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Proposed Section 162(m) Regs: Corporate Transactions

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January 28, 2020 | Barbara Baksa

Proposed Section 162(m) Regs: Corporate Transactions

This week I continue my coverage of the IRS’s newly proposed regulations under Section 162(m). These regulations would implement the amendments to Section 162(m) under the Tax Cuts and Jobs Act of 2017 and expand upon the guidance in Notice 2018-68. For today’s blog entry, I look at the effect of corporate transactions on a company’s covered employees.

Mergers and Acquisitions

One question that wasn’t covered in Notice 2018-68 is whether covered employees of an acquired company are still covered after the acquisition. The IRS answers the question in the proposed regs, but it’s not good news.

The short answer is yes. Under the proposed regs, when a public company is acquired by or merges with another public company, the covered employees of the target (which the regs refer to as a “predecessor corporation”) will remain covered employees in the new company. Thus, an acquisition of a public company could significantly increase the acquirer’s covered employees.

Chain, Chain, Chain…Chain of, er, Companies

The above rule can apply through multiple acquisitions. Per the proposed regs:

A reference to a predecessor of a corporation includes each predecessor of the corporation and the predecessor or predecessors of any prior predecessor or predecessors.

That’s pretty hard to parse, but I think what it means is that if Public Company A is acquired by Public Company B, which is subsequently acquired by Public Company C, any covered employees from Company A that manage to stick around though both acquisitions will still be covered employees in Company C.

Public to Private to Public

In some circumstances, when a company goes private and then goes public again (or is acquired by a public company), the original public company will be considered a predecessor company of the current public company. This means that whoever was a covered employee in the original public company will be covered in the current public company. This applies if the company becomes public for a taxable year that ends within 36 months of when the original public company’s federal tax returns were last due.


In a spin-off, executives can end up being a covered employee for both companies. Any employee of the original combined entity that is hired by the spun off entity within the 12 months before or after the spin off is a covered employee for both entities (the spun-off entity and the company that did the spinning off). (This assumes that both entities are publicly held.)

Some Good News—There’s a Transition

All of the predecessor corporation stuff only applies to corporate transactions that occur after tax years beginning after December 31, 2016, so you don’t have to review all your company acquisitions since the beginning of time to figure out who should be a covered employee. But if you’ve had any corporate transactions since December 31, 2016, you may need to review the employees who were covered in those companies to ensure they are treated as covered employees in your company.

Not a Do-It-Yourself Project

Not surprisingly, the rules proposed by the IRS are more complicated than I’ve described here. If your company has acquired public companies or private companies that were once public, or if you’ve spun off any entities (or if your company was spun off from a public company), I recommend that you review each corporate transaction with your legal counsel to determine if any of the employees of these entities are covered employees for your company.

- Barbara

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