Section 162(m)(5) was adopted in 2008 and applies to the chief executive officer (CEO), chief financial officer (CFO), and next three highest paid officers of public and private entities that accepted money under TARP.Section 162(m)(6) becomes effective in 2013, and its limitations apply to most employees of health care providers.
With respect to reducing excessive, non-performance-based compensation, many consider Section 162(m) a failure, including Christopher Cox, the then-chairman of the Securities and Exchange Commission, who went so far as to suggest it belonged “in the museum of unintended consequences.” Sen. These sophisticated folks are working with Swiss-watch-like devices to game this Swiss-cheese-like rule.
Charles Grassley (R-Iowa), the then-chair of the Senate Committee on Finance, was even more direct, saying: 162(m) is broken. Since Section 162(m) passed nearly 20 years ago, both academic and practitioner research has shown a dramatic increase in executive compensation, with little evidence that it is more closely tied to performance than before.
Shareholders are asked to, and usually do, approve plans without knowing whether the performance conditions are challenging or not, and the potential payouts from the plan.
Those details are left to the compensation committee, which must set the terms no later than the first quarter of the company’s fiscal year.
Over the years, lawmakers have tweaked the tax code to limit disfavored forms of executive compensation, while regulators have increased the amount of disclosure companies must make. Barbara Lee (D-Calif.) has introduced the Income Equity Act of 2011 (H. 382), which would amend the Internal Revenue Code to prohibit deductions for excessive compensation for any full-time employee; compensation is defined as “excessive” if it exceeds either $500,000 or 25 times the compensation of the lowest-paid employee, whichever is larger.
The objective of this study is to examine the impact of a prior limitation on deductibility of compensation, Internal Revenue Code Section 162(m).In Section 2, we will go through the components of the compensation package and discuss the tax consequences of each.Section 3 will utilize executive compensation information disclosed in corporate proxy statements—those required statements, useful in assessing how management is paid and identifying potential conflicts of interest, that must be filed with the U. Securities and Exchange Commission (Form DEF 14A)—to summarize and tabulate compensation reported for each year from 2007 to 2010 and to contrast the amounts reported with those actually deductible by those corporations.In this paper, we estimate that corporate deductions for executive compensation have been limited by this provision, with public corporations paying, on average, an extra .5 billion per year in federal taxes. Because actual tax return data are, by statute, confidential, our estimates are somewhat imprecise, as we have to infer both the tax deductibility of executive compensation and the corporation’s tax status from public filings.They continue, however, to deduct the majority of their executive compensation, with these deductions costing the U. Our key findings are: Section 162 of the Internal Revenue Code covers trade and business expenses. In one night hes gone from being a precinct nuisance to worldwide notoriety.