Guidance Clarifies When Dividends Are Qualified Performance-Based Compensation


In Rev. Rul. 2012-19, the IRS ruled on whether dividends and dividend equivalents paid on restricted stock were qualified performance-based compensation excluded from the applicable employee remuneration to which the $1 million limitation on the deduction for compensation by publicly held corporations applies.

The revenue ruling addressed two situations involving publicly held corporations. Both corporations maintained plans that granted eligible employees restricted stock or restricted stock units (RSUs). In both cases, the restricted stock vested only when the employees satisfied performance goals that met the requirements of Regs. Sec. 1.162-27(e). For the first corporation, the dividends and dividend equivalents with respect to the restricted stock and RSUs granted to the employees were payable only if the same performance goals that applied to the stock’s vesting were met, whereas, for the second corporation, dividends and dividend equivalents with respect to the restricted stock and RSUs granted to the employees were payable before the stock vested regardless of whether the performance goals were met.

The IRS explained that the dividends and dividend equivalents are grants of compensation that are separate from the related restricted stock and RSU grants and, as such, must satisfy the requirements of Regs. Sec. 1.162-27(e) separately to be qualified performance-based compensation.

The IRS ruled that the dividends and dividend equivalents payable by the first corporation met this requirement and therefore could be excluded when applying the $1 million limitation under Sec. 162(m)(1). The dividends and dividend equivalents paid under second corporation’s plan did not meet this requirement because they did not vest and become payable solely on account of the attainment of preestablished performance goals. Therefore, they were includible as applicable remuneration for purposes of applying the $1 million limitation.

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