[Federal Register Volume 80, Number 61 (Tuesday, March 31, 2015)]
[Rules and Regulations]
[Pages 16970-16973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-07386]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9716 ]
RIN 1545-BI65


Certain Employee Remuneration in Excess of $1,000,000 Under 
Internal Revenue Code Section 162(m)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
deduction limitation for certain employee remuneration in excess of 
$1,000,000 under the Internal Revenue Code (Code). These regulations 
affect publicly held corporations.

DATES: 
    Effective date: These regulations are effective on April 1, 2015.
    Applicability date: For dates of applicability, see Sec.  1.162-
27(j)(2)(vi).

[[Page 16971]]


FOR FURTHER INFORMATION CONTACT: Ilya Enkishev at (202) 317-5600 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    On June 24, 2011, the Treasury Department and the IRS published a 
notice of proposed rulemaking (proposed regulations) in the Federal 
Register (76 FR 37034, corrected by 76 FR 55321 on September 7, 2011) 
under section 162(m) of the Internal Revenue Code (Code). The proposed 
regulations clarified Sec.  1.162-27(e)(2)(vi)(A) by providing that the 
plan under which an option or stock appreciation right is granted must 
specify the maximum number of shares with respect to which options or 
rights may be granted to any individual employee during a specified 
period. The proposed regulations also clarified that the general 
transition rule under Sec.  1.162-27(f)(1) for a corporation that 
becomes a publicly held corporation applies to all compensation other 
than compensation specifically identified in Sec.  1.162-27(f)(3).
    The Treasury Department and the IRS received written comments in 
response to the proposed regulations. All comments were considered and 
are available for public inspection at http://www.regulations.gov or 
upon request. No public hearing on the proposed regulations was 
requested or held. After consideration of the comments received, the 
Treasury Department and the IRS adopt the proposed regulations, with 
modifications, as final regulations.

