Update To Client Memorandum On Section 162(M) Of The Internal Revenue Code

On February 4, 2008, Fried Frank issued a client memorandum describing a recent Private Letter Ruling in which the Internal Revenue Service ("IRS") reversed its previous position on the effect that certain termination of employment provisions have on payments which are intended to qualify as "performancebased compensation" for purposes of section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). That ruling held that performance-based arrangements that accelerate upon a termination without cause or for good reason would not qualify, whether or not the performance goals are actually attained. Although a Private Letter Ruling can be relied on only by the taxpayer receiving the ruling, a Private Letter Ruling is indicative of the IRS' position on an issue.

On February 21, 2008, after pressure for guidance and reconsideration from commentators, the IRS released a Revenue Ruling confirming the holding of the Private Letter Ruling and also providing transition relief. Accordingly, provisions in contracts, plans, award agreements or other arrangements that accelerate the vesting of performance-based awards upon a termination without cause, for good reason or upon voluntary retirement will cause compensation attributable to the award to not be excepted from the $1,000,000 deduction limit under Section 162(m) of the Code (regardless of the circumstances of the actual payout). However, clauses that provide for acceleration of performance-based awards on the death or disability of the executive or on a change in ownership of the company will not cause performance-based arrangements paid on...