Source: http://www.irs.gov/irb/2003-40_IRB/ar12.html
Timestamp: 2014-04-24 02:45:15
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Internal Revenue Bulletin - October 6, 2003 - T.D. 9083 Internal Revenue Bulletin: 2003-40 October 6, 2003 T.D. 9083 Golden Parachute Payments Table of Contents
PAPERWORK REDUCTION ACT Background Explanation of Provisions and Summary of Comments Special Analyses Adoption of Amendments to the Regulations PART I — INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1986. Drafting Information
DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 AGENCY:
This document contains final regulations relating to golden parachute payments under section 280G of the Internal Revenue
Code. These regulations incorporate changes and clarifications to reflect comments received concerning the proposed regulations
primarily concerning the small corporation exemption, prepayment of the excise tax, and the definition of change in ownership
Effective Date: August 4, 2003. These regulations apply to any payment that is contingent on a change in ownership or control if the change
in ownership or control occurs on or after January 1, 2004. Comments on the collection of information in §1.280G-1, Q/A-7(a) should be received by October 3, 2003. ADDRESSES:
Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224. FOR FURTHER INFORMATION CONTACT:
Concerning the regulations, Erinn Madden at (202) 622-6030 (not a toll-free number). SUPPLEMENTARY INFORMATION:
PAPERWORK REDUCTION ACT The collection of information in this final rule has been reviewed and, pending receipt and evaluation of public comments,
approved by the Office of Management and Budget (OMB) under 44 U.S.C. 3507 and assigned control number 1545-1851.
The collection of information in this regulation is in §1.280G-1, Q/A-7(a). This information is a brief description of all
material facts concerning all payments which would be parachute payments (but for §1.280G-1, Q/A-6). This information may
be used by certain corporations with no readily tradeable stock (assuming certain shareholder approval requirements are also
met) to determine if the payments to a disqualified individual are exempt from the definition of parachute payments. The collection
of information is voluntary. The likely respondents are business or other for-profit institutions.
Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of
information in §1.280G-1, Q/A-7(a) should be received by October 3, 2003. Comments are specifically requested concerning:
Whether the collection[s] of information is necessary for the proper performance of the functions of the Internal Revenue
Service, including whether the information will have practical utility;
The accuracy of the estimated burden associated with the collection of information (see below);
How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the collection of information may be minimized, including through the application of automated
collection techniques or other forms of information technology; and
Estimated total annual reporting and/or recordkeeping burden: 12,000 hours.
Estimated average annual burden hours per respondent: 15 hours.
Estimated number of respondents and/or recordkeepers: 800
Estimated annual frequency of responses: On occasion. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays
Background This document contains amendments to 26 CFR part 1 under section 280G of the Internal Revenue Code (Code). Sections 280G and
4999 of the Code were added to the Code by section 67 of the Deficit Reduction Act of 1984, Public Law 98-369 (98 Stat. 585).
Section 280G was amended by section 1804(j) of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2807), section 1018(d)
of the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3581) and section 1421 of the Small
Business Job Protection Act of 1996, Public Law 104-188 (110 Stat. 1755). Section 280G denies a deduction to a corporation for any excess parachute payment. Section 4999 imposes a 20-percent excise
tax on the recipient of any excess parachute payment. Related provisions include section 275(a)(6), which denies the recipient
a deduction for the section 4999 excise tax, and section 3121(v)(2)(A), which relates to the Federal Insurance Contributions
Act. On February 20, 2002, a notice of proposed rulemaking (REG-209114-90, 2002-1 C.B. 576), was published in the Federal Register at 67 FR 7630 (the 2002 proposed regulations) and corrected in the Federal Register at 67 FR 42210 on June 21, 2002 (Ann. 2002-65, 2002-2 C.B. 182). No hearing was requested or held. The IRS received written
and electronic comments responding to the notice of proposed rulemaking. After consideration of the comments, the 2002 proposed
regulations are adopted as amended by this Treasury decision. The significant revisions are discussed below.
