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Section 280G: Understanding Golden Parachute Payments

Introduction

Section 280G of the Internal Revenue Code (IRC) is a provision designed to prevent excessive compensation, known as "golden parachute" payments, made to executives and other specified employees upon a change in control (CIC) or termination of employment.

What Is a Golden Parachute Payment?

A golden parachute payment is any payment made to a "disqualified individual" (generally, an employee, director, or officer) that is contingent on a CIC or termination of employment and exceeds a certain threshold. The threshold amount is three times the individual's base amount, which is generally their average annual compensation for the five preceding years.

Purpose of Section 280G

The purpose of Section 280G is to protect the interests of shareholders by preventing corporations from making unreasonably large payments to executives and other specified employees upon a CIC. This provision discourages excessive executive compensation and ensures that companies act in the best interests of their shareholders.

Tax Consequences of Golden Parachute Payments

Golden parachute payments are subject to a special 20% excise tax under Section 280G. The tax is imposed on both the disqualified individual and the corporation making the payment. The tax is intended to discourage companies from entering into excessive compensation arrangements with their executives.

Conclusion

Section 280G of the IRC is an important provision that helps prevent excessive executive compensation and protects the interests of shareholders. By imposing a 20% excise tax on golden parachute payments, this provision discourages companies from making unreasonably large payments to their executives upon a CIC or termination of employment.

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