IRS Proposed Regulations Clarify Certain Equity Compensation Rules Under IRC Section 162(m)

Section 162(m) of the Internal Revenue Code (the "Code") generally limits the deductibility of compensation paid by a publicly traded corporation to its top executive officers (the "covered employees") to $1 million annually (the "Million Dollar Cap"). However, this limit will not apply to certain amounts that qualify as "performance-based compensation." Compensation attributable to stock options, stock appreciation rights ("SARs") and restricted stock grants may qualify as performance-based compensation if they meet certain requirements. The IRS recently issued proposed Treasury Regulations that "clarify" two aspects of the current Section 162(m) rules relating to equity-based compensation. The areas addressed include: (1) a transition rule for awards made shortly after a company becomes publicly traded; and (2) the required limit on the number of shares subject to grants of stock options or SARs.