Federal Register / Vol. 90, No. 10 / Thursday, January 16, 2025 / Proposed Rules 4691 

1As a result, for example, such disallowed 

amounts generally may not be capitalized. See 

§§ 1.263(a)-1(b) and 1.263A–1(c)(2). 

successor form) in accordance with 

instructions, guidance, or publications 

published in the Internal Revenue 

Bulletin (see §§ 601.601(d)(2) and 

601.602 of this chapter). 

(ii) Successors. The term covered filer 

includes any successor (within the 

meaning of section 381(a) of the Code) 

to an entity described in paragraph 

(b)(1)(i) of this section. 

(2) Required reporting period. The 

term required reporting period means 

the period— 

(i) Beginning in the taxable year of the 

covered filer during which the first 

distribution occurs; and 

(ii) Ending in the fifth taxable year of 

the covered filer after the taxable year in 

which the control distribution occurs. 

(3) Significant distributee. The term 

significant distributee means: 

(i) A holder of stock of a distributing 

corporation that— 

(A) Receives stock of a controlled 

corporation in a section 355 transaction; 

and 

(B) Owned at least five percent (by 

vote or value) of the total outstanding 

stock of the distributing corporation 

immediately before the first 

distribution. 

(ii) A holder of securities of a 

distributing corporation that— 

(A) Receives stock or securities of a 

controlled corporation in a section 355 

transaction; and 

(B) Owned securities in the 

distributing corporation with a basis of 

at least $1,000,000 immediately before 

the first distribution. 

(4) Specified Federal income tax 

return. The term specified Federal 

income tax return means— 

(i) Form 1040, U.S. Individual Income 

Tax Return; 

(ii) Form 1040–NR, U.S. Nonresident 

Alien Income Tax Return; 

(iii) Form 1065, U.S. Return of 

Partnership Income; 

(iv) Form 1120, U.S. Corporation 

Income Tax Return; 

(v) Form 1120–F, U.S. Income Tax 

Return of a Foreign Corporation; 

(vi) Form 1120–S, U.S. Income Tax 

Return for an S Corporation; or 

(vii) Any other form listed in 

instructions, guidance, or publications 

published in the Internal Revenue 

Bulletin (see §§ 601.601(d)(2) and 

601.602 of this chapter). 

(c) Substantiation information. Under 

§ 1.6001–1(e), a covered filer must retain 

its permanent books and records and 

make those books and records available 

for inspection by any authorized IRS 

officers and employees. In connection 

with the section 355 transaction, the 

covered filer’s books and records, as 

relevant to the section 355 transaction, 

will be considered to be complete and 

accurate if they contain all information 

necessary to document and substantiate 

satisfaction of the requirements under 

section 355. 

(d) Applicability date—(1) In general. 

Except as provided in paragraph (d)(2) 

of this section, the rules of this section 

apply to taxable years ending after [date 

of publication of final regulations in the 

Federal Register] with respect to section 

355 transactions occurring after January 

16, 2025. For rules applicable to prior 

taxable years, see § 1.355–5 as in effect 

and contained in 26 CFR part 1, as 

revised April 1, 2024. 

(2) [Reserved] 

Douglas W. O’Donnell, 

Deputy Commissioner. 

[FR Doc. 2025–00312 Filed 1–13–25; 4:15 pm] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–118988–22] 

RIN 1545–BQ87 

Certain Employee Remuneration in 

Excess of $1,000,000 Under Internal 

Revenue Code Section 162(m) 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document sets forth 

proposed regulations under section 

162(m) of the Internal Revenue Code, 

which limits the deduction for certain 

employee remuneration in excess of 

$1,000,000 for Federal income tax 

purposes. These proposed regulations 

implement the amendments made to 

section 162(m) by the American Rescue 

Plan Act of 2021. These proposed 

regulations would affect publicly held 

corporations. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by March 17, 2025. 

ADDRESSES: Commenters are strongly 

encouraged to submit public comments 

electronically. Submit electronic 

submissions via the Federal 

eRulemaking Portal at 

www.regulations.gov (indicate IRS and 

REG–118988–22) by following the 

online instructions for submitting 

comments. Requests for a public hearing 

must be submitted as prescribed in the 

‘‘Comments and Requests for a Public 

Hearing’’ section of this preamble. Once 

submitted to the Federal eRulemaking 

Portal, comments cannot be edited or 

withdrawn. The Department of the 

Treasury (Treasury Department) and the 

IRS will publish for public availability 

any comments submitted to the IRS’s 

public docket. Send paper submissions 

to: CC:PA:01:PR (REG–118988–22), 

Room 5203, Internal Revenue Service, 

P.O. Box 7604, Ben Franklin Station, 

Washington, DC 20044. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Ilya Enkishev at (202) 317–5600; 

concerning submissions of comments 

and/or requests for a public hearing, 

contact the Publications and 

Regulations Section of the Office of 

Associate Chief Counsel (Procedure and 

Administration) by email at 

publichearings@irs.gov (preferred) or by 

telephone at (202) 317–6901 (not tollfree numbers). 

SUPPLEMENTARY INFORMATION: 

Authority 

These proposed regulations are issued 

under the express delegation of 

authority under section 7805 of the 

Code. Section 7805(a) directs the 

Secretary of the Treasury or her delegate 

to prescribe all needful rules and 

regulations for the enforcement of the 

Code, including all rules and 

regulations as may be necessary by 

reason of any alteration of law in 

relation to internal revenue. 

Background 

This document sets forth proposed 

amendments to the Income Tax 

Regulations (26 CFR part 1) under 

section 162(m). Section 162(m)(1) 

disallows a deduction by any publicly 

held corporation for applicable 

employee remuneration that is 

otherwise deductible with respect to 

any covered employee to the extent that 

such remuneration for the taxable year 

exceeds $1,000,000.1 Section 162(m) 

was added to the Internal Revenue Code 

(Code) by section 13211(a) of the 

Omnibus Budget Reconciliation Act of 

1993 (Pub. L. 103–66, 107 Stat. 312, 

469). Proposed regulations under 

section 162(m) were published in the 

Federal Register by the Treasury 

Department and the IRS on December 

20, 1993 (58 FR 66310) (1993 proposed 

regulations). On December 2, 1994, the 

Treasury Department and the IRS 

published in the Federal Register 

amendments to the proposed 

regulations (59 FR 61884) (1994 

proposed regulations). On December 20, 

1995, the Treasury Department and the 


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2The addition of section 162(m)(3)(C) resulted in 

pre-ARP section 162(m)(3)(C) being redesignated as 

section 162(m)(3)(D). 

3This interpretation is consistent with the 

description of section 162(m)(3)(C) by the Joint 

Committee on Taxation in General Explanation of 

the Tax Legislation Enacted in the 117th Congress. 

JCS–1–23, 129 (Dec. 2023). 

4These proposed regulations take the same 

approach as the current regulations of using 

‘‘publicly held corporation’’ to mean the affiliated 

group (as defined in § 1.162–33(c)(1)(ii)) of which 

the corporation that is a publicly held corporation 

(as defined in § 1.162–33(c)(1)(i)) is a part, and 

distinguishing between the two only where 

necessary. 

5See 17 CFR 229.402, Instructions to Item 

402(a)(3). 

6See H.R. Conf. Rep. No. 103–213, at 585 (1993) 

(‘‘Unless specifically excluded, the deduction 

limitation applies to all remuneration for 

services.’’). 

IRS published in the Federal Register 

final regulations under section 162(m) 

(TD 8650) (60 FR 65534) (1995 

regulations). 

