Differences between the Securities and Exchange Commission's (the "SEC's") new compensation disclosure rules and the original language of Section 162(m) of the Internal Revenue Code (the "Code") have led to a surprising result — chief financial officers are no longer subject to the million-dollar limitations on deductible compensation to certain officers of public companies. On June 5, 2007, the IRS released Notice 2007-49 clarifying the application of Code Section 162(m) to officers of publicly-traded companies. The clarification was a response to recent changes in the SEC's rules governing executive compensation disclosure, which require automatic disclosure of compensation to the registrant's chief financial officer (regardless of whether the chief financial officer is one of the registrant's most highly compensated officers).1 Notice 2007-49 confirms that chief financial officers are no longer subject to Code Section 162(m) (because, unlike the definition of "named executive officers" in the SEC rules, the definition of "covered employees," who are subject to Code Section 162(m), does not automatically include the chief financial officer).
Code Section 162(m) generally provides that annual compensation (other than performance-based compensation) over $1 million is not deductible if paid to a "covered employee" of a publicly-held corporation. Code Section 162(m) generally defines a "covered employee" as an employee of a publicly-traded taxpayer if (a) as of the close of the taxable year, such employee is the chief executive officer of the taxpayer, or (b) the total compensation of such employee for the taxable year is required to be reported to shareholders by reason of such employee being among the four highest compensated officers for the taxable year (other than the chief executive officer). This definition of "covered employee" under Code Section 162(m) mirrored the definition of "named executive officer" under the SEC's executive compensation disclosure rules prior to the changes to such rules in 2006.
However, the SEC's new executive compensation disclosure rules revised the definition of "named executive officers" in Item 402(a)(3) of Regulation S-K. "Named executive officers" for whom compensation disclosure is now required include the registrant's principal executive officer, principal financial officer and the three most highly compensated officers other than the principal executive officer and the principal financial officer.2 Generally, Notice 2007-49 explains that Code Section 162(m) will now be interpreted as applying to the following employees of a publicly-traded taxpayer: (a) the chief executive officer of the taxpayer at the close of the taxable year, and (b) the three most highly compensated officers of the taxpayer (other than the chief executive officer and the chief financial officer) whose compensation for the taxable year is required to be reported to shareholders. Consequently, and surprisingly, the chief financial officer of a publicly-traded taxpayer will not be subject to Code Section 162(m).