PLR 200115036: Executive compensation deduction limit for a foreign parent's US group

Plain-English summary

A US company owned by a foreign corporation asked whether section 162(m)'s executive compensation deduction limit applied to its US businesses. The foreign parent issued stock traded overseas and prepared a compensation table under its home country's law. It was not required to file the SEC compensation table described in the US disclosure rules, and the US companies were represented as not publicly held. Assuming neither company had to file that SEC table, the IRS ruled that no employees in the affiliated group were covered employees under section 162(m)(3). The US companies therefore were not subject to section 162(m)(1)'s deduction disallowance rule on these facts.

Ruling snapshot

• Question: Does section 162(m)'s executive compensation deduction limit apply to the US companies in this foreign parent's group?
• Outcome: Approved
• Key authorities: IRC §§ 162(m), 1504; Treas. Reg. § 1.162-27

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200115036
Washington, DC 20224
Release Date: 4/13/2001
Index Number: 162.36-02
Person to Contact:

Telephone Number:
(202) 622-6030
Refer Reply To:
CC:TEGE:EB:EC-PLR-117842-00
Date:
January 10, 2001

Company A =

Company B =

Country C =

Stock Exchange 1 =

Stock Exchange 2 =

Date X
=

Form Y
=

This is in response to a letter dated September 8, 2000, submitted by your authorized representative, requesting a ruling under section 162(m) of the Internal Revenue Code. Specifically a ruling is requested that the deduction limitation of section 162(m) of the Code does not apply to Company A and its affiliates.

Company A is a subsidiary of Company B, a Country C corporation. Company A is the United States parent of numerous United States businesses and is the highest employer in Company B’s United States corporate chain . Each of Company B’s United States subsidiaries is a member of Corporation B’s affiliated group, as defined in section 1504 of the Code (without regard to section 1504(b)). Company A and its United States subsidiaries pay United States federal income taxes and deduct compensation paid to various individuals who are its employees, including the chief executive officer of Company A. It has been represented that neither Company A nor any of its United States subsidiaries is a “publicly held corporation” under section 162(m)(2) of the Code.

Company B’s common stock is traded primarily on Stock Exchange 1 and Stock Exchange 2. On Date X, Company B filed Form Y with the United States Securities and Exchange Commission (SEC). Company B is a “foreign private issuer” under 17 C.F.R.

section 240.3b-4(c) because it is incorporated under the laws of Country C and does not fit the following description:

(1) More than 50 percent of its outstanding voting securities are held of record either directly or through voting trust certificates or depository receipts by United States residents; and

(2) Any of the following apply:

(i) the majority of its executive officers or directors are United States citizens or residents;
(ii) more than 50 percent of its assets are located in the United States: or
(iii) its business is administered principally in the United States.

The summary compensation table requirement under Item 402 of Regulation S-K under the Securities Exchange Act of 1934 (Exchange Act) does not apply to Company B. Accordingly, neither the Form Y filed by Company B, nor any other document contains a summary compensation table that is described in, or required by, Item 402(b) of Regulation S-K under the Exchange Act. However, pursuant to Country C laws, Company B is required to prepare a summary compensation table listing the compensation of the highest paid officers of Company B and its subsidiaries. Such table has included the chief executive officer of Company A. Company B included the summary compensation table in its most recent proxy statement delivered to its shareholders and filed with Country C authorities. Company B included the proxy statement with its most recent Form Y filing.

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) 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 $1,000,000.

Section 162(m)(2) defines “publicly held corporation” as any corporation issuing any class of common equity securities required to be registered under section12 of the Exchange Act.

Under section 1.162-27(c)(1)(ii) of the Income Tax Regulations, a publicly held corporation includes an affiliated group of corporations, as defined in section 1504 (determined without regard to section 1504(b)).

Section 162(m)(3) defines “covered employee” as any employee of the corporation if, as of the close of the taxable year, such employee is the chief executive officer of the taxpayer or is an individual acting in such capacity, or the total compensation of such employee for the taxable year is required to be reported to shareholders under the Exchange Act by reason of such employee being among the four highest compensated officers for the taxable year (other than the chief executive officer).

Under section 1.162-27(c)(2)(ii) of the regulations, whether an individual is the chief executive officer or an officer is determined pursuant to the executive compensation disclosure rules under the Exchange Act.

In the notice of proposed rulemaking containing the proposed regulations under section 162(m), the preamble contains the following language concerning the identification of “covered employee”:

The regulations clarify which employees are “covered employees” for purposes of section162(m). The legislative history to section 162(m) provides that “covered employees” are defined by reference to the SEC rules governing executive compensation disclosure under the Exchange Act. Under the regulations, an individual is generally a “covered employee” if the individual’s compensation is reported on the “summary compensation table” under the SEC’s executive compensation disclosure rules, as set forth in Item 402 of regulations S-K, 17 C.F.R. 229.402, under the Exchange Act. However, the regulations specifically provide that, in order to be a “covered employee” for section 162(m) purpose, an individual must be employed as an executive officer on the last of the taxable year. Thus, only those employees who appear on the “summary compensation table” and who are also employed on the last day of the taxable year are “covered employees.”

Therefore, based on the facts outlined above and assuming no summary compensation table under Item 402 of Regulation S-K under the Exchange Act is required to be filed by Company A or Company B with the Securities and Exchange Commission, no employees of Company B’s affiliated group are “covered employees” under section 162(m)(3) because their compensation is not required to be reported to shareholders under the Exchange Act. Therefore, Company A and its United States subsidiaries are not subject to the disallowance rule of section 162(m)(1) of the Code.

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. The taxpayer should attach a copy of this ruling to any income tax return to which it is relevant.

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

Sincerely yours,
ROBERT B. MISNER
Assistant Chief,
Executive Compensation Branch
Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities)

Enclosure:
Copy for 6110 purposes