In 2017, section 162(m) was amended 

by section 13601 of the Tax Cuts and 

Jobs Act (TCJA) (Pub. L. 115–97, 131 

Stat. 2054, 2155 (2017)). Specifically, 

section 13601 of TCJA amended the 

definitions of covered employee, 

publicly held corporation, and 

applicable employee remuneration in 

section 162(m). On December 20, 2019, 

the Treasury Department and the IRS 

published in the Federal Register 

proposed regulations relating to the 

TCJA amendments (84 FR 70356). On 

December 30, 2020, the Treasury 

Department and the IRS published in 

the Federal Register final regulations 

(TD 9932) relating to the TCJA 

amendments (85 FR 86481) (the current 

regulations). 

Section 162(m)(3) provides the 

definition of ‘‘covered employee.’’ 

Specifically, section 162(m)(3) defines 

the term ‘‘covered employee’’ as an 

‘‘employee of the taxpayer’’ if (1) the 

employee is the principal executive 

officer (PEO) or principal financial 

officer (PFO) of the taxpayer at any time 

during the taxable year, or was an 

individual acting in such a capacity, (2) 

the total compensation of the employee 

for the taxable year is required to be 

reported to shareholders under the 

Securities Exchange Act of 1934 

(Exchange Act) by reason of the 

employee being among the three highest 

compensated officers for the taxable 

year (other than the PEO and PFO), or 

(3) the individual was a covered 

employee of the taxpayer (or any 

predecessor) for any preceding taxable 

year beginning after December 31, 2016. 

Section 162(m)(3) also contains flush 

language providing that a covered 

employee includes any employee of the 

taxpayer whose total compensation for 

the taxable year places the individual 

among the three highest compensated 

officers for the taxable year (other than 

any individual who is the PEO or PFO 

of the taxpayer at any time during the 

taxable year, or was an individual acting 

in such a capacity) even if the 

compensation of the officer is not 

required to be reported to shareholders 

under the Exchange Act. 

In 2021, section 162(m) was amended 

by section 9708 of the American Rescue 

Plan Act of 2021 (ARP) (Pub. L. 117–2, 

135 Stat. 4, 206) to expand the 

definition of covered employee for 

taxable years beginning after December 

31, 2026. The ARP amended the 

definition of ‘‘covered employee’’ in 

section 162(m)(3) by adding section 

162(m)(3)(C),2 which includes any 

employee who is among the five highest 

compensated employees for the taxable 

year other than the PEO or PFO (as 

identified in section 162(m)(3)(A)) or 

the three highest compensated executive 

officers for the taxable year (as 

identified in section 162(m)(3)(B)). This 

amendment is effective for taxable years 

beginning after December 31, 2026. 

These proposed regulations (proposed 

regulations) would provide guidance on 

this amendment. 

Explanation of Provisions 

I. Definition of Employee 

These proposed regulations would 

provide that, for purposes of 

determining whether an employee is 

one of the five highest compensated 

employees as defined in new section 

162(m)(3)(C), the term ‘‘employee’’ 

means an ‘‘employee’’ as defined in 

section 3401(c). In general, under 

section 3401(c) and the corresponding 

regulations, the term ‘‘employee’’ 

includes a common law employee and 

an officer of a corporation. Accordingly, 

for purposes of section 162(m)(3)(C), the 

term ‘‘employee’’ would include, but 

not be limited to, executive officers.3

The text of section 162(m)(3)(C) does 

not exclude an individual who is a 

covered employee as defined in section 

162(m)(3)(D). Accordingly, these 

proposed regulations would provide 

that a covered employee by reason of 

section 162(m)(3)(C) includes an 

individual who is both one of the five 

highest compensated employees for the 

current taxable year (regardless of 

whether the individual is employed on 

the last day of the taxable year) and also 

a covered employee on the basis of 

being a covered employee for a 

preceding taxable year (as provided in 

section 162(m)(3)(D)). 

II. Determination of the Five Highest 

Compensated Employees 

These proposed regulations would 

use ‘‘compensation’’ as defined in 

paragraph (c)(3) of the current 

regulations (that is, compensation that 

would (but for section 162(m)) be 

allowable as a deduction) to determine 

whether an employee is one of the five 

highest compensated employees as 

defined in new section 162(m)(3)(C). 

The Treasury Department and the IRS 

expect this approach to be easily 

administrable because taxpayers 

currently track compensation to 

determine their tax liability for the 

taxable year. 

Because section 162(m)(3)(B) 

determines the three highest 

compensated employees based on the 

total compensation required to be 

disclosed under the Exchange Act for 

executive officers, the Treasury 

Department and the IRS considered 

using this approach to determine the 

five highest compensated employees for 

purposes of section 162(m)(3)(C). These 

proposed regulations would not adopt 

this approach because, unlike the 

statutory text of section 162(m)(3)(B), 

section 162(m)(3)(C) does not reference 

compensation disclosure under the 

Exchange Act. Furthermore, unlike the 

covered employees defined in section 

162(m)(3)(B), the five highest 

compensated employees under section 

162(m)(3)(C) are not limited to executive 

officers. 

Like the 1995 regulations, § 1.162– 

33(c)(1)(ii) of the current regulations 

defines the term ‘‘publicly held 

corporation’’ to include an affiliated 

group of corporations, as defined in 

section 1504 (without regard to section 

1504(b)) (affiliated group) that includes 

a corporation that is a publicly held 

corporation.4 This definition was 

needed in the 1995 regulations because, 

among other things, the executive 

officers to whom section 162(m) applied 

could include officers of subsidiaries,5

and their remuneration could come 

from subsidiaries, as well, so failure to 

include members of the affiliated group 

would have thwarted Congress’s intent 

to deny a deduction for all 

compensation of a covered employee in 

excess of $1 million per year.6 The 

definition also confirmed that each 

member of the affiliated group is 

potentially a ‘‘taxpayer’’ within the 

meaning of section 162(m)(3). 

The Treasury Department and the IRS 

are now similarly concerned that a 

publicly held corporation may employ 

many of its highest compensated 

employees at subsidiaries, and may 

even attempt to alter the composition of 

its five highest compensated employees 


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7See, for example, the Joint Committee on 

Taxation estimate that the amendment would raise 

$7.8 billion through Fiscal Year 2031. JCX–14–21, 

3 (March 9, 2021). 

8See section 882(c)(1). 

9 In relevant part, section 957(a) defines a 

controlled foreign corporation as a foreign 

corporation of which more than 50% (vote or value) 

is owned by United States shareholders as defined 

in section 951(b). Publicly held corporations as 

defined in section 162(m)(2) can be treated as 

United States shareholders. 

(as defined in section 162(m)(3)(C)) by 

transferring highly compensated 

employees to a subsidiary or by 

adopting a holding company structure, 

thereby thwarting Congress’s intent to 

expand significantly the number of 

covered employees whose 

compensation is subject to section 

162(m).7 Accordingly, these proposed 

regulations would provide that any 

employee of any corporation in the 

affiliated group may be one of the five 

highest compensated employees of the 

publicly held corporation regardless of 

whether the employee is an employee of 

or performs services for the publicly 

held corporation, as defined in § 1.162– 

33(c)(1)(i). 

Consistent with the rule in the current 

regulations for affiliated groups that 

contain more than one publicly held 

corporation (as defined in § 1.162– 

33(c)(1)(i)), these proposed regulations 

would provide that in such an affiliated 

group, each publicly held corporation 

has its own set of five highest 

compensated employees (as defined in 

section 162(m)(3)(C)). Because, as 

explained in the preceding paragraph, 

those individuals may be employees of 

a corporation in the affiliated group that 

is not a publicly held corporation, the 

affiliated group is divided into smaller 

affiliated groups for this purpose, each 

consisting of a publicly held corporation 

and certain affiliated non-publicly held 

corporations, if any. These proposed 

regulations provide rules for dividing 

up the affiliated group for this purpose. 