Explanation of Provisions and Summary of Comments Overview Section 280G(b)(2)(A) defines a parachute payment as any payment that meets all of the following four conditions: (a) the payment is in the nature of compensation; (b) the
payment is to, or for the benefit of, a disqualified individual; (c) the payment is 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 (d) the payment has (together with other payments described in (a), (b), and (c) of
this paragraph with respect to the same individual) an aggregate present value of at least 3 times the individual's base amount.
Section 280G(b)(2)(B) provides that 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 (securities violation parachute
payment). Section 280G(b)(1) defines the term excess parachute payment 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. 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. Generally, excess parachute payments may be reduced by certain amounts of reasonable compensation. Section 280G(b)(4)(B) provides
that, except in the case of securities violation parachute payments, the amount of an excess parachute payment is reduced
by any portion of the payment that the taxpayer establishes by clear and convincing evidence is reasonable compensation for
personal services actually rendered by the disqualified individual before the date of the change in ownership or control.
Such reasonable compensation is first offset against the portion of the base amount allocated to the payment.
Exempt Payments Section 280G specifically exempts from the definition of the term parachute payment several types of payments that would otherwise constitute parachute payments. Deductions for payments exempt from the definition
of parachute payment are not disallowed by section 280G, and such exempt payments are not subject to the 20-percent excise tax of section 4999.
In addition, such exempt payments are not taken into account in applying the 3-times-base-amount test of section 280G(b)(2)(A)(ii).
1. Tax-Exempt Entities
Q/A-6 of the 2002 proposed regulations provides that a payment with respect to a tax-exempt entity that would otherwise constitute
a parachute payment is exempt from the definition of the term parachute payment if certain conditions are satisfied. First, the payment must be made by a corporation undergoing a change in ownership or
control that is a tax-exempt organization. As defined in the 2002 proposed regulations, a tax-exempt organization is any organization described in section 501(c) that is subject to any express statutory prohibition against inurement of
net earnings to the benefit of any private shareholder or individual, an organization described in sections 501(c)(1) or 501(c)(21),
any religious or apostolic organization described in section 501(d), or any qualified tuition program described in section
529. Second, the organization must meet the definition of tax-exempt organization, as defined in the 2002 proposed regulations, both immediately before and immediately after the change in ownership or control.
One commentator requested the elimination of the requirement that the payment must be made by a tax-exempt organization. Instead,
the commentator suggested that the regulations require only that the payment be approved by the tax-exempt organization. The
exemption included in Q/A-6 of the 2002 proposed regulations for certain tax-exempt entities described in section 501(c) is
premised on the fact that those entities are subject to a statutory prohibition on private inurement. Requiring merely the
approval of a tax-exempt organization would allow corporations not subject to the inurement prohibition to make the payments
and, thus, to avoid the application of section 280G. Thus, these regulations retain the requirements contained in the 2002
2. Small Corporation Exemption Under section 280G and the 2002 proposed regulations, the term parachute payment does not include any payment to a disqualified individual with respect to a corporation which (immediately before the change
in ownership or control) was a small business corporation (as defined in section 1361(b) but without regard to section 1361(b)(1)(C)
thereof). See also, Q/A-6(a)(1).
Commentators indicated that the 2002 proposed regulations do not clearly address whether a corporation that does not elect
to be treated as an S Corporation, but could make the election (because aside from the election the corporation otherwise
meets the requirements to be treated as an S corporation), may use the exemption under Q/A-6(a)(1). These regulations clarify
that a corporation that could elect to be treated as an S Corporation under the Code, but does not do so, may nevertheless
use the exemption of Q/A-6(a)(1) for any payments to a disqualified individual. In addition, commentators recommended that the final regulations provide that a corporation domiciled outside the United States
can qualify for both the small business corporation exception and the shareholder approval exception. With respect to the
small business corporation exception, Treasury and the IRS do not have the authority to expand this exception to include foreign
corporations. Section 280G(b)(5)(A)(i) refers to “a small business corporation (as defined in section 1361(b) but without
regard to paragraph (1)(C) thereof).” A small business corporation as defined in section 1361(b) must be a domestic corporation,
and section 1361(b)(1)(C) merely addresses the existence of a nonresident alien as a shareholder. It is clear from the statute
that the small business corporation exception cannot apply to a foreign corporation.
