Firm Opposes Provision in Exec Comp Regs

February 18, 2020

Office of Associate Chief Counsel
(Tax Exempt and Government Entities)
Attention: Ilya E. Enkishev
Internal Revenue Service (I.R.S.)
1111 Constitution Avenue, NW
Washington, DC 20224

CC:PA:LPD:PR
(REG-122180-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20224

Re: Comments on REG-122180-18: Certain Employee
Remuneration in Excess of $1,000,000 under Internal Revenue Code Section 162(m)

Dear Mr. Enkishev:

We appreciate the opportunity to submit the comments below on REG-122180-18, which sets forth proposed regulations under section 162(m) of the Internal Revenue Code.

Our comments focus on section 1.162-33(c)(3) of the proposed regulations, which expands the application of section 162(m)'s deduction limits to compensation paid by partnerships that are not publicly traded. Section 1.162-33(c)(3) does this by including in the definition of "compensation" to which the limitations of section 162(m) apply "an amount equal to a publicly held corporation's distributive share of a partnerships deduction for compensation expense attributable to the remuneration paid by the partnership for services performed by a covered employee of the publicly held corporation."

In the explanation accompanying the proposed regulations, the Internal Revenue Service ("IRS") acknowledged that this provision represented a significant change from prior IRS interpretations, describing four private letter rulings that had stated "that if a publicly held corporation is a partner in a partnership, then section 162(m) does not apply to the corporation's distributive share of the partnership's deduction for compensation paid by the partnership for services performed for it by a covered employee of the corporation."

Acknowledging the lack of generally applicable guidance on this topic and the contrary private letter rulings, moreover, the IRS provided the following transition relief in the proposed regulations:

The Treasury Department and the IRS are aware that this issue has not been addressed in generally applicable guidance and understand taxpayers may have taken positions contrary to those set forth in these proposed regulations. Accordingly, the proposed regulations provide transition relief for current compensation arrangements, but also prohibit the formation or expansion of these types of structures for the purpose of avoiding the application of section 162(m) prior to the issuance of final regulations. Specifically, in order to ensure that compensation agreements are not formed or otherwise structured to circumvent this rule after publication of these proposed regulations and prior to the publication of the final regulations, the proposed regulations propose that the rule with respect to compensation paid by a partnership will apply to any deduction for compensation that is otherwise allowable for a taxable year ending on or after December 20, 2019 but will not apply to compensation paid pursuant to a written binding contract in effect on December 20, 2019 that is not materially modified after that date.

We agree with other commenters that the significant departure from prior interpretations represented by the proposed regulations on this topic is not justified by any change in the statutory language, and we therefore oppose the application of section 162(m)'s limits to compensation paid by partnerships that are not publicly traded.

If the change is maintained, however, we believe that broader transition relief would be appropriate. Specifically, we would request that the new interpretation not apply retroactively.

Under the proposed rules, the new interpretation would apply to "any deduction for compensation that is otherwise allowable for a taxable year ending on or after December 20, 2019." Prop. Treas. Reg. s. 1.162-33(h)(2)(C). The transition relief is limited to "compensation paid pursuant to a written binding contract that is in effect on December 20, 2019 and that is not materially modified after that date."

Under this formulation of the applicability dates, large amounts of compensation that were paid before the IRS's change in interpretation was announced on December 20, 2019 with the publication of the proposed regulations would retroactively become subject to the limits of section 162(m). For example, a performance-based bonus that was paid by a calendar year taxpayer in February 2019 — some 10 months before the change in the IRS's position was publicly announced — would retroactively be made subject to the limits of section 162(m) for 2019. Similarly, base salary and other compensation paid by a calendar year taxpayer during the first 11 1/2 months of 2019 under a binding employment agreement that expired by its terms on December 19, 2019 would retroactively be made subject to the limits of Section 162(m), whereas the same compensation paid under an employment agreement that expired by its terms on December 21, 2019 would remain exempt.

This retroactive application of the deduction limits of section 162(m) represents an unfair surprise to taxpayers who had structured their compensation arrangements in reliance on prior IRS guidance indicating that section 162(m) did not apply. The explanation accompanying the proposed regulations suggested that the IRS was aware of this reliance, indicating that the proposed transition relief was provided because "[t]he Treasury Department and the IRS are aware that this issue has not been addressed in generally applicable guidance and understand taxpayers may have taken positions contrary to those set forth in these proposed regulations." However, as described above, the proposed transition relief does not adequately protect or provide fair notice to those taxpayers.

We respectfully request that the transition relief be expanded to include amounts paid prior to the publication of the proposed regulations on December 20, 2019 as well as to amounts paid after that date under written binding contracts in effect on December 20, 2019 that are not materially modified after that date.

* * * * *

We appreciate your consideration of the above comments and would be happy to discuss further if you have any questions or if further information would be helpful.

Sincerely,

[signed]
Foley & Lardner LLP