Summary of Comments and Explanation of Provisions

1. Maximum Number of Shares With Respect To Which Options or Rights May 
Be Granted to Each Individual Employee

    Section 162(m)(1) precludes a deduction under chapter 1 of the Code 
by any publicly held corporation for compensation paid to any covered 
employee to the extent that the compensation for the taxable year 
exceeds $1,000,000. Section 162(m)(4)(C) provides that the deduction 
limitation does not apply to qualified performance-based compensation. 
Section 1.162-27(e)(1) provides that qualified performance-based 
compensation is compensation that meets all of the requirements of 
Sec.  1.162-27(e)(2) through (e)(5).
    The proposed regulations clarified Sec.  1.162-27(e)(2)(vi)(A) by 
providing that the plan under which an option or stock appreciation 
right is granted must state ``the maximum number of shares with respect 
to which options or rights may be granted during a specified period to 
any individual [emphasis added] employee'' (per-employee limitation 
requirement). The existing regulations provide that the per-employee 
limitation applies to ``any employee'' during a specified period. The 
proposed regulations also provided a corresponding clarification of the 
shareholder approval requirement under Sec.  1.162-27(e)(4). 
Specifically, the proposed regulations clarified Sec.  1.162-
27(e)(4)(iv) to provide that compensation is not adequately described 
for purposes of the shareholder approval requirement unless the maximum 
number of shares on which grants may be made to any individual employee 
during a specified period and the exercise price of those options is 
disclosed to the shareholders of the corporation. The proposed 
regulations provided that the clarifications to Sec.  1.162-
27(e)(2)(vi)(A) and (e)(4)(iv) apply to amounts that are otherwise 
deductible for taxable years ending on or after June 24, 2011.
    Commenters suggested that these final regulations clarify that 
under Sec.  1.162-27(e)(2)(vi)(A) a plan satisfies the per-employee 
limitation requirement if the plan specifies the maximum number of 
shares with respect to which any type of equity-based compensation may 
be granted to any individual employee during a specified period. 
Commenters explained that clarification is needed on whether the per-
employee limitation may apply to all types of equity-based awards, not 
merely stock options and stock appreciation rights, which are the two 
types of equity-based awards described in Sec.  1.162-27(e)(2)(vi)(A). 
In addition, commenters noted that a per-employee limitation on all 
types of equity-based awards would have the same effect as a per-
employee limitation with respect to stock options and stock 
appreciation rights. In response to these comments, the final 
regulations modify Sec.  1.162-27(e)(2)(vi)(A) to provide that a plan 
satisfies the per-employee limitation requirement if the plan specifies 
an aggregate maximum number of shares with respect to which stock 
options, stock appreciation rights, restricted stock, restricted stock 
units and other equity-based awards may be granted to any individual 
employee during a specified period under a plan approved by 
shareholders in accordance with Sec.  1.162-27(e)(4). This 
clarification is not intended as a substantive change.
    One commenter suggested that the clarification to Sec.  1.162-
27(e)(2)(vi)(A) apply only to compensation attributable to stock 
options and stock appreciation rights granted under a plan that was 
submitted for shareholder approval after August 8, 2011 (that is, 
forty-five days after the publication of the proposed regulations) and 
not to grants under plans submitted for shareholder approval before 
August 9, 2011 (even if the grant was made after that date). Another 
commenter suggested that the clarification apply only after the first 
shareholder meeting that occurs at least 12 months after the 
publication of these final regulations. These commenters reasoned that 
a transition period is appropriate because a plan providing for an 
aggregate share limit (but not an explicit per-employee share 
limitation) arguably satisfies the per-employee limitation requirement 
under the existing regulations because no individual employee may 
receive shares in excess of the aggregate limit.
    These final regulations do not adopt either of these suggestions. 
The clarification to Sec.  1.162-27(e)(2)(vi)(A) is not a substantive 
change. The transition rule in Sec.  1.162-27(h)(3)(i) of the 
regulations provides that a plan providing for an aggregate limit, but 
not a per-employee limit, satisfies Sec.  1.162-27(e)(2)(vi)(A) only if 
the plan was approved by shareholders before December 20, 1993, and 
only during a limited reliance period specified in Sec.  1.162-
27(h)(3)(i). Additionally, the legislative history to section 162(m) 
and the preamble to the 1993 Treasury Regulations (58 FR 66310) under 
section 162(m) provide for a limit on the maximum number of shares for 
which options or stock appreciation rights may be granted to individual 
employees. The preamble to the 1993 Treasury Regulations explains the 
reason for requiring a per-employee limitation: ``Some have questioned 
why it would be necessary for the regulations to require an individual 
[emphasis added] employee limit on the number of the shares for which 
options or stock appreciation rights may be granted, where shareholder 
approval of an aggregate limit is obtained for securities law purposes. 
The regulations follow the legislative history, which suggests that a 
per-employee limit be required under the terms of the plan.'' The 
preamble further explains that ``a limit on the maximum number of 
shares for which individual employees may receive options or other 
rights is appropriate because it is consistent with the broader 
requirement that a performance goal include an objective formula for 
determining the maximum amount of compensation that an individual 
employee could receive.'' Accordingly, these final regulations provide 
that the clarification to Sec.  1.162-27(e)(2)(vi)(A) applies to 
compensation

[[Page 16972]]

attributable to stock options and stock appreciation rights that are 
granted on or after June 24, 2011 (the date of publication of the 
proposed regulations).

