Section 280G Shareholder Approval Exception Checklist

Summary

This checklist outlines a step-by-step process for privately held companies to conduct a shareholder vote to approve parachute payments under I.R.C. § 280G(b)(5)(B) and 26 C.F.R. § 1.280G-1, Q&A—7 to avoid the adverse tax effects that might otherwise arise from exceeding the statutory threshold. Parachute payments are compensatory payments made to disqualified individuals (i.e., certain shareholders, officers, and highly compensated individuals) that are contingent on the change in ownership or effective control of a corporation and that, in the aggregate, equal or exceed the statutory threshold. I.R.C. § 280G(b)(1); 26 C.F.R. § 1.280G-1, Q&A–2. Compliance with the shareholder consent requirements achieves an exception from the general rules under I.R.C. §§ 280G and 4999, which, respectively, disallow a deduction for, and impose a 20% excise tax on, so-called excess parachute payments. (These statutes are collectively referred to here as Section 280G.)