The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 9, April 2001, Panel Publishers, New York, NY.


By Robert W. Wood

As we've covered in these pages before, one of the seemingly endless items that a buyer or seller will have to consider (even in a tax-free transaction) is the applicability of the golden parachute rules. The basic concept, of course, is that payments contingent on a change in ownership or control if they rise above a certain level (generally three times a base amount) will be subject to a double whammy: nondeductible by the payor corporation (in other words, not reasonable compensation if you wish to characterize it that way), and also subject to an excise tax. Everyone ends up unhappy. Perhaps as a result of the magnitude of the problem, golden parachute rulings seem to be proliferating. We noted a couple of months back an interesting ruling request that was withdrawn. For details, see Wood, "Parachute Ruling Request Withdrawn," Vol. 9, No. 5, M&A Tax Report, December 2000, p. 8. Then, a short time later, we devoted significant attention to some interesting and important private letter rulings for — dare we say it — avoiding the golden parachute rules. See Wood, "Holes in Golden Parachutes," Vol. 9, No. 6, The M&A Tax Report, January 2001, p. 1. The latter article cites a number of recent rulings that deal with the not so mechanical question of exactly how options should be valued in a deal, particularly when they are not exchanged but rather when they are accelerated. Frequently in a merger some or all employees have some of their options accelerated (or their vesting schedule basically changed). For a summary of these rules and what they seem to portent, see the January 2001 issue of The M&A Tax Report, page 1.

New Ruling

Yet another letter ruling has recently been released, Letter Ruling 200110009, Tax Analysts Doc. No. 2001-6929, 2001 TNT 48-24. This is a fairly simple ruling, concluding that several mergers will not result in a change of ownership and therefore will not trigger the golden parachute payment rules of Section 280G. Likewise, the ruling concludes that the Section 4999 excise tax will not apply to payments to current or former employees of the corporation despite the fact that the payments are contingent on the purchase.

The basic transaction in Letter Ruling 200110009 involves wholly-owned subsidiaries of a holding company, which will merge into Corporations X and E, respectively. X and E will be the survivors, becoming wholly-owned subsidiaries of the holding company. The stock of Corporation X and Corporation E before the transaction are widely-held and listed on a national exchange. The ruling sensibly concludes that there should be no golden parachute issue.

No Change in Ownership for Golden Parachute Purposes, Vol. 9, No. 9, The M&A Tax Report (April 2001), p. 7.