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: Jim Hamilton's World of Securities Regulation

By Jim Hamilton

Bailout Bill Curtails 162(m) Executive Compensation Deductibility for Troubled Entities

The changes to IRC 162(m) worked by the Emergency Economic Stabilization Act curtail the deductibility of executive compensation for entities participating in the troubled asset purchase program, using SEC criteria, with one notable exception. Under Section 162(m), the deductibility of compensation paid to senior corporate officers, called covered employees, is limited to $1 million. IRS Notice 2008-94.

But the salary deduction is limited to $500,000 for any financial institution or other entity that sells illiquid securities or other assets to the Treasury under the troubled asset relief program, but only if the aggregate amount of the assets acquired exceeds $300 million. For corporations that are subject to SEC Exchange Act reporting, the highest three officers are determined on the basis of SEC shareholder disclosure, with one important difference.

Tracking SEC executive compensation disclosure rules, The five executive officers covered by 162(m)(5) are the chief executive officer, the chief financial officer, and the three highest compensated officers other than the CEO or CFO. For the purpose of determining the high three officers, compensation is defined as it is in the SEC rules to include total compensation without regard to whether the compensation is includible in an executive officer?s gross income. However, unlike the SEC rules that determine the high three officers by reference to total compensation for the last completed fiscal year, the measurement period under 162(m)(5) for purposes of determining the high three officers for an applicable taxable year is that taxable year.

For purposes of § 162(m)(5), including the determination of whether the aggregate amount of assets acquired from an employer exceeds $300 million, two or more persons who are treated as a single employer under § 414(b) (employees of a controlled group of corporations) and § 414(c) (employees of partnerships, proprietorships, etc., that are under common control) are treated as a single employer.

An applicable employer for purposes of § 162(m)(5) is not limited to a publicly traded corporation or even to the corporate business form. Thus, an entity, whether or not publicly traded, is an applicable employer if it sells troubled assets pursuant to the Treasury?s program. Also, unlike the general 162(m) calculation of employee remuneration subject to the deductible limit, 162(m)(5) remuneration includes commissions and performance-based compensation.

Golden Parachutes

The Internal Revenue Code, primarily Section 280G, does not allow the deduction of excessive golden parachute payments to senior executives and imposes an excise tax on such excessive payments equal to 20 percent of the amount of the payment. Section 302(b) of the Act amended § 280G by expanding the definition of a parachute payment to include certain severance payments made to a covered executive of an employer participating in the Treasury?s troubled asset relief program. The provision covers an executive severed from employment by reason of involuntary termination or in connection with any bankruptcy, liquidation, or receivership of an entity selling illiquid assets to the Treasury.

Full post as published by Jim Hamilton's World of Securities Regulation on October 15, 2008 (boomark / email).