Like the Regulations, the proposed regulations looked to the last day of the corporation's tax year to determine its status as a publicly held corporation. The proposed regulations, however, reflected the TCJA amendments under which a corporation is considered publicly held if any of its securities are required to be registered under Section 12 of the Exchange Act or the corporation is required to file reports under Section 15 d of the Exchange Act.
Under the proposed regulations, a corporation was not considered publicly held while its obligation to file reports under Section 15 d was suspended. The proposed regulations also clarified that a subsidiary of a publicly held corporation was itself a publicly held corporation and separately subject to IRC Section m under the affiliated group rules discussed below. Citing the TCJA amendments and legislative history, the proposed regulations rejected a commenter's suggestion that foreign private issuers be exempt from IRC Section m.
The proposed regulations did, however, recognize that a safe harbor for these corporations may be appropriate, given that they are not subject to the SEC executive compensation disclosure rules and thus may incur undue burdens identifying their covered employees.
The proposed regulations generally retained the Regulations' rules for affiliated groups of corporations. Under those rules, a publicly held corporation included an affiliated group of corporations as defined in IRC Section without regard to IRC Section b , but each publicly held subsidiary and its subsidiaries if any were separately subject to IRC Section m.
The proposed regulations included a new rule under which IRC Section m would apply to a privately held parent corporation with a publicly held subsidiary. The proposed regulations also expanded on the Regulations' rules for prorating the deduction disallowance among the members of an affiliated group.
The proposed regulations included a new rule for disregarded entities. If a disregarded entity owned by a privately held corporation was an issuer of securities required to be registered under Sections 12 b or 15 d of the Exchange Act, the proposed regulations treated the otherwise privately held corporation as a publicly held corporation for purposes of IRC Section m.
The proposed regulations included a similar rule for QSubs certain wholly owned subsidiaries of S corporations. The final regulations retain the rules from the proposed regulations. Under a new rule, consistent with the proposed rule for QSubs, a real estate investment trust REIT that owns a qualified real estate investment trust subsidiary QRS is a publicly held corporation if the QRS issues securities required to be registered under Section 12 b of the Exchange Act or is required to file reports under Section 15 d of the Exchange Act.
There is no safe harbor for identifying covered employees of foreign private issuers in the final regulations because none was proposed by commenters. The final regulations modify an example involving the application of IRC Section m in the case of an individual who is a covered employee for only two of the three publicly held corporations in an aggregated group but who is paid compensation by all three. This was Example 2 in the proposed regulations, but it is Example 20 in the final regulations.
This change was made in response to a comment criticizing the double counting. The proposed regulations generally followed the methodology for identifying covered employees that was set forth in Notice The IRS and Treasury declined to adopt some comments requesting simplification. Notice did not address how to identify the three most highly-compensated executive officers if the corporation's fiscal year and tax year did not align, such as when the corporation has a full month fiscal year but a short tax year.
Under the proposed regulations, the SEC executive compensation disclosure rules would be applied as if the relevant tax year a short tax year, for example were the corporation's fiscal year.
This rule was proposed to apply to tax years beginning on or after the publication of the proposed regulations in the Federal Register December 20, Notice also did not address how to identify the predecessor of a publicly held corporation for purposes of the rule that treats an individual as a covered employee if the individual was a covered employee of the publicly held corporation or any predecessor corporation for any tax year beginning after December 31, The proposed regulations supplied rules for a variety of corporate transactions: reorganizations, divisions, stock acquisitions and asset acquisitions.
These rules were proposed to apply to corporate transactions for which all events necessary for the transaction occurred on or after the date the final regulations were published in the Federal Register. The proposed regulations also would treat a corporation as its own predecessor if it went from being publicly held to being privately held and then back to being publicly held again within a three-year period if the corporation became publicly held again on or after the final regulations were published in the Federal Register.
For the period prior to publication of the final regulations, the proposed regulations permitted reliance on the proposed rule, or any reasonable, good faith interpretation of the term "predecessor," and defined certain examples of what would not represent a reasonable, good faith interpretation.
