Chat with us, powered by LiveChat sath-assignment3 | Economics Write
+1(978)310-4246 credencewriters@gmail.com
  

Conduct a search of Campbellsville University’s online Library resources to find 1 recent peer reviewed article (within the past 3 years) that closely relate to The Golden Rule. Your submission must include the following information in the following format:Key Term:The Golden Rule(attached the journal)DEFINITION: a brief definition of the key term followed by the APA reference for the term; this does not count in the word requirement.SUMMARY: Summarize the article in your own words- this should be in the 150-200 word range. Be sure to note the article’s author, note their credentials and why we should put any weight behind his/her opinions, research or findings regarding the key term.ANALYSIS: Using 300-350 words, write a brief analysis, in your own words of how the article relates to the selected chapter Key Term. An analysis is not rehashing what was already stated in the article, but the opportunity for you to add value by sharing your experiences, thoughts and opinions. This is the most important part of the assignment.REFERENCES: All references must be listed at the bottom of the submission–in APA format. Be sure to use the headers in your submission to ensure that all aspects of the assignment are completed as required.
golden_rule.pdf

Unformatted Attachment Preview

05-2020-Corporate Tax-Knight_.qxp_zEssentials.temp 5/15/20 12:16 PM Page 48
DEPARTMENTS | Corporate Taxation
Change in Corporate Ownership
or Control May Result in Golden
Parachute Payments
By Ray A. Knight and Lee G. Knight
IN BRIEF
The “golden parachute”—a payment to
key executives of an acquired company
who help ensure the success of the
sale—has become a common component
of corporate combinations. These payments have not gone unnoticed by the
tax authorities; under certain circumstances they can be subject to significant
taxation. The authors provide an
overview of the golden parachute rules,
including definitions of important terms,
how the IRS and the courts have applied
the rules, and certain exemptions.
48
f a company is considering entering into an agreement with key executives to provide them with an incentive to assist in the successful sale
of the company, these payments may be considered “golden parachute
payments.” This article summarizes the issues surrounding these payments, outlines the golden parachute rules under Internal Revenue Code
(IRC) section 280G, and examines the application of such rules to payments
contingent on or closely related to a change of control of the paying corporation. In addition, it summarizes certain exemptions from the parachute rules
and possible opportunities for structuring the payments to minimize the effect
of the parachute rules and the related excise tax under IRC section 4999.
These issues are timely in light of the number of retirement-bound baby
boomers heading family corporations.
I
Issues Surrounding Executive Payments
Payments made to certain key executives and employees because of a
change in control may be subject to the golden parachute rules. If these payments are determined to be subject to the golden parachute rules and the
MAY 2020 / THE CPA JOURNAL
05-2020-Corporate Tax-Knight_.qxp_zEssentials.temp 5/15/20 4:51 PM Page 49
payments equal or exceed three times the
individual’s average base compensation,
then the payment in excess of that average base is subject to a 20% federal
excise tax in addition to the normal federal and state withholding requirements.
In addition, the excess payments are not
deductible to the company.
The meanings of “parachute pament,”
“excess parachute payment,” and
“exempt payments” are critical in the discussion. A “parachute payment” for purposes of IRC section 280G means any
compensation payment made to, or for
the benefit of, a disqualified individual
that is contingent upon a change in the
ownership of a corporation, in the effective control of a corporation, or in the
ownership of a substantial portion of the
assets of a corporation, with an aggregate
present value of at least three times the
individual’s base compensation amount.
The definition of “parachute payments”
also includes any compensation payment pursuant to an agreement that violates a generally enforced securities law
or regulation. These agreements ordinarily have two features: 1) a changein-control clause, which allows the
executive to vest certain benefits upon
a specified shift in the ownership of the
company stock or membership of its
board; and 2) a termination clause,
which provides for certain payments or
benefits if the executive is dismissed or
her job responsibilities or status diminished. The term “excess parachute payment” means an amount equal to the
excess of any parachute payment over
the portion of the base amount allocated
to the payment. The base amount of a
disqualified individual is the average
annual compensation for services performed for the corporation that is subject to the change in ownership or
control. The base amount only includes
compensation that has been included in
gross income.
