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Attempt to avoid golden parachute rules fails.

Jewel Companies, Inc. entered into severance pay contracts with its senior executives after it agreed to merge with an acquiring company. The agreements' stated purpose was to keep the executives from leaving before the change in control actually took place. Under these agreements, an executive terminated due to the change in control would receive three times his or her annual salary plus certain other sums.

One month after these contracts were agreed to--and following enactment of the golden parachute rules (IRC sections 280G and 4999)--Jewel and the executives changed the agreements, reducing the amount of severance pay so there would be no "excess parachute payments" under the newly enacted rules.

The parties understood the acquiring corporation would "do its best" to employ the executives and compensate them to make up the difference between the severance pay amount in the amended contract and the amount in the original contract.

Once the takeover was accomplished, the acquiring corporation did employ the executives as consultants and compensated them based on the original severance pay amounts, not on the time the executives actually spent performing services.

Under the golden parachute rules, certain payments that are "contingent on a change in control or ownership" cannot be deducted by a company to the extent the payments exceed a certain amount. The recipients of the excess payments must pay a 20% excise tax. Amounts shown to be reasonable compensation for services are excluded in computing the amount of an excess parachute payment.

The IRS treated most of the compensation paid to the executives by the acquiring corporation as contingent on a change in ownership or control and, therefore, as excess parachute payments.

The executives took the dispute to the Tax Court.

Result: For the IRS. The compensation paid to the executives by the acquiring corporation was clearly contingent on the change of ownership--it would not have been paid but for the takeover. The compensation was intended to replace the severance pay that would have been made under the original agreements.

Note: Had the original contracts been entered into just one day earlier, the golden parachute rules would not have applied. * Balch, 100 TC no. 21.
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Article Details
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Title Annotation:Balch
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jul 1, 1993
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