Golden Parachute Payments: A Tax Trap for Excessive Remuneration
What is Section 280G?
Section 280G of the Internal Revenue Code (IRC) addresses "golden parachute payments," which are excessive compensation payments made to certain executives in connection with a "change in control" of a company. These payments are designed to incentivize executives to stay with the company during a transition period but can result in significant tax penalties if they are deemed unreasonable.
The purpose of Section 280G is to protect shareholders by preventing corporations from making unreasonably large payments to departing executives. These payments can deplete the company's assets and reduce its value for shareholders.
Key Concerns for Compensation Benefits
When a change in control occurs, one of the primary concerns from a compensation and benefits perspective is the potential impact of the Golden Parachute rules. These rules can impose substantial tax penalties on both the executives receiving the payments and the corporations making them.
To avoid these penalties, it is crucial for companies to carefully consider the terms of any compensation agreements that could be subject to Section 280G. These agreements should be drafted in a manner that aligns with the company's legitimate business objectives and does not provide excessive benefits to executives.
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