SECTION 2. BACKGROUND

Section 280G denies a deduction to a corporation for any excess parachute payment. An excess parachute payment is defined in § 280G(b)(1) as an amount equal to the excess of any parachute payment over the portion of the disqualified individual’s base amount that is allocated to such payment.

Section 280G(b)(2)(A) defines a parachute payment as any payment in the nature of compensation to (or for the benefit of) a disqualified individual if such payment is (i) contingent on a change in the ownership of a corporation, the effective control of a corporation, or the ownership of a substantial portion of the assets of a corporation (a change in ownership or control), and (ii) the aggregate present value of the payments in the nature of compensation which are contingent on such change equals or exceeds an amount equal to 3 times the base amount. The term parachute payment also includes any payment in the nature of compensation to, or for the benefit of, a

disqualified individual if the payment is pursuant to an agreement that violates any generally enforced securities laws or regulations.

A payment in the nature of compensation for purposes of § 280G includes the transfer of an option (including an option to which § 421 applies), without regard to whether the option has a readily ascertainable fair market value within the meaning of § 83. The option is considered transferred not later than the time at which the option becomes substantially vested (within the meaning of § 1.83–3(b) and (j)).

An individual’s base amount is, in general, the individual’s average annualized includible compensation for the most recent 5 taxable years ending before the date of the corporation’s change in ownership or control. For this purpose, the portion of the base amount allocated to a parachute payment is the amount that bears the same ratio to the base amount as the present value of the parachute payment bears to the aggregate present value of all such payments to the same disqualified individual.

Section 4999 imposes a 20-percent excise tax on the recipient of any excess parachute payment, within the meaning of § 280G(b).

Rev. Proc. 98–34 (1998–1 C.B. 983) provides a methodology for valuation of certain compensatory stock options for purposes of gift, estate, and generationskipping transfer taxes. The methodology described in Rev. Proc. 98–34 is an option pricing model that takes into account factors similar to those established by the Financial Accounting Standards Board in Accounting for StockBased Compensation, Statement of Financial Accounting Standards No. 123 (Fin. Accounting Standards Bd. 1995 (FAS 123)). This methodology applies only to the valuation of a nonpublicly traded compensatory stock option for stock that, on the valuation date, is publicly traded on an established securities market.