On the other hand, Treasury and the IRS believe that a foreign corporation may qualify for the shareholder approval exception,
discussed below, if all of the applicable requirements are satisfied. Because the statute and regulations permit this result,
it is not necessary to specify the treatment in the final regulations. 3. Shareholder Approval
Additionally, under section 280G and the 2002 proposed regulations, the term parachute payment does not include any payment to a disqualified individual with respect to a corporation if (i) immediately before the change
in ownership or control, no stock in such corporation was readily tradeable on an established securities market or otherwise,
and (ii) certain shareholder approval requirements are met.
Section 280G(b)(5)(B) provides that the shareholder approval requirements are met if two conditions are satisfied. First,
the payment is approved by a vote of the persons who owned, immediately before the change in ownership or control, more than
75 percent of the voting power of all outstanding stock of the corporation. Second, there is adequate disclosure to shareholders
of all material facts concerning all payments which (but for this rule) would be parachute payments with respect to a disqualified
individual. Q/A-7(b) of the 2002 proposed regulations provides rules to determine the shareholders who are entitled to vote. In response
to comments, Q/A-7(b)(1) is revised to clarify that only stock that would otherwise be entitled to vote is considered outstanding
and is entitled to vote for purposes of Q/A-7(b). Thus, for example, because an individual who only holds options generally
would not be entitled to vote, such individual will not be considered to hold outstanding stock entitled to vote for purposes
of Q/A-7. Q/A-7(b)(2) of the 2002 proposed regulations includes a rule of administrative convenience allowing the corporation to identify
shareholders eligible to vote for this purpose using the shareholders of record at the time of any vote taken in connection
with a transaction or event giving rise to the change in ownership or control within the three-month period ending on the
date of the change in ownership or control. Several commentators suggested that the final regulations permit corporations to determine the shareholders of record at any
time during the three months prior to the change in ownership or control. Other commentators requested that the time be expanded
in the final regulations. In response to these comments, these regulations expand this rule to allow corporations to determine
the shareholders of record on any day during the six-month period ending on the date of the change in ownership or control,
regardless of whether there was a vote on that day.
Q/A-7(b)(4) is revised to clarify that stock held (directly or indirectly) by a disqualified individual who would receive
a parachute payment if the shareholder approval requirements of Q/A-7 are not met is not entitled to vote with respect to
a payment to be made to any disqualified individual. For example, assume E is a disqualified individual with respect to Corporation
X. E’s base amount is $100,000, and on a change in ownership or control of X, E will receive contingent payments of $295,000.
Corporation X undergoes a change in ownership or control. In determining the persons who are entitled to vote under Q/A-7(b),
any stock held by E is considered outstanding and E is entitled to vote. If E would receive contingent payments of $305,000
on the change in ownership or control, any stock held by E is not considered outstanding and is not entitled to vote under
Q/A-7 with respect to payments to any disqualified individual.
An entity shareholder is not entitled to vote stock that it holds that is constructively owned by a disqualified person who
would receive a parachute payment if the shareholder approval requirements of Q/A-7 are not met. Additionally, these regulations
provide in Q/A-7(b)(4) that if the person authorized to vote the stock of an entity shareholder is a disqualified individual
who would receive a parachute payment if the requirements of Q/A-7 are not met, such person is not permitted to vote any of
the shares held by the entity shareholder. However, the entity shareholder is permitted to authorize another equity interest
holder in the entity shareholder to vote the otherwise eligible shares or, in the case of a trust, another person eligible
to vote on behalf of the trust. Thus, for example, assume a partner owns one-third of a partnership; the partner is authorized
to vote on behalf of the partnership; the partnership owns stock in a corporation; the partner is a disqualified individual
with respect to the corporation; and the corporation undergoes a change in ownership or control. Under these circumstances,
none of the stock held by the partnership is entitled to vote under Q/A-7. However, the partnership is permitted to appoint
an equity interest holder in the entity shareholder (who is not a disqualified individual who would receive parachute payments
if the shareholder approval requirements of Q/A-7 are not met) to vote two-thirds of the stock.
