Test 1 Finance Exam Review Essay

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FIN4332-Test 1 Notes

Chapter 34 – Golden Parachute Plan
|The golden parachute plan is a |compensation arrangement that provides special severance benefits to executives if the|
| |corporation changes ownership and covered executives are terminated |
|If company is target for acquisition, |executives expect parachute-type compensation arrangements for self-protection |
|Within limits, such agreements are |an acceptable compensation practice |
|Parachute compensation has the potential for |abuse |
|Abuse in parachute compensation is like when |grant themselves large parachute payments that would act as a financial obstacle to |
|inefficient managers |acquisition, or would unduly burden successor management. |
|Because of abuse in parachute compensation, congress |limit corporate deductions for these payments and impose a penalty on the recipient |
|added provisions to the Internal Revenue Code that |for payments beyond specified limits. |
|However, these provisions (made by congress) |do not generally apply to closely held corporations. |
|1st tax implication: Any amount characterized as an |The employer cannot deduct the excess payment for tax purposes |
|“excess parachute payment” will result in 2 things: |The executive who receives the payment is subject to a 20% penalty tax on the excess |
| |payment |
|2nd tax implication: An excess parachute payment is |The amount of any “parachute payment” less the portion of the “base amount” that is |
| |allocated to the payment |
|Calculation of the excess parachute payment |[pic] |
|A parachute payment is any compensatory payment made |the payment is contingent on a change (i) in the ownership or effective control of the|
|to an employee or independent contractor who is an |corporation, or (ii) in the ownership of a substantial portion of the assets of the |
|officer, shareholder, or highly compensated individual|corporation |
|(defined as one of the highest 1% of the company |the aggregate present value of the payments equals or exceeds three times the base |
|employees with a maximum of 250 employees) that meets |amount |
|the following criteria: | |
|Another definition of parachute payment is any |payment made under an agreement that violates securities laws |
|If the agreement for a payment(s) is/are made within |presumption (which is rebuttable) that the payment is contingent on an ownership |
|one year of an ownership change, there is a |change |
|Any amount that the taxpayer can prove is “reasonable |treated as a parachute payment |
|compensation” for personal services rendered before | |
|the takeover will not…