As of 1987, H was chairman of two banks, CSB and IBT. In 1987, CSB and IBT entered into negotiations with Corporation K, to be acquired by K.
In 1987, H entered into a contract with CSB, under which he provided consulting services and which included a covenant not to compete with CSB for three years. He later entered into a similar six-year contract with CSB and K, which would go into effect if K acquired CSB. K merged with CSB in 1987.
In 1988, H entered into a similar arrangement with IBT; ultimately, his contract was for consulting services and not to compete with K for 10 years. Again, this contract would go into effect only if K acquired IBT. K merged with IBT in 1988.
From 1989-1994, H received payments under his CSB and IBT contracts. In 1995, the IRS audited H and determined that the payments received from K were "golden parachute payments" under Sec. 280G, and subject to the Sec. 4999 excise tax on "excess parachute payments" H challenged this determination, arguing that, because the payments were made pursuant to an agreement with the acquiring company (K) and not the target companies, they did not come under Sec. 280G.
The District Court (opinion Campbell, J.) holds for the Service; Secs. 280G and 4999 are not limited to payment contracts made by a target company, but apply to all payment agreements contingent on a change of control.
Sec. 280G(b) (2)(A) defines "parachute payment" as follows:
(A) In general.--The term "parachute payment" means any payment in the nature of compensation to (or for the benefit of) a disqualified individual if--O) [sic] such payment is contingent on a change--(I) in the ownership or effective control of the corporation, or (II) in the ownership of a substantial portion of the assets of the corporation, and (ii) the aggregate present value of the payments in the nature of compensation to (or for the benefit of) such individual which are contingent on such change equals or exceeds an amount equal to 3 times the base amount.
The statute does not specify whether an agreement by an acquiring corporation can constitute a parachute payment contract. However, the statute is written broadly to cover "any payment" contingent on a change in corporate ownership or control. The plain language would seem to encompass agreements between acquiring companies and employees of the target company.
The legislative history of Sec. 280G indicates that it has a dual purpose. First, Congress intended to discourage the use of...