Section 280G was enacted to protect shareholders’ interests by prohibiting companies from making excessive payments to unqualified individuals when control of a corporation changes hands. Only public and private corporations are covered under Section 280G. It does not apply to partnerships taxed as S-Corps, Partnerships, or LLCs. Golden parachute payments are both limited in amount and subject to a special excise tax under Section 280G. The rule only applies if the payment is worth more than or equal to three times the disqualified individual’s average annual taxable compensation during the five years immediately preceding the change in control.

1. What Is Section 280G?
Section 280G of the Internal Revenue Code is designed
to prevent excessive remuneration (sometimes known as
“golden parachute payments”) to certain officials,
highly compensated individuals, and shareholders who
own more than 1% of a company (known as
“disqualified individuals”)

2. When it comes to Section 280G,
sensitive issues can arise during
M&A transaction. If Section 280G is
triggered, the individual employee
(or independent contractor)
receiving compensation subject to
Section 280G is personally liable for
a nondeductible 20% excise tax on
any “excess parachute payments”
Section 280G In
M&A Transaction

3. When Does Section
280G Apply
When compensatory payments are
made to disqualified individuals

4. When compensatory payment is contingent
on a change in the “ownership” or “effective
control”