Court: Executives Did Float on Golden Parachutes
>That was the substance of a recent ruling by the US Tax Court on a dispute between the company and the Internal Revenue Service over the firm’s claiming of a tax deduction for the executives’ payments made under the firm’s contracts with them, according to a CCH report.
>CCH reported that the employer entered into agreements with its senior executives that included golden parachute provisions for lump-sum termination payments in the event the company changed hands. The firm was acquired the following year.
>The new owners, seeking to retain management
expertise, hammered out contracts with most of the
executives. The post-acquisition employment agreements
replaced the pre-acquisition agreements, but included
retention payments that more than compensated the
executives for relinquishing their entitlement to lump-sum
termination payments under the pre-acquisition agreements.
The company claimed a tax deduction for the compensation
paid out under the employment agreements. The IRS
disallowed most of the claimed deductions as excess
parachute payments under Code Sec. 280G, and the matter
came before the Tax Court.
>The firm claimed that the payments for which it
sought a tax deduction were not golden parachute payments
because they were made under employment
agreements entered into after the company acquisition and
not “contingent on a change of ownership,” as required by
Code Sec. 280G(b)(2)(A)(
i
). The court turned away this argument.
The purpose of Code Sec. 280G, stated the court, was to
impose a tax penalty on corporations that paid excess
parachute payments, defined as payments that were
extraordinarily large in relation to the recipient’s
historical compensation, and were contingent on a change in
ownership. Citing 1989 Proposed Reg. 1.280G-1 at
Q&A-22 and Q&A-23, the court stated that a payment
is treated as “contingent upon a change of ownership” if
the payment would not have been made had a change in
ownership not occurred.
The pre-acquisition agreements in this case, observed the
court, gave the executives significant leverage in
negotiations with the acquiring employer who needed to keep
them. The
existence of lump-sum termination provisions,
contingent on a change of ownership, within the
pre-acquisition agreements, were
the cause of financially equivalent retention provisions in
the post-acquisition agreements. The court found that the
benefits to which the executives were entitled under the
post-acquisition agreements were obtained in consideration
of the rights they relinquished under the pre-acquisition
agreements.