MAY 2020 / THE CPA JOURNAL
Why Statutes Were Enacted
The golden parachute provisions (IRC
sections 280G and 4999) were added by
the Deficit Reduction Act of 1984 in
order to discourage the use of golden
parachute payments to senior executives
of a company in the event of a corporate
takeover (Boris I. Bittker and Lawrence
Lokken, Federal Taxation of Income,
Estates, and Gifts, Warren Gorham &
Lamont, 1989, pp. 22–35). Congress
found that agreements to make such payments hindered “acquisition activity in
the marketplace” by making target corporations less attractive to prospective
suitors [Bittker and Lokken, quoting Staff
of Joint Comm. On Taxation, General
Explanation of the Revenue Provisions
of the Deficit Reduction Act of 1984,
98th Cong., 2d Sess. 199 (J. Comm. Print
1984)]. The prospect of a large payment
“parachute payment” and “excess
parachute payment,” and section 4999(a)
imposes a 20% excise tax on excess
parachute payments. As stated above,
section 280G defines a “parachute payment” as a payment to a corporate officer
that is made contingent on a change in
the control or ownership of the corporation. To fall within the definition, however, the present value of that payment
must equal or exceed three times the
individual’s “base amount” [IRC section
280G(b)(2)(A)(ii)], which is the average
of the individual’s compensation for the
previous five years [IRC sections
280G(b)(3), 280G(d)(2)]. The parachute
payment rules do not apply to a payment
that the individual establishes, by clear and
convincing evidence, to be “reasonable
compensation” for personal services on or
after the date of acquisition of the corpo-
The prospect of a large payment tends to
encourage management personnel of the target
corporation to favor a proposed takeover, regardless of whether the takeover would be in the best
interests of the target corporation’s shareholders.
tends to encourage management personnel of the target corporation to favor a
proposed takeover, regardless of whether
the takeover would be in the best interests of the target corporation’s shareholders. The payments promised to the
executives also decrease the amounts
paid to the target corporation shareholders. For these reasons, Congress made
such parachute payments “nondeductible
to the payor and subject to an excise tax
of 20%, in addition to the regular income
tax, in the hands of the recipient” (Bittker
and Lokken).
The provisions contain a complex set
of definitions and interrelated applications. IRC section 280G(b) defines both
ration [IRC section 280G(b)(4)]. An
“excess parachute payment” is defined to
mean any parachute payment that exceeds
the individual’s base amount [IRC section
280G(b)(1)]. To the extent the rules apply,
therefore, “any excess of the payments
over the recipient’s average annual compensation is generally nondeductible”
(Bittker and Lokken). The recipient must
pay a 20% excise tax on the nondeductible
amount [IRC section 4999(a)].
Reasonable Compensation
The legislative history establishes a
presumption “that no parachute payment
is reasonable compensation for personal
services actually rendered,” a presump49
05-2020-Corporate Tax-Knight_.qxp_zEssentials.temp 5/15/20 12:18 PM Page 50
DEPARTMENTS I Corporate Taxation
tion that can be rebutted “only by clear
and convincing evidence.” One factor to
be considered is comparable compensation paid to other individuals for similar
services. Can it be shown that total compensation is comparable to the levels of
compensation earned by executives in
comparable positions?
The determination of what is “reasonable compensation” is a question of fact,
which a court reviews only for clear error
[RTS Investment Corp. v. Comm’r, 891 USTC section 9364, 877 F.2d 647, 650
(8th Cir. 1989)]. The burden of proving
the reasonableness of the compensation
is on the taxpayer (Hammond Lead
Prods. v. Comm’r, 70-1 USTC section
9322, 425 F.2d at 33). In making the factual findings, the court is the exclusive
judge of the credibility of the witnesses
(RTS Investment Corp.).
individuals of comparable skills (Cline).
In addition, the question of whether there
are substantial nontax purposes for entering into the agreement is a factor for consideration.
Finally, the IRS has previously ruled
that reasonable amounts paid in consideration for a covenant not to compete are
compensation for services to be rendered
(or not rendered) after the change in control [Treasury Regulations section
1.280G-1, Q&A 11(a)].
Contingent on a Change in Ownership
or Control
A payment is treated as contingent on
a change in ownership or control if the
payment would not have been made had
no change in ownership or control
occurred, even if the payment is also
conditioned on the occurrence of another
A payment is treated as contingent on a change in
ownership or control if the payment would not
have been made had no change in ownership or
control occurred, even if the payment is also
conditioned on the occurrence of another event.
In determining that the additional compensation is not reasonable under IRC
section 280G(b)(4)(A) for services after
a change in control, the court may
employ as its decisional standard the congressional conference committee’s presumption of unreasonableness that may
be rebutted only by clear and convincing
evidence (Cline v. Comm’r, 100 T.C.
