Interim CEO did not qualify as “outside director” for purposes of performance-based pay rules - CCH Pension and Benefits - June 26, 2008

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.