Source: https://www.executiveloyalty.org/tax---162-m--home.html
Timestamp: 2019-04-20 06:18:23+00:00

Document:
2018.03.21 Section 162(m) Accounting Issues Post-2017 Tax Reform. PwC's excellent report concludes with this heads-up: "As limitations on deductibility of compensation to covered executives becomes more prevalent, companies will need to adopt an accounting policy for allocating the deferred tax benefit limit to various forms of compensation. Models should be developed to schedule expected compensation into the future to calculate the deferred tax benefits under the chosen policy. And for many, this will also include developing robust processes for tracking 162(m) allowable tax deductions and any grandfathered payments."
2017.12.28 Tax Reform Act of 2017. The primarily 162(m) changes made by Section 13601 involve (1) prospectively eliminating the exemption for stock options and other performance-based compensation awards, (2) bringing CFOs back within the covered group, (3) applying the $1M deduction limit all years for which a covered employee receives compensation, even if paid after termination of employment, and (4) applying 162(m) to companies with publicly-traded debt. Also, under a grandfathering rule, companies should beware of making material modifications to stock options and other performance-based awards made on or before Nov. 2, 1017. It is also timely to review plans and awards because so many 162(m) provisions and practices will become unnecessary on a going forward basis.
(2) Waddell & Reed re reserving the use of negative discretion.
"The compensation committee would have the discretion to determine how many options it would actually grant within the limit specified in the approval vote. If it stayed within the limit approved by the shareholders, the grants under the specified limit would be performance-based. If the compensation committee granted options exceeding that specified limit, grants in excess of the limit would not be performance-based."
. . . "We note that if additional option grants [above the shareholder-approved per person limit] were made to Executive or other covered employees, such option grants would not be considered to be performance-based unless the shareholders approved the grants." Source: 2001 WL 933651.
(2) IRS Private Letter Ruling 200027012, 7/7/2000, recognizes that a 162(m) exemption is available for grants in excess of a plan's per-person limit if they are conditioned on later shareholder approval approval of an increase in that limit. Source: 2000 WL 33116116.
There is no sign of relief from the continued expansion of Code §162(m) as a vehicle for regulating executive compensation through the denial of corporate tax deductions when certain limits are exceeded. In the past few days, we have seen the latest legislative proposal aimed at conditioning executive bonus deductions on raises in employee salaries. See this Washington Post article describing the newly-–introduced “CEO-Employee Pay Fairness Act”. Meanwhile, the Treasury Department released its final regulations under Code §162(m)(6) which imposes a $500,000 deduction limit on compensation paid by health insurers.
2014.May Shareholder Approval Issues. Note PLR 200345012, ruling that the incentive payments were exempt from Section 162(m)'s $1 million deduction limitation where payment occurred pursuant to awards made before expiration of the five-year period set forth in Treas. Reg. 1.162-27(e)(4)(vi).
2013 Payment as Severance Destroys Exemption. Revenue Ruling 2008-13 warns that performance-based compensation will lose its 162(m) exemption if it is payable upon an employee's retirement or termination of employment without cause or for good reason. Applicable 162(m) regulations allow payment in the event of a change in corporate control, or the employee's death or disability.
May a company impose additional predetermined conditions on the receipt of qualified performance-based compensation where the additional conditions are not pre-established objective performance goals that have been approved by shareholders?
Example: No later than 90 days after the start of a fiscal year, but while the outcome is substantially uncertain, Corporation S establishes a bonus plan under which A, the chief executive officer, will receive a cash bonus equal to a percentage of Corporation S’s total profits for the fiscal year. The performance goal of profitability has been disclosed to and subsequently approved by the shareholders of Corporation S. In the event the performance goal is met, the compensation committee will reduce such cash bonus by up to 20% if the chief executive officer fails to meet other performance criteria set forth by the committee. These additional criteria have not been approved by shareholders. The committee is not permitted to increase the cash bonus under any circumstance.
[Proposed Response] . . . The Company may require that any such bonus be reduced or eliminated as a result of a failure to satisfy additional conditions, even if such conditions have not been disclosed to and approved by shareholders and even if the reduction or elimination of compensation is not discretionary.
IRS Response: The Service representative agrees with the proposed response. Provided that all the other conditions have met the shareholder approval requirements, the addition of additional conditions to the type of compensation for it to be received by the individual would not cause it to fail Section 162(m).
2012 Code §162(m) and Dividend Rights. In Rev. Rul. 2012-19, the IRS considered whether dividend and dividend equivalent rights paid in connection with underlying restricted stock and restricted stock unit awards are "qualified performance-based compensation" and, thus, excluded from the $1,000,000 limitation under Code Section 162(m). Finding that dividends and dividend equivalents constitute a separate form of compensation, they must separately satisfy the requirements for qualified performance-based compensation. Thus, dividends and dividend equivalents, to be excluded from the Code Section 162(m) limitations, should vest and become payable on accordance with the same limitations applied to the underlying equity award.
2011.June.23 IPO-related Rules Proposed re RSUs and Phantom Stock. The proposed regulations will limit the transition relief for RSUs and phantom stock to those awards settled within the post-IPO transition period, in contrast to the full exemption that is available for stock options, SARs, and restricted stock awards that are made during or before the transition period but that are exercised or settled after its expiration.
2009.Jul.19 Stock Option Issues Addressed. Chief Counsel Memo 2009-006. "For purposes of § 162(m), the date of grant of a stock option is the "date the granting corporation completes the corporate action constituting an offer of sale to an individual of a certain number of shares of stock at a fixed price per share. The grant dates LMSB examination used to compute adjustments, which are generally based on the measurement dates the taxpayers used for accounting purposes, are reasonable and appropriate dates under the present circumstances to use for purposes of applying § 162(m). Discounted stock options are not qualified performance-based compensation under § 162(m)(4)(C) even if, before or after exercise, the executive reimburses the employer for the discount or the option is “repriced” based on the fair market value on the actual date of grant."
2008 Performance Goals and Employment Agreements. As set forth in Rev. Rul. 2008-13, the income from performance-based incentives will not qualify for exemption from 162(m)'s $1M limit if an employment agreement, plan term, or other contractual right entitles the executive to receive the income upon terminating employment without cause, resigning for good reason, or retiring. The only allowable triggers under 162(m) are death, disability, and a change in corporate control.

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