Similar to the current regulations, 

these proposed regulations would 

provide that, if an employee of a 

publicly held corporation (as defined in 

§ 1.162–33(c)(1)(i)) is paid 

compensation by more than one 

member of an affiliated group, then 

compensation paid to the employee by 

each member of the affiliated group is 

aggregated in determining whether the 

employee is one of the five highest 

compensated employees. These 

proposed regulations would provide 

rules similar to the rules in the current 

regulations, but reflecting the rules 

described in the preceding paragraphs, 

for situations in which an individual 

performs services for members of an 

affiliated group that contains more than 

one publicly held corporation, and 

might also contain one or more 

corporations that are not publicly held 

corporations. Specifically, these 

proposed regulations would provide 

that whether the individual is one of the 

five highest compensated employees of 

a publicly held corporation is 

determined separately with respect to 

each publicly held corporation in the 

group, excluding compensation taken 

into account with respect to another 

publicly held corporation of the 

affiliated group. Section 1.162– 

33(c)(2)(i)(D)(4) of the proposed 

regulations also explains how that 

determination is made. 

For purposes of section 162(m), an 

affiliated group includes a foreign 

corporation. Pursuant to the 1995 

regulations and the current regulations, 

compensation includes remuneration 

paid by a member of an affiliated group 

that is a foreign corporation to the 

extent it is otherwise allowable as a 

deduction under chapter 1 of the Code. 

Accordingly, such compensation would 

be taken into account under these 

proposed regulations, among other 

things, to determine whether an 

individual is one of the five highest 

compensated employees. Compensation 

and other expenses of a foreign 

corporation normally may be taken as a 

deduction by the foreign corporation in 

computing its U.S. income tax, and thus 

may be actually be disallowed by 

section 162(m), only if they are incurred 

in connection with a trade or business 

carried on in the United States.8

However, if the foreign corporation is a 

controlled foreign corporation as 

defined in section 957,9 a pro rata share 

of certain types of income less 

associated deductions may be taken into 

account by a United States shareholder 

of the corporation under subpart F 

(sections 951 through 965). To assist 

taxpayers with compliance, section 

1.162–33(c)(3)(iii) of the proposed 

regulations would add an explicit rule 

to the definition of compensation 

regarding remuneration paid by a 

controlled foreign corporation that is a 

member of a publicly held corporation’s 

affiliated group. This rule is not a 

substantive change to the 1995 

regulations and the current regulations. 

Comments are requested on the 

application of these proposed rules to 

controlled foreign corporations, and 

whether these proposed rules should 

apply to controlled foreign corporations 

that are not members of an affiliated 

group. 

These proposed regulations would 

also provide that an ‘‘employee’’ of a 

publicly held corporation includes an 

individual who, under section 3401(c), 

is an ‘‘employee’’ of a person other than 

the publicly held corporation (such as a 

related but unaffiliated organization or 

certified professional employer 

organization) but nevertheless functions 

as an employee of the publicly held 

corporation in that the individual 

performs substantially all the 

individual’s services during the taxable 

year for the publicly held corporation. 

Consequently, these proposed 

regulations would provide that, in such 

circumstance, to the extent allowable as 

a deduction to the publicly held 

corporation, amounts paid to the 

individual or to a third party to obtain 

the services performed by the individual 

are considered ‘‘compensation.’’ Absent 

such a rule, the adoption of the section 

3401(c) definition by these proposed 

regulations could permit avoidance of 

section 162(m) through the use of thirdparty payors, which is not a concern 

under sections 162(m)(3)(A) and (B) due 

to their inclusion of all individuals 

acting as executive officers and the 

application of the executive 

compensation disclosure rules under 

the Exchange Act. 

III. Amendment to the Current 

Regulations 

These proposed regulations also 

include a technical correction that 

would amend the reference to Example 

22 in the conclusion to the facts in 

Example 23 (section 1.162– 

33(c)(1)(vi)(W)(2)) in the current 

regulations. The correct reference is to 

Example 20 of the current regulations. 

These proposed regulations would make 

that correction. 

Proposed Applicability Date 

These regulations generally are 

proposed to apply to compensation that 

is otherwise deductible for taxable years 

beginning after the later of December 31, 

2026, or the date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. The amendment to the 

conclusion of Example 23 in section 

1.162–33(c)(1)(vi)(W)(2)) of the current 

regulations is proposed to apply to 

taxable years ending on or after January 

16, 2025. 

Statement of Availability of IRS 

Documents 

For copies of recently issued revenue 

procedures, revenue rulings, notices and 

other guidance published in the Internal 

Revenue Bulletin, please visit the IRS 

website at www.irs.gov or contact the 

Superintendent of Documents, U.S. 


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4694 Federal Register / Vol. 90, No. 10 / Thursday, January 16, 2025 / Proposed Rules 

Government Publishing Office, 

Washington, DC 20402. 

Special Analyses 

I. Regulatory Planning and Review 

Pursuant to the Memorandum of 

Agreement, Review of Treasury 

Regulations under Executive Order 

12866 (June 9, 2023), tax regulatory 

actions issued by the IRS are not subject 

to the requirements of section 6 of 

Executive Order 12866, as amended. 

Therefore, a regulatory impact 

assessment is not required. 

II. Regulatory Flexibility Act 

Pursuant to the Regulatory Flexibility 

Act (RFA) (5 U.S.C. chapter 6), it is 

hereby certified that these proposed 

regulations would not have a significant 

economic impact on a substantial 

number of small entities. This 

certification is based on the fact that 

section 162(m)(1) applies only to 

publicly held corporations (for example, 

corporations that list securities on a 

national securities exchange and are 

rarely small entities) and only impacts 

those publicly held corporations that 

compensate certain employees in excess 

of $1,000,000 in a taxable year. 

III. Section 7805(f) 

Pursuant to section 7805(f), this 

notice of proposed rulemaking has been 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small business. 

IV. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 requires 

that agencies assess anticipated costs 

and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a State, local, or Tribal government, 

in the aggregate, or by the private sector, 

of $100 million in 1995 dollars, updated 

annually for inflation. This proposed 

rule does not include any Federal 

mandate that may result in expenditures 

by State, local, or Tribal governments, or 

by the private sector in excess of that 

threshold. 

V. Executive Order 13132: Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial, direct compliance costs on 

State and local governments, and is not 

required by statute, or preempts State 

law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Executive order. This 

proposed rule does not have federalism 

implications, does not impose 

substantial direct compliance costs on 

State and local governments, and does 

not preempt State law within the 

meaning of the Executive order. 

Comments and Requests for a Public 

Hearing 

Before these proposed amendments to 

the regulations are adopted as final 

regulations, consideration will be given 

to comments that are submitted timely 

to the IRS as prescribed in the preamble 

under the ADDRESSES section. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed regulations. All comments 

submitted will be made available at 

www.regulations.gov or upon request. 

A public hearing will be scheduled if 

requested in writing by any person who 

timely submits electronic or written 

comments. Requests for a public hearing 

are also encouraged to be made 

electronically by sending an email to 

publichearings@irs.gov. If a public 

hearing is scheduled, notice of the date 

and time for the public hearing will be 

published in the Federal Register. 

