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

(a) General rule A company can't deduct any "excess parachute payment" as a business expense. (b) Excess parachute payment (1) In general — An "excess parachute payment" is the amount by which a "parachute payment" exceeds the share of the person's "base amount" assigned to it. (2) Parachute payment defined (A) In general — A "parachute payment" is compensation-like payment to (or for) a "disqualified individual" if: it's contingent on a change in who owns or controls the company, or on a change in who owns a big chunk of the company's assets; and the total present value of all such contingent payments to that person is at least 3 times their base amount. (Payments excluded under paragraph (4)(A), (5), or (6) below don't count toward that 3-times threshold.) (B) Agreements — a payment also counts as a "parachute payment" if it's made under an agreement that violates generally enforced securities laws or rules; in a dispute over whether that happened, the Secretary — not the individual — has the burden of proving the violation. (C) Certain agreements — a payment under an agreement signed, or amended, within the year before the ownership change is presumed to be contingent on that change, unless proven otherwise by clear and convincing evidence. (3) Base amount — the "base amount" is the person's average annual taxable compensation over the "base period" (defined in (d)(2)). The portion of it assigned to a particular parachute payment is proportional to that payment's share of the total present value of all the person's parachute payments. (4) Reasonable compensation — the taxpayer (the company) can prove, with clear and convincing evidence, that part of a payment is reasonable pay for services performed on or after the ownership change — that part isn't a parachute payment at all. Similarly, the taxpayer can shrink the "excess parachute payment" amount by proving part of it is reasonable pay for services performed before the change; that reasonable-pre-change-pay amount is first subtracted from the base amount. (5) Small business exemption — Despite paragraph (2), "parachute payment" doesn't include: a payment tied to a company that, right before the ownership change, was a small business corporation (as section 1361(b) defines it, ignoring its shareholder-count limit); or a payment tied to another company where, right before the change, none of its stock was publicly traded and shareholders holding more than 75% of the voting stock approved the payment after getting full disclosure of the facts. Regulations can say the "not publicly traded" test isn't met if a big share of some other entity's assets is stock in this company and that entity's own interests are publicly traded. Certain preferred stock (under section 1504(a)(4)) doesn't count against the "not publicly traded" test if the payment doesn't hurt the shareholder's redemption or liquidation rights. Rules will also address how shareholder approval works when shareholders aren't individuals, or when an entity owns only a tiny amount of stock. (6) Qualified plan exemption — "parachute payment" also excludes payments to or from certain tax-favored retirement plans: 401(a) plans with an exempt trust, 403(a) annuity plans, SEPs under 408(k), and SIMPLE accounts under 408(p). (c) Disqualified individuals A "disqualified individual" is someone who performs personal services for a company as an employee, independent contractor, or other role named by regulation, and who is an officer, shareholder, or "highly-compensated individual." A personal-service corporation counts as an individual for this purpose. "Highly-compensated individual" means someone in the top 1% of paid employees (or the top 250, if that's fewer). (d) Other definitions and special rules (1) "Annualized includible compensation for the base period" means the average yearly pay the company gave the person, that was part of their taxable income, during the base period. (2) "Base period" means the 5 most recent tax years ending before the ownership change (or however much of that time the person actually worked for the company). (3) Any transfer of property counts as a payment, valued at its fair market value. (4) "Present value" is calculated using a discount rate of 120% of the applicable federal rate, compounded twice a year. (5) Except as regulations provide otherwise, all companies in the same affiliated group are treated as one company for this section, and an officer of any group member counts as an officer of that combined company. (e) Special rule for TARP employers (1) In general — For an executive of a company that took part in the Troubled Asset Relief Program (TARP), during the period that program's authority was active, this section applies with several substitutions: "disqualified individual" becomes "covered executive"; the "change in ownership" trigger becomes an "applicable severance from employment"; "corporation" becomes "applicable employer"; and the exceptions in (b)(2)(C), (b)(4), (b)(5), and (d)(5) don't apply. (2) Definitions — terms shared with section 162(m)(5) mean the same thing here. "Applicable severance from employment" means the executive is let go involuntarily, or loses their job because the employer goes bankrupt, is liquidated, or goes into receivership. If a payment already counts as a parachute payment without this special rule, this special rule doesn't also apply to it. The Secretary may issue guidance to carry out this subsection and TARP, to handle mergers or acquisitions, to coordinate this section with section 4999 when some payments qualify under this rule and others don't, and to stop people from disguising an ordinary severance as something else to dodge this rule. (f) Regulations The Secretary may issue whatever regulations are needed to carry out this section, including for related companies and personal-service corporations.