In January 2017, the Internal Revenue Service made public its Golden Parachute Payments – Audit Techniques Guide for Large Businesses. The Guide is intended for internal use for IRS agents auditing companies and high net worth individuals. However, in recent years, IRS has shared this and other Guides with the public to (i) make known its positions on certain issues, and (ii) help companies avoid the traps that could lead to problems with IRS.
As readers know all too well, Code Section 280G governs the determination of whether certain payments or benefits constitute excess parachute payments and denies a corporation a deduction for any such payments, and Code Section 4999 imposes a 20% excise tax on any excess parachute payments. The Guide includes “Nine Steps to Perform in a Parachute Examination” and a “Golden Parachute Payments Corporate Form 1120 Examination Flow Chart,” which provides assistance in determining whether Section 280G is applicable to a public corporation.
The Guide also gives auditors a list of documents to review in connection with golden parachute payment issues, which also may be helpful to practitioners as they consider the reporting and documentation of change in control payments, including:
- Form 10-K
- Proxy Statements, especially those soliciting shareholders’ approval for a merger or acquisition, which must include a shareholder advisory vote, commonly referred to as “vote on golden parachute payments”
- Forms S-4 and F-4, for information related to mergers, acquisitions, or when securities are exchanged between companies
- Board of Directors and Compensation Committee Minutes, for discussions of executive compensation due to change in control and change in control triggers
- Merger and Acquisition Agreement for information in determining if there was a change in control and information about payments that may be made in connection with a change in control
- Employment Contracts, Employment Security Agreements, and Executive Benefit Plans, which may contain additional information about any payments that will be made on a change in control and any change in control triggers
- Deferred Compensation Arrangements, which may include accelerated payments and/or change in control triggers
- Stock Option and Restricted Stock Plans
- The parent company's website for information on corporate acquisitions and mergers
- Internet Research, for information on the corporation for the years under audit
- Tax Returns, including the corporation's Form 1120 and Form 851, Affiliations Schedule, for newly added or omitted subsidiary companies, and Schedule M adjustments to determine whether the corporation has reduced its compensation deduction for excess parachute payments
- Form W-2’s and Form 1099’s, for large increases in compensation from one year to the next for employees of both the target company and the acquiring company
Finally, the Guide points out that any amount of excess parachute payment would reduce the $1 million deduction limitation under Code Section 162(m), where applicable, and gives a helpful example. In the example, if the CEO of a publicly-held company received $2 million dollars from the company in the year it is acquired, of which $200,000 was excess parachute payments under Section 280G, the Section 162(m) limitation for the CEO would be reduced to $800,000 ($1,000,000 - $200,000). However, this provision for reducing the $1 million limitation for the excess parachute payment may not apply if the CEO of the target is not considered a 162(m) covered employee for the year because the target goes out of existence and his pay is not re-ported in the proxy statement.