § 162(m)(4)(C) if the plan or agreement under which the covered
employee is paid provides that the compensation will be paid upon attainment of a
performance goal and also provides that the compensation will be paid without regard to
whether the performance goal is attained in either of the following situations: (i) the
covered employee’s employment is involuntarily terminated by the corporation without
cause or the covered employee terminates his or her employment for good reason, or
(ii) the covered employee retires.
FACTS
Company X is a publicly held corporation within the meaning of § 162(m)(2). X
maintains a bonus plan (Plan) that pays a cash award (Award) to covered employee E if
X’s earnings per share do not decrease during the calendar year, determined on
December 31, 2009 (Performance Goal). In accordance with § 1.162-27(e)(2) of the
Income Tax Regulations, X’s compensation committee established the Performance
Goal in writing within 90 days after the commencement of the period of service to which
the Performance Goal relates, and the Performance Goal satisfies § 1.162-27(e)(2)(ii)
and (iii). In 2009, X’s earnings per share increase by seven percent.
Situation 1.
The Plan provides that the Award will be paid to covered employee E if the
Performance Goal is attained. The Plan also provides that, even if the Performance
Goal is not attained, the Award will be paid if covered employee E dies or becomes

disabled, or if X experiences a change of ownership or control. In addition, the Plan
provides that the Award will be paid even if the Performance Goal is not attained if
covered employee E is terminated by X without “cause” or if covered employee E
voluntarily terminates his or her employment with X for “good reason.”
The definition of “cause” in the Plan is (i) an act of willful misrepresentation, fraud
or willful dishonesty intended to result in substantial personal enrichment at the expense
of X, (ii) willful misconduct with regard to X that was intended to have a material adverse
impact on X, (iii) willful or reckless behavior that has a material adverse impact on X, (iv)
willful failure to perform duties or follow written direction of the board of directors, or (v)
conviction of, or pleading nolo contendre or guilty to a felony. The definition of “cause”
does not include poor performance that does not involve one of the events described in
the preceding sentence.
The definition of “good reason” under the Plan is the occurrence of any of the
following, without the executive’s express written consent: (i) assignment of duties
materially inconsistent with the executive’s current authorities, duties, responsibilities,
and status, any reduction in the executive’s title, position, or reporting lines, or any
material reduction in the executive’s status, authorities, duties, or responsibilities, (ii)
relocation of the executive from the principal office of X or relocation of the principal
office of X, (iii) reduction in the executive’s base salary, (iv) reduction in the executive’s
overall level of participation in X incentive, benefit, or retirement plans, (v) failure of X to
obtain assumption of the executive’s employment agreement from a successor of X, or
(vi) any other material breach of the executive’s employment by X.
Situation 2.
The Plan provides that the Award will be paid to covered employee E if the
Performance Goal is attained. The Plan also provides that the Award will be paid to
covered employee E, even if the Performance Goal is not attained, if covered employee
E dies or becomes disabled or if X experiences a change of ownership or control. In
addition, the Plan provides that the Award will be paid to covered employee E even if
the Performance Goal is not attained if covered employee E voluntarily retires during
the calendar year.
LAW
Section 162(a)(1) allows as a deduction all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal services actually
rendered.
Section 162(m)(1) provides that in the case of any publicly held corporation, no
deduction is allowed for applicable employee remuneration with respect to any covered

employee to the extent that the amount of the remuneration for the taxable year
exceeds $1,000,000.
Section 162(m)(3) provides that the term “covered employee” means any
employee of the taxpayer if (i) as of the close of the taxable year, such employee is the
chief executive officer of the taxpayer or is an individual acting in such a capacity, or
(ii) the total compensation of such employee for the taxable year is required to be
reported to shareholders under the Securities Exchange Act of 1934 by reason of such
employee being among the 4 highest compensated officers for the taxable year (other
than the chief executive officer).
Section 162(m)(4)(A) defines “applicable employee remuneration,” with respect
to any covered employee for any taxable year, generally as the aggregate amount
allowable as a deduction for the taxable year (determined without regard to § 162(m))
for remuneration for services performed by the employee (whether or not during the
taxable year).
Section 162(m)(4)(C) provides that applicable employee remuneration does not
include any remuneration payable solely on account of the attainment of one or more
performance goals, but only if (i) the performance goals are determined by a
compensation committee of the board of directors of the taxpayer which is comprised
solely of 2 or more outside directors, (ii) the material terms under which the
remuneration is to be paid, including the performance goals, are disclosed to
shareholders and approved by a majority of the vote in a separate shareholder vote
before payment of such remuneration, and (iii) before any payment of such
remuneration, the compensation committee referred to in clause (i) certifies that the
performance goals and other material terms were in fact satisfied.
Section 1.162-27(b) provides that § 162(m) precludes a deduction under chapter
1 of the Internal Revenue Code by any publicly held corporation for compensation paid
to any covered employee to the extent that the compensation for the taxable year
exceeds $1,000,000. Section 1.162-27(e)(1) provides that the deduction limit in
§ 1.162-27(b) does not apply to qualified performance-based compensation. Section
1.162-27(e)(1) further provides that qualified performance-based compensation is
compensation that meets all of the requirements of § 1.162-27(e)(2) through (5).
Section 1.162-27(e)(2)(i) provides, in part, that qualified performance-based
compensation must be paid solely on account of the attainment of one or more
preestablished, objective performance goals.
Section 1.162-27(e)(2)(v) provides that compensation does not satisfy the
requirements of § 1.162-27(e)(2) if the facts and circumstances indicate that the
employee would receive all or part of the compensation regardless of whether the
performance goal is attained and that, if the payment of compensation under a grant or
award is only nominally or partially contingent on attaining a performance goal, none of

