Golden Parachute Payments: What You Need to Know

Introduction

In the wake of a change in control, executives may receive significant payments known as "golden parachutes." These payments are designed to provide a financial cushion for executives who are terminated or otherwise lose their jobs. However, these payments can also be subject to significant tax consequences.

What is Section 280G?

Section 280G of the Internal Revenue Code concerns so-called golden parachute payments. These payments are defined as any payment made to a disqualified individual on account of a change in control or ownership of a corporation. Disqualified individuals include executives, shareholders, and other individuals who own more than 1% of the corporation's stock.

Section 280G was created to protect the interests of shareholders by stopping corporations from making unreasonably large payments to executives in the event of a change in control. These payments can be seen as a way for executives to enrich themselves at the expense of the company and its shareholders.

The tax consequences of golden parachute payments can be significant. Any payments that are deemed to be excessive are subject to a non-deductible 20% excise tax. In addition, the recipient of the payment may be subject to income tax on the full amount of the payment.

What to Do if You Receive a Golden Parachute Payment

If you receive a golden parachute payment, it is important to seek professional advice to help you understand the tax consequences. You may be able to structure the payment in a way that minimizes your tax liability. You should also be aware of the potential impact of the payment on your other financial plans.

Golden parachute payments can be a complex issue. It is important to understand the tax consequences before accepting any such payments.