In these times of high M&A activity, we see a lot of questions about Code Section 280G (“Section 280G”) which we discussed generally on this blog a few weeks ago. One fine point issue that comes up relates to whether Section 280G applies in the first place.
Section 280G denies a deduction and imposes an additional 20% excise tax on “excess parachute payments” which are payments beyond a certain threshold that are made contingent on a change in ownership or effective control of a “corporation.” The definition of corporation includes all of the normal corporate entities, as well as publicly traded partnerships and foreign corporations, among others. But the Section 280G rules do not apply to partnerships or S-Corporations.
Because partnerships are excluded from coverage under Section 280G, there is a tendency to stop the analysis there. However, it is important not to overlook the Section 280G “affiliated group” rules which provide that all members of the same affiliated group as defined in Code Section 1504 (with minor modifications) are treated as a single corporation for several purposes under Section 280G. These purposes include the identification of disqualified individuals subject to Section 280G, change in control event identification, and which corporations making payments are exempt. Under Section 1504, in simplified terms, any companies that are owned 80% or more based on the value or voting power by a common parent are treated as one corporation.
As a practical matter, this means that one corporate taxed entity in the selling affiliated group can result in making Section 280G applicable to entities and their service providers that would have otherwise been exempt from the Section 280G rules had there been no corporate taxed entity. Remember to check the related entities and consider the affiliated group rules in any transaction where Section 280G may apply.
