On December 17, I blogged on the new Proposed Regulations on the changes to Code Section 162(m) made by the Tax Cuts and Jobs Act of 2017. Today, I will focus on just one aspect of the proposed regs: the expanded definition of “publicly held corporation.” A significant portion of the text of the proposed regs is devoted to the new definition of a publicly held corporation, including 26 examples.
Recall that prior to 2018, the $1 million deductibility cap of Section 162(m) only applied to a corporation issuing any class of common equity securities required to be registered under section 12 of the Exchange Act. The Tax Cuts and Jobs Act amended the definition of “publicly held corporation” in 162(m), extending its application to any company that is required to file reports under section 15(d) of such Act. Therefore, the deductibility cap now applies to many corporations that are not publicly traded and have never thought of themselves as “public,” including certain large private C or S corporations.
The simplest example of a corporation now subject to the 162(m) $1 million deductibility cap is a corporation that is required to file reports under Section 15(d) because it issues or has issued debt securities in a public offering registered under the Securities Act. These are easy to spot because they current file Form 10-K but not a proxy statement. And of course, the deductibility cap applies to companies that do not (or no longer) qualify for the exemption from registration available under section 12(g) for companies with total assets not exceeding $10,000,000 and a class of equity security held by either (i) 2,000 persons, or (ii) 500 persons who are not accredited investors (note that the 500 accredited investor exception is not available to banks, savings and loan holding companies, and a bank holding companies).
More complicated are the rules for a foreign private issuer with ADRs trading, affiliated groups of corporations in which one or more is required to be registered under section 12 or required to file reports under section 15(d) of the Exchange Act, and disregarded entities.
Foreign Private Issuer with ADRs: Generally, if the ADRs are listed on a national securities exchange (with or without a capital raising transaction) the foreign private issuer would be subject to 162(m). However, if the ADRs are traded in the over-the-counter market or quoted on over the counter bulletin board (OTCBB), generally the foreign private issuer would not be subject to 162(m) if it qualifies for an exemption from registration under Rule 12g3-2(b) (e.g., it maintains a listing of the subject class of securities on an exchange in a foreign jurisdiction that constitutes the primary trading market for those securities). This is true even when the depositary bank is required to register the ADRs under the Securities Act.
Affiliated Groups of Corporations One or More of Which are Public: The compensation paid by members of an affiliated groups of corporations one or more of which has securities required to be registered under section 12 or is required to file reports under section 15(d) of the Exchange Act, will be subject to 162(m). However, the allocation of the lost deduction among the affiliated corporations will be based on which corporation(s) employ the covered employee and which corporation(s) have securities required to be registered or are required to file reports under the Exchange Act.
Disregarded Entities: Not surprisingly, where a disregarded entity that is an issuer of securities that are required to be registered under section 12(b) or is required to file reports under section 15(d) of the Exchange Act, is owned by a privately held corporation, the proposed regulations treat the privately held corporation as a publicly held corporation for purposes of section 162(m).
Finally, a publicly traded partnership (PTP) that is not treated as a corporation for Federal tax purposes is not subject to 162(m), but a PTP that is treated as a corporation under Code Section 7704 (or otherwise) is subject to 162(m) if its securities are required to be registered under section 12 or it is required to file reports under section 15(d), of the Exchange Act. A).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.