
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC280G]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
                      PART IX--ITEMS NOT DEDUCTIBLE
 
Sec. 280G. Golden parachute payments


(a) General rule

    No deduction shall be allowed under this chapter for any excess 
parachute payment.

(b) Excess parachute payment

    For purposes of this section--

                           (1) In general

        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 such payment.

                    (2) Parachute payment defined

        (A) In general

            The term ``parachute payment'' means any payment in the 
        nature of compensation to (or for the benefit of) a disqualified 
        individual if--
                (i) such payment is contingent on a change--
                    (I) in the ownership or effective control of the 
                corporation, or
                    (II) in the ownership of a substantial portion of 
                the assets of the corporation, and

                (ii) the aggregate present value of the payments in the 
            nature of compensation to (or for the benefit of) such 
            individual which are contingent on such change equals or 
            exceeds an amount equal to 3 times the base amount.

        For purposes of clause (ii), payments not treated as parachute 
        payments under paragraph (4)(A), (5), or (6) shall not be taken 
        into account.

        (B) Agreements

            The term ``parachute payment'' shall also include any 
        payment in the nature of compensation to (or for the benefit of) 
        a disqualified individual if such payment is made pursuant to an 
        agreement which violates any generally enforced securities laws 
        or regulations. In any proceeding involving the issue of whether 
        any payment made to a disqualified individual is a parachute 
        payment on account of a violation of any generally enforced 
        securities laws or regulations, the burden of proof with respect 
        to establishing the occurrence of a violation of such a law or 
        regulation shall be upon the Secretary.

        (C) Treatment of certain agreements entered into within 1 year 
                before change of ownership

            For purposes of subparagraph (A)(i), any payment pursuant 
        to--
                (i) an agreement entered into within 1 year before the 
            change described in subparagraph (A)(i), or
                (ii) an amendment made within such 1-year period of a 
            previous agreement,

        shall be presumed to be contingent on such change unless the 
        contrary is established by clear and convincing evidence.

                           (3) Base amount

        (A) In general

            The term ``base amount'' means the individual's annualized 
        includible compensation for the base period.

        (B) Allocation

            The portion of the base amount allocated to any parachute 
        payment shall be an amount which bears the same ratio to the 
        base amount as--
                (i) the present value of such payment, bears to
                (ii) the aggregate present value of all such payments.

       (4) Treatment of amounts which taxpayer establishes as 
                           reasonable compensation

        In the case of any payment described in paragraph (2)(A)--
            (A) the amount treated as a parachute payment shall not 
        include the portion of such payment which the taxpayer 
        establishes by clear and convincing evidence is reasonable 
        compensation for personal services to be rendered on or after 
        the date of the change described in paragraph (2)(A)(i), and
            (B) the amount treated as an excess parachute payment shall 
        be reduced by the portion of such payment which the taxpayer 
        establishes by clear and convincing evidence is reasonable 
        compensation for personal services actually rendered before the 
        date of the change described in paragraph (2)(A)(i).

    For purposes of subparagraph (B), reasonable compensation for 
    services actually rendered before the date of the change described 
    in paragraph (2)(A)(i) shall be first offset against the base 
    amount.

         (5) Exemption for small business corporations, etc.

        (A) In general

            Notwithstanding paragraph (2), the term ``parachute 
        payment'' does not include--
                (i) any payment to a disqualified individual with 
            respect to a corporation which (immediately before the 
            change described in paragraph (2)(A)(i)) was a small 
            business corporation (as defined in section 1361(b) but 
            without regard to paragraph (1)(C) thereof), and
                (ii) any payment to a disqualified individual with 
            respect to a corporation (other than a corporation described 
            in clause (i)) if--
                    (I) immediately before the change described in 
                paragraph (2)(A)(i), no stock in such corporation was 
                readily tradeable on an established securities market or 
                otherwise, and
                    (II) the shareholder approval requirements of 
                subparagraph (B) are met with respect to such payment.

        The Secretary may, by regulations, prescribe that the 
        requirements of subclause (I) of clause (ii) are not met where a 
        substantial portion of the assets of any entity consists 
        (directly or indirectly) of stock in such corporation and 
        interests in such other entity are readily tradeable on an 
        established securities market, or otherwise. Stock described in 
        section 1504(a)(4) shall not be taken into account under clause 
        (ii)(I) if the payment does not adversely affect the 
        shareholder's redemption and liquidation rights.

