These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2021–3

January 19, 2021

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE, EMPLOYMENT TAX

ESTATE TAX

Notice 2021-7, page 482.

REG-114615-16, page 489.

Notice 2021-7 provides temporary relief in response to the

ongoing COVID-19 pandemic for employers using the automobile lease valuation rule to value an employee’s personal

use of an employer-provided automobile for purposes of income inclusion, employment tax, and reporting purposes. If

certain requirements are met, employers that are using the

automobile lease valuation rule may instead use the vehicle

cents-per-mile valuation rule to determine the value of an employee’s personal use of an employer-provided automobile

beginning as of March 13, 2020. For 2021, employers may

revert to the automobile lease valuation rule or continue using the vehicle cents-per-mile valuation rule provided certain

requirements are met.

EMPLOYEE PLANS, INCOME TAX

T.D. 9932, page 345.

Section 162(m)(1) of the Internal Revenue Code generally

limits to $1,000,000 the allowable deduction for a taxable

year for applicable employee remuneration paid by any publicly held corporation with respect to a covered employee.

The final regulations provide guidance on the application of

§162(m), as amended by section 13601 of Tax Cuts and

Jobs Act (the Act). The Act made significant amendments

to §162(m), and provided a transition rule applicable to certain outstanding arrangements (commonly referred to as

the grandfather rule). The final regulations provide guidance

on the amendments made by the Act to the definitions of

publicly held corporation, covered employee, and applicable

employee remuneration. Additionally, the final regulations

provide guidance on the operation of the grandfather rule,

including when a contract will be considered materially modified so that it is no longer grandfathered.

Finding Lists begin on page ii.

This guidance contains proposed regulations to establish a

new user fee for authorized persons who wish to request

the issuance of IRS Letter 627, also referred to as an estate

tax closing letter. Pursuant to the guidelines in OMB Circular

A-25, the IRS has calculated its cost of providing the estate

tax closing letter to be $67. REG-114615-16.

INCOME TAX

Notice 2021-2, page 478.

This notice provides the optional 2021 standard mileage

rates for taxpayers to use in computing the deductible costs

of operating an automobile for business, charitable, medical, or moving expense purposes. This notice also provides

the amount taxpayers must use in calculating reductions

to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile

cost that may be used in computing the allowance under

a fixed and variable rate plan. Additionally, this notice provides the maximum fair market value of employer-provided

automobiles first made available to employees for personal

use in calendar year 2021 for which employers may use

the fleet-average valuation rule in § 1.61-21(d)(5)(v) of the

Income Tax Regulations or the vehicle cents-per-mile valuation rule in § 1.61-21(e).

Notice 2021-5, page 479.

Beginning of Construction for Sections 45 and 48; Extension

of Continuity Safe Harbor for Offshore Projects and Federal

Land Projects. The notice extends the Continuity Safe Harbor

applicable to the production tax credit for renewable energy

facilities under section 45 and the investment tax credit for

energy property under section 48 for Offshore and Federal

Land Projects. Specifically, the notice provides that if a qualified facility or an energy property construction project is an

Offshore or Federal Land Project, the Continuity Safe Harbor

is satisfied if a taxpayer places the qualified facility or energy

property that is the subject of the project into service by

the end of a calendar year that is no more than 10 calendar

years after the calendar year during which construction of

the project began.

Rev. Proc. 2021-9, page 485.

This revenue procedure provides a safe harbor that allows a

trade or business that manages or operates a qualified residential living facility to be treated as a real property trade or

business solely for purposes of qualifying as an electing real

property trade or business under section 163(j)(7)(B) of the

Internal Revenue Code.

T.D. 9939, page 376.

These final regulations provide guidance under section 274

of the Internal Revenue Code (Code) regarding certain amendments made to section 274 by the Tax Cuts and Jobs Act of

2017 (TCJA). These final regulations address the elimination

of the deduction under section 274 for expenses related to

certain transportation and commuting benefits provided by

employers to their employees. The final regulations provide

guidance to determine the amount of such expenses that

is nondeductible and apply certain exceptions under section 274(e) that may allow such expenses to be deductible.

These final regulations affect taxpayers who pay or incur

such expenses.

T.D. 9941, page 396.

This Treasury Decision provides final rules regarding the

timing of income inclusion for accrual method taxpayers

with an applicable financial statement, and the treatment

of advance payments resulting from the 2017 enactment

of the Tax Cuts and Jobs Act (TCJA). The Treasury Decision

provides general rules on the timing of income inclusion,

including key definitions and guidance on calculating the

amount of the inclusion. The Treasury Decision also provides rules regarding cost offsets that apply in certain contexts.

T.D. 9942, page 450.

This document contains final regulations to implement legislative changes to sections 263A, 448, 460, and 471 of

the Internal Revenue Code (Code) that simplify the application of those tax accounting provisions for certain businesses having average annual gross receipts that do not

exceed $25 million, adjusted for inflation. This document

also contains final regulations regarding certain special accounting rules for long-term contracts under section 460

to implement legislative changes applicable to corporate

taxpayers. The final regulations generally affect taxpayers

with average annual gross receipts of not more than $25

million (adjusted for inflation).

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

January 19, 2021 

Bulletin No. 2021–3

Part I

26 CFR 1.162-33: Certain employee remuneration

in excess of $1,000,000 not deductible for taxable

years beginning after December 31, 2017.

T.D. 9932

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Certain Employee

Remuneration in Excess of

$1,000,000 under Internal

Revenue Code Section

162(m)

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document sets forth

final regulations under section 162(m) of

the Internal Revenue Code (Code), which

for Federal income tax purposes limits the

deduction for certain employee remuneration in excess of $1,000,000. These final

regulations implement the amendments

made to section 162(m) by the Tax Cuts

and Jobs Act and finalize the proposed

regulations published on December 20,

2019. These final regulations affect publicly held corporations.

DATES: Effective Date: These regulations are effective on December 30, 2020.

Applicability Dates: For dates of applicability, see §1.162-33(h).

FOR FURTHER INFORMATION

CONTACT: Ilya Enkishev at (202) 3175600 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends the Income

Tax Regulations (“Treasury regulations”

(26 CFR part 1) under section 162(m)).

Bulletin No. 2021–3

Section 162(m)(1) disallows a deduction

by any publicly held corporation for applicable employee remuneration paid or

otherwise deductible with respect to any

covered employee to the extent that such

remuneration for the taxable year exceeds

$1,000,000. Section 162(m) was added to

the Code by section 13211(a) of the Omnibus Budget Reconciliation Act of 1993,

Public Law 103-66. Proposed regulations

under section 162(m) were published

in the Federal Register on December

20, 1993 (58 FR 66310) (1993 proposed

regulations). On December 2, 1994, the

Department of the Treasury (Treasury

Department) and the Internal Revenue

Service (IRS) issued amendments to

the proposed regulations (59 FR 61884)

(1994 proposed regulations). On December 20, 1995, the Treasury Department

and the IRS issued final regulations under

section 162(m) (TD 8650) (60 FR 65534)

(1995 regulations).

Section 162(m) was amended by section 13601 of the Tax Cuts and Jobs Act

(TCJA) (Pub. L. 115-97, 131 Stat. 2054,

2155 (2017)). Section 13601 of TCJA

amended the definitions of covered employee, publicly held corporation, and

applicable employee remuneration in section 162(m). Section 13601 also provided a transition rule applicable to certain

outstanding compensatory arrangements

(commonly referred to as the grandfather

rule). On August 21, 2018, the Treasury

Department and the IRS released Notice 2018-68 (2018-36 I.R.B. 418), which

provides guidance on certain issues under

section 162(m).

On December 20, 2019, the Treasury

Department and the IRS published proposed regulations (REG-122180-18) relating to the amendments TCJA made to

section 162(m) in the Federal Register

(84 FR 70356) (the proposed regulations).

The changes to section 162(m) made by

section 13601 of TCJA and the initial

guidance provided by Notice 2018-68 are

described in detail in the preamble to the

proposed regulations.

A public hearing was held on March 9,

2020. The Treasury Department and the

IRS also received written comments with

respect to the proposed regulations. All

written comments received in response

345

to the proposed regulations are available

at www.regulations.gov or upon request.

After full consideration of the comments

received on the proposed regulations and

the testimony heard at the public hearing,

this Treasury decision adopts the proposed

regulations with modifications in response

to certain comments and testimony, as described in the Summary of Comments and

Explanation of Revisions section. Comments outside of the scope of the proposed

regulations generally are not addressed in

this preamble but may be considered in

connection with future guidance projects.

Summary of Comments and

Explanation of Revisions

I. Overview

Section 13601 of TCJA significantly amended section 162(m). Consistent

with the proposed regulations, these final

regulations add a section to the Treasury

regulations to reflect these amendments.

Amended section 162(m) applies to taxable years beginning after December 31,

2017, except to the extent transition and

grandfather rules described in section VI

of this preamble apply. Because the 1995

regulations continue to apply to deductions related to amounts of remuneration

to which the grandfather rule applies, the

1995 regulations are retained as a separate

section in the Treasury regulations under

section 162(m).

These final regulations retain the basic

approach and structure of the proposed

regulations, with certain revisions (including revised examples). This Summary of Comments and Explanation of Revisions discusses those revisions, as well

as comments received in response to the

proposed regulations.

II. Publicly Held Corporation

A. In General

As amended by TCJA, section 162(m)

(2) defines the term “publicly held corporation” as any corporation that is an issuer

(as defined in section 3 of the Securities

Exchange Act of 1934 (Exchange Act))

of securities that are required to be reg-

January 19, 2021

istered under section 12 of the Exchange

Act, or that is required to file reports under section 15(d) of the Exchange Act.

These final regulations adopt the rule in

the proposed regulations providing that,

for ease of administration, a corporation

is a publicly held corporation if, as of the

last day of its taxable year, its securities

are required to be registered under section

12 of the Exchange Act or it is required

to file reports under section 15(d) of the

Exchange Act.

These final regulations also adopt the

rules set forth in the proposed regulations

for determining whether a publicly traded partnership, a corporation that owns an

entity that is disregarded as an entity separate from its owner within the meaning

of §301.7701-2(c)(2)(i), or an S corporation (including an S corporation parent

of a qualified subchapter S subsidiary (as

defined in section 1361(b)(3)(B)) (QSub)

is a publicly held corporation as defined

in section 162(m)(2). Consistent with the

proposed rules, these final regulations

also provide that a real estate investment

trust (REIT), as defined in section 856(a),

that owns a qualified real estate investment trust subsidiary as defined in section

856(i)(2) (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.

B. Affiliated Groups

These final regulations adopt the rules

set forth in the 1995 regulations and the

proposed regulations providing that the

term “publicly held corporation” includes

an affiliated group of corporations (affiliated group), as defined in section 1504

(determined without regard to section

1504(b)), that includes one or more publicly held corporations, and that a subsidiary corporation that meets the definition

of publicly held corporation is separately

subject to section 162(m). These final regulations also adopt the rules set forth in

the proposed regulations providing that an

affiliated group includes a parent corporation that is privately held if one or more

of its subsidiary corporations is a publicly held corporation, and that an affiliated

group may include more than one publicly held corporation as defined in section

162(m)(2).

In response to the proposed regulations, a commenter suggested that an affiliated group with more than one publicly

held corporation should have only one set

of covered employees for the affiliated

group (instead of one set of covered employees for each separate publicly held

corporation that is a member of the affiliated group). These final regulations do not

adopt this suggestion because each corporation in an affiliated group is a separate

taxpayer and section 162(m)(3) provides

that each taxpayer that is a publicly held

corporation has its own set of covered

employees. Instead, as provided in the

1995 regulations and in the proposed regulations, these final regulations provide

that, in an affiliated group, each corporation that is a publicly held corporation is

separately subject to section 162(m) and,

therefore, has its own set of covered employees.

These final regulations adopt the rules

set forth in the 1995 regulations and the

proposed regulations addressing situations

in which a covered employee of a publicly

held corporation that is a member of an affiliated group performs services for another member of the affiliated group. These final regulations provide that compensation1

paid by all members of the affiliated group

is aggregated and that any amount disallowed as a deduction by section 162(m) is

prorated among the payor corporations in

proportion to the amount of compensation

paid to the covered employee by each corporation in the taxable year. For situations

in which a covered employee is paid com-

pensation during a taxable year by more

than one publicly held corporation that

are members of the same affiliated group,

these final regulations adopt the rules set

forth in the proposed regulations providing that the amount of the deduction that

is disallowed for compensation paid to a

covered employee is determined separately with respect to each payor corporation

that is a publicly held corporation. These

final regulations clarify that compensation

paid by a member of an affiliated group

that is not a publicly held corporation to

an employee who is a covered employee

of two or more other members of the affiliated group is prorated for purposes of the

determining the deduction disallowance

among the members that are publicly held

corporations of which the employee is a

covered employee.

C. Foreign Private Issuers

Pursuant to the amended definition

of publicly held corporation in section

162(m)(2), the proposed regulations provide that a foreign private issuer2 (FPI) is

a publicly held corporation if it is required

to register securities under section 12 of

the Exchange Act or file reports under

section 15(d) of the Exchange Act. The

legislative history to TCJA indicates that

Congress intended section 162(m) to apply to FPIs.3

In response to Notice 2018-68, commenters suggested that the proposed regulations provide that section 162(m) does

not apply to FPIs because FPIs are not

required to disclose compensation of their

officers on an individual basis under the

Exchange Act, unless similar disclosure

is required by their home country.4 The

commenters asserted that determining

compensation on an individual basis (in

order to determine the three most highly

compensated executive officers) would

require the FPIs to expend significant

time and money in adopting the necessary

1

For simplicity, where possible, these final regulations use the term “compensation” instead of “applicable employee remuneration.” These terms have the same meaning in these final regulations.

2

The term “foreign private issuer” is defined in 21 CFR 240.3b-4(c).

3

The legislative history to TCJA provides that the amendment to the definition of publicly held corporation under section 162(m) “extends the applicability of section 162(m) to include … all

foreign companies publicly traded through ADRs.” House Conf. Rpt. 115-466, 489 (2017). The Blue Book similarly states that “the provision extends the applicability of section 162(m) to

include all foreign companies publicly traded through ADRs.” Staff of the Joint Committee on Taxation, General Explanation of Public Law 115-97 (Blue Book), at 261 (December 20, 2018).

4

Before TCJA, the IRS ruled in several private letter rulings that section 162(m), as in effect at that time, did not apply to FPIs because FPIs are not required to disclose compensation of

their officers on an individual basis under the Exchange Act, and, therefore, did not have covered employees. A private letter ruling may be relied upon only by the taxpayer to whom the

ruling was issued and does not constitute generally applicable guidance. See section 11.02 of Revenue Procedure 2020-1, 2020-01 I.R.B. 144. TCJA amended section 162(m) to provide that

a requirement to disclose compensation is not determinative of whether an officer is a covered employee.

January 19, 2021

346

Bulletin No. 2021–3

internal procedures to make the determination consistent with Exchange Act requirements that are inapplicable to them.

The proposed regulations do not adopt

these suggestions.

However, the preamble to the proposed regulations requested comments as

to whether a safe harbor exemption from

the definition of a publicly held corporation under section 162(m) was appropriate

for FPIs that are not required to disclose

compensation of their officers on an individual basis in their home countries and,

if so, how such a safe harbor could be

designed. In response to this request for

comments a commenter suggested that

these final regulations should exempt any

FPI from the definition of publicly held

corporation, unless the FPI is required to

disclose compensation of its officers on

an individual basis in its home country.

