Subject to statutory exceptions, compensation to a disqualified individual that is contingent on a change in corporate ownership or effective control, or ownership of a substantial portion of corporate assets, may trigger IRC §280G when its aggregate present value equals or exceeds three times the individual’s base amount. The base amount generally reflects average annual compensation includible in gross income for services to the corporation, a predecessor, or covered related entities over the five taxable years ending before the change, with special rules for shorter service periods and other circumstances. The deduction disallowance and IRC §4999’s 20% excise tax generally apply to excess parachute payments, not merely the amount above the three-times threshold. An excess parachute payment generally equals the payment less its allocated share of the base amount, subject to the statutory adjustments.
Clear and convincing evidence of reasonable compensation for services to be rendered on or after the change can exclude that portion from parachute payments. Reasonable compensation for services performed before the change can instead reduce excess parachute payments, after the required base-amount offset.
Potential exceptions include qualifying small-business corporations and, for certain nonpublic corporations, a compliant shareholder-approval process. Transaction counsel should evaluate eligibility, coverage, and the complete calculation; compensation analysis supports the factual valuation of services.
When counsel retain us
We are engaged in transaction planning to substantiate the reasonable compensation position before signing, and in post-closing disputes — with the IRS or between parties — where the characterization of change-in-control payments is contested.
How the opinion is built
The analysis addresses the value of the executive’s services, the duties before and after the transaction, and the relationship between compensation and performance. The reasonable-compensation exclusions and reductions under IRC §280G(b)(4) require clear and convincing evidence. A documented study can support that showing but does not by itself establish an exclusion or reduction; the analysis must address the relevant payments, service periods, and regulatory requirements.
If this question is live in a matter you are handling, request a conflicts check — an initial conversation costs nothing and quickly clarifies whether an independent compensation expert strengthens your case. Our methodology and engagement structures pages explain how we work.
This material is general educational information, not legal or tax advice for a particular matter. Requirements vary by jurisdiction and can change. Counsel and tax advisers should verify the governing rules. No tax treatment, privilege, admissibility or case outcome is guaranteed. An inquiry does not create an engagement.