- 71 -
discouraged would-be acquirers, created conflicts of interest
between the managers and shareholders of such corporations, and
tended to reduce the share of the acquisition proceeds that
should go to the seller’s shareholders. Staff of Joint Comm. on
Taxation, General Explanation of the Revenue Provisions of the
Deficit Reduction Act of 1984, at 199-200 (J. Comm. Print 1984).
In this context, Congress concluded that golden parachutes should
be strongly discouraged by exacting a “tax penalty” if they are
paid. S. Prt. 98-169 (Vol. 1), at 195 (1984).
The purpose of section 280G, then, is to impose a tax
penalty on a corporation that pays golden parachutes, defined
generally as payments that are extraordinarily large in relation
to the recipient’s historical compensation and are contingent on
a change in control of the corporate payor. Moreover, the
statute provides that such payments are presumptively
unreasonable compensation. We do not believe that an independent
investor test for reasonable compensation is well designed to
accomplish Congress’s goal, since it asks only whether an
independent investor would have been satisfied with his return
after payment of the parachute payments (plus any other
compensation) to management. Presumably, when golden parachutes
are present, an acquisition goes forward because the acquirer–-
who is an actual, not merely hypothetical, independent investor-–
believes that his rate of return after paying the golden
Page: Previous 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 NextLast modified: May 25, 2011