the compensation payable under the grant or award will be considered performance-
based. Section 1.162-27(e)(2)(v) further provides that compensation does not fail to be
qualified performance-based compensation merely because the plan allows the
compensation to be payable upon death, disability, or change of ownership or control,
although compensation actually paid on account of those events prior to the attainment
of the performance goal would not satisfy the requirements of § 1.162-27(e)(2).
The IRS and Treasury have not previously issued any guidance on which
taxpayers are entitled to rely that explicitly addresses the situations described in this
revenue ruling.
ANALYSIS
Under § 162(m)(4)(C) and § 1.162-27(e), compensation is not considered
applicable employee remuneration, and thus is not subject to the $1,000,000 limit in
§ 162(m)(1), if it satisfies the requirements for “qualified performance-based
compensation.” Among these requirements is that the compensation is payable “solely”
on account of the attainment of one or more performance goals. Under § 1.162-
27(e)(2)(v), compensation is not performance-based if the facts and circumstances
indicate that the employee would receive all or part of the compensation regardless of
whether the performance goal is attained. Section 1.162-27(e)(2)(v) provides further
that compensation does not fail to be qualified performance-based compensation
merely because the plan allows the compensation to be payable upon death, disability,
or change of ownership or control.
Situation 1.
A covered employee’s termination without “cause” or for “good reason” is not
listed as a permissible payment event under § 1.162-27(e)(2)(v). As defined in the
Plan, involuntary termination without “cause” may occur or a “good reason” (e.g., a
reduction in title or base salary) may arise as a result of covered employee E’s poor
performance and failure to meet the Performance Goal. Therefore, under the facts and
circumstances analysis, the compensation is not “remuneration payable solely on
account of the attainment of one or more performance goals,” as required by
§ 162(m)(4)(C).
Situation 2.
Voluntary retirement is not listed as a permissible payment event under § 1.162-
27(e)(2)(v). Because retirement generally is a voluntary action within the control of the
covered employee, the compensation is not “remuneration payable solely on account of
the attainment of one or more performance goals,” as required by § 162(m)(4)(C).

HOLDINGS
Situation 1.
The Award is not qualified performance-based compensation under
§ 162(m)(4)(C) and § 1.162-27(e)(2).
Situation 2.
The Award is not qualified performance-based compensation under
§ 162(m)(4)(C) and § 1.162-27(e)(2).
APPLICATION
Pursuant to § 7805(b)(8), the holdings in this revenue ruling will not be applied to
disallow a deduction for any compensation that otherwise satisfies the requirements for
qualified performance-based compensation under § 162(m)(4)(C) and § 1.162-27(e)
and that is paid under a plan, agreement, or contract that has payment terms similar to
the terms described in this revenue ruling if either (i) the performance period for such
compensation begins on or before January 1, 2009 or (ii) the compensation is paid
pursuant to the terms of an employment contract as in effect (without respect
to future renewals or extensions, including renewals or extensions that occur
automatically absent further action of one or more of the parties to the contract) on
February 21, 2008. For purposes of the preceding sentence, the performance period
for such compensation is the period of service to which the performance goal applicable
to such compensation relates. The relief under this paragraph does not extend to other
issues under § 162(m) or to any other provision of the Code.
DRAFTING INFORMATION
This revenue ruling was prepared by Ken Griffin of the Office of the Division
Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further
information regarding this revenue ruling, contact Mr. Griffin at (202) 622-6030 (not a
toll-free call).