331, at 349). The court may also employ
the three factors offered by the Joint
Committee on Taxation for determining
whether the compensation is reasonable:
1) the individual’s historic compensation,
2) the duties to be performed under the
contract, and 3) the compensation of
50
event. A payment generally is treated as
one that would not have been made in
the absence of a change in ownership or
control, unless it is substantially certain
at the time that the payment would have
been made whether or not the change
occurred. A payment that becomes vested as a result of a change in ownership
or control is not treated as one that was
substantially certain to have been made
whether or not the change occurred.
An event is considered closely associated with a change in ownership or
control if the event is of a type often
preliminary or subsequent to, or otherwise closely associated with, a change
in ownership or control. An event is
presumed to be materially related to a
change in ownership or control if the
event occurs within a period beginning
one year before and ending one year
after the date of the change in ownership or control. If the event occurs outside of this period, it is presumed not
materially related to the change in ownership or control. A payment does not
fail to be contingent upon a change in
ownership or control merely because it
is also contingent on the occurrence of
a second event, without regard to
whether the second event is closely
associated with or materially related to
a change in ownership or control. IRC
section 280G also includes payments
based on a change in ownership of a
substantial portion of assets.
Disqualified Individuals
The golden parachute rules apply to
payments to “disqualified individuals”
[IRC section 280G]. Disqualified individuals are employees, independent contractors, and other persons who perform
services for a corporation and who are
officers, shareholders, or highly compensated individuals. Disqualified individuals
also include personal service corporations
and similar entities created by individuals
[IRC section 280G(c); Treasury
Regulations section 1.280G-1, Q&A 16].
An officer generally is an administrative
executive who is in regular and continued service; an individual employed for
a special and single transaction is not an
officer. Whether an individual is an officer for this purpose is determined on the
basis of all facts and circumstances,
including the source of the individual’s
authority, the term for which he is elected
or appointed, and the nature and extent
of his duties. Any individual who has the
title of officer is presumed to be an officer unless the facts and circumstances
demonstrate that the individual does not
MAY 2020 / THE CPA JOURNAL
05-2020-Corporate Tax-Knight_.qxp_zEssentials.temp 5/15/20 12:18 PM Page 51
have the requisite authority; however, an
individual who does not have the title of
officer may nevertheless be considered
an officer if the facts and circumstances
demonstrate that the individual has the
authority of an officer [Treasury
Regulations section 1.280G-1, Q&A
18(a)]. Any individual who is an officer
of any member of an affiliated group that
is treated as one corporation for purposes
of the golden parachute rules is treated
as an officer of the corporation [IRC section 280G(d)(5); Treasury Regulations
section 1.280G-1, Q&A 18(b)]. A highly compensated individual is a disqualified individual when she is (or would
be if employed by the corporation) one
of the highest-paid 1% of employees or,
if less, one of the 250 highest-paid
employees of the corporation [IRC section 280G(c)].
Parachute payments contingent on the
change in ownership or effective control
include 1) payments where an individual’s right to receive the payment (or to
receive the payment more quickly) is
expressly contingent on the change; 2)
payments contingent on an event that is
closely associated with a change where
the change in ownership or control actually occurs and the occurrence of the
event is materially related to the change;
and 3) payments made under a contract
that is entered into or amended within
one year before the change, unless the
presumption that payments under the
contract are contingent upon a change of
control is rebutted based upon the facts
and circumstances under which the contract was entered into.
Employment agreements entered into
within one year of the change in control
(including amendments to such agreements) have a rebuttable presumption that
they are contingent on a change in control.
Exceptions
Several exceptions exist that exempt cerMAY 2020 / THE CPA JOURNAL
tain payments from the definition of
“parachute payment.” Pursuant to IRC section 280G(b)(5), a “parachute payment”
does not include any payment made to a
“disqualified individual” with respect to a
corporation that, immediately before the
change in ownership or control, was a
small business corporation [as defined in
IRC section 1361(b), without regard to
paragraph (1)(C)], without regard to
whether the corporation had an election to
be treated as a corporation under IRC section 1361 in effect on the date of the
change in ownership or control.
IRC section 280G(b)(5) also provides
that the small business exception will
apply where 1) immediately before the
change in ownership or control, no stock
in the corporation was readily tradable
on an established securities market or
otherwise; and 2) shareholder approval
reasonable shareholder would consider it
important. The proposed regulations state
that the shareholder vote, which can be
prospective or retrospective, must determine the right of the disqualified individual
to receive the payment, or, in the case of
a payment made before the vote, the right
of the disqualified individual to retain the
payment. If either of the tests is met, the
subject payments will not result in the
application of the parachute payment rules.
