Updated IRS audit guide gives insight to golden parachute treatment
TAX BLOG |
Is your company a C corporation that may be undergoing a change in control? If so, you should be aware of the potential adverse tax consequences that may result from the payment of “golden parachute payments.”
A golden parachute payment refers to a payment of compensation by a corporation to an executive that is contingent on the change in ownership or control of the corporation. A corporation will typically make such a payment in connection with the executive’s termination of employment.
With respect to a corporation’s highest-level executives, the Internal Revenue Code disallows the corporation’s deduction of those payments to the extent that the payments exceed a certain amount. In addition, the Code imposes a 20 percent excise tax on the individuals who receive excess change in control payments.
These rules apply to change in control transactions involving both public and private C corporations. However, these rules do not apply to any corporation that is an S corporation or is eligible to make an S election. It is important to note that privately held C corporations might be able to avoid the adverse tax consequences by taking certain actions and securing approval of the payments by a super-majority vote of its shareholders.
Recently, the IRS issued an updated Golden Parachute Payments/ Code section 280G Audit Techniques Guide. The guide is one of a series of Audit Techniques Guides addressing various executive compensation tax matters. The guides, which are intended for use by IRS agents in their examinations, set forth procedures, identify the documentation the agent needs to review and specify an approach to the analysis/determination of the particular matters.
The issuance of this latest guide does not necessarily mean the IRS will be increasing its examination activity of golden parachute payments nor does it reflect the IRS will focus more on parachute payments involving public corporations as opposed to private C corporations.
However, if your corporation issues golden parachute payments, you may find it provides a helpful roadmap to the IRS agent’s information requests and an understanding of the agent’s approach to the golden parachute analysis. Review the guide with your tax team to make sure you are prepared to defend your executive compensation package.