Pension Protection Act Blog

At what point does a member of a corporation’s board of directors qualify as an “outside director” of purposes of Code section 162(m)(4)(C)(i) after serving as an interim chief executive officer? The IRS answered this question today in Rev. Rul. 2008-32.

In Rev. Rul. 2008-32, the IRS addresses the situation where a CEO suddenly resigns, and the corporation’s Board of Directors hires one of the directors to serve as Interim CEO while the corporation hunts for a CEO. The IRS’ analysis is short and to the point:

“The determination of whether an individual is or was an officer is based on all of the facts and circumstances in the particular case, including without limitation the source of the individual’s authority, the term for which the individual is elected or appointed, and the nature and extent of the individual’s duties. Director A was in regular and continued service from January 7, 2008 through December 11, 2008. Company X did not employ Director A for a special and single transaction and Director A did not merely have the title of officer. Instead, Company X employed Director A for an indefinite period to serve as interim CEO with the full authority vested in that office. Accordingly, under the facts and circumstances analysis, Director A was an officer of Company X.”

Rev. Rul. 2008-32 holds that under these facts, a member of the board of directors who serves as an interim chief executive officer is not an “outside director” for purposes of Code section 162(m)(4)(C) and Treas. Reg. 1.162-27(e)(3). The underlying question for the corporation was the tax treatment of the $1 million base salary compensation plan provided to Director A for serving as the interim CEO as well as Director A particating in Company X’s executive bonus plan, which pays a percentage of base salary. Code section 162(a)(1) provide a deduction for a reasonable allowance for salaries and other compensation for personal services actually rendered. Code section 162(m)(1) provides that for a publicly held corporation, no deduction is allowed for remuneration which exceeds $1 million with respect to any covered employees. If Director A is a covered employee, then no deduction for Company X above the $1 million in remuneration. If Director A is not a covered employee, then Company X may have a deduction for remuneration paid to Director A above $1 million.

Company X contends that Director A is an “outside director” and therefore is not a covered employee, thus they get the deduction. IRS responds with Rev. Rul. 2008-32 that Director A is a covered employee based on their analysis, and thus no deduction above $1 million in remuneration.

Technorati Tags: Pension Protection Act, ppa, Interim CEO, 162(m)(1), 162(a)(1), outside director, ERISA