Certain Employee Remuneration in Excess of $1,000,000 Under Internal Revenue Code Section 162(m), 4691-4699 [2025-00728]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 90, Number 10 (Thursday, January 16, 2025)]
[Proposed Rules]
[Pages 4691-4699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00728]


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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.

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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cannot be edited or withdrawn.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 [email protected] (preferred) or 
by telephone at (202) 317-6901 (not toll-free 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

[[Page 4692]]

IRS published in the Federal Register final regulations under section 
162(m) (TD 8650) (60 FR 65534) (1995 regulations).
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    \1\ As a result, for example, such disallowed amounts generally 
may not be capitalized. See Sec. Sec.  1.263(a)-1(b) and 1.263A-
1(c)(2).
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    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.
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    \2\ The addition of section 162(m)(3)(C) resulted in pre-ARP 
section 162(m)(3)(C) being redesignated as section 162(m)(3)(D).
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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\
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    \3\ This 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).
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    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, Sec.  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).
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    \4\ These proposed regulations take the same approach as the 
current regulations of using ``publicly held corporation'' to mean 
the affiliated group (as defined in Sec.  1.162-33(c)(1)(ii)) of 
which the corporation that is a publicly held corporation (as 
defined in Sec.  1.162-33(c)(1)(i)) is a part, and distinguishing 
between the two only where necessary.
    \5\ See 17 CFR 229.402, Instructions to Item 402(a)(3).
    \6\ See H.R. Conf. Rep. No. 103-213, at 585 (1993) (``Unless 
specifically excluded, the deduction limitation applies to all 
remuneration for services.'').
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    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

[[Page 4693]]

(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 Sec.  1.162-
33(c)(1)(i).
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    \7\ See, 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).
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    Consistent with the rule in the current regulations for affiliated 
groups that contain more than one publicly held corporation (as defined 
in Sec.  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 Sec.  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.
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    \8\ See 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.
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    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 third-party 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.

[[Page 4694]]

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 [email protected]. 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

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. Section 1.162-33 is amended by:
0
a. Revising paragraphs (c)(1)(vi)(W)(2) and (c)(2)(i)(C);
0
b. Adding paragraphs (c)(2)(i)(D) and (c)(2)(vii)(CC) through (EE);
0
c. Redesignating paragraphs (c)(3)(iii) and (iv) as paragraphs 
(c)(3)(v) and (vi);
0
d. Adding new paragraphs (c)(3)(iii) and (iv) and adding paragraphs 
(c)(3)(vi)(D) and (E);
0
e. Revising paragraph (h)(2)(ii)(C); and
0
f. Adding paragraphs (h)(2)(ii)(F) and G.
    The revisions and additions read as follows:


Sec.  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 Sec.  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

[[Page 4695]]

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 wholly-owned 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

[[Page 4696]]

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 x $2,000,000/
$3,000,000). Corporation CP has an otherwise allowable deduction of 
$900,000, of which $600,000 ($900,000 x $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

[[Page 4697]]

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 x $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 x $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 x $2,000,000/$3,000,000). Corporation 
CX would have a nondeductible compensation expense of $600,000 
($900,000 x $2,000,000/$3,000,000). Corporation CZ would have a 
nondeductible compensation expense of $400,000 ($600,000 x $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.

[[Page 4698]]

    (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 Sec.  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.

[[Page 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