2. Compensation Payable Under Restricted Stock Units Paid by Companies 
That Become Publicly Held

    In general, Sec.  1.162-27(f)(1) provides that when a corporation 
becomes publicly held, the section 162(m) deduction limitation ``does 
not apply to any remuneration paid pursuant to a compensation plan or 
agreement that existed during the period in which the corporation was 
not publicly held.'' Pursuant to Sec.  1.162-27(f)(2), a corporation 
may rely on Sec.  1.162-27(f)(1) until the earliest of: (i) The 
expiration of the plan or agreement; (ii) a material modification of 
the plan or agreement; (iii) the issuance of all employer stock and 
other compensation that has been allocated under the plan or agreement; 
or (iv) the first meeting of shareholders at which directors are to be 
elected that occurs after the close of the third calendar year 
following the calendar year in which an initial public offering (IPO) 
occurs or, in the case of a privately held corporation that becomes 
publicly held without an IPO, the first calendar year following the 
calendar year in which the corporation becomes publicly held. Section 
1.162-27(f)(3) provides that the relief provided under Sec.  1.162-
27(f)(1) applies to any compensation received pursuant to the exercise 
of a stock option or stock appreciation right, or the substantial 
vesting of restricted property, granted under a plan or agreement 
described in Sec.  1.162-27(f)(1) if the grant occurs on or before the 
earliest of the events specified in Sec.  1.162-27(f)(2). The proposed 
regulations clarified that the transition rule in Sec.  1.162-27(f)(1) 
applies to all compensation other than compensation specifically 
identified in Sec.  1.162-27(f)(3). Specifically, the proposed 
regulations identified compensation payable under a restricted stock 
unit arrangement (RSU) or a phantom stock arrangement as being 
ineligible for the transition relief in Sec.  1.162-27(f)(3). 
Therefore, the effect of the proposed regulations is that compensation 
payable under a RSU is eligible for transition relief only if it is 
paid, and not merely granted, before the earliest of the events 
specified in Sec.  1.162-27(f)(2).
    Commenters suggested that compensation payable under a RSU should 
qualify for the transition relief in Sec.  1.162-27(f)(3) because a RSU 
is economically similar to restricted stock. These final regulations do 
not adopt this suggestion. A RSU provides a right to receive an amount 
of compensation based on the value of stock that is payable in cash, 
stock, or other property (as defined in Sec.  1.83-3(e)) upon the 
satisfaction of a vesting condition (such as a period of service). 
Restricted stock, by contrast, is property that has been transferred to 
the service provider on the date of grant subject to the satisfaction 
of a specified vesting condition. Restricted stock and RSU's are 
treated differently under the Code. RSU's generally are treated as 
nonqualified deferred compensation and may be subject to the rules 
under section 409A, whereas restricted stock is treated as property and 
is governed by the rules under section 83. Because compensation 
attributable to a RSU is in the nature of nonqualified deferred 
compensation (unlike restricted stock), compensation attributable to a 
RSU is not sufficiently similar to restricted property to receive the 
transition relief provided under Sec.  1.162-27(f)(3). Accordingly, 
these final regulations adopt the proposed clarification to Sec.  
1.162-27(f)(3) without change.
    The proposed regulations provided that the clarification to Sec.  
1.162-27(f)(3) would apply on or after the date of publication of the 
Treasury decision adopting the proposed regulations as final 
regulations. Commenters suggested that the clarification to Sec.  
1.162-27(f)(3) should apply to RSU's granted after the publication of 
final regulations and not merely to remuneration payable under a RSU 
after the date of publication. These final regulations adopt this 
suggestion. Accordingly, these final regulations provide that the 
clarification to Sec.  1.162-27(f)(3) applies to remuneration otherwise 
deductible under a RSU that is granted on or after April 1, 2015.

Proposed Effective/Applicability Date

    The clarifications to paragraphs (e)(2)(vi)(A), (e)(2)(vii) Example 
9, and (e)(4)(iv) of this section apply to compensation attributable to 
stock options and stock appreciation rights that are granted on or 
after June 24, 2011. The clarification to Sec.  1.162-27(f)(3) applies 
to any remuneration that is otherwise deductible resulting from a stock 
option, stock appreciation right, restricted stock (or other property), 
restricted stock unit, or any other form of equity-based remuneration 
that is granted on or after April 1, 2015.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations, and because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Internal Revenue Code, the proposed regulations 
preceding these regulations were submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these final regulations is Ilya Enkishev, 
Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities). However, other personnel from the IRS and the 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. In Sec.  1.162-27 paragraphs (e)(2)(vi)(A), (e)(2)(vii) Example 
9, (e)(4)(iv), and (f)(3) are revised and paragraph (j)(2)(vi) is added 
to read as follows:


Sec.  1.162-27  Certain employee remuneration in excess of $1,000,000.

* * * * *
    (e) * * *
    (2) * * *
    (vi) * * *
    (A) In general. Compensation attributable to a stock option or a 
stock appreciation right is deemed to satisfy the requirements of this 
paragraph (e)(2) if the grant or award is made by the compensation 
committee; the plan under which the option or right is granted states 
the maximum number of shares with respect to which options or rights 
may be granted during a specified period to any individual employee; 
and, under the terms of the option or right, the amount of compensation 
the employee may receive is based solely on an increase in the value of 
the stock

[[Page 16973]]

