New Revenue Ruling Regarding Section 162(m)

February 22, 2008

On February 21, 2008, the Internal Revenue Service (the “IRS”) issued a revenue ruling confirming the views first expressed by the IRS in a private letter ruling released January 25, 2008 (“PLR 200804004”) that compensation awards that may be payable upon termination without cause by the employer or resignation for good reason by the employee without regard to the achievement of the underlying performance goals will not be considered “qualified performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, regardless of whether the specified performance goals are attained. The new revenue ruling is attached hereto (“Ruling 2008-13”). Ruling 2008-13 also goes beyond PLR 200804004 to cover compensation awards that may be payable upon voluntary retirement without regard to the achievement of the underlying performance goals. As discussed in our recent alert memo regarding PLR 200804004, also attached hereto, these views are inconsistent with conclusions reached in prior private letter rulings in 1999 and 2005.

Ruling 2008-13 states its holdings will not apply to compensation paid under a plan, agreement, or contract if either (i) the performance period for such payment begins on or before January 1, 2009 (meaning, for example, Ruling 2008-13 will not apply to 2008 annual bonuses) or (ii) the compensation is paid pursuant to the terms of an employment contract as in effect on February 21, 2008. However, compensation payable under contracts that are renewed or extended (including by means of automatic renewal) on or after February 21, 2008 will be subject to Ruling 2008-13. For example, if the term of an employment contract is scheduled to renew automatically on March 1, 2009 (unless either party gives notice of nonrenewal) and such contract provides for the payment of performance-based compensation upon a termination of the covered employee’s employment without cause regardless of attainment of the performance goals, Ruling 2008-13 would apply to such compensation effective as of March 1, 2009.

Unlike a private letter ruling, which is not binding on the IRS vis-à-vis taxpayers other than the taxpayer to whom the ruling is directed, revenue rulings are binding on (and may be relied upon by) all taxpayers. Companies should begin to review bonus plans, employment agreements, severance arrangements and proxy disclosure accordingly.