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The Corporate Executive, Vol. XXIII, No. 1
January-February 2009

Tax Implications

In our January-February 2008 issue, we provided "best practice" disclosure for addressing compliance with Internal Revenue Code Section 162(m). The Emergency Economic Stabilization Act of 2008 (the "EESA") and the US Treasury’s Capital Purchase Program (the "CPP") brought Section 162(m) guidance to the forefront again, with a requirement that any participating institution agree, as a condition to participate in the CPP, that it will be subject to the $500,000 annual deduction limit under Section 162(m)(5). Section 162(m)(5), which was added by Section 302 of the EESA, reduces the deduction threshold for the remuneration paid to senior executive officers during any taxable year from $1 million to $500,000, and it also eliminates the exception to the deduction limit for "performance-based compensation" as well as deferred compensation.

When the SEC’s specific mandate to address the applicability of Section 162(m) in Executive Com- 7 pensation Disclosure was omitted in favor of principles-based disclosure, it seems that in some cases companies just decided to drop the Section 162(m) disclosure entirely (presumably concluding that it was no longer material), and those that have retained it include mostly boilerplate disclosure. (Readers should be reminded that the SEC in the adopting release for the 2006 amendments stated that the new approach "should not be construed to eliminate this [162(m)] discussion" as well as other "tax consequences to the named executive officers as well as tax consequences to the company.") Given the flexibility afforded by the rules, however, a financial institution subject to the new $500,000 deductibility limit imposed in the EESA that chooses, nevertheless, to pay more, may (incorrectly) conclude that it does not have to disclose this fact in its proxy statement. We believe that this information is material for all companies, especially given the current economic climate—and needs to be disclosed in the CD&A—otherwise shareholders will have no idea if the boards of their companies are sticking with the applicable restrictions or purposefully going outside of them. Companies should provide a separate, captioned section addressing Section 162(m), which must be an actual disclosure of any amounts that exceeded the cap and a conclusion that the board considered it and nevertheless decided to exceed the deductibility limits. Companies also need to make clear that the forgone deduction is a real cost to the company.

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