Limited interim CFO service did not disqualify outside director

Plain-English summary

A public company's director temporarily served as interim chief financial officer after an unexpected resignation. The appointment had a fixed expiration, paid no base salary, focused primarily on completing financial disclosures, and did not include the broader policymaking role held by the prior and successor CFOs. Under the then-applicable section 162(m) regulations, a former officer could not qualify as an outside director, but “officer” required regular and continued executive service and excluded a special, single assignment. The IRS ruled that the director's limited interim service did not make the director an officer for this purpose. The director therefore remained an outside director eligible to serve on the compensation committee that approved performance-based compensation.

Ruling snapshot

• Question: Did a director's temporary, limited service as interim CFO prevent the director from qualifying as an outside director under section 162(m)(4)(C)?
• Outcome: approved, the director qualified as an outside director
• Key authorities: IRC § 162(m)(4)(C); Treas. Reg. § 1.162-27(e)(3); Rev. Rul. 2008-32

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury
                                                Washington, DC 20224

Number: 201733004                               [Third Party Communication:
Release Date: 8/18/2017                         Date of Communication: Month DD, YYYY]
Index Number: 162.36-05
                                                Person To Contact:
----------------------                          -----------------------, ID No. -------------------
--------------                                  ---------------------------------------------------
--------------------------
----------------------------------              Telephone Number:
                                                ----------------------
                                                Refer Reply To:
                                                CC:TEGE:EB:EC
                                                PLR-107874-17
                                                Date:
                                                May 19, 2017

Legend

Taxpayer = --------------
Director = -----------------------
Year 1 = --------------------------
Date A = ----------------------
Date B = ----------------------
Date C = --------------------


Dear -------------------:

This letter is in response to a letter dated March 2, 2017, submitted by your authorized
representative, requesting a ruling under section 162(m) of the Internal Revenue Code
(Code). Specifically, Taxpayer requested a ruling that Director qualifies as an “outside
director” for purposes of section 162(m)(4)(C) of the Code. The facts, as represented,
are as follows.

Taxpayer is a publicly held corporation. Director is a member of Taxpayer’s board of
directors and chairs the audit committee. In connection with an unexpected resignation
of Taxpayer’s Chief Financial Officer (CFO), Taxpayer appointed Director to serve as
interim CFO starting on Date A while Taxpayer conducted a search for a permanent
replacement CFO. Pursuant to the appointment agreement, the appointment
automatically expired on Date C. Taxpayer did not pay Director a base salary for the
appointment, limited Director’s authority to primarily completing financial disclosure
statements, and constrained any policy making function by not appointing Director to
serve as Executive Vice President (Taxpayer’s prior and successor CFO’s served as
Executive Vice Presidents with policy making functions). Prior to the expiration of the
appointment agreement, Taxpayer selected a permanent replacement CFO and, on
Date B, Director ceased to serve as interim CFO.
PLR-107874-17                                 2

Section 162(a)(1) of the Code allows a deduction for all of the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for personal
services actually rendered.

Section 162(m)(1) of the Code provides that for any publicly held corporation no
deduction shall be allowed for applicable employee remuneration with respect to any
covered employee to the extent that the amount of such remuneration for the taxable
year exceeds $1 million.

Section 162(m)(4)(A) defines “applicable employee remuneration,” with respect to any
covered employee for any taxable year, generally as the aggregate amount allowable
as a deduction for the taxable year (determined without regard to section 162(m)) for
remuneration for services performed by the employee (whether or not during the taxable
year).

Section 162(m)(4)(C) provides that applicable employee remuneration does not include
any remuneration payable solely on account of the attainment of one or more
performance goals, but only if (i) the performance goals are determined by a
compensation committee of the board of directors of the taxpayer which is comprised
solely of 2 or more outside directors, (ii) the material terms under which the
remuneration is to be paid, including the performance goals, are disclosed to
shareholders and approved by a majority of the vote in a separate shareholder vote
before payment of such remuneration, and (iii) before any payment of such
remuneration, the compensation committee referred to in clause (i) certifies that the
performance goals and other material terms were in fact satisfied.

Section 1.162-27(e)(3)(i) of the Income Tax Regulations (Regulations) provides that a
director is an “outside director” if the director (A) is not a current employee of the
publicly held corporation; (B) is not a former employee of the publicly held corporation
who receives compensation for prior services (other than benefits under a tax-qualified
retirement plan) during the taxable year; (C) has not been an officer of the publicly held
corporation; and (D) does not receive remuneration from the publicly held corporation,
either directly or indirectly, in any capacity other than as a director. For this purpose,
remuneration includes any payment in exchange for goods or services.

Section 1.162-27(e)(3)(vi) of the Regulations provides that whether a director is an
employee or a former officer is determined on the basis of the facts at the time that the
individual is serving as a director on the compensation committee. Thus, a director is
not precluded from being an outside director solely because the director is a former
officer of a corporation that previously was an affiliated corporation of the publicly held
corporation. For example, a director of a parent corporation of an affiliated group is not
precluded from being an outside director solely because that director is a former officer
PLR-107874-17                                  3

of an affiliated subsidiary that was spun off or liquidated. However, an outside director
would no longer be an outside director if a corporation in which the director was
previously an officer became an affiliated corporation of the publicly held corporation.

Section 1.162-27(e)(3)(vii) of the Regulations provides that, solely for this purpose,
“officer” means an administrative executive who is or was in regular and continued
service. The regulations state that the term implies continuity of service and excludes
those employed for a special and single transaction. An individual who merely has (or
had) the title of officer, but not the authority of an officer, is not considered an officer.
The regulations further state that determination of whether an individual is or was an
officer is based on all of the facts and circumstances in the particular case, including
without limitation the source of the individual’s authority, the term for which the
individual is elected or appointed, and the nature and extent of the individual’s duties.

Revenue Ruling 2008-32, 2008-2 C.B. 6, considers a situation in which the board of
directors of a publicly held corporation appointed a director to serve as an interim CEO
while the board of directors conducted a search for a permanent replacement CEO.
The service agreement between the publicly held corporation and the director did not
limit the director’s authority as interim CEO and provided for termination of service upon
selection of a permanent CEO. Revenue Ruling 2008-32 holds that the director is an
officer because the director was not employed for a single transaction and did not
merely have the title of officer but was, instead, employed for an indefinite period to
serve as an interim officer with the full authority vested in that office.

Therefore, based solely on the facts presented, we rule as follows:

Director qualifies as an “outside director” of Taxpayer for purposes of section
162(m)(4)(C) of the Code.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.
PLR-107874-17                               4


The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                     Sincerely,



                                     Thomas D. Scholz
                                     Senior Counsel, Executive Compensation
                                     (Employee Benefits)
                                     (Tax Exempt & Government Entities)

Enclosures:
Copy of letter
Copy for section 6110 purposes