A new ruling from the IRS (Rev. Rul. 2012-19) addresses when dividends and dividend-equivalents paid to an employee in connection with restricted stock or restricted-stock units (RSUs) will qualify as performance-based compensation for purposes of the deduction limitation under Code Section 162(m).

Note. This ruling is of particular relevance to publicly traded companies. They are limited by Code Section 162(m) in their ability to deduct compensation paid to a "covered employee," unless the compensation is qualifying performance-based compensation.

The ruling concludes that rights to dividends and dividend-equivalents must be analyzed separately from the underlying restricted stock or RSUs to determine whether they qualify as performance-based compensation.

For example, if an employee is granted restricted stock that qualifies as performance-based compensation but is also given the right to receive dividends with respect to the restricted stock without regard to whether the performance conditions are satisfied with respect to the restricted stock, the dividends will not qualify as performance-based compensation and will be subject to the deduction limitation under Section 162(m). But if the arrangement provides that the dividends will be accumulated and paid to the employee only if and when the performance-based conditions on the restricted stock are satisfied, the dividends also will qualify as performance-based compensation.