162(M) And Treatment Of Dividends And Dividend Equivalents-IRS Clarifies

Earlier this summer, the Internal Revenue Service issued Revenue Ruling 2012-19 to clarify the treatment of dividends and dividend equivalents on equity that qualifies as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). A copy of the ruling can be found here.

Background

Section 162(m) of the Code provides that a publicly held corporation may not deduct certain remuneration to any covered employee to the extent that the total remuneration for the taxable year exceeds $1,000,000. A covered employee is typically the corporation's chief executive officer and the other four most highly compensated officers.

However, the $1 million deduction limit does not apply to "qualified performance-based compensation." A corporation may deduct remuneration to a covered employee that is payable solely on account of the attainment of one or more pre-established objective performance goals.

Revenue Ruling

Revenue Ruling 2012-19 clarifies that if dividends and dividend equivalents are issued with respect to restricted stock and restricted stock units ("RSUs") that qualify as performance-based compensation, such dividends must...