Drafting Information 

The principal author of these 

regulations is Ilya Enkishev, Office of 

Associate Chief Counsel (Employee 

Benefits, Exempt Organizations, and 

Employment Taxes). However, other 

personnel from the Treasury 

Department and the IRS participated in 

the development of these regulations. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, the Treasury Department 

and the IRS propose to amend 26 CFR 

part 1 as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

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

* * * * * 

■ Par. 2. Section 1.162–33 is amended 

by: 

■ a. Revising paragraphs (c)(1)(vi)(W)(2) 

and (c)(2)(i)(C); 

■ b. Adding paragraphs (c)(2)(i)(D) and 

(c)(2)(vii)(CC) through (EE); 

■ c. Redesignating paragraphs (c)(3)(iii) 

and (iv) as paragraphs (c)(3)(v) and (vi); 

■ d. Adding new paragraphs (c)(3)(iii) 

and (iv) and adding paragraphs 

(c)(3)(vi)(D) and (E); 

■ e. Revising paragraph (h)(2)(ii)(C); and 

■ f. Adding paragraphs (h)(2)(ii)(F) and 

G. 

The revisions and additions read as 

follows: 

§ 1.162–33 Certain employee remuneration 

in excess of $1,000,000 not deductible for 

taxable years beginning after December 31, 

2017. 

* * * * * 

(c) * * * 

(1) * * * 

(vi) * * * 

(W) * * * 

(2) Conclusion. The result is the same 

as in paragraph (c)(1)(vi)(T) of this 

section (Example 20). Even though 

Corporations P, Q, and R each are 

publicly held corporations, they 

comprise an affiliated group. Because 

Employee C is a covered employee of 

both Corporations P and Q, the amount 

disallowed as a deduction is prorated 

separately between Corporations P and 

R and between Corporations Q and R. 

* * * * * 

(2) * * * 

(i) * * * 

(C) Any individual who was a covered 

employee of the publicly held 

corporation (or any predecessor of a 

publicly held corporation, within the 

meaning of paragraph (c)(2)(ii) of this 

section) for any preceding taxable year 

beginning after December 31, 2016, 

other than an individual who was a 

covered employee in that year solely on 

account of paragraph (c)(2)(i)(D) of this 

section. For taxable years beginning 

prior to January 1, 2018, covered 

employees are identified in accordance 

with the rules in § 1.162–27(c)(2). 

(D) The five highest compensated 

employees of the publicly held 

corporation for the taxable year 

regardless of whether the individual is 

serving at the end of the publicly held 

corporation’s taxable year, other than 

any individual described in paragraph 

(c)(2)(i)(A) or (B) of this section, 

determined in accordance with the rules 

in this paragraph (c)(2)(i)(D). See 

paragraph (c)(3)(iv) of this section for a 

special rule treating certain employees 

of a person other than the publicly held 

corporation as employees of the 

publicly held corporation. 

(1) Compensation. The amount of 

compensation used to identify the five 

most highly compensated employees for 

the taxable year for purposes of 

paragraph (c)(2)(i)(D) of this section is 

the amount of compensation as defined 

in paragraph (c)(3) of this section, 

provided that, in determining 

compensation for purposes of applying 

this paragraph (c)(2)(i)(D), references to 

‘‘covered employee’’ or ‘‘covered 


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employee (as defined in paragraphs 

(c)(2)(i) through (v) of this section)’’ in 

paragraph (c)(3) of this section shall be 

replaced with references to ‘‘employee.’’ 

(2) Employee. For purposes of this 

paragraph (c)(2)(i)(D), the term 

‘‘employee’’ means an employee as 

defined in section 3401(c). 

(3) Determining the employees eligible 

to be the five highest compensated 

employees with respect to an affiliated 

group with one publicly held 

corporation. In the case of an affiliated 

group (as defined in paragraph (c)(1)(ii) 

of this section) that includes one 

publicly held corporation (as defined in 

paragraph (c)(1)(i) of this section), an 

employee of any member of the 

affiliated group is eligible to be one of 

the five highest compensated employees 

of the publicly held corporation 

regardless of whether the individual is 

an employee of the publicly held 

corporation itself or performs services 

for the publicly held corporation itself. 

(4) Determining the employees eligible 

to be the five highest compensated 

employees with respect to an affiliated 

group with more than one publicly held 

corporation. In the case of an affiliated 

group (as defined in paragraph (c)(1)(ii) 

of this section) that includes more than 

one publicly held corporation (as 

defined in paragraph (c)(1)(i) of this 

section), the group of employees eligible 

to be the five highest compensated 

employees is determined separately 

with respect to the parent corporation 

(as defined below) and each publicly 

held corporation (as defined in 

paragraph (c)(1)(i) of this section) that is 

not the parent corporation (an 

additional publicly held corporation). 

For this purpose, the parent corporation 

is the highest corporation in the chain 

or chains of includible corporations 

(that comprise the affiliated group) that 

is a publicly held corporation as defined 

in paragraph (c)(1)(i) of this section. In 

the case of an affiliated group in which 

more than one member may be the 

parent corporation (such as where a 

common parent that is not publicly held 

owns multiple publicly held 

corporations), the affiliated group must 

choose which member to treat as the 

parent corporation for the taxable year. 

With respect to the parent corporation, 

an employee of any member of the 

affiliated group, excluding a member of 

an affiliated group of an additional 

publicly held corporation (as defined 

below), is eligible to be one of its five 

highest compensated employees 

regardless of whether the individual is 

an employee of the parent corporation 

itself or performs services for the parent 

corporation itself. Similarly, with 

respect to an additional publicly held 

corporation, any employee of the 

affiliated group of the additional 

publicly held corporation is eligible to 

be one of its five highest compensated 

employees regardless of whether the 

individual is an employee of the 

additional publicly held corporation 

itself or performs services for the 

additional publicly held corporation 

itself. For this purpose, an affiliated 

group of an additional publicly held 

corporation means, with respect to any 

corporation, the affiliated group which 

would be determined under section 

1504(a) if such corporation were the 

common parent and if section 1504(b) 

did not apply. These rules similarly 

apply to all additional publicly held 

corporations, beginning at the bottom of 

each chain of corporations and 

proceeding up until all members of the 

affiliated group that may be so allocated 

have been allocated to one (and only 

one) affiliated group of an additional 

publicly held corporation. If the 

affiliated group includes only publicly 

held corporations (as defined in 

paragraph (c)(1)(i) of this section), the 

affiliated group used to determine the 

employees eligible to be each publicly 

held corporation’s five highest 

compensated employees is that publicly 

held corporation itself. 

(5) Determining the five highest 

compensated employees in an affiliated 

group. In determining whether an 

employee is one of the five highest 

compensated employees with respect to 

the parent corporation (as defined in 

paragraph (c)(2)(i)(D)(4) of this section) 

for the taxable year, compensation paid 

by each member of the affiliated group 

(as defined in paragraph (c)(1)(ii) of this 

section) in the taxable year, excluding 

any member of an affiliated group of an 

additional publicly held corporation (as 

defined in paragraph (c)(2)(i)(D)(4) of 

this section), is aggregated. In 

determining whether an employee is 

one of the five highest compensated 

employees with respect to a publicly 

held corporation (as defined in 

paragraph (c)(1)(i) of this section) in an 

affiliated group of an additional 

publicly held corporation, 

compensation paid by each member of 

the affiliated group of the additional 

publicly held corporation in the taxable 

year is aggregated. 

(6) Application of proration rules. The 

proration rules in paragraph (c)(1)(ii)(B) 

of this section generally apply in the 

same way to covered employees 

determined under this paragraph 

(c)(2)(i)(D), except that a publicly held 

corporation or publicly held payor 

corporation refers to the portion of the 

affiliated group of which the publicly 

held corporation (as defined in 

paragraph (c)(1)(i) of this section) is a 

part, as determined under paragraph 

(c)(2)(i)(D)(4) of this section. 

* * * * * 

(vii) * * * 

(CC) Example 29 (Individual as one of 

the five highest compensated employees 

of a publicly held corporation that 

includes the affiliated group)—(1) Facts. 

