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CCH® PENSION AND BENEFITS — 6/26/08

Interim CEO did not qualify as “outside director” for purposes of performance-based pay rules

An interim chief executive officer did not subsequently qualify as an “outside director” for purposes of the performance-based compensation rules of Code Sec. 162(m) (4)(C), according to an IRS revenue ruling.

Code Sec. 162(m) imposes a $1 million cap on deductions for executive compensation. However, there is an exception to the cap for performance-based compensation if a performance goal is established by the company’s compensation committee consisting solely of two or more outside directors. In the facts at issue, a member of the board of directors of a publicly owned corporation was appointed to serve as interim chief executive officer until a permanent CEO was found. The service agreement between the corporation and the interim CEO did not limit the director’s authority. After almost a year, a permanent CEO was hired. As agreed, the interim CEO’s service terminated. He then became a member of the corporation’s compensation committee as an outside director.

IRS Reg. §1.162-27(e)(3)(i) provides that an “outside director” must not have been an officer of the publicly held corporation, among other requirements. Under the facts and circumstances presented, the interim CEO acted with the full authority of an officer and was, therefore, barred from participating on the compensation committee as an outside director, the IRS concluded.