Tax News

CCH (cch.taxgroup.com) reports:

  The IRS must clarify its position in IRS Letter Ruling 200804004 (TAXDAY, 2008/01/28, L.1), according to 90 of the country's largest law firms. The 90 law firms wrote to the IRS on February 19 requesting that the Service immediately review IRS Letter Ruling 200804004 and explain how it intends to treat incentive awards in executive compensation arrangements. Since publication of the letter ruling in late January, benefits practitioners and their clients have been struggling to understand if the ruling signals a departure from the IRS' traditional treatment of incentive awards or not.

Controversial Ruling

  In IRS Letter Ruling 200804004, a corporation's incentive awards plan provided that, if the executive's employment was terminated by the company other than for cause or by the executive for good reason, any performance goal under any outstanding performance share or performance unit awards would be deemed to be achieved and the awards would vest at termination. The IRS determined these provisions failed to satisfy Code Sec. 162(m)'s performance-based compensation exception.

  On February 14, Kenneth Griffin, chief counsel, Executive Compensation Branch, IRS, noted that regulations under Code Sec. 162(m) require that compensation be payable solely on account of the attainment of one or more pre-established performance goals (TAXDAY, 2008/02/15, I.3).Reg. §1.162-27(e)(2)(v) provides that compensation does not satisfy the performance goal requirement 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. Termination by the corporation other than for cause or by the executive for good reason are dissimilar from death, disability or a change in ownership, Griffin explained. Many corporations have viewed the safe harbor as encompassing incentive awards plans as described in IRS Letter Ruling 200804004.

  Griffin predicted that the IRS would issue more guidance before March. However, he did not identify the specifics of the guidance.

IRS Review

  The 90 law firms asked the IRS to review the position take in IRS Letter Ruling 200804004 and, if the Service ultimately should adopt it, to make it prospective only. In the meantime, taxpayers should be able to interpret Code Sec. 162(m) consistently with prior rulings (IRS Letter Ruling 199949014 and IRS Letter Ruling 200613012). If the IRS should adopt the position in IRS Letter Ruling 200804004, compensation awards already in place should be grandfathered.

  "Publicly-traded companies have legitimately designed performance-based bonus arrangements with automatic triggers based on involuntary or good reason terminations in light of the positions announced by the IRS in its prior private letter rulings," Brian Pinheiro, partner, Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, told CCH. "The sudden change in position presents considerable difficulty for companies that are currently making decisions for 2008 awards and for proxy reporting."

  By George L. Yaksick, Jr., CCH News Staff

Law Firms' Letter Regarding IRS Letter Ruling 200804004