Another commenter suggested that these

final regulations should exclude FPIs from

the definition of publicly held corporation

because determining compensation on an

individual basis (in order to determine the

three most highly compensated executive

officers) requires extensive calculations

consistent with executive compensation

disclosure rules under the Exchange Act

that are not applicable to FPIs. The commenters did not provide any analysis in

support of a safe harbor rule or address

how a safe harbor could be designed and

administered. These final regulations do

not adopt these suggestions because the

scope of the exemption suggested for FPIs

from the definition of publicly held corporation is inconsistent with the statutory

language and the legislative history. Rather, these final regulations adopt the rules

set forth in the proposed regulations providing that a FPI is a publicly held corporation if it is required to register securities

under section 12 of the Exchange Act or

file reports under section 15(d) of the Exchange Act.

III. Covered Employee

A. In General

As amended by TCJA, section 162(m)

(3) defines the term “covered employee”

5

6

as an employee of the taxpayer if (1) the

employee is the principal executive officer

(PEO) or principal financial officer (PFO)

of the taxpayer at any time during the taxable year, or was an individual acting in

such a capacity, (2) the total compensation of the employee for the taxable year

is required to be reported to shareholders

under the Exchange Act by reason of the

employee being among the three highest

compensated officers for the taxable year

(other than the PEO and PFO), or (3)

the individual was a covered employee

of the taxpayer (or any predecessor) for

any preceding taxable year beginning after December 31, 2016. TCJA also added

flush language to provide that a covered

employee includes any employee of the

taxpayer whose total compensation for the

taxable year places the individual among

the three highest compensated officers for

the taxable year (other than any individual

who is the PEO or PFO of the taxpayer at

any time during the taxable year, or was

an individual acting in such a capacity)

even if the compensation of the officer is

not required to be reported to shareholders

under the Exchange Act.

These final regulations adopt the rules

set forth in the proposed regulations providing that a covered employee for any

taxable year means any employee of the

publicly held corporation who is among

the three highest compensated executive

officers for the taxable year, regardless of

whether the executive officer is serving

as an executive officer at the end of the

publicly held corporation’s taxable year,

and regardless of whether the executive

officer’s compensation is subject to disclosure for the publicly held corporation’s

last completed fiscal year under the applicable SEC rules. The determination that

an officer is a covered employee because

the officer is one of the three highest compensated executive officers, even if the

officer’s compensation is not required to

be disclosed under the SEC rules, is based

on the flush language to section 162(m)

(3), the legislative history,5 and the SEC

executive compensation disclosure rules.6

These final regulations also adopt the rule

in the proposed regulations providing that

the amount of compensation used to iden-

tify the three most highly compensated

executive officers is determined pursuant

to the executive compensation disclosure

rules under the Exchange Act, substituting the publicly held corporation’s taxable

year for references to the corporation’s

fiscal year for purposes of applying the

disclosure rules under the Exchange Act.

In response to the proposed regulations, a commenter suggested that, with

respect to the three highest compensated

executive officers (other than the PEO

and PFO), the term “covered employee”

should include only executive officers

whose compensation is required to be

disclosed pursuant to the SEC executive

compensation disclosure rules. These final

regulations do not adopt this suggestion

because it is inconsistent with the flush

language of section 162(m)(3) providing

that, even if the compensation of an executive officer is not required to be reported

to shareholders under the Exchange Act,

the officer is a covered employee if the officer’s total compensation for the taxable

year, determined in accordance with the

SEC disclosure rules, places the officer

among the three highest compensated officers for the taxable year (other than the

PEO and PFO).

Section 162(m)(3)(C) provides that the

term “covered employee” includes any

employee who was a covered employee of

any predecessor of the publicly held corporation for any preceding taxable year

beginning after December 31, 2016. The

proposed regulations provide rules for

determining the predecessor of a publicly held corporation for various corporate

transactions. With respect to asset acquisitions, the proposed regulations provide

that, if an acquiror corporation acquires at

least 80% of the operating assets (determined by fair market value on the date of

acquisition) of a publicly held target corporation, then the target corporation is a

predecessor of the acquiror corporation. A

commenter suggested that these final regulations clarify that the operating assets

refer to gross operating assets instead of

net operating assets. These final regulations adopt this suggestion.

The proposed regulations also provide

rules for determining the covered employ-

See House Conf. Rpt. 115-466, 489 (2017).

17 CFR 229.402(a)(3) (Item 402 of Regulation S-K).

Bulletin No. 2021–3

347

January 19, 2021

ees of an owner of a disregarded entity,

and an S corporation that owns a QSub.

No comments were received with respect

to these provisions of the proposed regulations. Accordingly, these final regulations

adopt the rules set forth in the proposed

regulations and, consistent with those

rules, provide additional rules for purposes of determining the covered employees

of a REIT that owns a QRS.

B. Covered Employees Limited to

Executive Officers

Under the definition of covered employee in section 162(m)(3) as amended

by TCJA, a PEO and PFO are covered employees by virtue of holding those positions

or acting in those capacities. The three

highest compensated officers (other than

the PEO or PFO) are covered employees

by reason of their compensation. Pursuant

to section 162(m)(3)(B), the three highest

compensated officers are determined based

on the methods by which these officers are

identified for purposes of the executive

compensation disclosure rules under the

Exchange Act. With respect to the three

highest compensated officers for a taxable

year, consistent with the disclosure rules

under the Exchange Act, the proposed regulations provide that only an executive officer, as defined in 17 CFR 240.3b-7 (Rule

3b-7), may qualify as a covered employee.

In relevant part, Rule 3b-7 provides that

“[e]xecutive officers of subsidiaries may be

deemed executive officers of the registrant

if they perform…policy making functions

for the registrant.” A commenter suggested

that these final regulations provide that an

executive officer of a subsidiary may be a

covered employee of the publicly held corporation that is the registrant only if the officer is also an officer of that publicly held

corporation. These final regulations do not

adopt this suggestion because it is inconsistent with Rule 3b-7.

C. Covered Employees after Separation

from Service

Section 162(m)(3)(C), as amended by

TCJA, provides that a covered employee

includes “a covered employee of the taxpayer (or any predecessor) for any preceding taxable year beginning after December 31, 2016.” The legislative history to

TCJA provides that:

if an individual is a covered employee

with respect to a corporation for a taxable year beginning after December 31,

2016, the individual remains a covered

employee for all future years. Thus, an

individual remains a covered employee

with respect to compensation otherwise deductible for subsequent years,

including for years during which the individual is no longer employed by the

corporation and years after the individual has died.

(House Conf. Rpt. 115-466, 489 (2017)).

The Blue Book reiterated the legislative

history in explaining the amended definition of covered employee. See Blue Book

at page 260.

Consistent with section 162(m)(3)(C),

as amended by TCJA, and the legislative

history, the proposed regulations provide

that a covered employee identified for

taxable years beginning after December 31, 2016, will continue to be a covered employee for all subsequent taxable

years, including years during which the

individual is no longer employed by the

corporation and years after the individual has died. A commenter suggested that,

based on the statutory text of both section

162(m) and section 4960, which was enacted by TCJA, Congress intended the

term “employee” in section 162(m) to be

limited to a current employee. The commenter pointed out that section 4960(c)

(2) provides, in relevant part, that “the

term ‘covered employee’ means any employee (including any former employee)”

and noted that the words “including any

former employee” are absent from the

definition of covered employee in section

162(m)(3). The commenter reasoned that,

because Congress enacted section 4960

and amended the definition of covered

employee in section 162(m) in the same

legislation (TCJA), the absence of these

words limits the definition of covered em-

ployee to a current employee for purposes

of section 162(m).

The Treasury Department and the IRS

have concluded that the better analysis is

that Congress intended to apply both section 162(m) and section 4960 to current

and former employees. Congress may accomplish the same objective in two separate legislative provisions without using

identical statutory language. As explained

in section III. D of the preamble to the

proposed regulations, the reference to

an employee in section 162(m) provides

no indication that the term “employee”

is limited to a current employee, since a

reference in the Code to an “employee”

has frequently been interpreted in regulations as a reference to both a current and

a former employee.7 In addition, as previously noted, the legislative history to

section 162(m) makes clear that Congress

intended the term “covered employee” to

include a former employee.8 Accordingly,

these final regulations adopt the proposed

regulations without change.

IV. Applicable Employee Remuneration

A. In General

Section 162(m)(4)(A) defines the term

“applicable employee remuneration”

with respect to any covered employee

for any taxable year as the aggregate

amount allowable as a deduction for the

taxable year (determined without regard

to section 162(m)) for remuneration for

services performed by such employee

(whether or not during the taxable year).

Section 162(m)(4)(F) provides that remuneration shall not fail to be applicable

employee remuneration merely because

it is includible in the income of, or paid

to, a person other than the covered employee, including after the death of the

covered employee. For simplicity, the

proposed regulations and these final regulations use the term “compensation”

instead of “applicable employee remuneration” wherever possible. Like the

proposed regulations, these final regulations provide that compensation means

the aggregate amount allowable as a de-

See section III. D of the preamble to the proposed regulations. For example, under §1.105-11(c)(3)(iii), the nondiscrimination rules of section 105(h)(3) apply to former employees even

though the Code uses only the term “employees.”

8

House Conf. Rpt. 115-466, supra, at 489.

7

January 19, 2021

348

Bulletin No. 2021–3

duction under chapter 1 of the Code for

the taxable year (determined without regard to section 162(m)) for remuneration

for services performed by a covered employee, whether or not the services were

performed during the taxable year, and

that compensation includes an amount

that is includible in the income of, or

paid to, a person other than the covered

employee, including after the death of the

covered employee

B. Compensation Paid by a Partnership to

a Covered Employee

Section 162(m)(1) provides that “[i]

n the case of any publicly held corporation, no deduction shall be allowed under

this chapter for applicable employee remuneration with respect to any covered

employee.” As explained in section IV.

B of the preamble to the proposed regulations, this statutory provision serves

as the basis for the rule in the proposed

regulations that a publicly held corporation that holds a partnership interest must

take into account its distributive share of

the partnership’s deduction for compensation paid to the publicly held corporation’s covered employee and aggregate

that distributive share with the corporation’s otherwise allowable deduction for

compensation paid directly to that employee in applying the deduction limitation under section 162(m).

In response to this provision of the proposed regulations, commenters suggested

that remuneration paid by a partnership is

not compensation for purposes of section

162(m) because the partnership is neither

a publicly held corporation nor a member

of an affiliated group. Section 162(m) does

not limit the application of section 162(m)

in that manner. Rather, section 162(m) applies to all compensation, which includes

“all amounts allowable as a deduction…

for remuneration for services performed

by such employee (whether or not during

the taxable year).” While the comments

suggest a reading of section 162(m)(1)

that services must be performed in the

employee’s capacity as an employee and

must be performed for the publicly held

corporation, neither of these requirements

appear in the statute. In addition, adoption

of the commenters’ suggestion could lead

to the use of partnerships as a method of

Bulletin No. 2021–3

avoiding application of section 162(m), a

result that the Treasury Department and

IRS conclude is not intended by the statute.

Commenters also suggested that remuneration paid by a partnership should

be compensation for purposes of section

162(m) only if the publicly held corporation has an 80% or greater interest in the

partnership because the definition of an

affiliated group requires 80% ownership

by vote and value among the members

of the affiliated group. The Treasury Department and the IRS did not adopt this

rule because the analogy to the affiliated

group proffered by the commenters does

not take into account that the tax treatment of a partner in a partnership differs

from the tax treatment of a corporation

that owns stock in another corporation.

Although a consolidated group of corporations may obtain a tax result similar

to a deduction flow through, a subsidiary’s compensation deduction does not

flow through to the parent corporation

in a non-consolidated group of corporations. In contrast, when a publicly held

corporation is a partner in a partnership,

a share of the partnership’s items of income, gain, loss, and deduction generally is allocated to the publicly held corporation in accordance with partnership

agreement, subject to section 704. Furthermore, that allocation may occur regardless of the level of ownership by the

publicly held corporation.

These final regulations adopt the provisions of the proposed regulations and provide that a publicly held corporation must

take into account its distributive share of a

partnership’s deduction for compensation

paid to the publicly held corporation’s

covered employee in determining the

amount allowable to the corporation as a

deduction for compensation under section

162(m). Consistent with an example in

the proposed regulations and incorporated

into these final regulations, these final regulations clarify that the publicly held corporation’s distributive share of the partnership’s deduction for compensation paid

by the partnership to a covered employee

in connection with the performance of services includes the partnership’s deduction

for a payment to the covered employee for

services under section 707(a) or section

707(c).

349

In response to a commenter’s request

for clarification on the application of the

rule that a publicly held corporation must

take into account its distributive share of

a partnership’s compensation payment to

the publicly held corporation’s covered

employee, the Treasury Department and

the IRS confirm that these final regulations address only application of the section 162(m) compensation deduction limitation to the publicly held corporation’s

distributive share of the payment. The

commenter also noted that this partnership rule results in a different application

of section 162(m) depending on whether

a publicly held corporation’s covered employee receives compensation for services

from a partnership in which the publicly

held corporation is a partner or from a

corporate subsidiary of the partnership.

Assuming the partnership is respected

for U.S. Federal income tax purposes,

section 162(m) generally would not apply to compensation paid to a publicly

held corporation’s covered employee by a

corporate subsidiary of a partnership for

services performed as an employee of the

subsidiary because, in this circumstance,

the corporate subsidiary would not be a

member of the publicly held corporation’s

affiliated group.

In recognition of the prior lack of clarity in this area, the proposed regulations

provide a special applicability date for this

rule, as well as limited transition relief applicable to arrangements in which a publicly held corporation holds a partnership

interest. Specifically, to ensure that compensation agreements were not formed

or otherwise structured to circumvent the

rule regarding partnerships after publication of the proposed regulations and prior

to the publication of these final regulations, the proposed regulations set forth a

special applicability date that would apply

the rule to any deduction for compensation paid by a partnership that is otherwise

allowable for a taxable year ending on or

after December 20, 2019 (the publication

date of the proposed regulations), but

would not apply the rule to compensation

paid pursuant to a written binding contract

in effect on December 20, 2019 that is not

materially modified after that date.

Commenters requested additional

transition relief for this rule. A commenter suggested a transition relief period of

January 19, 2021

7 years from the date of publication of

these final regulations.9 Other commenters suggested that transition relief should

apply for taxable years beginning before

the publication of these final regulations.

In the alternative, these commenters suggested transition relief for compensation

arrangements in effect on December 22,

2017 (the date of TJCA enactment), regardless of whether the partnership is obligated to pay the amount of compensation

under applicable law, which would provide for more expansive transition relief

than set forth in the proposed regulations.

As the preamble to the proposed regulations explains, the transition relief for

this definition of compensation must be

designed to ensure that compensation

agreements are not formed or otherwise

structured to circumvent the proposed

rules after publication of the proposed

regulations and prior to the publication of

these final regulations. In consideration of

commenters’ requests for additional transition relief, these final regulations modify

the applicability date of the definition of

compensation under §1.162-33(c)(3)(ii)

to provide additional limited transition

relief. Under these final regulations, the

definition of compensation under §1.16233(c)(3)(ii) includes an amount equal

to a publicly held corporation’s distributive share of a partnership’s deduction

for compensation expense attributable

to the compensation paid by the partnership after December 18, 2020, the date on

which these final regulations were made

publicly available on the IRS website at

http://www.irs.gov. Because the date that

these final regulations are made publicly

available is prior to the date that they are

published in the Federal Register, using

the earlier date for the expiration of the

additional transition relief is appropriate

to ensure that compensation is not paid

to circumvent these final regulations. In

addition, these final regulations continue

to provide that this aspect of the definition

of compensation does not apply to compensation paid after December 30, 2020

if the compensation is paid pursuant to a

written binding contract that is in effect on

December 20, 2019, and that is not materially modified after that date.

