"Section 162(m) Alert: Got Performance? Transition Relief Expires on December 31, 2009 for Performance-Based Compensation Arrangements with Certain Termination Triggers"

Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”) prohibits most U.S. companies reporting under the Securities Exchange Act of 1934 (i.e., most U.S. public companies) from deducting compensation over $1 Million to their “named executive officers” (generally, a company’s CEO and its three most other highly compensated officers) unless such compensation is “performance-based” compensation. In 2008, the Internal Revenue Service (the “Service”) released Revenue Ruling 2008-13, in which it concluded, contrary to the established practice of many reporting companies, that notwithstanding the establishment of otherwise valid performance goals, compensation will not be deemed to constitute performance-based compensation if the compensation may be paid where the covered employee terminates employment without cause, for good reason, or due to retirement. Because the Service acknowledged that some companies could view these pronouncements as departures from prior practice, it provided transition relief in order to address the concerns of public companies that relied on its prior position. This Stroock Special Bulletin provides an overview of this limited transition relief, which expires on December 31, 2009 for performance-based compensation arrangements with certain termination triggers.