Corporation CO is a publicly held 

corporation for its 2026 and 2027 

taxable years. Corporation CP is a 

foreign corporation and is a whollyowned subsidiary of Corporation CO. 

Corporation CP is a controlled foreign 

corporation, but the only income it has 

is effectively connected with a U.S. 

trade or business. Corporation CO is a 

partner in Partnership CQ (a partnership 

for Federal tax purposes). Under the 

partnership agreement, Corporation CO 

has a 50% distributive share of the 

partnership’s income, gain, loss, 

deductions, and credits. These 

allocations comply with section 704(b) 

and its regulations. Employee E.O. is an 

employee of Corporation CO. In 2026, 

Employee E.O. is a covered employee of 

Corporation CO because Employee E.O. 

is one of the three highest compensated 

executive officers of Corporation CO. In 

2027, Employee E.O. is not an executive 

officer of Corporation CO but performs 

services for and receives compensation 

from Corporations CO for services as its 

employee. Furthermore, in 2027, 

Employee E.O. performs services for and 

receives compensation from Corporation 

CP and Partnership CQ (Employee E.O. 

is not a partner of Partnership CQ). In 

2027, the total compensation paid to 

Employee E.O. is $3,600,000, of which 

Corporation CO pays $1,500,000, 

Corporation CP pays $900,000, and 

Partnership CQ pays $1,200,000. For the 

2027 taxable year, the total 

compensation paid to any employee of 

Corporations CO and CP did not exceed 

$2,500,000. 

(2) Conclusion (Compensation paid by 

Corporation CO). The $1,500,000 in 

compensation paid by Corporation CO 

is taken into account to determine 

whether Employee E.O. is one of the 

five highest compensated employees of 

Corporation CO for its 2027 taxable 

year. 

(3) Conclusion (Compensation paid by 

Corporation CP). Corporations CO and 

CP are an affiliated group as defined in 

paragraph (c)(1)(ii) of this section. 

Therefore, the $900,000 in 

compensation paid by Corporation CP is 

taken into account to determine whether 

Employee E.O. is one of the five highest 

compensated employees of Corporation 

CO for its 2027 taxable year. Because a 

publicly held corporation includes an 


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affiliated group for purposes of 

paragraph (c)(3) of this section, the 

result would be the same even if there 

were intermediary privately held 

subsidiaries between Corporations CO 

and CP as long as all these corporations 

comprised an affiliated group. 

(4) Conclusion (Compensation paid by 

Partnership CQ). Under paragraph 

(c)(3)(ii) of this section, Corporation 

CO’s $600,000 distributive share of 

Partnership CQ’s deduction (50% of 

$1,200,000) is compensation that is 

taken into account to determine whether 

Employee E.O. is one of the five highest 

compensated employees of Corporation 

CO for its 2027 taxable year. Because a 

publicly held corporation includes an 

affiliated group for purposes of 

paragraph (c)(3) of this section, the 

result would be the same even if there 

were an intermediary privately held 

subsidiary between Corporation CO and 

Partnership CQ (so that, instead of 

Corporation CO, an intermediary 

subsidiary was a partner in Partnership 

CQ), as long as Corporation CO and the 

intermediary subsidiary comprised an 

affiliated group. 

(5) Conclusion (Employee E.O. as a 

covered employee). Because the 

aggregate compensation taken into 

account with respect to Employee E.O. 

is $3,000,000 ($1,500,000 + $900,000 + 

$600,000), Employee E.O. is a covered 

employee of Corporation CO for its 2027 

taxable year by reason of being one of 

its five highest compensated employees 

for the taxable year as provided in 

paragraph (c)(2)(i)(D) of this section 

(even though Employee E.O. is also a 

covered employee of Corporation CO for 

its 2027 taxable year by reason of being 

a covered employee for its 2026 taxable 

year (as provided in paragraph 

(c)(2)(i)(C) of this section)). 

(6) Conclusion (Amount disallowed as 

a deduction). Because the compensation 

paid by all affiliated group members is 

aggregated for purposes of section 

162(m)(1), the aggregate compensation 

of $3,000,000 exceeds the limitation in 

section 162(m)(1) and $2,000,000 of the 

compensation paid to Employee E.O. is 

nondeductible. Corporations CO and CP 

each are treated as paying a ratable 

portion of the nondeductible 

compensation. Thus, two thirds of each 

corporation’s payment will be 

nondeductible. Taking into account 

Corporation CO’s $600,000 distributive 

share of the Partnership CQ’s deduction, 

Corporation CO has an otherwise 

allowable deduction of $2,100,000 

($1,500,000 + $600,000). Therefore, 

Corporation CO has a nondeductible 

compensation expense of $1,400,000 

($2,100,000 × $2,000,000/$3,000,000). 

Corporation CP has an otherwise 

allowable deduction of $900,000, of 

which $600,000 ($900,000 × $2,000,000/ 

$3,000,000) is a nondeductible 

compensation expense. 

(DD) Example 30 (Individual as one of 

the five highest compensated employees 

of a publicly held corporation that 

includes the affiliated group and 

affiliated groups of additional publicly 

held corporations)—(1) Facts. 

Corporations CR, CT, and CV are 

publicly held corporations for their 

2027 taxable years. Corporations CS and 

CU are privately held for their 2027 

taxable years. Corporation CT is a 

subsidiary of Corporation CS, which is 

a subsidiary of Corporation CR. 

Corporation CV is a subsidiary of 

Corporation CU, which is a subsidiary 

of Corporation CT. Corporations CR, CS, 

CT, CU, and CV are members of an 

affiliated group. Employee EP is an 

employee of Corporations CR, CS, CU, 

and CV. In 2027, Employee EP performs 

services for and receives compensation 

from Corporations CR, CS, CU, and CV. 

The total compensation paid to 

Employee EP from the affiliated group 

members is $7,000,000 for the taxable 

year, of which Corporation CR pays 

$1,200,000, Corporation CS pays 

$1,800,000, Corporation CU pays 

$1,500,000, and Corporation CV pays 

$2,500,000. 

(2) Conclusion (Employee EP is 

eligible to be a covered employee of 

Corporation CR). Because Employee EP 

is an employee of Corporation CR, 

Employee EP is eligible to be one of the 

five highest compensated employees of 

Corporation CR. Even though 

Corporations CR, CS, CT, CU, and CV 

comprise an affiliated group as defined 

in paragraph (c)(1)(ii) of this section, 

because Corporations CT and CV are 

additional publicly held corporations of 

the affiliated group, the affiliated group 

contains affiliated groups of these 

additional publicly held corporations 

(as defined in paragraph (c)(2)(i)(D)(4) of 

this section). Compensation paid by the 

affiliated groups of these additional 

publicly held corporations is not taken 

into account to determine whether 

Employee EP is one of the five highest 

compensated employees of Corporation 

CR for its 2027 taxable year. 

Accordingly, Corporations CT and CU 

comprise an affiliated group of an 

additional publicly held corporation 

(Corporation CT), and compensation 

paid by Corporation CU is not taken into 

account to determine whether Employee 

EP is one of the five highest 

compensated employees of Corporation 

CR for its 2027 taxable year. 

Furthermore, Corporation CV is an 

affiliated group of an additional 

publicly held corporation (Corporation 

CV), and compensation paid by 

Corporation CV is not taken into 

account to determine whether Employee 

EP is one of the five highest 

compensated employees of Corporation 

CR for its 2027 taxable year. Therefore, 

only the $1,200,000 in compensation 

paid by Corporation CR and the 

$1,800,000 paid by Corporation CS are 

taken into account to determine whether 

Employee EP is one of the five highest 

compensated employees of Corporation 

CR for its 2027 taxable year. 

