Treasury and IRS Rule on Issues Regarding Golden Parachute Rules in Bankruptcy

July 19, 2004 (—The Treasury Department and the IRS issued Revenue Ruling 2004-87 Monday regarding the application of the golden parachute rules to companies in bankruptcy.

The ruling says “Section 280G of the Code was enacted to discourage substantial payments to top executives and other personnel of a target corporation in connection with an acquisition.   In some situations, the existence of golden parachute arrangements could encourage executives and other key personnel to favor a proposed takeover that may not be in the best interest of the shareholders.   To the extent amounts must be paid to executives and other key personnel of the target corporation because of golden parachutes or similar arrangements, there is less for the shareholders of that corporation.”  

The IRS and Treasury define an excess parachute payment as one equal to the excess of any parachute payment over the portion of the disqualified individual’s base amount that is allocated to such payment.

Today’s ruling discusses:

  • whether a change in ownership or control occurs when creditors acquire company stock in a bankruptcy reorganization
  • how a company in a bankruptcy reorganization may satisfy the shareholder approval requirements for the small business corporation exception to the golden parachute rules
  • situations in which a company that is a debtor in a bankruptcy reorganization will not be treated as having stock that is readily tradable on an established securities market, for purposes of the small business corporation exception, where the stock may be traded on an over-the-counter market.

This revenue ruling is effective Monday and applies to any future payment “that is contingent on a change in ownership or control.”

There is a comment period in effect untilOctober 18, 2004 , regarding whether or not the definition of “readily tradeable” as used in this rule should exclude stock of a corporation that is tradeable on an over-the-counter market, the ruling said.

More information is available at  the Treasury Web site .