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Golden Parachutes (Portfolio 396)

Tax Management Portfolio No. 396-2nd, Golden Parachutes, discusses the definitions and concepts peculiar to the golden parachute provisions, describes the process for ascertaining whether a change in control has occurred, whether excess parachute payments will result and analyzes the corporate income tax consequences and the individual excise tax consequences resulting from the payment of excess parachute payments.

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Tax Management Portfolio No. 396-2nd, Golden Parachutes, discusses the definitions and concepts peculiar to the golden parachute provisions, describes the process for ascertaining whether a change in control has occurred, whether excess parachute payments will result and analyzes the corporate income tax consequences and the individual excise tax consequences resulting from the payment of excess parachute payments.

The Portfolio illustrates the application of the golden parachute provisions with examples and worksheets, including sample contract provisions.


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AUTHORS

BILL C. WILSON
Bill C. Wilson, Partner, Executive Compensation Tax Services, Deloitte & Touche LLP; CPA; B.S., Cum Laude, University of Southern California. From June, 2002, a retired partner and a consultant to Deloitte & Touche.

DIANE M. MCGOWAN
Diane M. McGowan, Senior Manager, Executive Compensation Tax Services, Deloitte & Touche LLP; B.A., B.S. Summa Cum Laude, and MPrA, University of Utah.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Golden Parachutes

B. Overview

1. Congressional Intent and Effective Date

2. Tax Penalties as Enforcement

a. In General

b. The Process of Analyzing Parachutes

3. Corporations and Affiliated Groups

II. Exempt Payments: Small Business Corporations, Shareholder Voting and Certain Tax-Exempt Corporations

A. Exempt Payments from Small Business Corporations

B. Private Corporations and Shareholder Voting

1. The Voting Exemption

2. The Voting Requirements

a. Shareholders Entitled to Vote

b. Adequate Disclosure

c. When to Vote

d. Effect of Vote on Legal Obligation to Make Payment

C. Tax-Exempt Entities

III. Change in Ownership or Effective Control

A. Introduction

B. Final Regulations

1. Change in Ownership

2. Change in Effective Control

3. Change in Ownership of Substantial Portion of Corporation's Assets

C. Changes in Control Prior to the Final Regulations

D. Bankruptcy Transactions

IV. Determining Disqualified Individuals

A. Introduction

B. Who Is a Disqualified Individual?

C. Who Is a Shareholder for Disqualified Individual Purposes?

D. Who Is an Officer for Disqualified Individual Purposes?

E. Who Is a Highly Compensated Individual for Disqualified Individual Purposes?

V. Contingent Payments, Reasonable Compensation and Exempt Payments

A. Introduction

B. Payments Contingent on a Change in Control

1. Payments in the Nature of Compensation

2. Payments in the Nature of Compensation that Are Contingent on a Change in Control

3. Is the Full Amount of Contingent Payments Treated as a Parachute?

4. The One Year Presumption and Rebuttal

C. Property Transfers and Stock Options

1. Special Rule for Property Transfers

2. Special Rules for Stock Options

3. Consideration Paid for Property and Stock Options

D. Exempt Payments

1. Payments Specifically Exempt from § 280G Treatment

2. Post Change in Control Agreements

3. Reasonable Compensation

a. In General

b. Reasonable Compensation for Services Rendered After a Change in Control

c. Reasonable Compensation for Services Rendered Before a Change in Control

E. Payor of Parachute Payments

F. SEC Violations

VI. Section 280G Math: Calculations and Illustrations of Base Amount, Present Value, Valuation of Stock Options, Reasonable Compensation, and Excess Parachute Payments

A. Introduction

B. Base Amount

1. Average Includible Compensation

a. The Base Period

b. What Compensation Is to Be Taken into Account?

(1) Compensation from Predecessor or Related Entities

(2) Inclusion of Compensation from Contingent or Parachute Payments in the Base Amount

(3) Compensation from Foreign Subsidiaries

c. How Is the Average Computed?

2. Annualization of Part Year Compensation

a. In General

b. Annualization When the Year of Hire Is the Year of the Change in Control

3. Other Special Base Amount Issues

C. Present Value

1. The Interest Rate

2. The Present Value Formula

D. Threshold Test (Three Times Base Amount)

E. Excess Parachute Payments and the Excise Tax

1. The Determination of Excess Parachutes and Excise Taxes - Simple Case

2. The Determination of Excess Parachutes and Excise Taxes - Multiple Payments

F. Reasonable Compensation

1. Reasonable Compensation for Future Services

2. Reasonable Compensation for Prior Services

G. Portion of a Payment Contingent on a Change in Control

1. The Acceleration of the Timing of the Payment

2. The Acceleration of a Payment that Would have Become Vested if the Individual Continued to Provide Services for a Specified Period of Time

a. Acceleration of the Payment

b. Lapse of the Obligation to Continue to Provide Services

c. The Sum of the Components Cannot Exceed the Value of the Payment

H. Determining the Value of Stock Options

VII. Corporate Change in Control Strategies: Benefit Design Issues, Caps, Gross-Ups and Best Payments

A. Introduction

B. Questions and Considerations in Designing Change in Control Provisions in Compensation and Benefit Plans and Agreements

C. Caps, Gross-ups and Best Payments

1. Overview

2. Caps

a. How Caps Work

b. Pros and Cons of Caps

3. Gross-Ups

a. How Full Gross-Ups Work

b. Less Than Full Gross-Ups

c. Pros and Cons of Gross-Ups

4. Best Payments

a. Procedure

b. Pros and Cons of Best Payments

VIII. Reporting, Withholding and Other Issues

A. Reporting and Withholding Parachute Payments

1. Payments to Employees

2. Payments to Nonemployees

3. Special Rule for Accelerating Payments of the Excise Tax

B. Additional Lost Deductions When § § 280G and 162(m) Both Apply

C. Self-Insured Medical Coverage as a Parachute Payment

D. Hard-Cutbacks: Problems with Reasonable Compensation and Inadequate Cutbacks

1. Reasonable Compensation for Services Rendered Prior to a Change in Control

2. Inadvertently Inadequate Cutbacks

E. Calculation Problems with SERPs

F. Planning to Reduce or Eliminate Excess Parachute Payments

1. Increase the Base Amount

2. Offset Parachute Payments with Increases in a Qualified Plan Benefit

3. Waive Acceleration of Vesting of Parachute Benefits

IX. Parachute Payments Under the Emergency Economic Stabilization Act of 2008

Content


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Description of Golden Parachute Example Facts and Analysis

Worksheet 2 Golden Parachute Example Calculations

Worksheet 3 Sample Noncompete Provision

Worksheet 4 Sample § 280G Gross-Up Provision

Bibliography

OFFICIAL

Statutes:

Legislative History:

Treasury Regulations:

Proposed and Temporary Regulations:

Treasury Rulings and Procedures:

Cases:

UNOFFICIAL

Miscellaneous Materials:

Tax Management Portfolios:

Periodicals:

1998

2001

2002

2004

2006