More generally, several commentators requested significant revisions to Q/A-7 to reflect certain business practices. The revisions
suggested by commentators include, among other things, treating approval of a compensation agreement when the agreement is
executed as sufficient for Q/A-7 or deeming shareholders who acquire stock after approval of any compensation agreements to
consent to any parachute payments contained in these agreements. While the Treasury Department and IRS understand that the
requirements of Q/A-7 may not coincide with certain business practices, the requirements of Q/A-7 are based on the statutory
framework provided by Congress. The golden parachute provisions are intended to protect equity shareholders whose interest
in the corporation could be impaired by parachute payments to disqualified individuals by discouraging these types of payments.
The basic structure of section 280G does not permit any approval or shareholder vote for a publicly traded corporation. The
exception for corporations that are not publicly traded is based on a vote of those persons who hold shares immediately before
the change in ownership or control after adequate disclosure. The suggested revisions to the shareholder approval requirements
are inconsistent with these requirements and, accordingly, no changes are made in these regulations.
Payment of the Excise Tax under section 4999 Q/A-11(c) of the 2002 proposed regulations provided a mechanism to allow a disqualified individual to prepay the excise tax
under section 4999 in certain circumstances. Thus, the requirements of section 4999 may be satisfied in the year of the change
in ownership or control (or the first year for which a payment contingent on a change in ownership or control is certain to
be made) even though the payment is not yet includible in income (or otherwise received). These regulations continue to allow the prepayment of the excise tax in the year of the change in ownership or control. These
regulations also provide that a taxpayer may prepay the excise tax in a later year. For purposes of prepayment, these regulations
require the payor and disqualified individual to treat the payment of the excise tax consistently and require the payor to
satisfy its obligations under section 4999. These regulations clarify that the prepayment of the excise tax is based on the
present value of the excise tax that would be due in the year the excess parachute payment would actually be paid. For purposes
of determining the present value of the excise tax due, the discount rate is determined in accordance with Q/A-32. Thus, for example, assume that E is a disqualified individual with respect to Corporation X, that X undergoes a change in
ownership or control, and that E receives parachute payments, including a series of annual payments to be made for the next
10 years. Assume further that all other parachute payments to E are made in the year of the change in ownership or control
(with payment of the excise tax and compliance by X with section 4999(c)). Under these regulations, if three years after a
change in ownership or control, X and E agree that E will prepay the excise tax related to the remaining annual payments,
and that X will satisfy its obligations under section 4999(c) related to these payments, E is permitted to prepay the excise
tax with respect to the remaining payments.
The 2002 proposed regulations provided that the prepayment of the excise tax would not be available with respect to certain
payments, including payments related to health benefits or coverage. Commenters requested that the prepayment option be expanded
to include health benefits or coverage. Treasury and the IRS do not consider the available valuation methods sufficient to
allow projections of individual payments related to health coverage or health benefits for this purpose. In the event that
valuation methods change or there is otherwise greater certainty with respect to the valuation of such benefits, Treasury
and the IRS may consider additional guidance that would make prepayment of the excise tax with respect to such benefits available.
Treatment of Options Q/A-13 of the 2002 proposed regulations provides that the transfer of an option is treated as a payment when the option becomes
substantially vested without regard to whether the option has an ascertainable fair market value under §1.83-7(b) of the regulations.
Thus, the vesting of an option is treated as a payment in the nature of compensation for purposes of section 280G. Vested
is defined in these regulations as substantially vested within the meaning of §1.83-3(b) and (j) or the right to the payment
is not otherwise subject to a substantial risk of forfeiture within the meaning of section 83(c). The 2002 proposed regulations, and the 1989 proposed regulations, provided that options must be valued under the facts and
circumstances of a particular case. Factors relevant to the determination include, but are not limited to: the difference
between the option’s exercise price and the value of the option property, the probability of the value of the option property
increasing or decreasing, and the length of the period during which the option can be exercised. In coordination with the issuance of the 2002 proposed regulations, the Commissioner issued two revenue procedures under section
280G providing additional guidance on the valuation of options, Rev. Proc. 2002-13, 2002-1 C.B. 549, and Rev. Proc. 2002-45,
2002-2 C.B. 40. These revenue procedures provide guidance on the use of option valuation methods, and provide that using only
the spread between the exercise price and the value of the option property is not an adequate method for valuing an option.