C. Compensation for Services in a

Capacity other than as a Common Law

Employee

The proposed regulations provide that

compensation subject to section 162(m)

includes remuneration for services performed by a covered employee in any

capacity, including as a common law employee, a director, or an independent contractor. As explained in section IV. C of the

preamble to the proposed regulations, this

rule is based on the lack of a specific limitation in the statutory language regarding

the capacity in which the covered employee must perform the services for which remuneration is paid, and it is supported by

the legislative history to the enactment of

section 162(m) in 199310 and the preamble

to the 1993 proposed regulations.11

In response to the proposed regulations, commenters suggested that, based

on the language of section 162(m)(4)(A),

compensation subject to section 162(m)

should include only compensation for

services performed by a covered employee as an employee of the publicly held

corporation. The commenters reasoned

that, because section 162(m)(4)(A) uses

the phrase “for remuneration for services

performed by such employee” (emphasis

added) in defining compensation subject

to section 162(m), only compensation for

services provided as an employee is subject to section 162(m).12

While the statute may be read in the

manner suggested by the commenters,

there is nothing in the language that

compels this reading, nor does the legislative history to the enactment of section

162(m) suggest that compensation subject to section 162(m) was intended to

include only compensation for services

as an employee. Section 162(m)(4)(A),

which was not amended by TCJA, provides that “the term ‘applicable employee

remuneration’ means, with respect to any

covered employee for any taxable year,

the aggregate amount allowable as a deduction under this chapter for such taxable

year…for remuneration for services performed by such employee (whether or not

during the taxable year).” The legislative

history provides that section 162(m) “applies to all compensation…regardless of

whether the compensation is for services

as a covered employee and regardless of

when the compensation was earned.”13

Consistent with this legislative history, the

1995 regulations defined the term compensation as “the aggregate amount allowable as a deduction…for remuneration for

services performed by a covered employee, whether or not the services were performed during the taxable year.”14 Thus,

This commenter also suggested a transition relief period of 10 years for taxpayers that, prior to the IRS first announcing the no-rule position on this issue in Revenue Procedure 2010-3,

received private letter rulings providing that section 162(m) did not limit the deduction of the publicly held corporation for compensation paid to a covered employee by a partnership in which

the publicly held corporation held a partnership interest. The IRS announced the no-rule position in 2010 in section 5.06 of Revenue Procedure 2010-3, 2010-1 I.R.B. 110, which provided that

“[w]hether the deduction limit under § 162(m) applies to compensation attributable to services performed for a related partnership” was an area under study in which rulings or determination

letters will not be issued until the IRS resolves the issue through publication of a revenue ruling, revenue procedure, regulations, or otherwise.

10

The legislative history to the enactment of section 162(m) provides that:

9

Unless specifically excluded, the deduction limitation applies to all remuneration for services, including cash and the cash value of all remuneration (including benefits) paid in a medium other than cash. If an individual is a covered employee for a taxable 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.



House Conf. Rpt. 103-213, 585 (1993).



The preamble to the 1993 proposed regulations provides that, “[t]he deduction limit of section 162(m) applies to any compensation that could otherwise be deducted in a taxable year, except

for enumerated types of payments set forth in section 162(m)(4)” (58 FR 66310, 66310).

12

In suggesting that the statute should be read to exclude payments for services performed as an independent contractor from compensation subject to section 162(m), commenters point to

a private letter ruling issued in 1997 (PLR 9745002). In the letter ruling, based on the facts presented, the IRS ruled that, for purposes of section 162(m), compensation excludes consulting

fees for services performed by a covered employee as an independent contractor. A private letter ruling may be relied upon only by the taxpayer to whom the ruling was issued and does not

constitute generally applicable guidance. See section 11.02 of Revenue Procedure 2020-1, 2020-01 I.R.B. 144.

13

House Conf. Rpt. 103-213, 585 (1993).

14

Section 1.162-27(c)(3)(i). The preamble to the 1993 proposed regulations reiterates this principle, as quoted earlier.

11

January 19, 2021

350

Bulletin No. 2021–3

neither the statute nor the 1995 regulations specifically limit the compensation

subject to section 162(m) to remuneration

paid to the covered employee for services

as an employee.

Commenters also suggested that section 162(m) does not apply to compensation for services as an independent contractor because by excluding from the

definition of compensation payments that

may be made only to an employee, section 162(m)(4)(C) indicates that compensation subject to section 162(m) is limited to compensation for services as an

employee. Section 162(m)(4)(C) excludes

from the definition of compensation: “(i)

any payment referred to in so much of section 3121(a)(5) as precedes subparagraph

(E) thereof, and (ii) any benefit provided

to or on behalf of an employee if at the

time such benefit is provided it is reasonable to believe that the employee will be

able to exclude such benefit from gross

income under this chapter.”

Section 162(m)(4)(i), by cross-referencing sections 3121(a)(5)(A)-(D),

generally excludes from compensation

contributions by an employer on an employee’s behalf to certain types of qualified retirement plans and payments from

those types of plans to the employee.

Thus, contributions to these arrangements

for which an employer would otherwise

have a deduction available will not be

treated as compensation and the deduction will not be limited by section 162(m).

Section 162(m)(4)(C)(ii) serves a similar

function by excluding from compensation

(and thus not limiting the compensation

deduction) certain employee benefits that

would be excludible from the employee’s

income. These exclusions of benefit payments from the definition of “applicable

employee remuneration” reflect only that

an individual must be an active employee of the publicly held corporation (or

a predecessor) at some point in order to

become a covered employee, and that the

individual typically would participate in

these types of employee benefit arrangements as an employee (often continuing

participation that started before the individual became a covered employee).

Importantly, the TCJA amendments

to section 162(m) changed the context

in which the question as to whether

non-employee compensation is subject

to the deduction limitation is analyzed.

Prior to TCJA, the section 162(m) deduction limitation could be avoided by

ensuring that any compensation in excess

of $1,000,000 paid to a covered employee

qualified as performance-based compensation or was paid to the covered employee after separation from service or after

termination of the individual’s status as a

covered employee. For example, if a PEO

ceased serving as PEO or as an executive

officer but continued as an employee of

the publicly held corporation for later taxable years, the former PEO could be compensated without taking into account the

potential for a limitation on the deduction

due to section 162(m).

The TCJA amendment of section

162(m) eliminates the exclusion from

the deduction limitation for compensation paid after the individual is no longer

a covered employee. Under the amended

section 162(m) rules, once an individual is identified as a covered employee,

the individual continues to be a covered

employee, and all compensation paid to

that individual is subject to the deduction

limitation, even after the individual is no

longer employed by the publicly held corporation. As explained in the legislative

history, this result was intended.15

The commenters’ suggestion that section 162(m) does not apply to compensation for services as an independent

contractor would lead to uncertainty and

administrative burdens for both the taxpayer and the IRS, as well as to the potential for abusive arrangements structured to

avoid the application of section 162(m) to

covered employees who have terminated

employment (or who have purportedly

terminated employment). Given that the

amendments to section 162(m) no longer

limit the deduction disallowance to taxable

years in which a covered employee is employed on the last day of the taxable year,

and the lack of statutory language or legislative history specifically indicating an intent to restrict the deduction limitation to

compensation earned by the individual in

the capacity as an employee, the Treasury

Department and the IRS have determined

that the more appropriate construction of

the statutory language defining “applicable employee remuneration” is to include

all compensation paid to a covered employee regardless of the capacity in which

the covered employee performed services

to earn that compensation.

V. Privately Held Corporations that

Become Publicly Held

These final regulations adopt the rules

set forth in the proposed regulations providing that, in the case of a privately held

corporation that becomes a publicly held

corporation, section 162(m) limits the deduction for any compensation that is otherwise deductible for the taxable year ending on or after the date that the corporation

becomes a publicly held corporation, and

that a corporation is considered to become

publicly held on the date that its registration statement becomes effective under

the Securities Act or the Exchange Act.

These final regulations also adopt the

transition relief set forth in the proposed

regulations providing that a privately held

corporation that becomes a publicly held

corporation on or before December 20,

2019, generally may rely on the transition

rules provided in §1.162-27(f)(1) and (2)

of the 1995 regulations.16 In response to

a question from a commenter, these final regulations clarify that a subsidiary

that is a member of an affiliated group

may rely on transition relief provided in

§1.162-27(f)(4) of the 1995 regulations if

it becomes a separate publicly held corporation (for example, in a spin-off transaction) on or before December 20, 2019.

Consistent with comments received

prior to issuance of the proposed regulations, a commenter suggested that these final regulations should continue to provide

transition relief similar to that provided in

§1.162-27(f)(1) and (2) of the 1995 regulations for privately held corporations

that become publicly held after December 20, 2019. Those sections of the 1995

regulations were formulated based on the

House Conf. Rpt. 115-466, 489 (2017).

Specifically, a privately held corporation that becomes a publicly held corporation before December 20, 2019, may rely on the transition rules provided in §1.162-27(f)(1) until the earliest

of the events described in §1.162-27(f)(2). As provided in the 1995 regulations, a corporation that is a member of an affiliated group that includes a publicly held corporation is considered

publicly held and, thus, may not rely on the transition relief provided in §1.162-27(f)(1).

15

16

Bulletin No. 2021–3

351

January 19, 2021

legislative history to the enactment of

section 162(m) and were intended to permit a transition period to meet the shareholder approval requirement for qualified

performance-based compensation so that

the resulting compensation would not be

subject to the deduction limitation under

section 162(m). TCJA eliminated the exclusion from the definition of compensation for qualified performance-based

compensation. Thus, a transition period

to accommodate a shareholder approval

process is no longer needed. There is no

indication in the language of the amended

section 162(m) or the legislative history to

the amendments that the transition period

was intended be extended even though the

original basis for its adoption no longer

exists. Accordingly, the suggestion is not

adopted in these final regulations.

VI. Grandfather Rule

A. In General

Section 13601(e) of TCJA generally

provides that the amendments to section

162(m) apply to taxable years beginning

after December 31, 2017. However, it further provides that those amendments do

not apply to compensation that is payable

pursuant to a written binding contract that

was in effect on November 2, 2017, and

that was not modified in any material respect on or after that date (the grandfather

rule).

As discussed in section VI. A of the

preamble to the proposed regulations,

the text of section 13601(e) of TJCA is

almost identical to the text of pre-TCJA

section 162(m)(4)(D), which provided a

transition rule in connection with the enactment of section 162(m) in 1993 (the

1993 grandfather rule). Under the 1993

grandfather rule, section 162(m) did not

apply to compensation payable under a

written binding contract that was in effect on February 17, 1993, and that was

not modified thereafter in any material respect before the compensation was paid.

Section 1.162-27(h) provides guidance on

the definitions of written binding contract

and material modification for purposes of

applying the 1993 grandfather rule. The

proposed regulations adopt those definitions for purposes of the grandfather rule

under section 13601(e) of TCJA. These

January 19, 2021

final regulations adopt the provisions of

the proposed regulations and retain these

definitions, including that compensation is

payable under a written binding contract

that was in effect on November 2, 2017,

only to the extent that the corporation is

obligated under applicable law to pay the

compensation if the employee performs

services or satisfies the applicable vesting

conditions. Section 162(m), as amended,

applies to any amount of compensation

that exceeds the amount that applicable

law obligates the corporation to pay under

a written binding contract that was in effect on November 2, 2017.

In response to the proposed regulations, a commenter requested that these

final regulations adopt a safe harbor based

on Generally Acceptable Accounting

Principles (GAAP). The same suggestion

had been made prior to issuance of the

proposed regulations, and section VI. A

of the preamble to the proposed regulations describes a number of issues with a

GAAP safe harbor and asks for comments

on how and whether these issues could be

addressed. The commenter did not address

any of these issues related to the formulation and application of a GAAP safe harbor. Accordingly, these final regulations

do not adopt a GAAP safe harbor rule.

Another commenter suggested a safe

harbor that would grandfather an amount

of compensation paid pursuant to a compensation arrangement that satisfied three

requirements on or before November 2,

2017: (1) the arrangement was memorialized in some form of media (for example,

presentation slides or spreadsheet); (2)

the arrangement was communicated to its

participants (for example, disseminated in

hard copy, electronically, or via presentation format); and (3) participants in the

arrangement had a reasonable expectation

that they were eligible to receive compensation pursuant to the arrangement. This

suggested safe harbor would require an

intensive facts and circumstances analysis and raise administrability issues

about how to determine the participants’

expectations regarding the compensation

arrangement and whether those expectations were reasonable. Furthermore, the

suggested safe harbor arguably is inconsistent with the statutory language that

grandfathers an amount of compensation

only if the corporation was obligated to

352

pay it under applicable law pursuant to a

written binding contract in effect on November 2, 2017, and not, for example, if

an employee merely had a reasonable expectation of payment (without regard to

the corporation’s obligation under applicable law). For these reasons, these final

regulations do not adopt this safe harbor.

B. Compensation Subject to Negative

Discretion

These final regulations adopt the rule

set forth in the proposed regulations providing that a provision in a compensation

agreement that purports to provide the

employer with the discretion to reduce or

eliminate a compensation payment (negative discretion) is taken into account only

to the extent the corporation has the right

to exercise the negative discretion under

applicable law (for example, applicable

state contract law). If a compensation

arrangement allows the corporation to

exercise negative discretion, compensation payable under the arrangement is not

grandfathered to the extent the corporation is not obligated to pay it under applicable law.

In response to the proposed regulations, a commenter suggested that

negative discretion provisions should

be disregarded in determining whether

compensation is grandfathered because

numerous performance-based compensation arrangements provide corporations

with such discretion. However, the practice of including negative discretion provisions in compensation arrangements is

based on a well-known and longstanding regulatory provision, and Congress

could have provided for a grandfather

rule that addressed performance-based

compensation arrangements that include

a negative discretion provision, but it did

not. Instead, the grandfather rule refers

only to compensation paid pursuant to a

legally binding contract in effect on the

transition date. Thus, whether a performance-based compensation arrangement

that includes a negative discretion provision is a legally binding contract is determined based on applicable law.

Another commenter suggested that

a corporation should be deemed not to

have a right to exercise negative discretion if the terms of the agreement provide

Bulletin No. 2021–3

that the corporation may not exercise this

discretion if doing so would result in the

payment of compensation that would

not be deductible by reason of section

162(m). Whether a compensation agreement that includes a negative discretion

provision of this sort would be a written

binding contract that permitted the exercise of the negative discretion after the

amendments to section 162(m) or rather

obligated the employer to pay the compensation because the section 162(m)

amendments negated the employer’s

ability to exercise the negative discretion

must be determined based on applicable

law. Accordingly, these final regulations

do not provide a separate standard for

purposes of applying the grandfather rule

to compensation agreements that include

this type of negative discretion provision

(or any other type of negative discretion

provision).

C. Recovery of Compensation

The proposed regulations provide

that, if the corporation is obligated or

has discretion to recover compensation

paid in a taxable year only upon the future occurrence of a condition that is

objectively outside of the corporation’s

control, then the corporation’s right to

recovery is disregarded for purposes of

determining the grandfathered amount

for the taxable year. The proposed regulations also provide that, if the condition

occurs, then only the amount the corporation is obligated to pay under applicable

law remains grandfathered, taking into

account the occurrence of the condition.

After further consideration, the Treasury

Department and the IRS recognize that

the corporation’s right to recover compensation is a contractual right that is

separate from the corporation’s binding

obligation under the contract (as of November 2, 2017) to pay the compensation. Accordingly, these final regulations

provide that the corporation’s right to

recover compensation does not affect the

determination of the amount of compensation the corporation has a written binding contract to pay under applicable law

as of November 2, 2017, whether or not

the corporation exercises its discretion to

recover any compensation in the event

the condition arises in the future.

