A&M Tax Advisor Weekly

The Fog Has Lifted: The IRS Issues Proposed Regulations under Section 162(m)

John Schultz, Managing Director


Vance Yudell, Director

J.D. Ivy, Managing Director


Sarah Rumsey, Senior Associate

February 19, 2020 / North America

On December 16, 2019, the Internal Revenue Service (“IRS”) released proposed regulations (REG-122180-18) under Internal Revenue Code (“IRC”) section 162(m), which is the tax provision that generally imposes a $1 million annual limit on deductions by a publicly held corporation for compensation paid to covered employees. In 2017, the Tax Cuts and Jobs Act (“TCJA”) amended section 162(m) by expanding the definition of publicly held corporation and covered employees, and by eliminating the highly utilized performance-based compensation exception. Following the TCJA amendments to section 162(m), the IRS issued Notice 2018-68 (the “Notice”), which provided further insight to the TCJA amendments.

The IRS released the proposed regulations, which generally follow the guidance issued in the Notice. A&M believes the areas where companies will be impacted the most include the definition of a covered employee, specifically that once an employee becomes a covered employee, they maintain that status for life and the company must keep track of such status. Additionally, the IRS has provided guidance on the complicated issue of compensation paid by a partnership to a covered employee who provides services to the partnership. A&M knows these issues are tricky and therefore we have attempted to provide insightful direction and explanations of the proposed regulations. Below is a list of the key areas addressed in the proposed regulations:

  • 1. Definition of publicly held corporation
  • 2. Definition of covered employee
  • 3. Privately held corporations that become publicly held
  • 4. Applicable employee remuneration
  • 5. Grandfather rules
  • 6. Coordination with IRC section 409A

1. Definition of Publicly Held Corporation
A publicly held corporation is defined in the proposed regulations as any corporation that issues securities to be registered under section 12 of the Exchange Act, or that is required to file reports under section 15(d) of the Exchange Act. Note, however, that a corporation is not subject to IRC section 162(m) if its obligation to file reports under section 15(d) of the Exchange Act is suspended.

Additionally, an entity’s status as a publicly held corporation is determined as of the last day of its taxable year. If a corporate subsidiary of a publicly held corporation separately registers or files under section 12 or 15(d) of the Exchange Act, then it is treated as a separate publicly held corporation.

Furthermore, the proposed regulations explain that an S corporation or an S corporation parent of a qualified subchapter S subsidiary (“QSub”), would be considered a publicly held corporation if it issues securities pursuant to section 12 or files reports under section 15(d) of the Exchange Act (i.e. the S corporation has publicly traded debt).

Lastly, a publicly traded partnership which is treated as a corporation for federal tax purposes is considered a publicly held corporation if, as of the last day of its taxable year, its securities must be registered pursuant to section 12 or reports filed pursuant to section 15(d) of the Exchange Act.
The IRS rejected comments pertaining to foreign private issuers (“FPI”) being excluded from section 162(m). In conjunction with congressional intent and legislative history of the TCJA, an FPI is a publicly held corporation if it is required to register its securities under section 12 or file reports under section 15(d) of the Exchange Act.

The IRS and the Treas. Dept. confirmed that under section 162(m), a publicly held corporation includes an affiliated group of corporations (as determined pursuant to section 1504). However, the proposed regulations modify the original affiliated group rule under section 162(m) to now state that an affiliated group includes a parent corporation that is privately held and its subsidiary that is publicly held. Furthermore, if a disregarded entity is owned by a privately held corporation and the disregarded entity is an issuer of securities that are registered under section 12 or files reports under section 15(d) of the Exchange Act, then the privately held corporation is treated as a publicly held corporation for section 162(m) purposes…

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