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Tax Gross-Ups: Down But Not Out

19 Jan 2011

With the U.S. national unemployment rate lingering above 9%, many are trying to identify the issues responsible for the current situation. Often, the blame is placed on excessive executive compensation. In particular, tax gross-ups have become a major point of contention with shareholders, politicians and shareholder advisory services. Companies are torn between protecting their key executives and appeasing groups that have rallied against tax gross-ups. Taxand US analyses the effect of tax gross-up the trends in Section 280G excise tax protection.

Taxand's Take

Pressure from shareholders, politicians, shareholder advisory services and others has prompted many companies to reconsider their approach to excise tax gross-ups. While removing gross-ups or modified gross-ups may initially appease shareholders, it could have negative long-term ramifications. Firms need to explore all of their options to find the solution that best benefits the executive and shareholders. Companies wanting to remove gross-ups should consider implementing a valley provision that provides a benefit to the executive at no additional cost to the company. Not all policies fit a standard mould, and some firms use unique excise tax provisions to retain top talent. Lastly, to avoid Section 409A complications, companies should specify the order in which parachute payments are cut back and re-examine the exact events (single trigger vs. double trigger) that entitle the executives to the gross-up payment.

Read the full article from Taxand US here

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Taxand's Take Author