(3) Conclusion (Employee EP is 

eligible to be a covered employee of 

Corporation CT). Because Corporation 

CT is a publicly held corporation, 

Corporations CT and CU comprise an 

affiliated group of an additional 

publicly held corporation (as defined in 

paragraph (c)(2)(i)(D)(4) of this section). 

Because an employee of any member of 

the affiliated group is eligible to be one 

of the five highest compensated 

employees of the publicly held 

corporation (regardless of whether the 

employee performs services for the 

publicly held corporation), Employee 

EP is eligible to be a covered employee 

of Corporation CT, even though 

Employee EP does not perform services 

for Corporation CT. Because only 

compensation paid by a member of the 

affiliated group of the additional 

publicly held corporation in the taxable 

year is taken into account to determine 

whether an individual is one of the five 

highest compensated employees with 

respect to the additional publicly held 

corporation, only compensation paid by 

Corporation CU is taken into account to 

determine whether Employee EP is one 

of the five highest compensated 

employees of Corporation CT for its 

2027 taxable year. Accordingly, the 

$1,500,000 in compensation paid by 

Corporation CU is taken into account to 

determine whether Employee EP is one 

of the five highest compensated 

employees of Corporation CT for its 

2027 taxable year. 

(4) Conclusion (Employee EP is 

eligible to be a covered employee of 

Corporation CV). Because Employee EP 

is an employee of Corporation CV, 

Employee EP is eligible to be one of the 

five highest compensated employees of 

Corporation CV. Because Corporation 

CV is a publicly held corporation, 

Corporation CV comprises an affiliated 

group of an additional publicly held 

corporation (as defined in paragraph 

(c)(2)(i)(D)(4) of this section). Because 

only compensation paid by a member of 

the affiliated group of the additional 

publicly held corporation in the taxable 

year is taken into account to determine 

whether an individual is one of the five 

highest compensated employees with 


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respect to the additional publicly held 

corporation, only compensation paid by 

Corporation CV is taken into account to 

determine whether Employee EP is one 

of the five highest compensated 

employees of Corporation CV for its 

2027 taxable year. Accordingly, the 

$2,500,000 in compensation paid by 

Corporation CV is taken into account to 

determine whether Employee EP is one 

of the five highest compensated 

employees of Corporation CV for its 

2027 taxable year. 

(5) Conclusion (Employee EP as 

covered employee of Corporation CR). 

The $1,200,000 in compensation paid 

by Corporation CR and the $1,800,000 

in compensation paid by Corporation 

CS are taken into account to determine 

whether Employee EP is one of the five 

highest compensated employees of 

Corporation CR for its 2027 taxable year. 

If, pursuant to paragraph (c)(2)(i)(D) of 

this section, Employee EP is a covered 

employee of Corporation CR, then 

Corporation CR’s deduction for 

$1,200,000 and Corporation CS’s 

deduction for $1,800,000 for the 2027 

taxable year would be subject to the 

section 162(m)(1) limit. Because the 

compensation paid by the affiliated 

group members is aggregated for 

purposes of section 162(m)(1), the 

aggregate compensation of $3,000,000 

exceeds the limitation in section 

162(m)(1) and $2,000,000 of the 

compensation paid to Employee EP 

would be nondeductible. Corporations 

CR and CS each are treated as paying a 

ratable portion of the nondeductible 

compensation. Corporation CR has an 

otherwise allowable deduction of 

$1,200,000, of which $800,000 

($1,200,000 × $2,000,000/$3,000,000) 

would be a nondeductible 

compensation expense. Corporation CS 

has an otherwise allowable deduction of 

$1,800,000, of which $1,200,000 

($1,800,000 × $2,000,000/$3,000,000) 

would be a nondeductible 

compensation expense. 

(6) Conclusion (Employee EP as 

covered employee of Corporation CT). 

The $1,500,000 in compensation paid 

by Corporation CU is taken into account 

to determine whether Employee EP is 

one of the five highest compensated 

employees of Corporation CT for its 

2027 taxable year. If, pursuant to 

paragraph (c)(2)(i)(D) of this section, 

Employee EP is a covered employee of 

Corporation CT, then Corporation CU’s 

deduction for $1,500,000 for the 2027 

taxable year would be subject to the 

section 162(m)(1) limit. Accordingly, 

pursuant to paragraph (c)(2)(i)(D)(6) of 

this section, Corporation CU would 

have a nondeductible compensation 

expense of $500,000. 

(7) Conclusion (Employee EP as 

covered employee of Corporation CV). 

The $2,500,000 in compensation paid 

by Corporation CV is taken into account 

to determine whether Employee EP is 

one of the five highest compensated 

employees of Corporation CV for its 

2027 taxable year. If, pursuant to 

paragraph (c)(2)(i)(D) of this section, 

Employee EP is a covered employee of 

Corporation CV, then Corporation CV’s 

deduction for $2,500,000 for the 2027 

taxable year would be subject to the 

section 162(m)(1) limit. Accordingly, 

Corporation CV would have a 

nondeductible compensation expense of 

$1,500,000. 

(EE) Example 31 (Individual as one of 

the five highest compensated employees 

of a publicly held corporation that 

includes the affiliated group that 

chooses a parent corporation)—(1) 

Facts. Corporations CX and CY are 

publicly held corporations for their 

2027 taxable years. Corporations CW 

and CZ are privately held corporations 

for their 2027 taxable years. 

Corporations CX and CY are 

subsidiaries of Corporation CW. 

Corporations CX and CY each directly 

own 50% (by vote and value) of 

Corporation CZ’s only class of stock. In 

2027, Employee EQ performs services 

for and receives compensation from 

Corporations CW, CX, CY, and CZ. The 

total compensation paid to Employee 

EQ from all corporations is $4,700,000 

for the taxable year, of which 

Corporation CW pays $1,500,000, 

Corporation CX pays $900,000, 

Corporation CY pays $1,700,000, and 

Corporation CZ pays $600,000. 

(2) Conclusion (Employee EQ is 

eligible to be a covered employee of 

Corporations CX and CY). Because 

Employee EQ is an employee of 

Corporations CX and CY, Employee EQ 

is eligible to be one of the five highest 

compensated employees of these 

publicly held corporations. Because 

both Corporations CX and CY are the 

highest publicly held corporations in 

the chain of includible corporations that 

comprise an affiliated group (composed 

of Corporations CW, CX, CY, and CZ) as 

defined in paragraph (c)(1)(ii) of this 

section, the affiliated group may choose 

to treat either Corporation CX or CY as 

the parent corporation for the 2027 

taxable year. If the affiliated group 

chooses to treat Corporation CX as the 

parent corporation, then only 

compensation paid by Corporations CW, 

CX, and CZ is taken into account to 

determine whether Employee EQ is one 

of the five highest compensated 

employees of Corporation CX for the 

2027 taxable year. Because Corporation 

CY is an affiliated group of the 

additional publicly held corporation 

composed of one corporation 

(Corporation CY), only compensation 

paid by Corporation CY is taken into 

account to determine whether Employee 

EQ is one of the five highest 

compensated employees of Corporation 

CY. A similar analysis would apply if 

the affiliated group chose to treat 

Corporation CY as the parent. 

(3) Conclusion (Employee EQ as a 

covered employee of Corporation CX). 