        (B) Shareholder approval requirements

            The shareholder approval requirements of this subparagraph 
        are met with respect to any payment if--
                (i) such payment was approved by a vote of the persons 
            who owned, immediately before the change described in 
            paragraph (2)(A)(i), more than 75 percent of the voting 
            power of all outstanding stock of the corporation, and
                (ii) there was adequate disclosure to shareholders of 
            all material facts concerning all payments which (but for 
            this paragraph) would be parachute payments with respect to 
            a disqualified individual.

        The regulations prescribed under subsection (e) shall include 
        regulations providing for the application of this subparagraph 
        in the case of shareholders which are not individuals (including 
        the treatment of nonvoting interests in an entity which is a 
        shareholder) and where an entity holds a de minimis amount of 
        stock in the corporation.

          (6) Exemption for payments under qualified plans

        Notwithstanding paragraph (2), the term ``parachute payment'' 
    shall not include any payment to or from--
            (A) a plan described in section 401(a) which includes a 
        trust exempt from tax under section 501(a),
            (B) an annuity plan described in section 403(a),
            (C) a simplified employee pension (as defined in section 
        408(k)), or
            (D) a simple retirement account described in section 408(p).

(c) Disqualified individuals

    For purposes of this section, the term ``disqualified individual'' 
means any individual who is--
        (1) an employee, independent contractor, or other person 
    specified in regulations by the Secretary who performs personal 
    services for any corporation, and
        (2) is an officer, shareholder, or highly-compensated 
    individual.

For purposes of this section, a personal service corporation (or similar 
entity) shall be treated as an individual. For purposes of paragraph 
(2), the term ``highly-compensated individual'' only includes an 
individual who is (or would be if the individual were an employee) a 
member of the group consisting of the highest paid 1 percent of the 
employees of the corporation or, if less, the highest paid 250 employees 
of the corporation.

(d) Other definitions and special rules

    For purposes of this section--

       (1) Annualized includible compensation for base period

        The term ``annualized includible compensation for the base 
    period'' means the average annual compensation which--
            (A) was payable by the corporation with respect to which the 
        change in ownership or control described in paragraph (2)(A) of 
        subsection (b) occurs, and
            (B) was includible in the gross income of the disqualified 
        individual for taxable years in the base period.

                           (2) Base period

        The term ``base period'' means the period consisting of the most 
    recent 5 taxable years ending before the date on which the change in 
    ownership or control described in paragraph (2)(A) of subsection (b) 
    occurs (or such portion of such period during which the disqualified 
    individual performed personal services for the corporation).

                       (3) Property transfers

        Any transfer of property--
            (A) shall be treated as a payment, and
            (B) shall be taken into account as its fair market value.

                          (4) Present value

        Present value shall be determined by using a discount rate equal 
    to 120 percent of the applicable Federal rate (determined under 
    section 1274(d)), compounded semiannually.

                 (5) Treatment of affiliated groups

        Except as otherwise provided in regulations, all members of the 
    same affiliated group (as defined in section 1504, determined 
    without regard to section 1504(b)) shall be treated as 1 corporation 
    for purposes of this section. Any person who is an officer of any 
    member of such group shall be treated as an officer of such 1 
    corporation.

(e) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this section (including 
regulations for the application of this section in the case of related 
corporations and in the case of personal service corporations).

(Added Pub. L. 98-369, div. A, title I, Sec. 67(a), July 18, 1984, 98 
Stat. 585; amended Pub. L. 99-121, title I, Sec. 102(c)(4), Oct. 11, 
1985, 99 Stat. 508; Pub. L. 99-514, title XVIII, Sec. 1804(j), Oct. 22, 
1986, 100 Stat. 2807; Pub. L. 100-647, title I, Sec. 1018(d)(6)-(8), 
Nov. 10, 1988, 102 Stat. 3581; Pub. L. 104-188, title I, 
Sec. 1421(b)(9)(A), Aug. 20, 1996, 110 Stat. 1798.)