Bulletin No. 2021–3

D. Account and Nonaccount Balance

Plans

The proposed regulations include examples illustrating the application of the

grandfather rule to account and nonaccount balance nonqualified deferred compensation (NQDC) plans. In response to

comments, these final regulations clarify

the application of the grandfather rule to

compensation payable under these plans

by providing detailed rules and thus eliminate the need to retain certain examples in

these final regulations. Specifically, with

respect to an account balance plan, these

final regulations provide that the grandfathered amount under an account balance

plan is the amount that the corporation is

obligated to pay pursuant to the terms of

the plan as of November 2, 2017, as determined under applicable law. If the corporation is obligated to pay the employee

the account balance that is credited with

earnings and losses and has no right to terminate or materially amend the contract,

then the grandfathered amount would be

the account balance as of November 2,

2017, plus any additional contributions

and earnings and losses that the corporation is obligated to credit under the plan,

through the date of payment. These final

regulations provide an analogous rule for

nonaccount balance plans.

If the terms of the account balance

plan that is a written binding contract as

of November 2, 2017, provide that the

corporation may terminate the plan and

distribute the account balance to the employee, then the grandfathered amount is

the account balance determined as if the

corporation had terminated the plan on

November 2, 2017, or, if later, the earliest possible date the plan could be terminated (termination date). Furthermore,

whether additional contributions and

earnings and losses credited to the account balance after the termination date,

through the earliest possible date the account balance could have been distributed to the employee, are grandfathered

depends on whether the terms of the plan

require the corporation to make those

contributions or credit those earnings and

losses through the earliest possible date

the account balance could be distributed

if it were terminated as of the termination

date. These final regulations provide an

353

analogous rule for nonaccount balance

plans.

If the terms of the account balance plan

provide that the corporation may not terminate the contract, but may discontinue

future contributions to the account balance and distribute the account balance

in accordance with the terms of the plan,

then the grandfathered amount is the account balance determined as if the corporation had exercised the right to discontinue contributions on November 2, 2017

or, if later, the earliest permissible date the

corporation could exercise that right in accordance with the terms of the plan (the

freeze date). Furthermore, if the plan required the crediting of earnings and losses on the account balance after the freeze

date through the payment date, then those

earnings and losses credited to the grandfathered account balance are also grandfathered. These final regulations provide

an analogous rule for nonaccount balance

plans.

Alternatively, whether the terms of

the account balance plan provide that the

corporation may terminate the plan or,

instead, may discontinue future contributions, the corporation may elect to treat the

account balance as of the termination date

(or freeze date, if applicable) as the grandfathered amount regardless of when the

amount is paid and regardless of whether

it has been credited with earnings or losses

prior to payment. These final regulations

provide an analogous rule for nonaccount

balance plans. These final regulations

adopt this alternative grandfather rule

that disregards earnings and losses in order to minimize the administrative burden

of tracking the earnings, losses and new

contributions (if made) on an account balance plan or the increase or decrease in a

nonaccount balance benefit after November 2, 2017. With respect to an account

balance plan, the Treasury Department

and IRS understand that this grandfather

rule may result in contributions made after November 2, 2017, not being subject

to the section 162(m) limitation if the

contributions offset losses; however, the

Treasury Department and IRS concluded

that under many common arrangements

the continuous separate tracking of earnings, losses, and contributions on the November 2, 2017, account balance through

the payment date would be burdensome to

January 19, 2021

administer while having a limited, if any,

impact on the available deduction.

E. Ordering Rule for Payments

Consisting of Grandfathered and NonGrandfathered Amounts Deductible for

Taxable Years Ending Prior to December

20, 2019

These final regulations adopt the ordering rule set forth in the proposed regulations for identifying the grandfathered

amount when payment under a grandfathered arrangement is made in a series of

payments. Pursuant to the ordering rule,

the grandfathered amount is allocated to

the first otherwise deductible payment

paid under the arrangement. If the grandfathered amount exceeds the payment,

then the excess is allocated to the next

otherwise deductible payment paid under

the arrangement. This process is repeated

until the entire grandfathered amount has

been paid.

For example, assume an employer

maintains a nonaccount balance NQDC

plan (payable as an annuity) as of November 2, 2017, and that the grandfathered

amount is $2,000,000. Further assume

that additional benefits accrue under the

plan after November 2, 2017, with the

result that the employee’s benefit is payable as an annual annuity of $1,500,000

commencing at the employee’s retirement

for the employee’s life. Under these final

regulations, the entire $1,500,000 paid in

the first year is grandfathered. In the second year, only $500,000 of the $1,500,000

payment is grandfathered; the remaining

$1,000,000 paid in the second year is not

grandfathered. For subsequent taxable

years, none of the $1,500,000 payments

are grandfathered.

A commenter suggested that for payments otherwise deductible for taxable

years ending prior to the date the proposed

regulations were published (December 20,

2019), it would be a reasonable good faith

interpretation of the statute if the grandfathered amount were allocated to the last

otherwise deductible payment or to each

payment on a pro rata basis. The Treasury Department and the IRS agree and

these final regulations permit the grandfathered amount to be allocated to the last

otherwise deductible payment or to each

payment on a pro rata basis for taxable

January 19, 2021

years ending before December 20, 2019.

However, these final regulations provide

that the ordering rule requiring the grandfathered amount to be allocated to the first

otherwise deductible payment paid under

the arrangement must be used for taxable

years ending on or after December 20,

2019, regardless of the method used to

allocate the grandfathered amount for taxable years ending prior to that date.

F. Grandfathered Amount Limited to a

Particular Plan or Arrangement

These final regulations provide that the

grandfathered amount payable under a

plan or arrangement applies solely to the

amounts paid under that plan or arrangement. Regardless of whether all of the

grandfathered amount is paid to the employee, no portion of that grandfathered

amount may be treated as a grandfathered

amount under any other separate plan or

arrangement in which the employee is a

participant. If, for example, all or a portion of a grandfathered amount is forfeited

because the employee died before being

paid the entire amount, then any unpaid

portion of the grandfathered amount may

not be applied as a grandfathered amount

to payments under any other separate plan

or arrangement in which the employee

participated.

G. Material Modification

1. In General

These final regulations adopt the rules

set forth in the proposed regulations related to material modifications. A material modification occurs when a contract

is amended to increase the amount of

compensation payable to the employee.

If a written binding contract is materially modified, it is treated as a new contract

entered into as of the date of the material

modification. Accordingly, if a contract

is materially modified, amounts received

by an employee under the contract before

the material modification are not affected,

but amounts received after the material

modification are treated as paid pursuant

to a new contract, rather than as grandfathered. The adoption of a supplemental

contract or agreement that provides for

increased compensation, or the payment

354

of additional compensation, results in a

material modification if the facts and circumstances demonstrate that the compensation under the supplement is paid on the

basis of substantially the same elements

or conditions as the compensation that

is otherwise paid pursuant to the written

binding contract.

If a written binding contract in effect on

November 2, 2017, is subsequently modified to defer the payment of compensation, any compensation paid or to be paid

that is in excess of the amount that was

originally payable to the employee under

the contract will not be treated as resulting

in a material modification if the additional amount is based on either a reasonable

rate of interest or a predetermined actual

investment (whether or not assets associated with the original amount are actually invested therein) such that the amount

payable by the employer at the later date

will be based on the rate of interest or the

actual rate of return on the investment

(including any decrease, as well as any

increase, in the value of the investment).

However, the additional amount paid will

not be treated as a grandfathered amount.

Additionally, a modification of the contract after November 2, 2017, to offer an

additional or substitute a predetermined

actual investment as an investment alternative under the arrangement is not a material modification.

A commenter suggested that these final

regulations provide that the deferral of a

grandfathered amount after November 2,

2017, but prior to September 10, 2018 (the

publication date of Notice 2018-68), is not

a material modification even if the earnings on the deferred amount are not based

on either a reasonable rate of interest or a

predetermined actual investment because

taxpayers were not aware prior to the

publication of the notice that this deferral

would constitute a material modification.

The grandfather rule described in section

13601(e) of TCJA and its legislative history, including the definition and the resulting impact of a material modification, is

almost identical to the statutory language

and legislative history to the grandfather

rule provided when section 162(m) was

enacted in 1993. The 1995 final regulations interpreting the original grandfather

rule in the 1993 legislation provided that a

deferral of payment of compensation will

Bulletin No. 2021–3

not be treated as a material modification

if any additional amount paid were determined based on a reasonable rate of interest or one or more predetermined actual

investments, and there is no indication in

the grandfather rule in section 13601 of

TCJA or its legislative history of an intent to adopt a different grandfather rule.17

Therefore, these final regulations do not

adopt the commenter’s suggestion.

2. Extension of an Exercise Period for a

Non-Statutory Stock Option

Commenters asked if extending the

exercise period for a non-statutory stock

option18 is a material modification. The

grandfather rule in the proposed regulations provides that compensation attributable to the exercise of an option is grandfathered only if, as of November 2, 2017,

pursuant to terms of the option and under

applicable law, the employer is obligated

to transfer the option’s underlying shares

of stock to the employee upon exercise of

the option.

The Treasury Department and the IRS

recognize that, for bona fide business reasons, an employer may want to extend

an exercise period of a stock option or a

stock appreciation right (SAR). This often

occurs when a stock option or SAR grant

agreement provides that the exercise period will terminate immediately or within

a short period following the employee’s

separation from service, but the employer

later decides to waive that termination or

otherwise extend the exercise period for

some period of time upon the employee’s

separation from service. These concerns

led to treating certain extensions of stock

options or SARs as not being material

modifications in the regulations under

section 409A. For the same reasons, these

final regulations incorporate the section

409A regulatory provisions and provide

that, if compensation attributable to the

exercise of a non-statutory stock option or

a SAR is grandfathered and the exercise

period of the option or SAR is extended,

then all compensation attributable to the

exercise of the option or the SAR is grandfathered if the extension complies with

§1.409A-1(b)(5)(v)(C)(1).19

VII. Coordination with Section 409A

Section 409A addresses NQDC arrangements and sets forth certain requirements that must be met to avoid current income inclusion, a 20% additional income

tax on the amount includible in income

per section 409A(a)(1)(B)(i)(II), and a

second additional income tax based on the

tax benefit received due to the deferral per

section 409A(a)(1)(B)(i)(I). Recognizing that the TCJA amendments to section

162(m) required coordination with the

section 409A rules in certain circumstances, the preamble to the proposed regulations provided that certain modifications

would be made to the regulations under

section 409A and that taxpayers may rely

on the preamble until this guidance is issued. Commenters suggested additional

modifications to the rules and regulations

under section 409A to provide further coordination between sections 162(m) and

409A. Until guidance under section 409A

is issued, taxpayers may continue to rely

on the preamble to the proposed regulations. The Treasury Department and the

IRS will continue to consider whether

additional guidance under section 409A is

appropriate.

VIII. Applicability Dates

A. General Applicability Date

Generally, these final regulations apply

to taxable years beginning on or after December 30, 2020. However, taxpayers may

choose to apply these final regulations to a

taxable year beginning after December 31,

2017, provided the taxpayer applies these

final regulations in their entirety and in a

consistent manner to that taxable year and

all subsequent taxable years. See section

7805(b)(7). Like the proposed regulations,

these final regulations generally do not expand the definition of “covered employee”

as provided in Notice 2018-68 and do not

narrow the application of the definition of

“written binding contract” as provided in

Notice 2018-68. With respect to the limited number of changes that do affect these

definitions, a special applicability date

has been provided as described in section

VIII. B of this preamble. Accordingly, taxpayers may not rely on Notice 2018-68 for

taxable years ending on or after December

20, 2019, the publication date of the proposed regulations.

B. Special Applicability Dates

These final regulations include special

applicability dates covering certain aspects of the following provisions of these

final regulations:

1. Definition of covered employee.

2. Definition of predecessor of a publicly held corporation.

3. Definition of compensation.

4. Application of section 162(m) to a

deduction for compensation otherwise

deductible for a taxable year ending on or

after a privately held corporation becomes

a publicly held corporation.

5. Definitions of written binding contract and material modification.

First, the definition of covered employee applies to taxable years ending on or

after September 10, 2018, the publication

date of Notice 2018-68, which provided guidance on the definition of covered

employee. Notice 2018-68 also provided

that the Treasury Department and the IRS

anticipate that the guidance in the notice

will be incorporated into future regulations that, with respect to the issues addressed in the notice, will apply to any

taxable year ending on or after September

10, 2018. These final regulations adopt the

definition of covered employee in Notice

2018-68 as anticipated, and according-

Section 1.162-27(h)(iii)(B) provides that if the contract is modified to defer the payment of compensation, any compensation paid in excess of the amount that was originally payable to

the employee under the contract will not be treated as a material modification if the additional amount is based on either a reasonable rate of interest or one or more predetermined actual

investments (whether or not assets associated with the amount originally owed are actually invested therein) such that the amount payable by the employer at the later date will be based on

the actual rate of return of the specific investment (including any decrease as well as any increase in the value of the investment).

18

A non-statutory stock option is an option other than an incentive stock option described in section 422 or a stock option granted under an employee stock purchase plan described in section

423.

19

Section 1.409A-1(b)(5)(v)(C)(1) describes the following requirements for an extension: (1) at the time of the extension, the exercise price is greater than the underlying stock’s fair market

value and (2) the exercise period is extended to a date no later than the earlier of the latest date upon which the stock right could have expired by its original terms or the 10th anniversary of

the original date of grant.

17

Bulletin No. 2021–3

355

January 19, 2021

ly the definition of covered employee in

these final regulations applies to taxable

years ending on or after September 10,

2018. The Treasury Department and the

IRS recognize, however, that the rules

under §1.162-33(c)(2)(i)(B), related to a

corporation whose fiscal year and taxable

year do not end on the same date, were

not addressed in Notice 2018-68 but were

discussed initially in the proposed regulations. Accordingly, these final regulations

provide that, for a corporation the fiscal

and taxable years of which do not end on

the same date, the rule requiring the determination of the three most highly compensated executive officers to be made

pursuant to the rules under the Exchange

Act applies to taxable years ending on or

after December 20, 2019.

Second, the provisions defining a predecessor corporation of a publicly held

corporation apply to corporate transactions that occur on or after December 30,

2020. These final regulations also include

a special applicability date for corporations that change from being a publicly

held corporation to a privately held corporation, and, later, back to a publicly

held corporation on or after December 30,

2020.

If a corporate transaction occurs before

December 30, 2020, then taxpayers may

apply either the definition of predecessor

of a publicly held corporation in §1.16233(c)(2)(ii) of these final regulations or a

reasonable good faith interpretation of the

term “predecessor” in section 162(m)(3)

(C) with respect to such transaction. However, with respect to any of the following

corporate transactions occurring after December 20, 2019, and before December

30, 2020, excluding target corporations

from the definition of the term “predecessor” is not a reasonable good faith interpretation of the statute: (1) a publicly

held target corporation the stock or assets

of which are acquired by another publicly

held corporation in a transaction to which

section 381(a) applies, and (2) a publicly

held target corporation, at least 80% of the

total voting power of the stock of which,

and at least 80% of the total value of the

stock of which, are acquired by a publicly

held acquiring corporation (including an

affiliated group). No inference is intended

regarding whether the treatment of a target

corporation as other than a “predecessor”

January 19, 2021

in any other situation is a reasonable good

faith interpretation of the statute.

Third, as discussed in section IV. B.

of this preamble, these final regulations

modify the proposed applicability date

for the definition of compensation under

§1.162-33(c)(3)(ii). Under these final

regulations, the definition of compensation under §1.162-33(c)(3)(ii) includes an

amount equal to the publicly held corporation’s distributive share of a partnership’s

deduction for compensation expense only

if the deduction is attributable to compensation paid by the partnership after December 18, 2020 (the date that these final

regulations were made publicly available

on the IRS website at http://www.irs.gov).

However, these final regulations continue to provide a transition rule so that this

aspect of the definition of compensation

related to the distributive share of a partnership’s deduction for compensation expense does not apply to compensation paid

after December 30, 2020 if the compensation is paid pursuant to a written binding

contract that is in effect on December 20,

2019, and that is not materially modified

after that date.

