New IRS View on Sec. 162; SEC Action; More

A surprise ruling from the Internal Revenue Service might send companies scrambling to review the termination provisions of compensation plans intended to satisfy Section 162(m) of the federal tax code.

In a private letter released Jan. 25 that appears to reverse a previous IRS position, the agency said that a plan that allows performance-based compensation payable upon a termination without cause and without regard to performance does not qualify for the performance-based compensation exemption to the $1 million dollar deduction limit under Section 162(m).

Private-letter rulings only apply to the taxpayer to whom they’re directed. Still, compensation experts say the ruling could have far-reaching consequences for other companies if the IRS takes the same view in other cases. The new interpretation could have “huge ramifications for all types of severance arrangements,” according to Broc Romanek, editor of CompensationStandards.com.

Romanek

Romanek, speaking at RiskMetrics Group’s U.S. Governance Conference last week, noted that the ruling could be applied retroactively. “That could force companies to write off billions this quarter” and could cause them to revise all their plans and arrangements, he noted.

A Jan. 31 memo from the law firm Wachtell, Lipton Rosen & Katz advises that companies should “review the termination provisions of their plans and programs intended to satisfy the performance-based exception to Section 162(m) and should discuss the implications of the ruling with their legal counsel and auditors,” including Financial Interpretation No. 48, the unpopular rule requiring companies to disclose how certain they are (or are not) about tax strategies they claim on financial statements.

Similarly, a Feb. 1 client alert from compensation consulting firm Frederic Cook & Co., which describes the ruling as “a major shift in interpretation,” also urges companies to “immediately” review the provisions of incentive plans intended to satisfy Section 162(m), provisions of related award agreements, and employment and severance agreements, since the terms of the Section 162(m) incentive plan awards for calendar year-end companies must be established by the end of March 2008.

Additionally, the alert states, “We anticipate that this Section 162(m) development will be an audit item.”

For a link to the IRS private letter ruling and other related resources, see the box at right.

SEC to Consider Proposals on Rules for FPIs

In keeping with recent staff comments that the Securities and Exchange Commission will focus on rulemaking related to foreign issuers in 2008, the agency will hold an open meeting tomorrow to consider whether to amend its rules regarding the circumstances where a foreign private issuer is required to register a class of equity securities under Section 12(g) of the Exchange Act.

The Commission will also consider whether to propose a package of amendments aimed at improving reporting by foreign private issuers. According to the SEC notice, the amendments would allow FPI status to be tested once a year, change the FPI annual reports filing deadline, revise the FPI annual report and registration statement forms to improve disclosure, and amend the rule regarding private transactions to reflect recent regulatory changes.

Also on the agenda tomorrow: A review of the annual accounting support fee of the Financial Accounting Standards Board, and consideration of whether to amend rules under the Investment Advisers Act that would require investment advisers to provide clients with narrative brochures containing plain English descriptions of their businesses, services, and conflicts of interest. Under the proposal, the brochures would have to be electronically filed with the Commission and made available to the public through the SEC’s Web site.

Details can be found on the SEC’s Web site.

SEC Grants Exemptive Authority to Corporation Finance

The SEC has amended its rules to let the director of the Division of Corporation Finance, under certain circumstances, decide exemptions from the requirement that registrants furnish an annual report to security holders that contains audited financial statements as required by the Securities Exchange Act.

The SEC said the director of the Division of Corporation Finance may exercise this new authority when, among other things, the request for relief doesn’t appear to present significant issues that haven’t been addressed previously or to raise questions of fact or policy indicating that the public interest or the interest of investors warrants that the SEC consider the matter.

The staff said the move is intended to conserve SEC resources by permitting the staff to review and act on exemptive applications under Section 36 of the Securities Exchange Act when appropriate.

Noting that a number of companies “have faced the dilemma of being required to hold a meeting of security holders when they are unable to deliver current audited financial statements,” the SEC rule release stated: “Although these situations are infrequent, we recognize the need to flexibly address this conflict in limited circumstances.”

FTC Revises Hart-Scott-Rodino Reporting Triggers

The Federal Trade Commission has amended the threshold amounts that will require companies to make pre-merger filings under the Hart-Scott-Rodino Act.

The thresholds are revised annually based on the change in gross national product. The new threshold amounts for filings represent an increase over the current thresholds of roughly 5.5 percent. The revised thresholds apply to transactions that close on or after Feb. 28, 2008. Under the new thresholds, the size-of-transaction threshold will increase from $59.8 million to $63.1 million.

The FTC notice includes revised transaction values on which the HSR filing fee schedule is based.

The FTC also announced revised thresholds, effective immediately, for determining whether competing corporations may have interlocking directors. Section 8 of the law bars a person from serving as a director or officer of two competing corporations if two thresholds are met. Under the revised thresholds, the prohibition applies to corporations with more than $25,319,000 in capital, surplus, and undivided profits. It doesn’t apply if either corporation has competitive sales of less than $2,531,900.

For details, see the full text of the FTC notices in the box, above right.