After the change in securities disclosure laws back in 2006, it was a common statement that the CFO of a public company was no longer covered by the $1 million deduction limit on non-performance based compensation under 162(m) of the tax code. This was (and is) because of a disconnect between the securities laws and the tax code.
The tax code says that the chief executive officer and each of the next four most highly compensated officers whose compensation is required to be disclosed pursuant to the securities rules are “covered employees” for purposes of the $1 million limit. The 2006 changes in the securities rules changed the disclosure rules to require disclosure of compensation of the principal executive officer (usually the CEO), the principal financial officer (usually the CFO), and the three most highly compensated executive officers other than the principal executive officer and the principal financial officer and up to two additional individuals in certain circumstances). The IRS said that lack of a reference to the “principal financial officer” in the tax code meant that CFOs, by and large, were exempt from 162(m).
However, when legal regimes cross, it’s not always as simple as it seems. For smaller reporting companies (generally those with less than a $75 million in public float), the securities rules only require disclosure of the compensation of the principal executive officer (usually the CEO) and the next two most highly compensated executive officers (other than the principal executive officer). There is no reference to the principal financial officer (by title) in these rules.
In recent guidance (a Chief Counsel memo, to be specific), the IRS stated that, for a smaller reporting company, a CFO can be subject to 162(m) if he or she is among the two most highly compensated executive officers (other than the principal executive officer). Given the interaction of the tax code and the securities rules, this makes sense, and smaller reporting companies were likely already observing this rule. However, it serves as an important reminder to confirm any conclusion that involves the interaction of two different legal regimes.