Many public companies include a description of Section 162(m) of the Internal Revenue Code in their proxy statements without distinguishing the application of 162(m) between various categories of issuers such as accelerated filers and smaller reporting companies.
Section 162(m)(1) of the Code provides that for any publicly held corporation no deduction shall be allowed for applicable employee remuneration with respect to any “covered employee” to the extent that the amount of such remuneration for the taxable year exceeds $1 million. When describing and applying Section 162(m), many public companies have relied on IRS Notice 2007-49. That Notice provides that the term “covered employee” for purposes of Section 162(m) does not include those individuals for whom disclosure is required under the Exchange Act by reason of the individual being the taxpayer’s principal financial officer, or PFO (most of the world other than the SEC refers to PFOs as Chief Financial Officers or CFOs).
However the IRS has informally revised its guidance in this Chief Counsel Advice dated August 24, 2015 and released October 23, 2015. In the CCA the IRS notes that SEC reporting is different for smaller reporting companies as they are permitted to rely on Item 402(m) of Regulation S-K. The SEC disclosure rules for smaller reporting companies do not require disclosure of compensation of an officer by reason of the individual serving as PFO. Instead, the disclosure rules require disclosure of compensation for the PFO of a smaller reporting company only if the PFO is one of the two most highly compensated executive officers other than the PEO [Principal Executive Officer or more commonly referred to as Chief Executive Officer] who were serving as executive officers at the end of the year. Therefore the IRS concludes that the PFO of a smaller reporting company is a covered employee if the PFO is one of the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the year.
It’s possible that the new informal IRS guidance could be construed to include emerging growth companies as well since those issuers are also permitted to rely on Item 402(m).
Issuers that are not smaller reporting companies or emerging growth companies may want to make clear that the description of Section 162(m) included in their proxy statement does not include the application of Section 162(m) for those issuers entitled to rely in Item 402(m). Obviously, smaller reporting companies and possibly emerging growth companies will want to consider tailoring their description of Rule 162(m) to the CCA as well as considering the substantive implications of the CCA.