Often a challenge faced in a merger or sale is the triggering of 280 (g) as it relates to golden parachute payments that will be received by certain key executives of the target. Section 280 (g) of the Internal Revenue Code limits the amount of payments received by the executive and if this limitation is triggered, creates a tax liability or penalty. These golden parachute payments may consist of bonuses, retention bonuses, accelerated vesting of stock options, restricted stock, other equity compensation, fringe benefits, severance payments, life insurance, and post change in control arrangements.
Excess parachute payments can be reduced or eliminated by demonstrating with clear and convincing evidence that the payment is reasonable compensation for services performed after the change in control. Determining and assigning value to a non-compete agreement can help avoid triggering 280 (g), since the non-compete is compensation for not competing with the business after the change in control.
Be prepared in advance of entering a transaction by establishing and valuing non-compete agreements for certain key individuals.