PLR 1050012: IRS ruled that the taxpayer's officers were not covered employees for a short taxable year

Plain-English summary

The IRS considered whether a corporation's officers were covered employees for a short taxable year that ended when the corporation became part of an affiliated group after a merger. The corporation represented that it was not required to disclose officer compensation to shareholders for that year under the federal securities laws. The IRS ruled that the officers were not covered employees for purposes of IRC section 162(m), which limits deductions for compensation paid by publicly held corporations. The result meant the specific section 162(m) covered-employee limitation did not apply to the officers for the short taxable year described in the ruling.

Ruling snapshot

• Question: Were the taxpayer's officers covered employees for the short taxable year ending when the taxpayer became part of an affiliated group after a merger?
• Outcome: approved
• Key authorities: IRC §§ 162(a)(1) and 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: 201050012 Third Party Communication: None
Release Date: 12/17/2010 Date of Communication: Not Applicable
Index Number: 162.36-01
Person To Contact:
-------------------------- ------------------
Telephone Number:
---------------------
Refer Reply To:
CC:TEGE:EB:EC
----------------------- PLR-113302-10
------------------------- Date:
------------------------------------------------ September 09, 2010

LEGEND:

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

Dear --------------

This letter is in response to a letter dated March 19, 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). The facts, as represented, are as follows.

On Date a, Taxpayer entered into a merger agreement with Acquiring and Merger
Subsidiary. On Date b, Merger Subsidiary acquired more than 80% of the vote and
value of Taxpayer’s shares, resulting in Taxpayer becoming a member of Acquiring’s
affiliated group and having a short taxable year ending on Date b. Merger Subsidiary is
a direct wholly-owned subsidiary of Acquiring. Pursuant to the merger agreement,
Merger Subsidiary merged with and into Taxpayer, which was the surviving corporation.
The acquisition was completed on Date c. 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-113302-10 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-113302-10 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.

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,



                                               John B. Richards
                                               Senior Technician Reviewer
                                               Executive Compensation Branch
                                               Office of Division Counsel /
                                               Associate Chief Counsel /
                                               Tax Exempt & Government Entities