The revenue procedures also provide a safe harbor method of valuation based on a table. Comments received in response to these
revenue procedures raised issues related to the difficulty of valuing options in the context of a change in ownership or control,
particularly with respect to assumptions regarding the term of the option and the volatility. In coordination with the issuance
of these regulations, the IRS is issuing a revenue procedure restating the previous revenue procedures and addressing these
comments. Disqualified Individuals The 2002 proposed regulations provide that an individual is a disqualified individual if, at any time during the disqualified
individual determination period, the individual is an employee or independent contractor of the corporation and is, with respect
to the corporation, a shareholder (see Q/A-17), an officer (see Q/A-18), or a highly-compensated individual (see Q/A-19).
The 2002 proposed regulations provide that whether an individual is an officer with respect to a corporation is determined
based on all the facts and circumstances in the particular case (such as the source of the individual's authority, the term
for which the individual is elected or appointed, and the nature and extent of the individual's duties).
These regulations retain this rule concerning officers. However, under Q/A-18 of these regulations any individual who has
the title of officer is presumed to be an officer unless the facts and circumstances demonstrate that the individual does
not have the authority of an officer. However, an individual who does not have the title of officer may nevertheless be considered
an officer if the facts and circumstances demonstrate that the individual should be considered to be an officer. Nonvested Payments under Q/A-24 Under Q/A-24(c) of the 2002 proposed regulations, only a portion of certain nonvested payments is treated as contingent on
a change in ownership or control. Specifically, Q/A-24(c) applies to a payment that becomes vested as a result of a change
in ownership or control to the extent that (i) without regard to the change in ownership or control, the payment was contingent
only on the continued performance of services for the corporation for a specified period of time; and (ii) the payment is
attributable, at least in part, to the performance of services before the date the payment is made or becomes certain to be
These regulations retain these rules regarding the calculation of the amount of the payment that is considered contingent
on a change in ownership or control, with one revision. Under the 2002 proposed regulations, the payment calculation under
Q/A-24(c) could not exceed the amount of the accelerated payment. A portion of a payment is contingent on a change in ownership
or control if there is accelerated vesting, even if there is no accelerated payment. In that case, the amount attributable
to the lapse of the obligation to perform services is 1 percent of the present value of the future payment multiplied by the
number of full months between the date that the individual’s right to receive the payment is vested and the date that, absent
the acceleration, the payment would have been vested. Under these final regulations, the total portion of such payment treated
as contingent on the change in ownership or control cannot exceed the present value of the accelerated payment.
Change in Ownership or Control A change in ownership or control is defined in Q/A-27, 28, and 29 of the 2002 proposed regulations. Under Q/A-27 of the 2002
proposed regulations, a change in control of a corporation occurs on the date that any one person (or persons acting as a
group) acquires ownership or stock of the corporation that, together with stock held by such person or group, has more than
50 percent of the total fair market value or total voting power of the corporation. Under Q/A-28 of the 2002 proposed regulations, a change in the effective control of a corporation is presumed to occur on
the date that either (1) any one person (or more than one person acting as a group) acquires (or has acquired during the 12-month
period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation
possessing 20 percent or more of the total voting power of the stock of such corporation, or (2) a majority of members of
the corporation’s board of directors is replaced during any 12-month period by directors whose appointment or election is
not endorsed by a majority of the members of the corporation’s board of directors prior to the date of the appointment or
election. Under Q/A-29 of the 2002 proposed regulations, a change in the ownership of a substantial portion of a corporation’s assets
occurs on the date that any one person (or more than one person acting as a group) acquires (or has acquired during the 12-month
period ending on the date of the most recent acquisition by such person) assets from the corporation that have a total gross
fair market value equal to or more than one third of the total gross fair market value of all of the assets of the corporation
immediately prior to such acquisition.
These regulations generally follow the same approach as the 2002 proposed regulations. Some commenters suggested that these
three provisions explicitly address whether more than one change in ownership or control can occur in a single transaction.
