Tax Code 162(m)
- The $1 Million Deduction Limit for Each Top Public Company Officer
2018.11.08 AICPA Comments on Notice 2018-68. For an excellent discussion focused on open issues relating to determining who is a public company -- and who are the covered employees -- subject to Code 162(m), see this AICPA comment letter.
2018.08.21 IRS 162(m) Guidance Brings Little Relief - Headache re Negative Discretion. Today, the IRS released Notice 2018-68, which addresses questions raised by changes to Code Section 162(m) as part of the Tax Cuts and Jobs Act of 2017 (discussed below). See KPMG Summary of IRS Notice 2018-68.
2018.03.21 Section 162(m) Accounting Issues Post-2017 Tax Reform. PwC's excellent report concludes with this heads-up: "As limitations on deductibility of compensation to covered executives becomes more prevalent, companies will need to adopt an accounting policy for allocating the deferred tax benefit limit to various forms of compensation. Models should be developed to schedule expected compensation into the future to calculate the deferred tax benefits under the chosen policy. And for many, this will also include developing robust processes for tracking 162(m) allowable tax deductions and any grandfathered payments."
2017.12.28 Tax Reform Act of 2017. The primarily 162(m) changes made by Section 13601 involve (1) prospectively eliminating the exemption for stock options and other performance-based compensation awards, (2) bringing CFOs back within the covered group, (3) applying the $1M deduction limit all years for which a covered employee receives compensation, even if paid after termination of employment, and (4) applying 162(m) to companies with publicly-traded debt. Also, under a grandfathering rule, companies should beware of making material modifications to stock options and other performance-based awards made on or before Nov. 2, 1017. It is also timely to review plans and awards because so many 162(m) provisions and practices will become unnecessary on a going forward basis. See 2017 Legislative Changes.
2015.Jan.1 Code §162(m) Disclosures in Proxy Statements. Here are two 162(m) disclosures to note:
(1) IBEX Corp re how 162(m) and accounting issues factor into executive compensation decisions, and
(2) Waddell & Reed re reserving the use of negative discretion.
2015.Jan.1 Code §162(m) Amendment to Increase Per Person Limit
Here's the issue: if, without shareholder approval, a company amends a 162(m)-exempt stock plan to increase the per person limit on awards, is the exemption still available for awards up to the shareholder-approved limit. Below are two relevant IRS rulings:
(1) Chief Counsel Advice 200133014, dated 5/16/2001, expresses the IRS view that a 162(m) exemption for stock options will be lost only to the extent an award exceeds a shareholder-approved limit, but will not be lost for those granted up to the limit. The IRS discussion cites regulatory and legislative history, and includes the following statements:
(2) IRS Private Letter Ruling 200027012, 7/7/2000, recognizes that a 162(m) exemption is available for grants in excess of a plan's per-person limit if they are conditioned on later shareholder approval approval of an increase in that limit. Source: 2000 WL 33116116.
2014.Sept.21 Code §162(m) Contagion - from Proposed Legislation, to Final Regulations for Healthcare
There is no sign of relief from the continued expansion of Code §162(m) as a vehicle for regulating executive compensation through the denial of corporate tax deductions when certain limits are exceeded. In the past few days, we have seen the latest legislative proposal aimed at conditioning executive bonus deductions on raises in employee salaries. See this Washington Post article describing the newly-–introduced “CEO-Employee Pay Fairness Act”. Meanwhile, the Treasury Department released its final regulations under Code §162(m)(6) which imposes a $500,000 deduction limit on compensation paid by health insurers.
2014.May Shareholder Approval Issues. Note PLR 200345012, ruling that the incentive payments were exempt from Section 162(m)'s $1 million deduction limitation where payment occurred pursuant to awards made before expiration of the five-year period set forth in Treas. Reg. 1.162-27(e)(4)(vi).
2013 Payment as Severance Destroys Exemption. Revenue Ruling 2008-13 warns that performance-based compensation will lose its 162(m) exemption if it is payable upon an employee's retirement or termination of employment without cause or for good reason. Applicable 162(m) regulations allow payment in the event of a change in corporate control, or the employee's death or disability.
2013.May Negative Discretion Need Not Be Shareholder-approved. Per the following Q&A from the ABA JCEB meeting with IRS:
17. § 162(m) – Performance Pay [Negative Discretion]
2012 Code §162(m) and Dividend Rights. In Rev. Rul. 2012-19, the IRS considered whether dividend and dividend equivalent rights paid in connection with underlying restricted stock and restricted stock unit awards are "qualified performance-based compensation" and, thus, excluded from the $1,000,000 limitation under Code Section 162(m). Finding that dividends and dividend equivalents constitute a separate form of compensation, they must separately satisfy the requirements for qualified performance-based compensation. Thus, dividends and dividend equivalents, to be excluded from the Code Section 162(m) limitations, should vest and become payable on accordance with the same limitations applied to the underlying equity award.
2011.June.23 IPO-related Rules Proposed re RSUs and Phantom Stock. The proposed regulations will limit the transition relief for RSUs and phantom stock to those awards settled within the post-IPO transition period, in contrast to the full exemption that is available for stock options, SARs, and restricted stock awards that are made during or before the transition period but that are exercised or settled after its expiration.
2009.Jul.19 Stock Option Issues Addressed. Chief Counsel Memo 2009-006. "For purposes of § 162(m), the date of grant of a stock option is the "date the granting corporation completes the corporate action constituting an offer of sale to an individual of a certain number of shares of stock at a fixed price per share. The grant dates LMSB examination used to compute adjustments, which are generally based on the measurement dates the taxpayers used for accounting purposes, are reasonable and appropriate dates under the present circumstances to use for purposes of applying § 162(m). Discounted stock options are not qualified performance-based compensation under § 162(m)(4)(C) even if, before or after exercise, the executive reimburses the employer for the discount or the option is “repriced” based on the fair market value on the actual date of grant."
2008 Performance Goals and Employment Agreements. As set forth in Rev. Rul. 2008-13, the income from performance-based incentives will not qualify for exemption from 162(m)'s $1M limit if an employment agreement, plan term, or other contractual right entitles the executive to receive the income upon terminating employment without cause, resigning for good reason, or retiring. The only allowable triggers under 162(m) are death, disability, and a change in corporate control.
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