26 U.S.C. § 280G — Golden parachute payments

(a) General rule. No deduction is allowed for any excess parachute payment. (b) Excess parachute payment. (1) In general: an "excess parachute payment" is the amount by which a parachute payment exceeds the portion of the "base amount" assigned to it. (2) Parachute payment defined: (A) In general — a "parachute payment" is any payment that looks like compensation to (or for) a "disqualified individual" if (i) it is contingent on a change in the corporation's ownership or effective control, or a change in ownership of a substantial part of the corporation's assets, and (ii) the total present value of all such contingent compensation payments to that individual equals or exceeds 3 times the base amount. For step (ii), payments excluded under paragraph (4)(A), (5), or (6) are not counted. (B) Agreements — "parachute payment" also includes a compensation-like payment made under an agreement that violates generally enforced securities laws or regulations; in a dispute over whether such a violation occurred, the Secretary bears the burden of proof. (C) Treatment of certain agreements entered into within 1 year before change of ownership — a payment under an agreement signed, or a prior agreement amended, within 1 year before the ownership or control change, is presumed contingent on that change unless clear and convincing evidence shows otherwise. (3) Base amount: (A) In general — "base amount" means the individual's average annual includible compensation for the "base period." (B) Allocation — the part of the base amount assigned to a specific parachute payment matches that payment's share of the present value of all such payments to that individual. (4) Treatment of amounts which taxpayer establishes as reasonable compensation: for a payment described in paragraph (2)(A) — (A) the part of it the taxpayer proves, by clear and convincing evidence, is reasonable compensation for services to be performed on or after the change is not treated as a parachute payment; and (B) the excess-parachute-payment amount is reduced by the part the taxpayer proves is reasonable compensation for services actually performed before the change. For (B), that reasonable-compensation amount is first offset against the base amount. (5) Exemption for small business corporations, etc.: (A) In general — despite paragraph (2), "parachute payment" does not include (i) a payment tied to a corporation that was a "small business corporation" (as defined in section 1361(b), without its shareholder-count limit) immediately before the change, or (ii) a payment tied to another corporation if (I) immediately before the change, no stock in that corporation was readily tradeable on an established market or otherwise, and (II) the shareholder-approval requirements in (B) were met. The Secretary may, by regulation, provide that condition (I) is not met where a substantial part of some entity's assets consists of stock in that corporation, and interests in that other entity are readily tradeable. Certain stock described in section 1504(a)(4) is not counted against condition (I) if the payment does not adversely affect the shareholder's redemption and liquidation rights. (B) Shareholder approval requirements — these are met if (i) the payment was approved by a vote of the people who owned, immediately before the change, more than 75 percent of the corporation's voting stock, and (ii) shareholders received adequate disclosure of all material facts about payments that would otherwise be parachute payments. Regulations under subsection (e) must cover how this applies where shareholders are not individuals, and where an entity holds a minimal amount of stock. (6) Exemption for payments under qualified plans: despite paragraph (2), "parachute payment" does not include a payment to or from (A) a plan described in section 401(a) that includes a trust exempt under section 501(a), (B) an annuity plan described in section 403(a), (C) a simplified employee pension as defined in section 408(k), or (D) a simple retirement account described in section 408(p). (c) Disqualified individuals. A "disqualified individual" is anyone who (1) is an employee, independent contractor, or other person specified by the Secretary's regulations who performs personal services for a corporation, and (2) is an officer, shareholder, or "highly-compensated individual." A personal service corporation (or similar entity) is treated as an individual for this purpose. "Highly-compensated individual" only includes someone who is (or would be, as an employee) in the highest-paid 1 percent of the corporation's employees, or the highest-paid 250 employees if that number is smaller. (d) Other definitions and special rules. (1) Annualized includible compensation for base period: the average annual compensation (A) paid by the corporation where the ownership or control change described in subsection (b)(2)(A) occurs, and (B) included in the disqualified individual's gross income for the base period's tax years. (2) Base period: the most recent 5 tax years ending before the date of the change described in subsection (b)(2)(A) (or the part of that period the individual actually performed services for the corporation). (3) Property transfers: any transfer of property (A) is treated as a payment, and (B) is counted at its fair market value. (4) Present value: figured using a discount rate equal to 120 percent of the applicable federal rate under section 1274(d), compounded semiannually. (5) Treatment of affiliated groups: except as regulations provide otherwise, all members of the same affiliated group (as defined in section 1504, without regard to section 1504(b)) are treated as one corporation for this section, and an officer of any group member is treated as an officer of that one corporation. (e) Special rule for application to employers participating in the Troubled Assets Relief Program. (1) In general: for the severance from employment of a "covered executive" of an "applicable employer" during the period the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect, this section applies to payments to that executive with these changes: (A) any reference to a disqualified individual (other than in subsection (c)) means a covered executive; (B) any reference to a change described in subsection (b)(2)(A)(i) means an "applicable severance from employment" of a covered executive, and any reference to a payment contingent on that change means a payment made during an applicable tax year of the employer because of that severance; (C) any reference to a corporation means an applicable employer; and (D) subsections (b)(2)(C), (b)(4), (b)(5), and (d)(5) do not apply. (2) Definitions and special rules: (A) Definitions — a term used in this subsection that is also used in section 162(m)(5) has the meaning given there. (B) Applicable severance from employment — means a covered executive's severance from employment (i) because the employer involuntarily terminated the executive, or (ii) in connection with the employer's bankruptcy, liquidation, or receivership. (C) Coordination and other rules — (i) In general: if a payment is treated as a parachute payment because of this subsection, and it would also be a parachute payment without this subsection, this subsection does not apply to that payment. (ii) Regulatory authority: the Secretary may prescribe guidance, rules, or regulations needed (I) to carry out this subsection and the Emergency Economic Stabilization Act of 2008, including how far this subsection applies to a merger, acquisition, or reorganization of an applicable employer, (II) to apply this section and section 4999 when some payments to an individual are treated as parachute payments under this subsection and others are treated as parachute payments under the section's regular rules, and (III) to stop people from avoiding this section by mischaracterizing a severance from employment as something other than an applicable severance from employment. (f) Regulations. The Secretary must prescribe regulations necessary or appropriate to carry out this section, including regulations covering related corporations and personal service corporations.