Sec. 162(m) (5) implications for TARP recipients.

• Author: Reinbold, Melissa A.
• Position: Troubled Assets Relief Program

Section 302(a) of the Emergency Economic Stabilization Act of 2008, P.L. 110-343 (EESA), created Sec. 162(m)(5) to impose strict limitations on the deductibility of certain executive remuneration. Section 111 of EESA, as amended by Section 7001 of the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), imposed these restrictions on entities that sell assets to Treasury under the Troubled Assets Relief Program (TARP). In addition, entities that had received such assistance prior to the February 17, 2009, effective date of ARRA had contractually obligated themselves to follow the rules of Sec. 162(m)(5) (Department of Treasury, October Interim Final Rule, 73 Fed. Reg. 62205 (10/20/08)). The restrictions of Sec. 162(m)(5) apply for any tax year during which any obligation arising from the receipt of financial assistance under TARP is outstanding. Due to the complexity of Sec. 162(m)(5), understanding the proper application of these rules is important. This item highlights the differences between Sec. 162(m)(5) and Sec. 162(m) as it existed before EESA and demonstrates the application of Sec. 162(m)(5).

Comparison of Secs. 162(m) and 162(m)(5)

Sec. 162(m) limits the deductibility of certain officer compensation in excess of $1 million. It exempts from its limitations certain types of compensation, most importantly compensation meeting certain performance-based criteria. Sec. 162(m) (5) limits executive compensation deductibility to $500,000 and has no exceptions for the types of compensation exempted by Sec. 162(m). Sec. 162(m) applies only to publicly held corporations, while Sec. 162(m)(5) applies to all companies, public and private, that received or will receive TARP financial assistance, including partnerships and S corporations. One key difference between Secs. 162(m) and 162(m)(5) is that the $500,000 executive compensation limitation will apply to all compensation earned in the current year, including amounts paid in a later year, while Sec. 162(m) applies only to compensation otherwise deductible during the current year. Another difference between the two provisions is the executives to whom the compensation limitations apply. Publicly held TARP recipients should analyze the applicability of both Sec. 162(m) and Sec. 162(m)(5). Non-publicly held TARP recipients need only consider Sec. 162(m)(5). The exhibit illustrates various differences between Secs. 162(m) and 162(m)(5).

General Limitation on Executive Remuneration

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