## Facts

- Jewel Companies, Inc. agreed to be acquired by American Stores Company through a merger.
- Richard G. Cline, a senior executive of Jewel, signed a severance agreement providing termination benefits tied to the merger.
- After federal “golden parachute” provisions (I.R.C. §§ 280G and 4999) were enacted, the severance agreement was amended to reduce benefits to avoid parachute-payment treatment.
- American Stores orally promised to make a good-faith effort to employ Cline after the merger in light of the reduced severance benefits.
- In 1984, Cline received $1,210,000 in severance pay under the revised agreement, which was less than his § 280G “base amount.”
- After the merger, Cline worked briefly for American Stores from January 1 to February 3, 1985 and received $409,163 for that period, including a $300,000 “bonus.”
- The Commissioner determined the $300,000 payment was not reasonable compensation for post-change-in-control services and, when combined with severance, constituted an excess parachute payment subject to the 20% excise tax under I.R.C. § 4999.
- The Tax Court sustained the Commissioner, finding the $300,000 payment was a disguised parachute payment rather than compensation for services.

## Issues

1. Whether the $300,000 payment qualified as “reasonable compensation” for services performed after the change in control and therefore was excluded from parachute-payment treatment under I.R.C. § 280G.
2. If not excluded, whether the $300,000 payment was properly treated (together with severance) as part of an “excess parachute payment” subject to the 20% excise tax under I.R.C. § 4999.

## Decision

- The Seventh Circuit affirmed the Tax Court.
- The court upheld the finding that the $300,000 payment was not reasonable compensation for the short post-merger service period.
- Because the payment did not qualify for the reasonable-compensation exclusion, it was treated as contingent on the change in control and included in the excess parachute payment calculation.
- The resulting excess parachute payment was subject to the § 4999 excise tax.

## Legal Principles

- Golden parachute rules impose adverse tax consequences on certain payments contingent on a change in corporate control: denial of the payor’s deduction (I.R.C. § 280G) and a 20% excise tax on the recipient for any “excess parachute payment” (I.R.C. § 4999).
- Amounts that constitute “reasonable compensation” for services performed after a change in control are excluded from parachute-payment treatment under § 280G.
- Whether a payment is “reasonable compensation” for post-change services is a fact-intensive inquiry; appellate review defers to the Tax Court’s findings absent clear error.
- Payments styled as post-change compensation may be recharacterized as disguised parachute payments when the amount, timing, employer practices, and lack of benchmarking show the payment is not tied to the value of actual services performed.

## Conclusion

The court held that Cline’s $300,000 post-merger “bonus,” paid for a brief transition period and unsupported by customary compensation practices or comparables, was not reasonable compensation and was properly treated as part of an excess parachute payment subject to the I.R.C. § 4999 excise tax.


Cline v. Commissioner, 34 F.3d 480 (7th Cir. 1994)