The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 5, December 2000, Panel Publishers, New York, NY.


By Robert W. Wood

Withdrawn ruling requests typically don't make news, but this one is interesting. A legal memorandum by Robert Misner, Assistant Chief, Executive Compensation Branch, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) ( there's a title!) wrote a memo informing a district director about the withdrawal of the ruling request. The withdrawal was made in anticipation of an adverse ruling. The topic? The acceleration of a "normative bonus" on account of change of control. The ruling requested was that this acceleration was not an excess parachute payment.

Here are the facts. A company entered into a change in control agreement with its executives, which triggered a series of compensation and vesting amounts if they were terminated within five years after a control change. The change of control did occur, and all executives selected to continue their employment with the new company.

Later still, the new company was acquired, and all the executives terminated their employment with the new company. On this second acquisition, each executive received an accelerated payment of a pro-rated portion of their normative bonus for the year. The accelerated payments were not part of the original change in control agreement. Instead, the executives were eligible, under their employment agreements with the new company, to receive annual bonuses based on attainment of appropriate performance targets.

In reviewing this situation, the Service concluded that the acceleration of the bonus was contingent on the second change in control because it was not substantially certain at the time of the change that the bonuses would have been paid if the executives had continued to work. The bonuses were therefore excess parachute payments that could not be reduced under Proposed Regulation Section 1.280G-1, Q&A 24(b) or 24(c). The Service in its memorandum noted, though, that to the extent the payments were reasonable compensation for services performed before termination, the excess payments could be reduced under Q&A 39 of Reg. §1.280G. For the full text of this document, see ILM 200043037, Tax Analysts Doc. No. 2000-27597, 2000 TNT 210-55.

Parachute Ruling Request Withdrawn, Vol. 9, No. 5, M&A Tax Report (December 2000), p. 8.