• IRC §280G:
– Applies if Target is a public company; OR
– To certain other non-public companies if shareholder approvals requirements are not met
– Imposes a combination of excise taxes and deduction limitations if change-in-control payments to officers, significant shareholders and certain
highly-compensated individuals equal or exceed 3x a computed “base amount”
– The base amount is the average taxable compensation for the 5 calendar years preceding the year in which
• IRC §280G:
– Applies if Target is a public company; OR
– To certain other non-public companies if shareholder approvals requirements are not met
– Imposes a combination of excise taxes and deduction limitations if change-in-control payments to officers, significant shareholders and certain
highly-compensated individuals equal or exceed 3x a computed “base amount”
– The base amount is the average taxable compensation for the 5 calendar years preceding the year in which
Potential Limitations on Compensation Deductions
• IRC §280G:
– If the 3x trigger is tripped:
• A 20% excise tax on all compensation deemed to be contingent on the change-in-control over 1x the base amount is levied against the employee
• All amounts subject to the 20% excise tax are non-deductible to Acquiror / Target
– The effect of tripping the trigger is especially onerous due to its “retroactive” application
• IRC §280G:
– If the 3x trigger is tripped:
• A 20% excise tax on all compensation deemed to be contingent on the change-in-control over 1x the base amount is levied against the employee
• All amounts subject to the 20% excise tax are non-deductible to Acquiror / Target
– The effect of tripping the trigger is especially onerous due to its “retroactive” application
Potential Limitations on Compensation Deductions
• IRC §280G - Example
– Base amount = $100,000
– Therefore, up to $299,999 of compensation can be paid that is deemed to be contingent on the change-in-control with no IRC §280G consequences
– However, if $1 of additional contingent compensation is paid:
– Excise tax of $40,000 [($300,000-$100,000) x 20%]
to employee
– Lost deduction of $200,000 to employer
– Total combined cost of the additional $1 = $110,000
• IRC §280G - Example
– Base amount = $100,000
– Therefore, up to $299,999 of compensation can be paid that is deemed to be contingent on the change-in-control with no IRC §280G consequences
– However, if $1 of additional contingent compensation is paid:
– Excise tax of $40,000 [($300,000-$100,000) x 20%]
to employee
– Lost deduction of $200,000 to employer
– Total combined cost of the additional $1 = $110,000
Potential Limitations on Compensation Deductions
• IRC §280G:
– There are numerous rules and special treatments to determine when / how compensation is considered contingent on a change-in-control
– Focuses more on accelerated vesting than on accelerated payment
– Potential tax planning strategies:
• Increase the base amount where possible (stock option exercises are a common strategy)
• Restructuring compensation arrangements, but this requires extreme care and often requires the
employee to make concessions
• IRC §280G:
– There are numerous rules and special treatments to determine when / how compensation is considered contingent on a change-in-control
– Focuses more on accelerated vesting than on accelerated payment
– Potential tax planning strategies:
• Increase the base amount where possible (stock option exercises are a common strategy)
• Restructuring compensation arrangements, but this requires extreme care and often requires the
employee to make concessions
Potential Limitations on Compensation Deductions
• IRC §280G:
– Contractual terms that address the application of IRC §280G:
– Cut-back – favors the employer at the expense of the employee (makes it the “employee’s
problem”)
– Gross-up - favors the employee at the expense of the employer (makes it the “employer’s
problem”)
– No provision – offers potential for planning
– Gross-up provisions can make the IRC §280G
• IRC §280G:
– Contractual terms that address the application of IRC §280G:
– Cut-back – favors the employer at the expense of the employee (makes it the “employee’s
problem”)
– Gross-up - favors the employee at the expense of the employer (makes it the “employer’s
problem”)
– No provision – offers potential for planning
– Gross-up provisions can make the IRC §280G
Potential Limitations on Compensation Deductions
• IRC §162(m):
– Applies to public companies
– Applies to the CEO and the top three most highly-compensated officers other than the CEO and the CFO (CFO is effectively exempt from the limitation under current law)
– Limits deductible compensation for the tax year for any of these officers to $1 million
– Exceptions for qualified performance-based
compensation such as stock options and incentive bonus plans approved by an independent board compensation committee
• IRC §162(m):
– Applies to public companies
– Applies to the CEO and the top three most highly-compensated officers other than the CEO and the CFO (CFO is effectively exempt from the limitation under current law)
– Limits deductible compensation for the tax year for any of these officers to $1 million
– Exceptions for qualified performance-based
compensation such as stock options and incentive bonus plans approved by an independent board compensation committee
Potential Limitations on Compensation Deductions
• IRC §162(m):
– The limitation only applies if:
• The compensation is required to be reported in the summary SEC compensation table in the proxy
filing and
• The officer holds his/her position as one of the affected officers as of the end of the tax year
– These conditions are often avoided in Target’s final pre-merger period, but care should be taken to ensure that any potential limitation is identified and factored into Acquiror’s purchase accounting
• IRC §162(m):
– The limitation only applies if:
• The compensation is required to be reported in the summary SEC compensation table in the proxy
filing and
• The officer holds his/her position as one of the affected officers as of the end of the tax year
– These conditions are often avoided in Target’s final pre-merger period, but care should be taken to ensure that any potential limitation is identified and factored into Acquiror’s purchase accounting