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Legal Update

Effect of Severance Arrangements on the Performance-Based Compensation Exception to the $1 Million Deduction Limit

5 November 2009
Mayer Brown Legal Update
US Internal Revenue Service (IRS) Revenue Ruling 2008-13 (the “Ruling”), available at, describes an incentive compensation arrangement that was generally intended to provide payment only if certain performance goals were attained, but also provided for payment by reason of an executive’s involuntary termination of employment (which included termination by the company without cause and termination by the executive for good reason) or by reason of retirement, in each case without regard to satisfaction of the performance goals. The Ruling held that the incentive compensation would not satisfy the “performance-based compensation” exemption from the $1 million limit on deductible compensation imposed by Internal Revenue Code section 162(m), even if the compensation was actually paid upon the attainment of the applicable performance goals. The holding reversed the holdings of earlier IRS private letter rulings.

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