The $1,500,000 in compensation paid 

by Corporation CW, the $900,000 paid 

by Corporation CX, and the $600,000 in 

compensation paid by Corporation CZ 

(that is, aggregate compensation of 

$3,000,000) are taken into account to 

determine whether Employee EQ is one 

of the five highest compensated 

employees of Corporation CX for its 

2027 taxable year. If, pursuant to 

paragraph (c)(2)(i)(D) of this section, 

Employee EQ is a covered employee of 

Corporation CX, then Corporation CW’s 

deduction for $1,500,000, Corporation 

CX’s deduction for $900,000, and 

Corporation CZ’s deduction for 

$600,000 for the 2027 taxable year 

would be subject to the section 

162(m)(1) limit. Because the 

compensation paid by the affiliated 

group members is aggregated for 

purposes of section 162(m)(1), the 

aggregate compensation of $3,000,000 

exceeds the limitation in section 

162(m)(1) and $2,000,000 of the 

compensation paid to Employee EQ 

would be nondeductible. Corporations 

CW, CX, and CZ each are treated as 

paying a ratable portion of the 

nondeductible compensation. 

Corporation CW would have a 

nondeductible compensation expense of 

$1,000,000 ($1,500,000 × $2,000,000/ 

$3,000,000). Corporation CX would 

have a nondeductible compensation 

expense of $600,000 ($900,000 × 

$2,000,000/$3,000,000). Corporation CZ 

would have a nondeductible 

compensation expense of $400,000 

($600,000 × $2,000,000/$3,000,000). 

(4) Conclusion (Employee EQ as a 

covered employee of Corporation CY). 

The $1,700,000 in compensation paid 

by Corporation CY is taken into account 

to determine whether Employee EQ is 

one of the five highest compensated 

employees of Corporation CY for its 

2027 taxable year. If, pursuant to 

paragraph (c)(2)(i)(D) of this section, 

Employee EQ is a covered employee of 

Corporation CY, then Corporation CY’s 

deduction for $1,700,000 for the 2027 

taxable year would be subject to the 

section 162(m)(1) limit. Accordingly, 

Corporation CY would have a 

nondeductible compensation expense of 

$700,000. 


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(3) * * * 

(iii) Compensation paid by a 

controlled foreign corporation that is a 

member of an affiliated group. For 

purposes of paragraph (c)(3)(i) of this 

section, compensation includes a 

publicly held corporation’s pro rata 

share (as determined under the 

principles of sections 951(a)(2) and 

951A(e)(1)) of the amounts that would 

be claimed by a controlled foreign 

corporation (as defined in section 957) 

that is a member of an affiliated group 

(as defined in paragraph (c)(1)(ii) of this 

section) as properly allocable to gross 

income included under sections 

951(a)(1) and 951A(a) under sections 

954(b)(5), 951A(c)(2)(A)(ii), and similar 

provisions, determined without regard 

to the disallowance of any such 

expenses by reason of section 162(m) 

and these regulations, for compensation 

expenses attributable to the 

remuneration paid by the controlled 

foreign corporation to a covered 

employee of a publicly held corporation 

for services performed by the covered 

employee. 

(iv) Amounts paid to individuals 

performing substantially all their 

services for a publicly held corporation. 

Notwithstanding paragraph 

(c)(2)(i)(D)(2) of this section, for 

purposes of paragraph (c)(2)(i)(D) of this 

section, an employee of a publicly held 

corporation includes an individual who, 

pursuant to section 3401(c), is an 

employee of a person other than the 

publicly held corporation but performs 

substantially all the individual’s 

services during the relevant taxable year 

for the publicly held corporation. 

Consequently, for purposes of paragraph 

(c)(3) of this section, compensation 

includes the aggregate amount allowable 

as a deduction to the publicly held 

corporation under chapter 1 of the 

Internal Revenue Code for the taxable 

year (determined without regard to 

section 162(m)(1)) to obtain the services 

performed by such individual, whether 

or not the particular services that give 

rise to the deduction were performed 

during the relevant taxable year. This 

rule applies regardless of how the 

amounts allowable as a deduction are 

paid or denominated, and regardless of 

whether the individual is compensated 

directly or by a third-party payor, 

including a related organization or 

certified professional employer 

organization under section 7705. The 

disallowance under paragraph (b) of this 

section likewise is applied to those 

amounts, however denominated, 

otherwise allowable as a deduction to 

obtain those services. Nothing in the 

previous sentence is intended to imply 

that such amounts paid to a third party 

for services by a covered employee, 

however denominated, are not already 

treated as remuneration for those 

services and thus compensation for 

purposes of paragraph (c)(3) of this 

section. 

* * * * * 

(D) Example 4—(1) Facts. Corporation 

U is a publicly held corporation for its 

2027 taxable year and is not a member 

of an affiliated group. Corporation U has 

a services agreement with unrelated 

Corporation V. In Corporation U’s 2027 

taxable year, it pays $1,500,000 to 

Corporation V pursuant to the 

agreement in exchange for the services 

of an interim chief accountant 

(Individual E) in the same year. The 

$1,500,000 is otherwise deductible for 

Corporation U’s 2027 taxable year. 

Individual E performs substantially all 

Individual E’s services in 2027 for 

Corporation U. 

(2) Conclusion. Pursuant to paragraph 

(c)(3)(iv) of this section, Individual E is 

treated as an employee of Corporation U 

for purposes of this section. The 

$1,500,000 paid to Corporation V by 

Corporation U in 2027 is compensation 

within the meaning of paragraph (c)(3) 

of this section and is taken into account 

to determine whether Individual E is a 

covered employee as one of the five 

highest compensated employees of 

Corporation U for its 2027 taxable year. 

If, pursuant to paragraph (c)(2)(i)(D) of 

this section, Individual E is a covered 

employee of Corporation U, then 

Corporation U’s deduction for 

$1,500,000 for the 2027 taxable year is 

subject to the section 162(m)(1) limit. 

Because a publicly held corporation 

includes an affiliated group for purposes 

of paragraph (c)(3) of this section, the 

result would be the same even if 

Corporation U owned a privately held 

subsidiary, and Individual E performed 

substantially all Individual E’s services 

for the subsidiary. In addition, the result 

would also be the same if Individual E 

performed substantially all Individual 

E’s services for both Corporation U and 

its subsidiary, as long as Corporation U 

and its subsidiary comprised an 

affiliated group (regardless of whether 

Corporation U or its subsidiary paid the 

$1,500,000 to Corporation V). In such 

case, pursuant to paragraph (c)(1)(ii) of 

this section, the amount disallowed as 

a deduction would be prorated between 

Corporation U and its subsidiary. 

Furthermore, the result would be the 

same even if Individual E were an 

employee of Corporation U (regardless 

of whether Individual E were also an 

employee of Corporation V). 

(E) Example 5—(1) Facts. Corporation 

W is a publicly held corporation for its 

2027 taxable year and is not a member 

of an affiliated group. Corporation W is 

a partner in Partnership X (a partnership 

for Federal tax purposes), that owns all 

the stock of Corporation Y. Under the 

partnership agreement, Corporation W 

has a 50% distributive share of the 

partnership’s income, gain, loss, 

deductions, and credits. These 

allocations comply with section 704(b) 

and its regulations. Individual F is a 

partner of Partnership X. In 2027, 

Individual F performs services for the 

partnership, and the partnership pays 

$1,000,000 to Individual F as a 

guaranteed payment for these services. 

With respect to the $1,000,000 paid to 

Individual F, a deduction of $500,000 is 

allocated to Corporation W. Corporation 

W’s $500,000 distributive share of the 

partnership’s deduction is reported 

separately to Corporation W pursuant to 

§ 1.702–1(a)(8)(iii). Individual F is also 

an employee (within the meaning of 

section 3401(c)) of Corporation Y. In 

Corporation W’s 2027 taxable year, it 

pays $8,000,000 to Corporation Y in 

exchange for Individual F’s services. 

The $8,000,000 is otherwise deductible 

for Corporation W’s 2027 taxable year. 

Individual F performs substantially all 

Individual F’s services in 2027 for 

Corporation W. 