                               Amendments

    1996--Subsec. (b)(6)(D). Pub. L. 104-188 added subpar. (D).
    1988--Subsec. (b)(5)(A). Pub. L. 100-647, Sec. 1018(d)(6), 
substituted ``section 1361(b) but without regard to paragraph (1)(C) 
thereof)'' for ``section 1361(b))'' in cl. (i) and inserted at end 
``Stock described in section 1504(a)(4) shall not be taken into account 
under clause (ii)(I) if the payment does not adversely affect the 
shareholder's redemption and liquidation rights.''
    Subsec. (b)(5)(B). Pub. L. 100-647, Sec. 1018(d)(7), inserted at end 
``The regulations prescribed under subsection (e) shall include 
regulations providing for the application of this subparagraph in the 
case of shareholders which are not individuals (including the treatment 
of nonvoting interests in an entity which is a shareholder) and where an 
entity holds a de minimis amount of stock in the corporation.''
    Subsec. (d)(5). Pub. L. 100-647, Sec. 1018(d)(8), substituted 
``officer of any member'' for ``officer or any member''.
    1986--Subsec. (b)(2)(A). Pub. L. 99-514, Sec. 1804(j)(6), inserted 
``For purposes of clause (ii), payments not treated as parachute 
payments under paragraph (4)(A), (5), or (6) shall not be taken into 
account.''
    Subsec. (b)(2)(B). Pub. L. 99-514, Sec. 1804(j)(7), amended subpar. 
(B) generally. Prior to amendment, subpar. (B) read as follows: ``The 
term `parachute payment' shall also include any payment in the nature of 
compensation to (or for the benefit of) a disqualified individual if 
such payment is pursuant to an agreement which violates any securities 
laws or regulations.''
    Subsec. (b)(4). Pub. L. 99-514, Sec. 1804(j)(2), substituted 
``Treatment of amounts which taxpayer establishes as reasonable 
compensation'' for ``Excess parachute payments reduced to extent 
taxpayer establishes reasonable compensation'' in heading and amended 
text generally. Prior to amendment, text read as follows: ``In the case 
of any parachute payment described in paragraph (2)(A), the amount of 
any excess parachute payment shall be reduced by the portion of such 
payment which the taxpayer establishes by clear and convincing evidence 
is reasonable compensation for personal services actually rendered. For 
purposes of the preceding sentence, reasonable compensation shall be 
first offset against the base amount.''
    Subsec. (b)(5). Pub. L. 99-514, Sec. 1804(j)(1), added par. (5).
    Subsec. (b)(6). Pub. L. 99-514, Sec. 1804(j)(3), added par. (6).
    Subsec. (c). Pub. L. 99-514, Sec. 1804(j)(5), inserted provision 
defining ``highly-compensated individual''.
    Subsec. (d)(2). Pub. L. 99-514, Sec. 1804(j)(8), substituted 
``performed personal services for the corporation'' for ``was an 
employee of the corporation''.
    Subsec. (d)(5). Pub. L. 99-514, Sec. 1804(j)(4), added par. (5).


                    Effective Date of 1996 Amendment

    Amendment by Pub. L. 104-188 applicable to taxable years beginning 
after Dec. 31, 1996, see section 1421(e) of Pub. L. 104-188, set out as 
a note under section 72 of this title.


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-514 effective, except as otherwise provided, 
as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 
98-369, div. A, to which such amendment relates, see section 1881 of 
Pub. L. 99-514, set out as a note under section 48 of this title.


                    Effective Date of 1985 Amendment

    Amendment by Pub. L. 99-121 applicable to sales and exchanges after 
June 30, 1985, in taxable years ending after such date, see section 
105(a)(1) of Pub. L. 99-121, set out as a note under section 1274 of 
this title.


                             Effective Date

    Section 67(e) of Pub. L. 98-369 provided that:
    ``(1) In general.--The amendments made by this section [enacting 
this section and section 4999 of this title and amending sections 275 
and 3121 of this title] shall apply to payments under agreements entered 
into or renewed after June 14, 1984, in taxable years ending after such 
date.
    ``(2) Special rule for contract amendments.--Any contract entered 
into before June 15, 1984, which is amended after June 14, 1984, in any 
significant relevant aspect shall be treated as a contract entered into 
after June 14, 1984.''


           Plan Amendments Not Required Until January 1, 1998

    For provisions directing that if any amendments made by subtitle D 
[Secs. 1401-1465] of title I of Pub. L. 104-188 require an amendment to 
any plan or annuity contract, such amendment shall not be required to be 
made before the first day of the first plan year beginning on or after 
Jan. 1, 1998, see section 1465 of Pub. L. 104-188, set out as a note 
under section 401 of this title.


           Plan Amendments Not Required Until January 1, 1989

    For provisions directing that if any amendments made by subtitle A 
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan, 
such plan amendment shall not be required to be made before the first 
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. 
L. 99-514, as amended, set out as a note under section 401 of this 
title.

                  Section Referred to in Other Sections

    This section is referred to in sections 162, 3121, 4999 of this 
title.