Fourth, the guidance on the applicability of section 162(m)(1) to the deduction for any compensation otherwise

deductible for a taxable year ending on

or after the date when a corporation becomes a publicly held corporation applies to corporations that become publicly held after December 20, 2019. A

corporation that was not a publicly held

corporation and then becomes a publicly

held corporation on or before December

20, 2019, may rely on the transition relief provided in §1.162-27(f)(1) until the

earliest of the events provided in §1.16227(f)(2). Furthermore, a subsidiary corporation that is a member of an affiliated

group (as defined in §1.162-27(c)(1)(ii))

may rely on the transition relief provided

in §1.162-27(f)(4) if it becomes a separate publicly held corporation (whether in

a spin-off transaction or otherwise) on or

before December 20, 2019.

Fifth, the definitions of written binding

contract and material modification in these

final regulations apply to taxable years

ending on or after September 10, 2018, the

publication date of Notice 2018-68, which

provided guidance defining these terms.

Notice 2018-68 also provided that the

356

Treasury Department and IRS anticipated

that the guidance in the notice would be

incorporated into future regulations that,

with respect to the issues addressed in the

notice, would apply to any taxable year

ending on or after September 10, 2018.

Because these final regulations adopt the

definitions of the terms “written binding

contract” and “material modification”

that were included in Notice 2018-68, the

guidance on these definitions in these final

regulations applies to taxable years ending

on or after September 10, 2018.

Effect on Other Documents

Section 4.01(13) of Revenue Procedure

2020-3, 2020-1 I.R.B. 131 (providing that

“[w]hether the deduction limit under §

162(m) applies to compensation attributable to services performed for a related

partnership” is an area in which rulings

or determination letters will not ordinarily

be issued) is obsolete as of December 30,

2020.

Statement of Availability of IRS

Documents

The IRS Notices, Revenue Rulings,

and Revenue Procedures cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and

are available from the Superintendent of

Documents, U.S. Government Publishing Office, Washington, DC 20402, or by

visiting the IRS website at http://www.irs.

gov.

Special Analyses

I. Regulatory Planning and Review

This regulation is not subject to review

under section 6(b) of Executive Order

12866 pursuant to the Memorandum of

Agreement (April 11, 2018) between the

Department of the Treasury and the Office

of Management and Budget regarding review of tax regulations.

II. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is

hereby certified that these final regulations

would not have a significant economic

Bulletin No. 2021–3

impact on a substantial number of small

entities. This certification is based on the

fact that section 162(m)(1) applies only

to publicly held corporations (for example, corporations that list securities on a

national securities exchange and are rarely small entities) and only impacts those

publicly held corporations that compensate certain executive officers in excess of

$1 million in a taxable year. Pursuant to

section 7805(f), the proposed regulations

preceding these final regulations were

submitted to the Chief Counsel for Advocacy of the Small Business Administration

for comment on its impact on small business, and no comments were received.

Exempt Organizations, and Employment

Taxes). However, other personnel from

the Treasury Department and the IRS participated in the development of these regulations.

III. Unfunded Mandates Reform Act

PART 1—INCOME TAXES

Section 202 of the Unfunded Mandates

Reform Act of 1995 (UMRA) requires

that agencies assess anticipated costs and

benefits and take certain actions before issuing a final rule that includes any Federal

mandate that may result in expenditures

in any one year by a state, local, or tribal government, in the aggregate, or by the

private section, of $100 million in 1995

dollars, update annually for inflation. This

rule does not include any Federal mandate

that may result in expenditures by state,

local, or tribal governments, or by the private section in excess of that threshold.

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.162-27 is amended

by revising the section heading and paragraphs (a) and (j)(1) to read as follows:

IV. Executive Order 13132: Federalism

Executive Order 13132 (entitled

“Federalism”) prohibits an agency from

publishing any rule that has federalism

implications if the rule either imposes

substantial, direct compliance costs on

state and local governments, and is not

required by statute, or preempts state law,

unless the agency meets the consultation

and funding requirements of section 6 of

the Executive order. This final rule does

not have federalism implications and does

not impose substantial direct compliance

costs on state and local governments or

preempt state law within the meaning of

the Executive order.

Drafting Information

The principal author of these regulations is Ilya Enkishev, Office of Associate Chief Counsel (Employee Benefits,

Bulletin No. 2021–3

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended as follows:

§1.162-27 Certain employee

remuneration in excess of $1,000,000 not

deductible for taxable years beginning on

or after January 1, 1994, and for taxable

years beginning prior to January 1, 2018.

(a) Scope. This section provides rules

for the application of the $1 million deduction limitation under section 162(m)

(1) for taxable years beginning on or after January 1, 1994, and beginning prior

to January 1, 2018, and, as provided in

paragraph (j) of this section, for taxable

years beginning after December 31, 2017.

For rules concerning the applicability of

section 162(m)(1) to taxable years beginning after December 31, 2017, see

§1.162-33. Paragraph (b) of this section

provides the general rule limiting deductions under section 162(m)(1). Paragraph

(c) of this section provides definitions of

generally applicable terms. Paragraph (d)

of this section provides an exception from

the deduction limitation for compensation

payable on a commission basis. Paragraph

(e) of this section provides an exception

for qualified performance-based compensation. Paragraphs (f) and (g) of this section provide special rules for corporations

that become publicly held corporations

and payments that are subject to section

357

280G, respectively. Paragraph (h) of this

section provides transition rules, including the rules for contracts that are grandfathered and not subject to section 162(m)

(1). Paragraph (j) of this section contains

the effective date provisions, which also

specify when these rules apply to the deduction for compensation otherwise deductible in a taxable year beginning after

December 31, 2017. For rules concerning the deductibility of compensation for

services that are not covered by section

162(m)(1) and this section, see section

162(a)(1) and §1.162-7. This section is not

determinative as to whether compensation

meets the requirements of section 162(a)

(1). For rules concerning the deduction

limitation under section 162(m)(6) applicable to certain health insurance providers, see §1.162-31.

*****

(j) * * *

(1) In general. Section 162(m) and this

section apply to the deduction for compensation that is otherwise deductible by

the corporation in taxable years beginning

on or after January 1, 1994, and beginning

prior to January 1, 2018. Section 162(m)

and this section also apply to compensation that is a grandfathered amount (as

defined in §1.162-33(g)) at the time it is

paid to the covered employee or otherwise

deductible. For examples of the application of the rules of this section to grandfathered amounts paid during or otherwise

deductible for taxable years beginning after December 31, 2017, see §1.162-33(g).

*****

Par. 3. Section 1.162-33 is added to

read as follows:

§1.162-33 Certain employee

remuneration in excess of $1,000,000 not

deductible for taxable years beginning

after December 31, 2017.

(a) Scope. This section provides rules

for the application of the $1 million deduction limitation under section 162(m)

(1) for taxable years beginning after December 31, 2017. For rules concerning the

applicability of section 162(m)(1) to taxable years beginning on or after January

1, 1994, and prior to January 1, 2018, see

§1.162-27. Paragraph (b) of this section

provides the general rule limiting deductions under section 162(m)(1). Paragraph

January 19, 2021

(c) of this section provides definitions of

generally applicable terms. Paragraph

(d) of this section provides rules for determining when a corporation becomes

a publicly held corporation. Paragraph

(e) of this section provides rules for payments that are subject to section 280G

(golden parachute payments). Paragraph

(f) of this section provides a special rule

for coordination with section 4985 (stock

compensation of insiders in expatriated

corporations). Paragraph (g) of this section provides transition rules addressing

the amendments made by Public Law

115-97, including the rules for contracts

that are grandfathered. Paragraph (h) of

this section sets forth the effective date

provisions. For rules concerning the deductibility of compensation for services

that are not covered by section 162(m)

(1) and this section, see section 162(a)(1)

and §1.162-7. This section is not determinative as to whether compensation meets

the requirements of section 162(a)(1). For

rules concerning the deduction limitation under section 162(m)(6) applicable

to certain health insurance providers, see

§1.162-31. For purposes of this section,

references to an amount being paid to an

employee refer to the event that otherwise

would result in the availability of a deduction to the employer with respect to such

amount, whether that results from an actual payment in cash, transfer of property, or

other event.

(b) Limitation on deduction. Section

162(m)(1) precludes a deduction under

chapter 1 of the Internal Revenue Code

by any publicly held corporation for compensation paid to any covered employee

to the extent that the compensation for the

taxable year exceeds $1,000,000.

(c) Definitions—(1) Publicly held corporation—(i) General rule. A publicly

held corporation means any corporation

that issues securities required to be registered under section 12 of the Exchange

Act or that is required to file reports under

section 15(d) of the Exchange Act. In addition, a publicly held corporation means

any S corporation (as defined in section

1361(a)(1)) that issues securities that are

required to be registered under section

12(b) of the Exchange Act, or that is required to file reports under section 15(d)

of the Exchange Act. For purposes of this

section, whether a corporation is publicly

January 19, 2021

held is determined based solely on whether, as of the last day of its taxable year,

the securities issued by the corporation 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. Whether registration under the Exchange Act is required

by rules other than those of the Exchange

Act is irrelevant to this determination. A

publicly traded partnership that is treated

as a corporation under section 7704 (or

otherwise) is a publicly held corporation

if, as of the last day of its taxable year, its

securities are required to be registered under section 12 of the Exchange Act or it is

required to file reports under section 15(d)

of the Exchange Act.

(ii) Affiliated groups—(A) In general. A publicly held corporation includes

an affiliated group of corporations (affiliated group), as defined in section 1504

(determined without regard to section

1504(b)), that includes one or more publicly held corporations (as defined in

paragraph (c)(1)(i) of this section). In the

case of an affiliated group that includes

two or more publicly held corporations as

defined in paragraph (c)(1)(i) of this section, each member of the affiliated group

that is a publicly held corporation as defined in paragraph (c)(1)(i) of this section

is separately subject to this section, and,

due to having at least one member that

is a publicly held corporation, the affiliated group as a whole is subject to this

section. Thus, for example, assume that

a publicly held corporation (as defined

in paragraph (c)(1)(i) of this section) is

a wholly-owned subsidiary of another

publicly held corporation (as defined in

paragraph (c)(1)(i) of this section), which

is a wholly-owned subsidiary of a privately held corporation. In this case, the

two subsidiaries are separately subject to

this section, and all three corporations

are members of an affiliated group that is

subject to this section. If an individual is

a covered employee of both subsidiaries,

each subsidiary has its own $1 million

deduction limitation with respect to that

covered employee. Furthermore, each

subsidiary has its own set of covered employees as defined in paragraphs (c)(2)(i)

through (iv) of this section (although the

same individual may be a covered employee of both subsidiaries).

358

(B) Proration of amount disallowed as

a deduction. If, in a taxable year, a covered employee (as defined in paragraphs

(c)(2)(i) through (v) of this section) of

one member of an affiliated group is paid

compensation by more than one member

of the affiliated group, compensation paid

by each member of the affiliated group is

aggregated with compensation paid to the

covered employee by all other members

of the affiliated group (excluding compensation paid by any other publicly held

corporation in the affiliated group, as defined in paragraph (c)(1)(i) of this section,

of which the individual is also a covered

employee as defined in paragraphs (c)(2)

(i) through (v) of this section). In the event

that, in a taxable year, a covered employee

(as defined in paragraphs (c)(2)(i) through

(v) of this section) is paid compensation

by more than one publicly held corporation in an affiliated group and is also a

covered employee of more than one publicly held payor corporation (as defined in

paragraph (c)(1)(i) of this section) in the

affiliated group, the amount disallowed as

a deduction is determined separately with

respect to each publicly held corporation

of which the individual is a covered employee. Any amount disallowed as a deduction by this section must be prorated

among the payor corporations (excluding

any other publicly held payor corporation

of which the individual is also a covered

employee) in proportion to the amount

of compensation paid to the covered employee (as defined in paragraphs (c)(2)(i)

through (v) of this section) by each such

corporation in the taxable year. For purposes of this paragraph (c)(1)(ii)(B), the

amount of compensation treated as paid by

a payor corporation that is not a publicly

held corporation (as defined in paragraph

(c)(1)(i) of this section) is determined by

prorating the amount actually paid by that

payor corporation in proportion to the total amount paid by all of the publicly held

corporations of which the individual is

a covered employee (as defined in paragraph (c)(2)(i) through (v) of this section).

This process is repeated for each publicly

held payor corporation of which the individual is a covered employee.

(iii) Disregarded entities. For purposes

of paragraph (c)(1) of this section, a publicly held corporation includes a corporation that owns an entity that is disregarded

Bulletin No. 2021–3

as an entity separate from its owner within

the meaning of §301.7701-2(c)(2)(i) of

this chapter if the disregarded entity 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.

(iv) Qualified subchapter S subsidiaries. For purposes of paragraph (c)(1) of

this section, a publicly held corporation

includes an S corporation that owns a

qualified subchapter S subsidiary as defined in section 1361(b)(3)(B) (QSub) if

the QSub 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.

(v) Qualified real estate investment

trust subsidiaries. For purposes of paragraph (c)(1) of this section, a publicly

held corporation includes a real estate investment trust as defined in section 856(a)

that owns a qualified real estate investment trust subsidiary as defined in section

856(i)(2) (QRS), 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.

(vi) Examples. The following examples illustrate the provisions of this paragraph (c)(1). For each example, assume

that no corporation is a predecessor of a

publicly held corporation within the meaning of paragraph (c)(2)(ii) of this section.

Furthermore, for each example, unless

provided otherwise, a reference to a publicly held corporation means a publicly

held corporation as defined in paragraph

(c)(1)(i) of this section. Additionally, for

each example, assume that the corporation

is a calendar-year taxpayer and has a fiscal

year ending December 31 for reporting

purposes under the Exchange Act. The examples in this paragraph (c)(1)(vi) are not

intended to provide guidance on the legal

requirements of the Securities Act and Exchange Act and the rules thereunder (17

CFR part 240).

(A) Example 1 (Corporation required to file reports under section 15(d) of the Exchange Act)—(1)

Facts. Corporation Z plans to issue debt securities in

a public offering registered under the Securities Act.

Corporation Z is not required to file reports under

section 15(d) of the Exchange Act for any other class

of securities and does not have another class of securities required to be registered under section 12 of the

Exchange Act. On April 1, 2021, the SEC declares

effective the Securities Act registration statement for

Bulletin No. 2021–3

Corporation Z’s debt securities. As a result, Corporation Z is required to file reports under section 15(d)

of the Exchange Act, and this requirement continues

to apply as of December 31, 2021.

(2) Conclusion. Corporation Z is a publicly held

corporation for its 2021 taxable year because it is

required to file reports under section 15(d) of the

Exchange Act as of the last day of its taxable year.

(B) Example 2 (Corporation not required to file

reports under section 15(d) of the Exchange Act)—

(1) Facts. The facts are the same as in paragraph (c)

(1)(vi)(A) of this section (Example 1), except that, on

January 1, 2022, pursuant to section 15(d) of the Exchange Act, Corporation Z’s obligation to file reports

under section 15(d) is automatically suspended for

the fiscal year ending December 31, 2022, because

Corporation Z meets the statutory requirements for

an automatic suspension. As of December 31, 2022,

Corporation Z is not required to file reports under

section 15(d) of the Exchange Act.

(2) Conclusion. Corporation Z is not a publicly

held corporation for its 2022 taxable year because

it is not required to file reports under section 15(d)

of the Exchange Act as of as of the last day of its

taxable year.

