Proposed excess compensation regulations reflect continued stricter application of statutory requirements

Washington National Tax Services

The IRS has released proposed amendments to the regulations under section 162(m), which limits the deduction that public companies may take for compensation paid to the CEO and the top three executives to $1 million each. The new proposed regulations are intended to clarify two issues under section 162(m) relating to stock-based compensation.

Observation: It appears that the IRS is reconsidering its interpretation of section 162(m) in both regulations and private letter rulings. Companies should review their performance-based compensation plans in light of the IRS's stricter application of section 162(m).

The portion of the proposed regulations addressing performance-based plans with stock options and stock appreciation rights (SARs) would be effective June 24, 2011. The portion of the proposed regulations addressing stock-based compensation granted during the period in which a company transitions from private to public ownership would be effective on the date final regulations are published in the Federal Register.

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