after the date of the grant or award. A plan may satisfy the 
requirement to provide a maximum number of shares with respect to which 
stock options and stock appreciation rights may be granted to any 
individual employee during a specified period if the plan specifies an 
aggregate maximum number of shares with respect to which stock options, 
stock appreciation rights, restricted stock, restricted stock units and 
other equity-based awards that may be granted to any individual 
employee during a specified period under a plan approved by 
shareholders in accordance with Sec.  1.162-27(e)(4). If the amount of 
compensation the employee may receive under the grant or award is not 
based solely on an increase in the value of the stock after the date of 
grant or award (for example, in the case of restricted stock, or an 
option that is granted with an exercise price that is less than the 
fair market value of the stock as of the date of grant), none of the 
compensation attributable to the grant or award is qualified 
performance-based compensation under this paragraph (e)(2)(vi)(A). 
Whether a stock option grant is based solely on an increase in the 
value of the stock after the date of grant is determined without regard 
to any dividend equivalent that may be payable, provided that payment 
of the dividend equivalent is not made contingent on the exercise of 
the option. The rule that the compensation attributable to a stock 
option or stock appreciation right must be based solely on an increase 
in the value of the stock after the date of grant or award does not 
apply if the grant or award is made on account of, or if the vesting or 
exercisability of the grant or award is contingent on, the attainment 
of a performance goal that satisfies the requirements of this paragraph 
(e)(2).
* * * * *
    (vii) * * *
    Example 9.  Corporation V establishes a stock option plan for 
salaried employees. The terms of the stock option plan specify that 
no individual salaried employee shall receive options for more than 
100,000 shares over any 3-year period. The compensation committee 
grants options for 50,000 shares to each of several salaried 
employees. The exercise price of each option is equal to or greater 
than the fair market value of a share of V stock at the time of each 
grant. Compensation attributable to the exercise of the options 
satisfies the requirements of paragraph (e)(2)(vi) of this section. 
If, however, the terms of the options provide that the exercise 
price is less than fair market value of a share of V stock at the 
date of grant, no compensation attributable to the exercise of those 
options satisfies the requirements of this paragraph (e)(2) unless 
issuance or exercise of the options was contingent upon the 
attainment of a preestablished performance goal that satisfies this 
paragraph (e)(2). If, however, the terms of the plan also provide 
that Corporation V could grant options to purchase no more than 
900,000 shares over any 3-year period, but did not provide a 
limitation on the number of shares that any individual employee 
could purchase, then no compensation attributable to the exercise of 
those options satisfies the requirements of paragraph (e)(2)(vi) of 
this section.
* * * * *
    (4) * * *
    (iv) Description of compensation. Disclosure as to the compensation 
payable under a performance goal must be specific enough so that 
shareholders can determine the maximum amount of compensation that 
could be paid to any individual employee during a specified period. If 
the terms of the performance goal do not provide for a maximum dollar 
amount, the disclosure must include the formula under which the 
compensation would be calculated. Thus, if compensation attributable to 
the exercise of stock options is equal to the difference between the 
exercise price and the current value of the stock, then disclosure of 
the maximum number of shares for which grants may be made to any 
individual employee during a specified period and the exercise price of 
those options (for example, fair market value on date of grant) would 
satisfy the requirements of this paragraph (e)(4)(iv). In that case, 
shareholders could calculate the maximum amount of compensation that 
would be attributable to the exercise of options on the basis of their 
assumptions as to the future stock price.
* * * * *
    (f) * * *
    (3) Stock-based compensation. Paragraph (f)(1) of this section will 
apply to any compensation received pursuant to the exercise of a stock 
option or stock appreciation right, or the substantial vesting of 
restricted property, granted under a plan or agreement described in 
paragraph (f)(1) of this section if the grant occurs on or before the 
earliest of the events specified in paragraph (f)(2) of this section. 
This paragraph does not apply to any form of stock-based compensation 
other than the forms listed in the immediately preceding sentence. 
Thus, for example, compensation payable under a restricted stock unit 
arrangement or a phantom stock arrangement must be paid, rather than 
merely granted, on or before the occurrence of the earliest of the 
events specified in paragraph (f)(2) of this section in order for 
paragraph (f)(1) of this section to apply.
* * * * *
    (j) * * *
    (2) * * *
    (vi) The modifications to paragraphs (e)(2)(vi)(A), (e)(2)(vii) 
Example 9, and (e)(4)(iv) of this section concerning the maximum number 
of shares with respect to which a stock option or stock appreciation 
right that may be granted and the amount of compensation that may be 
paid to any individual employee apply to compensation attributable to 
stock options and stock appreciation rights that are granted on or 
after June 24, 2011. The last two sentences of Sec.  1.162-27(f)(3) 
apply to remuneration that is otherwise deductible resulting from a 
stock option, stock appreciation right, restricted stock (or other 
property), restricted stock unit, or any other form of equity-based 
remuneration that is granted on or after April 1, 2015.

    Approved: March 9, 2015.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
 Mark D. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-07386 Filed 3-30-15; 8:45 am]
 BILLING CODE 4830-01-P