(C) Example 3 (Corporation not required to file

reports under section 15(d) of the Exchange Act)—

(1) Facts. The facts are the same as in paragraph (c)

(1)(vi)(B) of this section (Example 2), except that, on

January 1, 2022, pursuant to section 15(d) of the Exchange Act, Corporation Z’s obligation to file reports

under section 15(d) is not automatically suspended

for the fiscal year ending December 31, 2022. Instead, on May 2, 2022, Corporation Z is eligible to

suspend its section 15(d) reporting obligation under

17 CFR 240.12h-3 (Rule 12h-3 under the Exchange

Act) and files Form 15, Certification and Notice of

Termination of Registration under Section 12(g) of

the Securities Exchange Act of 1934 or Suspension

of Duty to File Reports under Sections 13 and 15(d)

of the Securities Exchange Act of 1934, (or its successor) to suspend its section 15(d) reporting obligation for its fiscal year ending December 31, 2022. As

of December 31, 2022, Corporation Z is not required

to file reports under section 15(d) of the Exchange

Act.

(2) Conclusion. Corporation Z is not a publicly

held corporation for its 2022 taxable year because

it is not required to file reports under section 15(d)

of the Exchange Act as of the last day of its taxable

year. If Corporation Z had not utilized Rule 12h-3

to suspend its section 15(d) reporting obligation,

Corporation Z would be a publicly held corporation

for its 2022 taxable year because it would have been

required to file reports under section 15(d) of the Exchange Act as of the last day of its taxable year.

(D) Example 4 (Corporation required to file reports under section 15(d) of the Exchange Act)—(1)

Facts. Corporation Y is a wholly-owned subsidiary

of Corporation X, which is required to file reports

under the Exchange Act. Corporation Y issued a

class of debt securities in a public offering registered

under the Securities Act, and therefore is required to

file reports under section 15(d) of the Exchange Act

for its fiscal year ending December 31, 2020. Corporation Y has no other class of securities registered

under the Exchange Act. In its Form 10-K, Annual

Report Pursuant to section 13 or section 15(d) of

359

the Securities Exchange Act of 1934, (or its successor) for the 2020 fiscal year, Corporation Y may

omit Item 11, Executive Compensation (required by

Part III of Form 10-K), which requires disclosure of

compensation of certain executive officers, because

it is wholly-owned by Corporation X and the other

conditions of General Instruction I to Form 10-K are

satisfied.

(2) Conclusion. Corporation Y is a publicly held

corporation for its 2020 taxable year because it is

required to file reports under section 15(d) of the

Exchange Act as of the last day of its taxable year.

(E) Example 5 (Corporation not required to file

reports under section 15(d) of the Exchange Act and

not required to register securities under section 12 of

the Exchange Act)—(1) Facts. Corporation A has a

class of securities registered under section 12(g) of

the Exchange Act. For its 2020 taxable year, Corporation A is a publicly held corporation. On September

30, 2021, Corporation A is eligible to terminate the

registration of its securities under section 12(g) of

the Exchange Act pursuant to 17 CFR 240.12g-4(a)

(2) (Rule 12g-4(a)(2) under the Exchange Act), but

does not terminate the registration of its securities

prior to December 31, 2021. Because Corporation

A did not issue securities in a public offering registered under the Securities Act, Corporation A is not

required to file reports under section 15(d) of the Exchange Act.

(2) Conclusion. Corporation A is not a publicly

held corporation for its 2021 taxable year because, as

of the last day of its taxable year, the securities issued

by Corporation A are not required to be registered

under section 12 of the Exchange Act and Corporation A is not required to file reports under section

15(d) of the Exchange Act.

(F) Example 6 (Corporation required to file reports under section 15(d) of the Exchange Act)—(1)

Facts. The facts are the same as in paragraph (c)(1)

(vi)(E) of this section (Example 5), except that Corporation A previously issued a class of securities

in a public offering registered under the Securities

Act. Furthermore, on October 1, 2021, Corporation

A terminates the registration of its securities under

section 12(g) of the Exchange Act. Because Corporation A issued a class of securities in a public offering

registered under the Securities Act and is not eligible to suspend its reporting obligation under section

15(d) of the Exchange Act, as of December 31, 2021,

Corporation A is required to file reports under section 15(d) of the Exchange Act.

(2) Conclusion. Corporation A is a publicly held

corporation for its 2021 taxable year because it is

required to file reports under section 15(d) of the

Exchange Act as of the last day of its taxable year.

(G) Example 7 (Corporation not required to file

reports under section 15(d) of the Exchange Act and

not required to register securities under section 12

of the Exchange Act)—(1) Facts. On November 1,

2021, Corporation B is an issuer with only one class

of equity securities. On November 5, 2021, Corporation B files a registration statement for its equity

securities under section 12(g) of the Exchange Act.

Corporation B’s filing of its registration statement

is voluntary because the Exchange Act does not require Corporation B to register its class of securities

under section 12(g) of the Exchange Act based on

the number and composition of its record holders.

January 19, 2021

On December 1, 2021, the SEC declares effective

the Exchange Act registration statement for Corporation B’s securities. As of December 31, 2021,

Corporation B continues to have its class of equity

securities registered voluntarily under section 12 of

the Exchange Act. Corporation B is not required to

file reports under section 15(d) of the Exchange Act

because it did not register any class of securities in a

public offering under the Securities Act.

(2) Conclusion. Corporation B is not a publicly

held corporation for its 2021 taxable year because,

as of the last day of that taxable year, the securities

issued by Corporation B are not required to be registered under section 12 of the Exchange Act and

Corporation B is not required to file reports under

section 15(d) of the Exchange Act.

(H) Example 8 (Corporation not required to file

reports under section 15(d) of the Exchange Act and

not required to register securities under section 12

of the Exchange Act)—(1) Facts. The facts are the

same as in paragraph (c)(1)(vi)(G) of this section

(Example 7), except that, on December 31, 2022,

because of a change in circumstances, Corporation

B must register its class of equity securities under

section 12(g) of the Exchange Act within 120 days

of December 31, 2022. On February 1, 2023, the

SEC declares effective the Exchange Act registration

statement for Corporation B’s securities.

(2) Conclusion. Corporation B is not a publicly

held corporation for its 2022 taxable year because,

as of the last day of that taxable year, Corporation B

is not required to file reports under section 15(d) of

the Exchange Act and the class of equity securities

issued by Corporation B is not yet required to be registered under section 12 of the Exchange Act.

(I) Example 9 (Securities of foreign private issuer in the form of ADRs traded in the over-the-counter

market)—(1) Facts. For its fiscal and taxable years

ending December 31, 2021, Corporation W is a foreign private issuer. Because Corporation W has not

registered an offer or sale of securities under the Securities Act, it is not required to file reports under

section 15(d) of the Exchange Act. Corporation W

qualifies for an exemption from registration of its

securities under section 12(g) of the Exchange Act

pursuant to 17 CFR 240.12g3-2(b) (Rule 12g3-2(b)

under the Exchange Act). Corporation W wishes to

have its securities traded in the U.S. in the over-thecounter market in the form of ADRs. Because Corporation W qualifies for an exemption pursuant to Rule

12g3-2(b), Corporation W is not required to register

its securities underlying the ADRs under section 12

of the Exchange Act; however, the depositary bank

is required to register the ADRs under the Securities

Act. Even though the depositary bank is required to

register the ADRs under the Securities Act, the registration of the ADRs does not result in either the

depositary bank or Corporation W being required to

file reports under section 15(d) of the Exchange Act.

On February 3, 2021, the SEC declares effective the

Securities Act registration statement for the ADRs.

On February 4, 2021, Corporation W’s ADRs begin

trading in the over-the-counter market. On December 31, 2021, the securities of Corporation W are

not required to be registered under section 12 of the

Exchange Act because Corporation W qualifies for

an exemption pursuant to Rule 240.12g3-2(b). Furthermore, on December 31, 2021, Corporation W is

January 19, 2021

not required to file reports under section 15(d) of the

Exchange Act.

(2) Conclusion. Corporation W is not a publicly

held corporation for its 2021 taxable year because, as

of the last day of that taxable year, the securities underlying the ADRs are not required to be registered

under section 12 of the Exchange Act and Corporation W is not required to file reports under section

15(d) of the Exchange Act. The result would be the

same if Corporation W had its securities traded in

the over-the-counter market other than in the form

of ADRs.

(J) Example 10 (Securities of foreign private issuer in the form of ADRs quoted on Over the Counter

Bulletin Board)—(1) Facts. The facts are the same as

in paragraph (c)(1)(vi)(I) of this section (Example 9),

except that Corporation W has its securities quoted

on the Over the Counter Bulletin Board (OTCBB) in

the form of ADRs. Because Corporation W qualifies

for an exemption pursuant to 17 CFR 240.12g3-2(b)

(Rule 12g3-2(b) under the Exchange Act), Corporation W is not required to register its securities underlying the ADRs under section 12 of the Exchange

Act. However, the depositary bank is required to register the ADRs under the Securities Act. In addition,

section 6530(b)(1) of the OTCBB Rules requires

that a foreign equity security may be quoted on the

OTCBB only if the security is registered with the

SEC pursuant to section 12 of the Exchange Act and

the issuer of the security is current in its reporting

obligations. To comply with the OTCBB Rules, on

February 5, 2021, Corporation W files a registration

statement for its class of securities underlying the

ADRs under section 12(g) of the Exchange Act. On

February 26, 2021, the SEC declares effective the

Exchange Act registration statement for Corporation

W’s securities. As of December 31, 2021, Corporation W is subject to the reporting obligations under

section 12 of the Exchange Act as a result of the section 12 registration.

(2) Conclusion. Corporation W is not a publicly

held corporation for its 2021 taxable year because,

as of the last day of that taxable year, its ADRs and

the securities underlying the ADRs are not required

by the Exchange Act to be registered under section

12 and Corporation W is not required to file reports

under section 15(d) of the Exchange Act. The Securities Act requirement applicable to the bank pursuant

to the OTCBB rules is irrelevant. The result would

be the same if Corporation W had its securities traded on the OTCBB other than in the form of ADRs.

(K) Example 11 (Securities of foreign private

issuer in the form of ADRs listed on a national securities exchange without a capital raising transaction)—(1) Facts. For its fiscal and taxable years

ending December 31, 2021, Corporation V is a foreign private issuer. Corporation V wishes to list its

securities on the New York Stock Exchange (NYSE)

in the form of ADRs without a capital raising transaction. Under the Exchange Act, Corporation V is required to register its securities underlying the ADRs

under section 12(b) of the Exchange Act. Because

the ADRs and the deposited securities are separate

securities, the depositary bank is required to register the ADRs under the Securities Act. On February

2, 2021, the SEC declares effective Corporation V’s

registration statement under section 12(b) of the

Exchange Act in connection with the underlying se-

360

curities, and the depositary bank’s registration statement under the Securities Act in connection with the

ADRs. On March 1, 2021, Corporation V’s securities

begin trading on the NYSE in the form of ADRs. As

of December 31, 2021, Corporation V is not required

to file reports under section 15(d) of the Exchange

Act; however, the securities underlying the ADRs

are required to be registered under section 12(b) of

the Exchange Act.

(2) Conclusion. Corporation V is a publicly held

corporation for its 2021 taxable year because, as of

the last day of that taxable year, the securities underlying the ADRs are required to be registered under

section 12 of the Exchange Act. The result would be

the same if Corporation V had its securities listed

on the NYSE other than in the form of ADRs. The

result also would be the same if Corporation V had

wished to raised capital during its 2021 taxable year

and been required to register the offer of securities

underlying the ADRs under the Securities Act and

to register the class of those securities under section

12(b) of the Exchange Act, and the depositary bank

was required to register the ADRs under the Securities Act.

(L) Example 12 (Foreign private issuer incorporates subsidiary in the United States to issue debt

securities and subsequently issues a guarantee)—(1)

Facts. For its fiscal and taxable years ending December 31, 2021, Corporation T is a foreign private issuer. Corporation T wishes to access the U.S. capital

markets. Corporation T incorporates Corporation U,

a wholly-owned subsidiary, in the U.S. to issue debt

securities. On January 15, 2021, the SEC declares

effective Corporation U’s Securities Act registration

statement. To enhance Corporation U’s credit and

the marketability of Corporation U’s debt securities,

Corporation T issues a guarantee of Corporation U’s

securities and, as required, registers the guarantee

under the Securities Act on Corporation U’s registration statement. On December 31, 2021, Corporations T and U are required to file reports under section 15(d) of the Exchange Act.

(2) Conclusion. Corporations T and U are publicly held corporations for their 2021 taxable years

because they are required to file reports under section

15(d) of the Exchange Act as of the last day of their

taxable years.

(M) Example 13 (Affiliated group comprised of

two corporations, one of which is a publicly held

corporation)—(1) Facts. Employee D, a covered

employee of Corporation N, receives compensation

from, Corporations N and O, members of an affiliated group. Corporation N, the parent corporation,

is a publicly held corporation. Corporation O is a

direct subsidiary of Corporation N and is a privately held corporation. The total compensation paid

to Employee D from the affiliated group members

is $3,000,000 for the taxable year, of which Corporation N pays $2,100,000 and Corporation O pays

$900,000.

(2) Conclusion. Because the compensation paid

by all affiliated group members is aggregated for

purposes of section 162(m)(1), $2,000,000 of the aggregate compensation paid is nondeductible. Corporations N and O each are treated as paying a ratable

portion of the nondeductible compensation. Thus,

two thirds of each corporation’s payment will be

nondeductible. Corporation N has a nondeductible

Bulletin No. 2021–3

compensation expense of $1,400,000 ($2,100,000

x $2,000,000/$3,000,000). Corporation O has a

nondeductible compensation expense of $600,000

($900,000 x $2,000,000/$3,000,000).

(N) Example 14 (Affiliated group comprised of

two corporations, one of which is a publicly held

corporation)—(1) Facts. The facts are the same as in

paragraph (c)(1)(vi)(M) of this section (Example 13),

except that Corporation O is a publicly held corporation, Corporation N is a privately held corporation,

and Employee D is a covered employee of Corporation O (instead of Corporation N).

(2) Conclusion. The result is the same as in paragraph (c)(1)(vi)(M) of this section (Example 13).

Even though subsidiary Corporation O is the publicly held corporation, Corporations N and O still comprise an affiliated group. Accordingly, $2,000,000 of

the aggregate compensation paid is nondeductible,

and Corporations N and O each are treated as paying

a ratable portion of the nondeductible compensation.

(O) Example 15 (Affiliated group comprised of

two publicly held corporations)—(1) Facts. The

facts are the same as in paragraph (c)(1)(vi)(M) of

this section (Example 13), except that Corporation O

is a publicly held corporation. As in paragraph (c)(1)

(vi)(M) of this section (Example 13), Employee D is

not a covered employee of Corporation O.

(2) Conclusion. The result is the same as in paragraph (c)(1)(vi)(M) of this section (Example 13).

Even though Corporations N and O each are publicly

held corporations, Corporations N and O comprise an

affiliated group for purposes of prorating the amount

disallowed as a deduction. Accordingly, $2,000,000

of the aggregate compensation paid is nondeductible,

and Corporations N and O each are treated as paying

a ratable portion of the nondeductible compensation.

(P) Example 16 (Affiliated group comprised of

two publicly held corporations)—(1) Facts. The

facts are the same as in paragraph (c)(1)(vi)(O) of

this section (Example 15), except that Employee D

also is a covered employee of Corporation O.

(2) Conclusion. Corporations N and O each

are publicly held corporations and separately

subject to this section, but also comprise an affiliated group. Because Employee D is a covered

employee of both Corporations N and O, each of

which is a separate publicly held corporation, the

determination of the amount disallowed as a deduction is made separately for each publicly held

corporation. Corporation N has a nondeductible

compensation expense of $1,100,000 (the excess

of $2,100,000 over $1,000,000), and Corporation

O has no nondeductible compensation expense because the amount it paid to Employee D did not

exceed $1,000,000.

(Q) Example 17 (Affiliated group comprised of

three corporations, one of which is a publicly held

corporation)—(1) Facts. Employee C, a covered

employee of publicly held parent Corporation P, receives compensation from Corporations P, Q, and R,

members of an affiliated group. Corporation Q is a

direct subsidiary of Corporation P, and Corporation

R is a direct subsidiary of Corporation Q. Corporations Q and R both are privately held. The total

compensation paid to Employee C from the affiliated

group members is $3,000,000 for the taxable year, of

which Corporation P pays $1,500,000, Corporation

Q pays $900,000, and Corporation R pays $600,000.

