Section 280G Due Diligence Information Request

Summary

This template can be used by parties involved in a corporate transaction to collect information needed to identify and calculate "excess parachute payments" to determine whether individuals may receive compensation resulting from the transaction subject to Internal Revenue Code (IRC) Sections 280G and 4999 rules (the Golden Parachute Rules). I.R.C. §§ 280G, 4999. This template includes practical guidance and drafting notes. The Golden Parachute Rules prohibit a corporation from deducting certain "excess parachute payments" and impose a 20% excise tax penalty on payments that are made to certain "disqualified individuals" receiving such payments. The Sections 280G and 4999 rules are triggered when an employee or independent contractor receives certain compensatory payments that, typically, are contingent on the consummation of a corporate transaction. The payments may be a bonus, acceleration of vesting of a stock option, a new employment agreement with an increase in wages, or a severance payment. The rules are intended to penalize certain employees and other service providers (the disqualified individual) who receive, and corporations who pay, "excess" amounts (sometimes referred to as "golden parachute payments") in connection with a change in control. If payments to a "disqualified individual" exceed a specified threshold, the individual is personally responsible for payment of the 20% excise tax (in addition to ordinary income tax and other employment taxes that likely apply to the payment) and the corporation is denied a federal income tax deduction for the excess parachute payment. A buyer will customarily use this Due Diligence Information Request by providing it to counsel for the seller, who will complete the response column, and attach relevant documentation. For a discussion about IRC Sections 280G and 4999, including a description of transactions that are exempt from the Golden Parachute Rules, see Section 280G Resource Kit which includes Sections 280G and 4999 Parachute Payment Rules and Section 280G Parachute Payment Determinations and Calculations, as well as various clauses that you may insert within an employment agreement or severance agreement that set forth the promise that the employer may make to the employee regarding treatment of the employee's potential liability for tax under Sections 280G and 4999. As IRC Section 409A issues may be implicated when making parachute payments, particularly because the definitions of "change in control" are different under Sections 409A and 280G, see Section 280G/409A Change-In-Control Event Comparison Chart for information in that regard. For additional resources regarding treatment of employee benefits and executive compensation upon corporate events, like mergers and acquisitions, see Corporate Transactions EBEC Resource Kit.