“Larry Summers claims that nothing can be done about the AIG bonuses.
As a former Secretary of the Treasury, he should know better.
Treasury Secretary Tim Geithner should direct the Commissioner of Internal Revenue to challenge the AIG bonuses as unreasonable compensation under the Internal Revenue Code. Finding the AIG bonuses to be unreasonable compensation would render them nondeductible for federal tax purposes, and would strengthen potential shareholder derivative suits to recapture The Great AIG Giveaway.
Section 162(a) of the Internal Revenue Code declares:
"There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including . . . a reasonable allowance for salaries or other compensation for personal services actually rendered."
In Gordy Tire Co. v. United States (155 Ct. Cl. 759, 1961), the United States Court of Claims declared that determinations of the reasonability, and thus the tax deductibility, of compensation should consider the "foresightedness and business acumen" of the individuals receiving such compensation. AIG's head honchos exhibited about as much foresightedness and business acumen as the captain of the Titanic. ....
If the AIG bonuses are determined to be unreasonable compensation, AIG would be unable to deduct such compensation for federal income tax purposes. The American taxpayers would thereby recoup some of the money they advanced to keep AIG solvent, money which wound up instead in the pockets of AIG's managers. Even if AIG does not owe any federal income tax this year, challenging the bonuses as unreasonable compensation prevents AIG from carrying the deduction forward for use as Net Operating Losses (NOLs) to offset future corporate earnings and thereby reduce AIG's future income taxes.
Determining these bonuses to be unreasonable compensation will also benefit AIG's shareholders. Corporate law allows a shareholder to bring a derivative action against the board of a corporation for recovery of excessive executive compensation. These shareholder claims will be buttressed by an IRS determination that the AIG bonuses are unreasonable. ....
Larry Summers says that the United States government is powerless to stop the unreasonable AIG executive compensation. He should know better. Mr. Summers: Yes you can.”
Aaron Zelinsky, "Larry Summers: Stop the AIG Bonuses. Yes You Can.", Huffington Post (15 March 2009).
http://www.huffingtonpost.com/aaron-zelinsky/larry-summers-stop-the-ai_b_175151.html
Aaron Zelinsky is a member of the Yale Law School Class of 2010 and an Articles Editor for the Yale Law Journal.
I must say I am of decidedly mixed view on this.
There is no doubt that the executives at AIG and other financial institutions do not deserve a bonus. Given their performance in recent years, it would be more appropriate to fire them.
In my view, this problem can be traced to the decision to bail out these firms rather than close them down and re-organize them. Bailing out these firms, rather than letting them go bankrupt and picking up the pieces, means accepting all the legal obligations of these firms that are in place.
These bonuses are part of a labor contract of the executives with AIG that is still in force. As such, the contracts should be honored and the bonuses paid. To quote President Obama’s top economist, Larry Summers, on the matter: "We're not a country where contracts just get abrogated willy nilly." He is right. A contract is a contract.
Mr. Zelinsky has a good idea on how to recover the bonuses. But it is too cute. Like it or not, these bonuses are a continuation of previous practice on Wall treet. For this reason, they should not be seen as extraordinary or unreasonable.
It was a mistake to start down the road on bailouts and it would appear there is no end to it and the trouble the bailouts bring. The question for the country is whether we can continue to travel this road. It’s not just that it’s expensive. It’s just increasingly stupid.
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