Calculation of Excise Tax and
Nondeductibility
The amount of an excess parachute
payment is the amount of any parachute
payment over the portion of the disqualified individual’s base amount (average
annual compensation over the five years
before the change in ownership) that is
allocated to such payment.
The amount of an excess parachute payment is the
amount of any parachute payment over the portion
of the disqualified individual’s base amount that is
allocated to such payment.
requirements are met regarding the payment (i.e., the no-market exemption).
The “shareholder approval” required to
qualify for the no-market exemption
means a vote of persons who, immediately
before the change in ownership or control,
owned more than 75% of the voting power
of all outstanding stock of the corporation
entitled to vote, and wherein the adequate
disclosure rules are met. Such approval
also must be premised upon adequate disclosure of “all material facts concerning
all payments” that, but for the no-market
exemption, would be parachute payments.
An omitted fact will be treated as material
if there is a substantial likelihood that a
For example, assume that a
parachute payment of $600,000 is made
to a disqualified individual, and the portion of the individual’s base amount
that is allocated to the parachute payment is $100,000. Assume also that
none of the $600,000 parachute payment is established as reasonable compensation for personal services actually
rendered before the date of the change
in ownership or control. In this case,
the excess parachute payment is
$500,000 and thus, is subject to the
20% excise tax of IRC section 4999
payable by the disqualified individual.
In addition, the payor does not receive
51
05-2020-Corporate Tax-Knight_.qxp_zEssentials.temp 5/15/20 12:19 PM Page 52
DEPARTMENTS I Corporate Taxation
a deduction for the $500,000 excess
parachute payment.
Example. Smith, who has a base
amount of $1,000,000 (five-year averaging), is entitled to receive two parachute
payments, one of $4,000,000 and the other
of $2,000,000. The $4,000,000 is immediately paid upon the change in ownership
or control, while the other $2,000,000 payment is postponed to a future date. The
present value of the $2,000,000 future
payment is $1,000,000 on the date of
change. The portions of the base amount
allocated to these payments are $800,000
[($4,000,000 ÷ $5,000,000) × $1,000,000]
and $200,000 [ ($1,000,000 ÷ $5,000,000)
× $1,000,000], respectively. Thus, the
excess amount of the first parachute payment is $3,200,000 ($4,000,000 −
$800,000) and the excess amount of the
second parachute payment is $1,800,000
($2,000,000 − $200,000).
Action Steps
The following action steps are warranted if the executive compensation
awarded by a company would be subject
to the golden parachute rules:
n Determine if any of the small business
exemptions could apply.
n Calculate the “base” compensation of
each of the employees involved.
n Determine which, if any, of the possible structuring alternatives would be
most appealing to the employees and the
company.
The following steps should be taken
to determine the impact of the golden
parachute rules and excise tax on the proposed payments:
n Determine whether any of the exemptions can be applied to the subject payments.
n Determine each individual’s base
amount based on the prior five years’
includible compensation and, based on
the calculation of the base amount, calculate the 300% excess parachute payment threshold.
Be Prepared
As soon as it is determined that a
potential change in ownership or control
may be on the horizon, tax planners
should alert the affected individuals of
the impact of the golden parachute rules.
A working knowledge of the rules will
allow for proper planning steps to determine any exemptions and explain the
impact to disqualified individuals.
q
Ray A. Knight, JD, CPA, PFS,
CGMA, is a professor of accounting
at Elon University, Elon, N.C. Lee G.
Knight, PhD, is a professor of accountancy at Wake Forest University,
Winston-Salem, N.C.
Stta
ay
a
y IInfor
nffor
orme
ed
d.. Sta
d
ay
y Connecte
ted
d
Time to R
Re
Ren
enew Y
en
Yo
our
ur Members
e b sship
ember
hip
p
l
y
Yo
a
e
n
p
o
or
a
e
v
p
Renew online
o li
att nysscpa.or
org/
g/dues
dues orr ca
ccall
all
ll 800-53
800-537
800
0 53
37-3635
7-3
7-363
3635
635
35
52
MAY 2020 / THE CPA JOURNAL
Copyright of CPA Journal is the property of New York State Society of Certified Public
Accountants and its content may not be copied or emailed to multiple sites or posted to a
listserv without the copyright holder’s express written permission. However, users may print,
download, or email articles for individual use.

Purchase answer to see full
attachment

error: Content is protected !!