Bulletin No. 2021–3

(2) Conclusion. Because the compensation paid

by affiliated group members is aggregated for purposes of section 162(m)(1), $2,000,000 of the aggregate compensation paid is nondeductible. Corporations P, Q, and R each are treated as paying a

ratable portion of the nondeductible compensation.

Thus, two thirds of each corporation’s payment will

be nondeductible. The nondeductible compensation

expense for Corporation P is $1,000,000 ($1,500,000

x $2,000,000/$3,000,000); for Corporation Q is

$600,000 ($900,000 x $2,000,000/$3,000,000);

and for Corporation R is $400,000 ($600,000 x

$2,000,000/$3,000,000).

(R) Example 18 (Affiliated group comprised of

three corporations, one of which is a publicly held

corporation)—(1) Facts. The facts are the same as

in paragraph (c)(1)(vi)(Q) of this section (Example

17), except that Corporation Q is a publicly held corporation and Corporation P is a privately held corporation, and Employee C is a covered employee of

Corporation Q (instead of Corporation P).

(2) Conclusion. The result is the same as in

paragraph (c)(1)(vi)(Q) of this section (Example

17). Even though Corporation Q, the subsidiary, is

the publicly held corporation, Corporations P, Q,

and R comprise an affiliated group. Accordingly,

$2,000,000 of the aggregate compensation paid is

nondeductible, and Corporations P, Q, and R each

are treated as paying a ratable portion of the nondeductible compensation.

(S) Example 19 (Affiliated group comprised of

three corporations, two of which are publicly held

corporations)—(1) Facts. The facts are the same as

in paragraph (c)(1)(vi)(R) of this section (Example

18), except that Corporation R also is a publicly held

corporation. As in paragraph (c)(1)(vi)(R) of this

section (Example 18), Corporation Q is a publicly

held corporation, Corporation P is a privately held

corporation, and Employee C is a covered employee of Corporation Q but not a covered employee of

Corporation R.

(2) Conclusion. The result is the same as in

paragraph (c)(1)(vi)(R) of this section (Example

18). Even though Corporation R also is a publicly

held corporation, Corporations P, Q, and R comprise

an affiliated group. Accordingly, $2,000,000 of the

aggregate compensation paid is nondeductible, and

Corporations P, Q, and R each are treated as paying

a ratable portion of the nondeductible compensation.

(T) Example 20 (Affiliated group comprised of

three publicly held corporations)—(1) Facts. The

facts are the same as in paragraph (c)(1)(vi)(Q) of

this section (Example 17), except that Corporations

Q and R also are publicly held corporations, and Employee C is a covered employee of both Corporations

P and Q but is not a covered employee of Corporation R.

(2) Conclusion. Even though Corporations P,

Q, and R each are publicly held corporations, they

comprise an affiliated group. Because Employee C

is a covered employee of both Corporations P and

Q, the determination of the amount disallowed as

a deduction is separately prorated among Corporations P and R and among Corporations Q and R.

For each separate calculation of the total amount of

the disallowed deduction and the proration of the

disallowed deduction, the amount paid by Corporation R is taken into account in proportion to the

361

total compensation paid by Corporations P and Q.

With respect to Corporations P and R, $875,000 of

the aggregate compensation is nondeductible (the

excess of $1,875,000 (the sum of the compensation

paid by Corporation P ($1,500,000) and the portion of compensation paid by Corporation R that is

treated as allocable to Employee C being a covered

employee of Corporation P ($600,000 x $1,500,000/

($1,500,000 + $900,000) = $375,000) over the

$1,000,000 deduction limitation). Corporations P

and R each are treated as paying a ratable portion of

the nondeductible compensation. Corporation P has

a nondeductible compensation expense of $700,000

($1,500,000 x $875,000/$1,875,000), and Corporation R has a nondeductible compensation expense

of $175,000 ($375,000 x $875,000/$1,875,000).

For Corporations Q and R, $125,000 of the aggregate compensation is nondeductible (the excess of

$1,125,000 (the sum of the compensation paid by

Corporation Q ($900,000) and the portion of compensation paid by Corporation R that is treated as

allocable to Employee C being a covered employee

of Corporation Q ($600,000 x $900,000/($1,500,000

+ $900,000) = $225,000) over the $1,000,000 deduction limitation). Corporation Q has a nondeductible compensation expense of $100,000 ($900,000

x $125,000/$1,125,000), and Corporation R has a

nondeductible compensation expense of $25,000

($225,000 x $125,000/$1,125,000). The total nondeductible compensation expense for Corporation R is

$200,000.

(U) Example 21 (Affiliated group comprised of

three publicly held corporations)—(1) Facts. The

facts are the same as in paragraph (c)(1)(vi)(T) of

this section (Example 20), except that Employee C

does not receive any compensation from Corporation

R.

(2) Conclusion. Even though Corporations P,

Q, and R each are publicly held corporations and

separately subject to this section, they comprise an

affiliated group. Because Employee C is a covered

employee of, and receives compensation from, both

Corporations P and Q, each of which is a separate

publicly held corporation, the determination of the

amount disallowed as a deduction is made separately

for Corporations P and Q. Corporation P has a nondeductible compensation expense of $500,000 (the

excess of $1,500,000 over $1,000,000), and Corporation Q has no nondeductible compensation expense because the amount it paid to Employee C was

below $1,000,000.

(V) Example 22 (Affiliated group comprised of

three corporations, one of which is a publicly held

corporation)—(1) Facts. The facts are the same as

in paragraph (c)(1)(vi)(Q) of this section (Example

17), except that Corporation R is a direct subsidiary

of Corporation P (and not a direct subsidiary of Corporation Q).

(2) Conclusion. The result is the same as in

paragraph (c)(1)(vi)(Q) of this section (Example

17). Corporations P, Q, and R comprise an affiliated group. Accordingly, $2,000,000 of the aggregate

compensation paid is nondeductible, and Corporations P, Q, and R each are treated as paying a ratable

portion of the nondeductible compensation.

(W) Example 23 (Affiliated group comprised of

three publicly held corporations)—(1) Facts. The

facts are the same as in paragraph (c)(1)(vi)(V) of

January 19, 2021

this section (Example 22), except that Corporations

Q and R also are publicly held corporations, and Employee C is a covered employee of both Corporations

P and Q but not of Corporation R.

(2) Conclusion. The result is the same as in paragraph (c)(1)(vi)(V) of this section (Example 22).

Even though Corporations P, Q, and R each are publicly held corporations, they comprise an affiliated

group. Because Employee C is a covered employee

of both Corporations P and Q, the amount disallowed

as a deduction is prorated separately among Corporations P and R and among Corporations Q and R.

(X) Example 24 (Disregarded entity)—(1) Facts.

Corporation G is privately held for its 2020 taxable

year. Entity H, a limited liability company, is wholly-owned by Corporation G and is disregarded as an

entity separate from its owner under §301.7701-2(c)

(2)(i) of this chapter. As of December 31, 2020, Entity H is required to file reports under section 15(d) of

the Exchange Act.

(2) Conclusion. Because Entity H is required to

file reports under section 15(d) of the Exchange Act

and is disregarded as an entity separate from its owner, Corporation G is a publicly held corporation for

its 2020 taxable year. The result would be the same if

Corporation G was a REIT under section 856(a) and

Entity H was a QRS under section 856(i)(2).

(2) Covered employee—(i) General rule. Except as provided in paragraph

(c)(2)(vi) of this section, with respect to

a publicly held corporation as defined in

paragraph (c)(1) of this section (without

regard to paragraph (c)(1)(ii) of this section), for the publicly held corporation’s

taxable year, a covered employee means

any of the following—

(A) The principal executive officer

(PEO) or principal financial officer (PFO)

of the publicly held corporation serving at

any time during the taxable year, including

individuals acting in either such capacity.

(B) The three highest compensated

executive officers of the publicly held

corporation for the taxable year (other

than the principal executive officer or

principal financial officer, or an individual acting in such capacity), regardless

of whether the executive officer is serving at the end of the publicly held corporation’s taxable year, and regardless of

whether the executive officer’s compensation is subject to disclosure for the last

completed fiscal year under the executive

compensation disclosure rules under the

Exchange Act. For purposes of this paragraph (c)(2)(i)(B), the term “executive

officer” means an executive officer as defined in 17 CFR 240.3b-7. The amount of

compensation used to identify the three

most highly compensated executive officers for the taxable year is determined

January 19, 2021

pursuant to the executive compensation

disclosure rules under the Exchange Act

(using the taxable year as the fiscal year

for purposes of making the determination), regardless of whether the corporation’s fiscal year and taxable year end on

the same date.

(C) Any individual who was a covered

employee of the publicly held corporation

(or any predecessor of a publicly held corporation, within the meaning of paragraph

(c)(2)(ii) of this section) for any preceding

taxable year beginning after December 31,

2016. For taxable years beginning prior to

January 1, 2018, covered employees are

identified in accordance with the rules in

§1.162-27(c)(2).

(ii) Predecessor of a publicly held corporation—(A) Publicly held corporations

that become privately held. For purposes

of this paragraph (c)(2)(ii), a predecessor

of a publicly held corporation includes a

publicly held corporation that, after becoming a privately held corporation, again

becomes a publicly held corporation for a

taxable year ending before the 36-month

anniversary of the due date for the corporation’s U.S. Federal income tax return

(disregarding any extensions) for the last

taxable year for which the corporation

was previously publicly held.

(B) Corporate reorganizations. A predecessor of a publicly held corporation

includes a publicly held corporation the

stock or assets of which are acquired in

a corporate reorganization (as defined in

section 368(a)(1)).

(C) Corporate divisions. A predecessor

of a publicly held corporation includes a

publicly held corporation that is a distributing corporation (within the meaning of

section 355(a)(1)(A)) that distributes the

stock of a controlled corporation (within

the meaning of section 355(a)(1)(A)) to its

shareholders in a distribution or exchange

qualifying under section 355(a)(1) (corporate division). The rule of this paragraph

(c)(2)(ii)(C) applies only with respect to

covered employees of the distributing

corporation who begin performing services for the controlled corporation (or

for a corporation affiliated with the controlled corporation that receives stock of

the controlled corporation in the corporate

division) within the period beginning 12

months before and ending 12 months after

the distribution.

362

(D) Affiliated groups. A predecessor

of a publicly held corporation includes

any other publicly held corporation that

becomes a member of its affiliated group

(as defined in paragraph (c)(1)(ii) of this

section).

(E) Asset acquisitions. If a publicly

held corporation, including one or more

members of an affiliated group as defined

in paragraph (c)(1)(ii) of this section (acquiror), acquires at least 80% of the gross

operating assets (determined by fair market value on the date of acquisition) of

another publicly held corporation (target),

then the target is a predecessor of the acquiror. For an acquisition of assets that occurs over time, only assets acquired within

a 12-month period are taken into account

to determine whether at least 80% of the

target’s gross operating assets were acquired. However, this 12-month period is

extended to include any continuous period

that ends on, or begins on, any day during

which the acquiror has an arrangement

to purchase, directly or indirectly, assets

of the target. A shareholder’s additions to

the assets of target made as part of a plan

or arrangement to avoid the application

of this subsection to acquiror’s purchase

of target’s assets are disregarded in applying this paragraph (c)(2)(ii)(E). This

paragraph (c)(2)(ii)(E) applies only with

respect to the target’s covered employees who begin performing services for

the acquiror (or a corporation affiliated

with the acquiror) within the period beginning 12 months before and ending 12

months after the date of the transaction as

defined in paragraph (c)(2)(ii)(I) of this

section (incorporating any extensions to

the 12-month period made pursuant to this

paragraph).

(F) Predecessor of a predecessor. For

purposes of this paragraph (c)(2)(ii), a

predecessor of a corporation includes each

predecessor of the corporation and the

predecessor or predecessors of any prior

predecessor or predecessors.

(G) Corporations that are not publicly held at the time of the transaction and

sequential transactions–(1) Predecessor

corporation is not publicly held at the

time of the transaction. This paragraph

(c)(2)(ii)(G)(1) applies if a corporation

that was previously publicly held (the

first corporation) would be a predecessor

to another corporation (the second corpo-

Bulletin No. 2021–3

ration) under the rules of this paragraph

(c)(2)(ii) but for the fact that the first corporation is not a publicly held corporation at the time of the relevant transaction

(or transactions). If this paragraph (c)(2)

(ii)(G)(1) applies, the first corporation is

a predecessor of a publicly held corporation if the second corporation is a publicly held corporation at the time of the

relevant transaction (or transactions) and

the relevant transaction (or transactions)

take place during a taxable year ending

before the 36-month anniversary of the

due date for the first corporation’s U.S.

Federal income tax return (excluding any

extensions) for the last taxable year for

which the first corporation was previously publicly held.

(2) Second corporation is not publicly held at the time of the transaction.

This paragraph (c)(2)(ii)(G)(2) applies

if a corporation that is publicly held (the

first corporation) at the time of the relevant transaction (or transactions) would

be a predecessor to another corporation

(the second corporation) under the rules

of this paragraph (c)(2)(ii) but for the

fact that the second corporation is not a

publicly held corporation at the time of

the relevant transaction (or transactions).

If this paragraph (c)(2)(ii)(G)(2) applies,

the first corporation is a predecessor of

a publicly held corporation if the second

corporation becomes a publicly held corporation for a taxable year ending before

the 36-month anniversary of the due date

for the first corporation’s U.S. Federal

income tax return (excluding any extensions) for the first corporation’s last taxable year in which the transaction is taken

into account.

(3) Neither corporation is publicly held

at the time of the transaction. This paragraph (c)(2)(ii)(G)(3) applies if a corporation that was previously publicly held (the

first corporation) would be a predecessor

to another corporation (the second corporation) under the rules of this paragraph

(c)(2)(ii) but for the fact that neither the

first corporation nor the second corporation is a publicly held corporation at the

time of the relevant transaction (or transactions). If this paragraph (c)(2)(ii)(G)(3)

applies, the first corporation is a predecessor of a publicly held corporation if the

second corporation becomes a publicly

held corporation for a taxable year ending

Bulletin No. 2021–3

before the 36-month anniversary of the

due date for the first corporation’s U.S.

Federal income tax return (excluding any

extensions) for the last taxable year for

which the first corporation was previously

publicly held.

(4) Sequential transactions. If a corporation that was previously publicly held

(the first corporation) would be a predecessor to another corporation (the second

corporation) under the rules of this paragraph (c)(2)(ii) but for the fact that the

first corporation is (or its assets are) transferred to one or more intervening corporations prior to being transferred to the second corporation, and if each intervening

corporation would be a predecessor of a

publicly held corporation with respect to

the second corporation if the intervening

corporation or corporations were publicly

held corporations, then paragraphs (c)(2)

(ii)(G)(1) through (3) of this section also

apply without regard to the intervening

corporations.

(H) Elections under sections 336(e)

and 338. For purposes of this paragraph

(c)(2), if a corporation makes an election

to treat as an asset purchase either the sale,

exchange, or distribution of stock pursuant to regulations under section 336(e)

(§§1.336-1 through 1.336-5) or the purchase of stock pursuant to regulations under section 338 (§§1.338-1 through 1.33811, 1.338(h)(10)-1, and 1.338(i)-1), the

corporation that issued the stock is treated

as the same corporation both before and

after such transaction.

(I) Date of transaction. For purposes

of this paragraph (c)(2)(ii), the date that

a transaction is treated as having occurred

is the date on which all events necessary

for the transaction to be described in the

relevant provision in this paragraph (c)(2)

(ii) have occurred.