In response to these comments, these regulations explicitly adopt the “one change” rule that historically has been applied
by the IRS. These regulations provide that if a corporation undergoes a change in ownership or control as described in either
Q/A-27 or Q/A-29, the other corporation involved in the transaction does not undergo a change in ownership or control.[1] As these regulations apply, in any transaction involving two corporations, if one has a change in ownership or control under
Q/A-27 or 29, the other corporation does not also have a change in ownership or control, under either Q/A-27 or 29. Under
these regulations, Q/A-28, which relates to effective control, provides that there is no change in effective control of a
corporation in a transaction in which the other corporation has a change of control under Q/A-27 or 29.
Commentators also requested that the final regulations define gross fair market value for purposes of Q/A-29. Under Q/A-29
of these regulations, gross fair market value is defined as the value of the assets of the corporation, or the value of the assets being disposed of, determined without
regard to any liabilities associated with such assets. This definition is used throughout these regulations.
For purposes of determining whether there is a change in ownership or control under Q/A-27 through Q/A-29 of the 2002 proposed
regulations, two or more persons may be considered as acting as a group. The 2002 proposed regulations provide that, for purposes
of determining whether two or more persons are acting as a group, a person who owns stock in both corporations involved in
a transaction (an overlapping shareholder) is treated as acting as a group with respect to the other shareholders in a corporation
only to the extent of such person’s ownership of stock in that corporation prior to the transaction, and not with respect
to his or her ownership in the other corporation. This rule is consistent with the interpretation of the 1989 proposed regulations
by the IRS. Commentators suggested different alternatives to the overlapping shareholder rule of Q/A-27 through Q/A-29 of the 2002 proposed
regulations. One commentator suggested eliminating the overlapping shareholder rule and instead relying on the presumption
of Q/A-28 for all transactions. Under this approach it would be possible for a transaction to result in one, two, or no change
in ownership or control. Other commentators suggested replacing the overlapping shareholder rule of the 2002 proposed regulations
with a new rule based on section 355 or 382. Finally, another commentator requested clarification of the application of the
overlapping shareholder rule of the 2002 proposed regulations under the 1989 proposed regulations.
These regulations retain the overlapping shareholder rule of the 2002 proposed regulations. The group concepts in section
355 or 382 do not fit well with the overall purpose of section 280G. Finally, these regulations are effective with respect
to changes in ownership or control that occur after January 1, 2004, and to payments that are contingent on such changes.
These regulations do not provide any transitional rules for the application of the overlapping shareholder rules for prior
periods both because these regulations are not effective for prior periods and because the positions set forth in 2002 proposed
regulations are merely clarifications of the positions taken by the IRS under section 280G (illustrated by the 1989 proposed
regulations). International Issues Commentators recommended that the final regulations provide that a disqualified individual who, during the disqualified individual
determination period, was a nonresident alien and was not subject to income tax in the United States on wages earned from
the affiliated group, not be subject to the excise tax. Treasury and the IRS do not believe that they have the authority to
preclude application of the excise tax to a nonresident alien under these circumstances. Accordingly, the final regulations
do not include any special rules for excess parachute payments received by nonresident aliens.
Commentators also requested clarification that, even though parachute payments made by a foreign subsidiary of a U.S. corporation
may not be deductible, such payments reduce the foreign subsidiary’s earnings and profits. Because this issue has implications
beyond section 280G and foreign subsidiaries, it is not addressed in these regulations. Effective Date and Reliance These regulations apply to any payments that are contingent on a change in ownership or control if the change of ownership
or control occurs on or after January 1, 2004. Under the 2002 proposed regulations, taxpayers are permitted to rely on the 2002 proposed regulations until January 1, 2004.
Taxpayers are permitted to rely on the 1989 proposed regulations with respect to payments contingent on a change in ownership
or control if that change occurs before January 1, 2004. A clarification in the 2002 proposed regulations does not support
reliance on the 1989 proposed regulations for a position contrary to the provisions of the 2002 proposed regulations.
Taxpayers are permitted to rely on the 2002 proposed regulations, including for purposes of amended returns with respect to
the following: (1) that a shareholder who owns stock with a fair market value of $1 million is not a disqualified individual
and (2) that the base amount includes the amount of compensation included in gross income under section 83(b).