The proposed regulations also treated employees of disregarded entities and QSubs as covered employees of their corporate owners if those employees were executive officers of the corporate owners under the SEC rules. The final regulations retain the rules from the proposed regulations, with certain minor additions and clarifications. The proposed regulations provided that "applicable employee remuneration" referred to in the proposed and final regulations as "compensation" for simplicity meant: 1 the aggregate amount allowable as a deduction under chapter 1 of the Code for the tax year; 2 determined without regard to IRC Section m ; 3 for compensation for services performed by a covered employee; 4 regardless of whether the services were performed during the tax year.
The proposed regulations reiterated that compensation includes an amount that is includible in the income of, or paid to, a person other than a covered employee, including after the death of the covered employee. Among the most significant new rules in the proposed regulations were the rules for partnerships. The proposed regulations would have applied IRC Section m to compensation payments made to a covered employee by a partnership to the extent the IRC Section deduction for that compensation was allocated to a publicly held corporation or its affiliate based on the corporation's interest in the partnership.
This result was contrary to four private letter rulings 2 and would effectively subject "Up-REITs" and businesses with so-called "Up-C" partnership structures in which a publicly held REIT or corporation, as applicable, holds an interest in a lower-tier operating partnership to IRC Section m for the first time.
This part of the proposed regulations had a special grandfather rule under which IRC Section m would not apply to compensation paid pursuant to a written binding contract in effect on the date the proposed regulations were published in the Federal Register December 20, and not materially modified after that date. Under the proposed regulations, IRC Section m would not be limited to compensation paid to a covered employee for services as an employee, but instead would also include compensation for services the individual rendered as an independent contractor.
What's more, the preamble to the proposed regulations asserted that this has been the rule since the enactment of IRC Section m in To reach that conclusion the IRS and Treasury relied heavily on the OBRA '93 legislative history, which states: "If an individual is a covered employee for a tax year, the deduction limitation applies to all compensation not explicitly excluded from the deduction limitation, regardless of whether the compensation is for services as a covered employee and regardless of when the compensation was earned.
The final regulations retain the rules from the proposed regulations but provide additional transition relief for a publicly held corporation's distributive share of a partnership's compensation deductions. In addition to grandfathering compensation paid pursuant to a written binding contract in effect on December 20, and not materially modified after that date , compensation paid on or before December 18, , is not subject to the partnership rule.
This date corresponds to the date the final regulations were available on the IRS website, which precedes the Federal Register publication date. Some practitioners had wondered whether the final rules would be expanded even further to apply IRC Section m to compensation paid by a partnership's corporate subsidiaries commonly found in an "Up-REIT" structure where the operating partnership holds a taxable REIT subsidiary.
The Preamble, however, affirms that, "[a]ssuming the partnership is respected for U. The Regulations provided a transition rule for a corporation that becomes publicly held. Under the proposed regulations, the IPO transition rule would not apply to corporations that became publicly held corporations on or after the date the proposed regulations were published in the Federal Register December 20, Instead, the proposed regulations specified that a privately held corporation that became publicly held would be subject to IRC Section m for the tax year ending on or after the date that its registration statement became effective under either the Securities Act or the Exchange Act.
The final regulations retain the rules from the proposed regulations and clarify that a subsidiary that was a member of an affiliated group may continue to rely on the transition rule if it became a separate publicly held corporation on or before December 20, ARTICLE Successfully implementing retail transformation Retail management should consider holistic approaches and practices when transforming operating models.
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The final regulations implement the TCJA changes and make several important changes to the applicability date rules in the proposed regulations see our prior coverage for a full discussion of the proposed regulations.
The final regulations are generally applicable to tax years beginning after the date they are published in the Federal Register, but there are a number of special provisions that are made effective earlier. Companies can also choose to apply the final regulations to any tax year beginning after , when the TCJA changes were made effective, provided the company applies the final regulations in their entirety and in a consistent manner to that tax year and all subsequent years.
Companies should re-evaluate their deferred tax assets for compensation items to determine whether any adjustments should be made. Broadening the individuals who are covered employees.
Expanding the companies that are subject to Section m. The Notice provides initial guidance on: The amended rules for identifying covered employees. The application of the transition rule. The Notice clarifies that the term "covered employee" for a taxable year includes any individual who served as the CEO or CFO at any time during the taxable year and the three other highest compensated executive officers for the taxable year other than the CEO and CFO regardless of whether: The executive is serving at the end of the company's taxable year.
The executive's compensation is subject to disclosure for the last completed fiscal year under the SEC's executive compensation disclosure rules. Related content. See the resources you can access with a Practical Law subscription.
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