Revenue Ruling 2008-32 Says Director Who Served as Interim CEO Was Company Officer within Meaning of 162(m)

IRS Revenue Ruling 2008-32 has declared that a company director who had served the company as interim chief executive officer was not an outside director for purposes of a Section 162(m) compensation committee because the director had been an officer of the company within the meaning of tax regulations defining an outside director.

Under Section 162(m) of the Internal Revenue Code, the deductibility of compensation paid to senior corporate officers, called covered employees, is limited to $1 million. However, Section 162(m) excludes performance-based compensation from the deduction limitation; and thus it is not taken into account in determining whether executive compensation exceeds $1 million. In general, performance-based compensation is compensation payable solely on account of the attainment of one or more performance goals and with respect to which certain requirements are satisfied.

One requirement is that the performance goals must be determined by a board compensation committee composed solely of outside directors and, before any payment is made, the compensation committee must certify that the performance goals were satisfied. Federal tax regulations define an outside director as one who is not a current employee of the company; not a former employee of the company receiving compensation for prior services, other than benefits under a tax-qualified retirement plan; has not been an officer of the company; and does not receive remuneration from the company in any capacity other than as a director.

The determination of whether individuals are or were corporate officers within the meaning of the regulations is based on all the facts and circumstances, noted the IRS, including the source of their authority, the term for which they are appointed, and the nature and extent of their duties.

In the Revenue Ruling 2008-32 scenario, upon the CEO’s unexpected resignation the director was named interim CEO with full authority; and continued in that role for almost one year. The company filed a Form 8-K with the SEC disclosing the CEO’s retirement and the director’s appointment as interim CEO until a permanent replacement could be found. After the new CEO was hired, the director joined the company’s compensation committee.

In determining that the director was not an outside director for purposes of serving on a Section 162(m) compensation committee, the IRS noted that the director had been in continuous service as interim CEO for almost one year. This was not a case in which the company employed the director for a special and single transaction, said the IRS, nor did the director merely have the title of an officer. Rather, the company employed the director for an indefinite period to serve as interim CEO with the full authority of that office.