(2) Conclusion. Pursuant to paragraph 

(c)(3)(iv) of this section, Individual F is 

treated as an employee of Corporation 

W for purposes of this section. The 

entire $8,000,000 paid to Corporation Y 

by Corporation W in 2027 is 

compensation within the meaning of 

paragraph (c)(3) of this section and is 

taken into account to determine whether 

Individual F is one of the five highest 

compensated employees of Corporation 

W for its 2027 taxable year. Because 

Corporation W’s $500,000 distributive 

share of the partnership’s deduction is 

attributable to the compensation paid by 

the partnership for services performed 

by Individual F (who is treated as an 

employee of Corporation W), the 

$500,000 is compensation within the 

meaning of paragraph (c)(3)(ii) of this 

section. Accordingly, Corporation W’s 

$500,000 distributive share of the 

partnership’s deduction is aggregated 

with Corporation W’s deduction for 

$8,000,0000 paid to Corporation Y in 

determining whether Individual F is a 

covered employee as one of the five 

highest compensated employees of 

Corporation W for its 2027 taxable year. 

If, pursuant to paragraph (c)(2)(i)(D) of 

this section, Individual F is a covered 

employee of Corporation W, then 

Corporation W’s deduction for 

$8,500,000 for its 2027 taxable year is 

subject to the section 162(m)(1) limit. 


ddrumheller on DSK120RN23PROD with PROPOSALS1
Federal Register / Vol. 90, No. 10 / Thursday, January 16, 2025 / Proposed Rules 4699 

Because a publicly held corporation 

includes an affiliated group for purposes 

of paragraph (c)(3) of this section, the 

result would be the same even if there 

were an intermediary privately held 

subsidiary between Corporation W and 

Partnership X (so that, instead of 

Corporation W, an intermediary 

subsidiary was a partner in Partnership 

X), as long as Corporation W and the 

intermediary subsidiary comprised an 

affiliated group, and as long as 

Individual F performed substantially all 

Individual F’s services for the 

intermediary subsidiary. Furthermore, 

the result would also be the same if 

Individual F performed substantially all 

Individual F’s services for both 

Corporation W and the intermediary 

subsidiary (regardless of whether 

Corporation W or the intermediary 

subsidiary paid the $8,000,000 to 

Corporation Y). In such case, pursuant 

to paragraph (c)(1)(ii) of this section, the 

amount disallowed as a deduction 

would be prorated between Corporation 

W and the intermediary subsidiary. 

* * * * * 

(h) * * * 

(2) * * * 

(ii) * * * 

(C) Definition of compensation. The 

definition of compensation provided in 

paragraph (c)(3)(ii) of this section 

(relating to distributive share of 

partnership deductions for 

compensation paid) applies to any 

deduction for compensation that is paid 

after December 18, 2020. The definition 

of compensation in paragraph (c)(3)(ii) 

of this section does not apply 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. For 

purposes of paragraph (h)(2)(C) of this 

section, written binding contract and 

material modification have the same 

meanings as provided in paragraphs 

(g)(1) and (2) of this section. The 

definition of compensation provided in 

paragraphs (c)(3)(iii) and (iv) of this 

section and the examples in paragraphs 

(c)(3)(vi)(D) and (E) of this section apply 

to any deduction for compensation that 

is otherwise deductible for taxable years 

beginning after the later of December 31, 

2026, or the date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. 

* * * * * 

(F) Five highest compensated 

employees. Paragraph (c)(2)(i)(D) of this 

section (describing the five highest 

compensated employees of a publicly 

held corporation) and the examples in 

paragraphs (c)(2)(vii)(CC) through (EE) 

of this section apply to taxable years 

beginning after the later of December 31, 

2026, or the date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. 

(G) Amendment to paragraph 

(c)(1)(vi)(W)(2) of this section. The 

amendment to paragraph (c)(1)(vi)(W)(2) 

of this section (Example 23) to reference 

paragraph (c)(1)(vi)(T) of this section 

(Example 20) is proposed to apply to 

taxable years ending on or after January 

16, 2025. 

Douglas W. O’Donnell, 

Deputy Commissioner. 

[FR Doc. 2025–00728 Filed 1–14–25; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 165 

[Docket Number USCG–2024–0123] 

RIN 1625–AA00 

Safety Zone; San Pedro Bay, Los 

Angeles and Long Beach, CA 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Coast Guard is proposing 

to establish moving safety zones around 

vessels carrying oversized cargo within 

the Los Angeles-Long Beach Port 

Complex in San Pedro Bay. Safety zones 

around vessels carrying oversized cargo 

during movements within the port 

complex would ensure navigational 

safety and minimize mishaps disrupting 

the navigational channels. Entry of 

persons or vessels into these safety 

zones would be prohibited unless 

specifically authorized by the Captain of 

the Port (COTP) Los Angeles-Long 

Beach or their designated 

representative. We invite your 

comments on this proposed rulemaking. 

DATES: Comments and related material 

must be received by the Coast Guard on 

or before February 18, 2025. 

ADDRESSES: You may submit comments 

identified by docket number USCG– 

2024–0123 using the Federal DecisionMaking Portal at https://

www.regulations.gov. See the ‘‘Public 

Participation and Request for 

Comments’’ portion of the 

SUPPLEMENTARY INFORMATION section for 

further instructions on submitting 

comments. This notice of proposed 

rulemaking with its plain-language, 100- 

word-or-less proposed rule summary 

will be available in this same docket. 

FOR FURTHER INFORMATION CONTACT: If 

you have questions about this proposed 

rulemaking, call or email LCDR Kevin 

Kinsella, Waterways Management, U.S. 

Coast Guard Sector Los Angeles-Long 

Beach; telephone (310) 357–1603, email 

D11-SMB-SectorLALB-WWM@uscg.mil. 

SUPPLEMENTARY INFORMATION: 

I. Table of Abbreviations 

CFR Code of Federal Regulations 

DHS Department of Homeland Security 

FR Federal Register 

NPRM Notice of proposed rulemaking 

§ Section 

U.S.C. United States Code 

II. Background, Purpose, and Legal 

Basis 

Within the past two years, there have 

been six arrivals of vessels carrying a 

total of 16 ship-to-shore cranes to the 

Port Complex. The Coast Guard 

anticipates future deliveries of 

additional cranes and other oversized 

cargo. The Coast Guard previously 

established seven temporary safety 

zones and two extensions of those rules 

for past arrivals, shifts, and departures 

of oversized critical infrastructure cargo 

to the port complex. With this proposed 

rule, we propose establishing a 

permanent safety zone around all 

vessels moving oversized cargos that 

would be enforced only when the 

vessels are transiting into, out of, or 

within the port complex. The COTP has 

determined that potential hazards 

associated with the oversized cargo 

movements would be a safety concern 

for anyone within a 500-foot radius of 

the vessel carrying oversized cargo. 

The purpose of this rulemaking is to 

ensure the safety of vessels and the 

navigable waters during movements of 

oversized cargo within the port 

complex. The Coast Guard is proposing 

this rulemaking under authority in 46 

U.S.C. 70034. 

III. Discussion of Proposed Rule 

The COTP is proposing to establish a 

safety zone for all vessels carrying 

oversized cargo inside the port complex. 

The safety zone would cover all 

navigable waters within a 500-foot 

radius of a vessel while it is in transit 

into, out of, and within the Los AngelesLong Beach port complex. The duration 

of the zone is intended to ensure the 

safety of vessels and these navigable 

waters during scheduled movements. 

No vessel or person would be permitted 

to enter the safety zone without 

obtaining permission from the COTP or 

a designated representative. The 


ddrumheller on DSK120RN23PROD with PROPOSALS1