Section 162(m) limits a public corporation’s deduction for a taxable year for compensation paid to certain executives to $1 million for each executive. However, the limitation does not apply to performance-based compensation. In order for compensation to be treated as performance-based compensation, the compensation must meet several requirements, including a requirement that the performance goals be established by a compensation committee that consists solely of outside directors. A director is an outside director if he or she is not a current employee, is not a former employee who is receiving compensation for prior services, has never been an officer, and does not receive any compensation from the corporation other than as a director.
In PLR 201733004, the IRS addressed a situation where a corporation’s CFO resigned unexpectedly. The corporation appointed one of its directors to serve as interim CFO for a stated, limited period of time while it searched for a permanent CFO. The director was not paid for serving as interim CFO, and his authority was limited to primarily completing financial disclosure statements. The prior CFO had been an executive vice president, but the director was not an executive vice president. According to the ruling, this constrained any policy-making function on the part of the director.
The ruling concludes that the director qualifies as an outside director despite serving as interim CFO. The ruling discusses several provisions in the regulations that support the conclusion, including the following:
- The determination of whether an individual is or was an officer is based on all of the facts and circumstances, including 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.
- The term “officer” means an administrative executive who is or was in regular and continued service.
- The regulations state that the term “officer” implies continuity of service, and excludes those employed for a special and single transaction.
- An individual who has, or had, the title of an officer, but not the authority of an officer, is not considered an officer.
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