(J) Publicly traded partnership. For

purposes of applying this paragraph (c)

(2)(ii), a publicly traded partnership is a

predecessor of a publicly held corporation

if under the same facts and circumstances

a corporation substituted for the publicly

traded partnership would be a predecessor of the publicly held corporation, and

at the time of the transaction the publicly

traded partnership is treated as a publicly

held corporation as defined in paragraph

(c)(1)(i) of this section. In making this determination, the rules in paragraphs (c)(2)

363

(ii)(A) through (I) of this section apply by

analogy to publicly traded partnerships.

(iii) Disregarded entities. If a publicly held corporation under paragraph (c)

(1) of this section owns an entity that is

disregarded as an entity separate from its

owner under §301.7701-2(c)(2)(i) of this

chapter, then the covered employees of the

publicly held corporation are determined

pursuant to paragraphs (c)(2)(i) and (ii)

of this section. The executive officers of

the entity that is disregarded as an entity

separate from its corporate owner under

§301.7701-2(c)(2)(i) of this chapter are

neither covered employees of the entity

nor of the publicly held corporation unless they meet the definition of covered

employee in paragraphs (c)(2)(i) and (ii)

of this section with respect to the publicly

held corporation, in which case they are

covered employees for its taxable year.

(iv) Qualified subchapter S subsidiaries. If a publicly held corporation under

paragraph (c)(1) of this section owns an

entity that is a QSub under section 1361(b)

(3)(B), then the covered employees of the

publicly held corporation are determined

pursuant to paragraphs (c)(2)(i) and (ii)

of this section. The executive officers of

the QSub are neither covered employees

of the QSub nor of the publicly held corporation unless they meet the definition of

covered employee in paragraphs (c)(2)(i)

and (ii) of this section with respect to the

publicly held corporation, in which case

they are covered employees for the taxable year of the publicly held corporation.

(v) Qualified real estate investment

trust subsidiaries. If a publicly held corporation under paragraph (c)(1) of this

section owns an entity that is a QRS under

section 856(i)(2), then the covered employees of the publicly held corporation

are determined pursuant to paragraphs

(c)(2)(i) and (ii) of this section. The executive officers of the QRS are neither

covered employees of the QRS nor of

the publicly held corporation unless they

meet the definition of covered employee in paragraphs (c)(2)(i) and (ii) of this

section with respect to the publicly held

corporation, in which case they are covered employees for the taxable year of the

publicly held corporation.

(vi) Covered employee of an affiliated group. A person who is identified as

a covered employee in paragraphs (c)(2)

January 19, 2021

(i) through (v) of this section for a publicly held corporation’s taxable year is also

a covered employee for the taxable year

of an affiliated group treated as a publicly

held corporation pursuant to paragraph (c)

(1)(ii) of this section (treatment of an affiliated group).

(vii) Examples. The following examples illustrate the provisions of this paragraph (c)(2). For each example, assume

that the corporation has a taxable year

that is a calendar year and has a fiscal

year ending December 31 for reporting

purposes under the Exchange Act. Also,

for each example, unless provided otherwise, assume that none of the employees

were covered employees for any taxable

year preceding the first taxable year set

forth in that example (since being a covered employee for a preceding taxable

year would provide a separate, independent basis for classifying that employee

as a covered employee for a subsequent

taxable year).

(A) Example 1 (Covered employees of members

of an affiliated group)—(1) Facts. Corporations A,

B, and C are direct wholly-owned subsidiaries of

Corporation D. Corporations D and A are each publicly held corporations as of December 31, 2020.

Corporations B and C are not publicly held corporations for their 2020 taxable years. Employee E

served as the PEO of Corporation D from January

1, 2020, to March 31, 2020. Employee F served as

the PEO of Corporation D from April 1, 2020, to

December 31, 2020. Employee G served as the PEO

of Corporation A for its entire 2020 taxable year.

Employee H served as the PEO of Corporation B

for its entire 2020 taxable year. Employee I served

as the PEO of Corporation C for its entire 2020 taxable year. From April 1, 2020, through September

30, 2020, Employee E served as an advisor (not as

a PEO) to Employee I and received compensation

from Corporation C for these services. In 2020, all

four corporations paid compensation to their respective PEOs.

(2) Conclusion (Employees E and F). Because

both Employees E and F served as the PEO of Corporation D during its 2020 taxable year, both Employees E and F are covered employees of Corporation D for its 2020 and subsequent taxable years.

(3) Conclusion (Employee G). Because Employee G served as the PEO of Corporation A, Employee G is a covered employee of Corporation A for its

2020 and subsequent taxable years.

(4) Conclusion (Employee H). Even though Employee H served as the PEO of Corporation B, Employee H is not a covered employee of Corporation

B for its 2020 taxable year, because Corporation B

is considered a publicly held corporation solely by

reason of being a member of an affiliated group as

defined in paragraph (c)(1)(ii) of this section.

(5) Conclusion (Employee I). Even though Employee I served as the PEO of Corporation C, Em-

January 19, 2021

ployee I is not a covered employee of Corporation

C for its 2020 taxable year, because Corporation C

is considered a publicly held corporation solely by

reason of being a member of an affiliated group as

defined in paragraph (c)(1)(ii) of this section.

(B) Example 2 (Covered employees of a publicly

held corporation)—(1) Facts. Corporation J is a publicly held corporation. Corporation J is not a smaller

reporting company or emerging growth company for

purposes of reporting under the Exchange Act. For

2020, Employee K served as the sole PEO of Corporation J and Employees L and M both served as the

PFO of Corporation J at separate times during the

year. Employees N, O, and P were, respectively, the

first, second, and third highest compensated executive officers of Corporation J for 2020 other than the

PEO and PFO, and all three retired before December

31, 2020. Employees Q, R, and S were, respectively, Corporation J’s fourth, fifth, and sixth highest

compensated executive officers other than the PEO

and PFO for 2020, and all three were serving as of

December 31, 2020. On March 1, 2021, Corporation

J filed its Form 10-K, Annual Report Pursuant to

Section 13 or 15(d) of the Securities Exchange Act

of 1934 with the SEC. With respect to Item 11, Executive Compensation (as required by Part III of Form

10-K, or its successor), Corporation J disclosed the

compensation of Employee K for serving as the PEO,

Employees L and M for serving as the PFO, and Employees Q, R, and S pursuant to 17 CFR 229.402(a)

(3)(iii) (Item 402 of Regulation S-K). Corporation J

also disclosed the compensation of Employees N and

O pursuant to 17 CFR 229.402(a)(3)(iv) (Item 402 of

Regulation S-K).

(2) Conclusion (Employee K). Because Employee K served as the PEO during 2020, Employee K is

a covered employee for Corporation J’s 2020 taxable

year.

(3) Conclusion (Employees L and M). Because

Employees L and M served as the PFO during 2020,

Employees L and M are covered employees for Corporation J’s 2020 taxable year.

(4) Conclusion (Employees N, O, P, Q, R, and S).

Even though the executive compensation disclosure

rules under the Exchange Act require Corporation

J to disclose the compensation of Employees N, O,

Q, R, and S for 2020, Corporation J’s three highest

compensated executive officers who are covered employees for its 2020 taxable year are Employees N,

O, and P, because these are the three highest compensated executive officers other than the PEO and

PFO for 2020.

(C) Example 3 (Covered employees of a smaller reporting company)—(1) Facts. The facts are the

same as in paragraph (c)(2)(vii)(B) of this section

(Example 2), except that Corporation J is a smaller

reporting company or emerging growth company for

purposes of reporting under the Exchange Act. With

respect to Item 11, Executive Compensation, Corporation J disclosed the compensation of Employee K

for serving as the PEO, Employees Q and R pursuant

to 17 CFR 229.402(m)(2)(ii) (Item 402(m) of Regulation S-K), and Employees N and O pursuant to 17

CFR 229.402(m)(2)(iii) (Item 402(m) of Regulation

S-K).

(2) Conclusion. The result is the same as in

paragraph (c)(2)(vii)(L) of this section (Example

364

2). For purposes of identifying a corporation’s covered employees, it is irrelevant whether the reporting obligation under the Exchange Act for smaller

reporting companies and emerging growth companies apply to the corporation, and it is irrelevant

whether the specific executive officers’ compensation must be disclosed pursuant to the disclosure

rules under the Exchange Act applicable to the

corporation.

(D) Example 4 (Covered employees of a publicly held corporation that is not required to file a

Form 10-K)—(1) Facts. The facts are the same as in

paragraph (c)(2)(vii)(B) of this section (Example 2),

except that on February 4, 2021, Corporation J files

Form 15, Certification and Notice of Termination of

Registration under Section 12(g) of the Securities

Exchange Act of 1934 or Suspension of Duty to File

Reports under Sections 13 and 15(d) of the Securities

Exchange Act of 1934, (or its successor) to terminate

the registration of its securities. Corporation J’s duty

to file reports under Section 13(a) of the Exchange

Act is suspended upon the filing of the Form 15

and, as a result, Corporation J is not required to file

a Form 10-K and disclose the compensation of its

executive officers for 2020.

(2) Conclusion. The result is the same as in

paragraph (c)(2)(vii)(B) of this section (Example

2). Covered employees include executive officers of

a publicly held corporation even if the corporation

is not required to disclose the compensation of its

executive officers under the Exchange Act. Therefore, Employees K, L, M, N, O, and P are covered

employees for 2020. The result would be different

if Corporation J filed Form 15 to terminate the registration of its securities prior to December 31, 2020.

In that case, Corporation J would not be a publicly

held corporation for its 2020 taxable year, and, therefore, Employees K, L, M, N, O, and P would not be

covered employees for Corporation J’s 2020 taxable

year.

(E) Example 5 (Covered employees of two publicly held corporations after a corporate transaction)—(1) Facts. Corporation T is a publicly held

corporation for its 2019 taxable year. Corporation

U is a privately held corporation for its 2019 and

2020 taxable years. On July 31, 2020, Corporation

U acquires for cash 80% of the only class of outstanding stock of Corporation T. The affiliated group

(comprised of Corporations U and T) elects to file a

consolidated Federal income tax return. As a result

of this election, Corporation T has a short taxable

year ending on July 31, 2020. Corporation T does

not change its fiscal year for reporting purposes

under the Exchange Act to correspond to the short

taxable year. Corporation T remains a publicly held

corporation for its short taxable year ending on July

31, 2020, and its subsequent taxable year ending on

December 31, 2020, for which it files a consolidated

Federal income tax return with Corporation U. For

Corporation T’s taxable year ending July 31, 2020,

Employee V serves as the only PEO, and Employee W serves as the only PFO. Employees X, Y, and

Z are the three most highly compensated executive

officers of Corporation T for the taxable year ending

July 31, 2020, other than the PEO and PFO. As a

result of the acquisition, effective July 31, 2020, Employee V ceases to serve as the PEO of Corporation

Bulletin No. 2021–3

T. Instead, Employee AA starts serving as the PEO

of Corporation T on August 1, 2020. Employee V

continues to provide services for Corporation T but

never serves as PEO again (or as an individual acting

in such capacity). For Corporation T’s taxable year

ending December 31, 2020, Employee AA serves as

the only PEO, and Employee W serves as the only

PFO. Employees X, Y, and Z continue to serve as executive officers of Corporation T during the taxable

year ending December 31, 2020. Employees BB,

CC, and DD are the three most highly compensated

executive officers of Corporation T, other than the

PEO and PFO, for the taxable year ending December

31, 2020.

(2) Conclusion (Employee V). Because Employee V served as the PEO during Corporation T’s short

taxable year ending July 31, 2020, Employee V is a

covered employee for Corporation T’s short taxable

year ending July 31, 2020, even though Employee

V’s compensation is required to be disclosed pursuant to the executive compensation disclosure rules

under the Exchange Act only for the fiscal year ending December 31, 2020. Because Employee V was a

covered employee for Corporation T’s short taxable

year ending July 31, 2020, Employee V is also a covered employee for Corporation T’s short taxable year

ending December 31, 2020.

(3) Conclusion (Employee W). Because Employee W served as the PFO during Corporation T’s short

taxable years ending July 31, 2020, and December

31, 2020, Employee W is a covered employee for

both taxable years, even though Employee W’s compensation is required to be disclosed pursuant to the

executive compensation disclosure rules under the

Exchange Act only for the fiscal year ending December 31, 2020. Because Employee W was a covered

employee for Corporation T’s short taxable year ending July 31, 2020, Employee W would be a covered

employee for Corporation T’s short taxable year ending December 31, 2020, even if Employee W did not

serve as the PFO during this taxable year.

(4) Conclusion (Employee AA). Because Employee AA served as the PEO during Corporation

T’s short taxable year ending December 31, 2020,

Employee AA is a covered employee for that short

taxable year.

(5) Conclusion (Employees X, Y, and Z). Employees X, Y, and Z are covered employees for Corporation T’s short taxable years ending July 31, 2020,

and December 31, 2020. Employees X, Y, and Z are

covered employees for Corporation T’s short taxable

year ending July 31, 2020, because those employees

are the three highest compensated executive officers

for that short taxable year. Because they were covered employees for Corporation T’s short taxable

year ending July 31, 2020, Employees X, Y, and Z

are covered employees for Corporation T’s short taxable year ending December 31, 2020 and would be

covered employees for that later short taxable year

even if their compensation would not be required to

be disclosed pursuant to the executive compensation

disclosure rules under the Exchange Act.

(6) Conclusion (Employees BB, CC, and DD).

Employees BB, CC, and DD are covered employees

for Corporation T’s short taxable year ending December 31, 2020, because those employees are the

three highest compensated executive officers for that

short taxable year.

Bulletin No. 2021–3

(F) Example 6 (Predecessor of a publicly held

corporation)—(1) Facts. Corporation EE is a publicly held corporation for its 2021 taxable year. Corporation EE is a privately held corporation for its 2022

and 2023 taxable years. For its 2024 taxable year,

Corporation EE is a publicly held corporation.

(2) Conclusion. For its 2024 taxable year, Corporation EE is a predecessor of a publicly held corporation within the meaning of paragraph (c)(2)(ii)(A)

of this section because, after ceasing to be a publicly

held corporation, it again became a publicly held

corporation for a taxable year ending prior to April

15, 2025. Therefore, for Corporation EE’s 2024 taxable year, the covered employees of Corporation EE

include the covered employees of Corporation EE

for its 2021 taxable year and any additional covered

employees determined pursuant to this paragraph (c)

(2).

(G) Example 7 (Predecessor of a publicly held

corporation)—(1) Facts. The facts are the same as in

paragraph (c)(2)(vii)(F) of this section (Example 6),

except that Corporation EE remains a privately held

corporation until it becomes a publicly held corporation for its 2027 taxable year.

(2) Conclusion. Corporation EE is not a predecessor of a publicly held corporation within the

meaning of paragraph (c)(2)(ii)(A) of this section

because it became a publicly held corporation for

a taxable year ending after April 15, 2025. Therefore, any covered employee of Corporation EE for

its 2021 taxable year is not a covered employee of

Corporation EE for its 2027 taxable year due to that

individual’s status as a covered employee of Corporation EE for a preceding taxable year (beginning

after December 31, 2016) but may be a covered employee due to that individual’s status during the 2027

taxable year.

(H) Example 8 (Predecessor of a publicly held

corporation that is party to a merger)—(1) Facts.

On June 30, 2021, Corporation FF (a publicly held

corporation) merged into Corporation GG (a publicly held corporation) in a transaction that qualifies

as a reorganization under section 368(a)(1)(A), with

Corporation GG as the surviving corporation. As

a result of the merger, Corporation FF has a short

taxable year ending June 30, 2021. Corporation FF

is a publicly held corporation for this short taxable

year. Corporation GG does not have a short taxable

year and is a publicly held corporation for its 2021

taxable year.

(2) Conclusion. Corporation FF is a predecessor

of a publicly held corp

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