PLR 1033008: IRS ruled that officers were not covered employees after a merger

Plain-English summary

A corporation merged into a wholly owned subsidiary of an acquiring company before the end of its taxable year, creating a short taxable year. The corporation later terminated its securities registration and represented that it was not required to disclose officer compensation for the relevant fiscal year. The IRS ruled that the corporation's officers were not covered employees for purposes of the section 162(m) deduction limitation for the short taxable year. Because the officers were not covered employees, the IRS did not issue a separate ruling on a related section 162(m)(4)(F) issue.

Ruling snapshot

• Question: Were the taxpayer's officers covered employees for section 162(m) purposes in the short taxable year ending on the merger date?
• Outcome: Approved
• Key authorities: IRC § 162(m); Treas. Reg. § 1.162-27(c)(2); Notice 2007-49.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201033008 Third Party Communication: None
Release Date: 8/20/2010 Date of Communication: Not Applicable
Index Number: 162.36-01
Person To Contact:
--------------------------------- ------------------
Telephone Number:
--------------------
Refer Reply To:
In Re: CC:TEGE:EB:EC
-------------------------------------------- PLR-108565-10
--------------------- Date:
---------------------------------- May 17, 2010

LEGEND:

Taxpayer = ---------------------------------------------
Acquiring = ------------------------
Merger Subsidiary = -----------------------------------
Date a = ---------------------------
Date b = -----------------------
Date c = -----------------------
Date d = ---------------------------

Dear -----------------:

This letter is in response to a letter dated February 23, 2010, submitted by your
authorized representative, requesting a ruling under section 162(m) of the Internal
Revenue Code (Code). Specifically, Taxpayer requested a ruling that Taxpayer’s
officers are not covered employees for the short taxable year ending on Date b for
purposes of section 162(m), and that the deduction limitation of section 162(m) is not
reduced by section 162(m)(4)(F). The facts, as represented, are as follows.

On Date a, Taxpayer entered into a merger agreement with Acquiring and Merger
Subsidiary. Merger Subsidiary is a direct wholly-owned subsidiary of Acquiring.
Pursuant to the merger agreement, Taxpayer merged with and into Merger Subsidiary,
which was the surviving corporation. The acquisition was completed on Date b, before
the end of the Taxpayer’s taxable year, resulting in a short taxable year ending on Date
b. On Date c, the Taxpayer terminated its registration of securities by filing a Form 15
with the Securities and Exchange Commission.

Taxpayer represents that pursuant to the executive compensation disclosure rules
under the Securities Exchange Act of 1934 (Exchange Act), Taxpayer is not required to
disclose compensation of its officers for the fiscal year ending on Date d, or for any

PLR-108565-10 2

portion of such year, including any portion of Taxpayer’s short taxable year ending on
Date b.

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) of the Code 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 million.

Section 162(m)(2) of the Code defines publicly held corporation to mean any
corporation issuing any class of common equity securities required to be registered
under section 12 of the Exchange Act.

Section 162(m)(3) of the Code defines covered employee as any employee of the
taxpayer if (A) 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 (B) 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).

Section 1.162-27(c)(2) of the Income Tax Regulations provides that a covered
employee means any individual who, on the last day of the taxable year, is (A) the chief
executive officer of the corporation or is acting in such capacity; or (B) among the four
highest compensated officers (other than the chief executive officer). Whether an
individual is the chief executive officer or one of the four highest compensated officers is
determined pursuant to the executive compensation disclosure rules under the
Exchange Act. The executive compensation disclosure rules are contained in Item 402
of Regulation S-K, 17 CFR 229.402. These rules require disclosure of compensation
awarded to, earned by, or paid to certain executive officers.

Pursuant to Notice 2007-49, 2007-1 CB 1429, effective for taxable years ending on or
after December 15, 2006, the IRS interprets the term “covered employee” for purposes
of section 162(m) to mean any employee of the taxpayer if, as of the close of the
taxable year, such employee is the principal executive officer (within the meaning of the
disclosure rules) of the taxpayer or an individual acting in such a capacity, or if the total
compensation of such employee for that taxable year is required to be reported to
shareholders under the Exchange Act by reason of such employee being among the
three highest compensated officers for the taxable year (other than the principal
executive officer or the principal financial officer).

PLR-108565-10 3

Therefore, based solely on the facts presented, we rule as follows:

For purposes of section 162(m) of the Code, Taxpayer’s officers are not covered
employees with respect to Taxpayer for Taxpayer’s taxable year ending on Date b.

Because Taxpayer’s officers are not covered employees of Taxpayer for its taxable year
ending on Date b, a ruling that the deduction limitation of section 162(m) is not reduced
by operation of section 162(m)(4)(F) is not being issued based on section 6.11 of
Revenue Procedure 2010-1, 2010-1 IRB 1.

Except as expressly provided herein, no opinion is expressed or implied as to the
federal tax consequences of the facts described above under any other provision of the
Code, including but not limited to section 280G.

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.

A copy of this letter must be attached to any income tax return to which it is relevant.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

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,



                                               Thomas D. Scholz
                                               Assistant Branch Chief
                                               Executive Compensation Branch
                                               Office of Division Counsel /
                                               Associate Chief Counsel /
                                               Tax Exempt & Government Entities