Use the Tax Code to Reclaim the AIG Bonuses

from http://taxprof.typepad.com/taxprof_blog/2009/03/use-the-tax-code-to-reclaim-the-aig-bonuses.html

Aaron Zelinsky (Yale 2L & son of Tax Prof Ed Zelinsky (Cardozo)) writes:  Larry Summers: Stop the AIG Bonuses. Yes You Can:

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. ...

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.