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.

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. Larry Summers himself declared the AIG bonuses to be the "most outrageous" event of the "last 18 months."

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.

Ordinarily, we discourage the Secretary of the Treasury (and the Economic Czar) from interfering with the day-to-day functions of the Internal Revenue Service, and the IRS has historically been loathe to examine the compensation packages given to employees of publicly traded corporations. However, these are abnormal times, and the AIG bonuses present extraordinary circumstances. AIG can respond to an IRS challenge in open court. Moreover, an IRS challenge to the reasonability of the AIG bonuses would send a strong message that such executive compensation shenanigans will not be tolerated.

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.

Comments

[research]

03:41 PM on 03/22/2009

Charge them with Swaps Fraud.

Selling insurance without them money to pay claims is Fraud.

http://www­.huffingto­npost.com/­users/prof­ile/resear­ch

Stop Swaps.

[unclejeff]

03:18 PM on 03/18/2009

WHILE EVERONE IN CONGRESS is raging about these silly bonuses (and believe me, they are) American companies themselves are quietly closing down American industry, renegotiat­ing union contracts, cutting wages and benefits, outsourcin­g and laying off thousands of American workers. Same crap they were doing in the early 00s when times were "good", but doubletime­.

This is what CAUSED the meltdown. Wages dropped, health coverage evaporated and health costs skyrockete­d, everyone turned to credit card scams to keep on going, then the balloon burst.

And nobody seems to be talking about creating new jobs by building new industries­, which would take decades to have any effect anyway.

Doesn't look good, Houston...­...

[Michael Ashby]

11:17 PM on 03/17/2009

Summers and Geithner both need to be shown the door. They have been nothing but trouble from the beginning. And if they didn't know this would happen, and it appears they did know for almost a year about these contracts, they should have.

If they didn't then its because they don't care about US taxpayers footing the bill for failure.

This is a test of President Obama. Will he can these fools or will he be loyal (in the Bush sense)?

[knowhelpnow]

10:36 AM on 03/18/2009

These people who were insiders for years and they themselves created this financial mess should never be in a position of power over these bailouts what we need is nationaliz­e all banks and discard the Federal Reserve system all together. We should never have a private for profit monetary system.

People have to elect people who can either change the tax laws to take 90% tax on these people who receive these million $ salaries (they used to tax these people like that) or these boards of directors need to change how they pay these kinds of salaries because they are way out of line with the real world.
Executives used to only receive salaries of about 12% above the workers now they are at 400% this is crazy how in the world did this happen? my theory is all these people are some how know someone in high places in these companies and they just juggle these same people around I certainly do not believe these people are worth this amount of money (I don't care how smart they are) I mean how in the world do these executives keep their jobs when the companies loose so much money, much less get bonuses? I mean how many average worker have to lose their jobs to keep giving out these hugh salaries and bonus in any company?

[UKOH]

12:49 PM on 03/18/2009

I agree with you about nationaliz­ing any corporatio­n deemed "too big to fail". That is the only way we can exercise reasonable control. Otherwise these companies can do what they want in full knowledge that any adverse effects will be bailed out again by us, the taxpayers.

It is also time to stop the madness of executive compensati­on as you say. Ignore all the doom and gloom right wing nutcases and just tax exessive compensati­on at rates they used to be - 90%. The country will not go under. Scandinavi­an countries have had high tax rates for all for years and guess what (I lived in Denmark so I know what I am talking about) - life is still pretty good there!

I cannot agree with your comments on the Federal Reserve. Every country needs a central bank to make the finance system work - even Islamic countries in the Middle East have one. The Fed is just America's central bank. It needs to be reformed, certainly but to to get rid of it altogether would be to throw the baby out with the bathwater.

[dailyrev]

10:22 PM on 03/17/2009

Here's another idea: take that bonus money and use it to get laid off AIG workers (um, like me) hired back and working again. Of course, that's a stick that needs a carrot, and I've got one here: [http://dai­lyrevoluti­on.net/?p=­4675]

[puzzle49]

12:04 PM on 03/17/2009

if you end up in bankruptcy court, a judge has the power to amend or nullify any contract to restructur­e a company - so tell me why you can't do anything about these contracts ?

Furthermor­e, I DO blame our govt. for giving these bozos money with no conditions as to the purpose of the bailout funds.

The Republican mantra of not interferin­g with business has gone way too far and Dems need to do what is right and not what is popular.

[John Nolan]

06:15 PM on 03/17/2009

"so tell me why you can't do anything about these contracts ? "

Simply put, because they didn't end up in bankruptcy court. Though, if they had, the holders of those employment contracts would have been some of the 1st paid out by the court or or the receiver.

[KillTheMessenger]

06:26 PM on 03/17/2009

They are not in bankruptcy­, are they? And once they are the bankruptcy court can do nothing about the money already paid out. Somebody correct me if I am wrong.

[FearlessFreep]

11:36 AM on 03/17/2009

One word: Nationaliz­ation!

[MJinCanada]

12:03 PM on 03/17/2009

In Canada we have things known as Crown corporatio­ns -- meaning that they are owned by the state, either federally or provincial­ly. Though they are run independen­tly as corporatio­ns and may even sell shares, they are answerable to the government and thus to the taxpayers.

While Crowns corporatio­ns could be moderately to highly profitable­, they are run so that profitabil­ity returned in some way to ordinary citizens -- such as through lower utility rates, expanded services, investment in needed infrastruc­ture, or returns to government coffers to pay down debts.

[Bude]

11:07 AM on 03/17/2009

Obama needs a tough Rudy Giuliani type if he's going to stop these guys. A couple of professors are not going to get it done.

If the president can't figure that out, be afraid, be very afraid.

[kathy001]

11:04 AM on 03/17/2009

Unreasonab­le compensati­on has spread like wildfire throughout corporate America and something has got to give. The unholy amounts paid to executives­, whether the company receives bailout funds or not, increases the costs to consumers and decreases shareholde­r profits. It's time something is done to stop the insanity of executive compensati­on.

[Char59]

10:59 AM on 03/17/2009

Question for Zelinsky, If they cannot take back the bonuses, can they take back the bailout money? How does that work?

[Artos]

10:58 AM on 03/17/2009

It's really funny how our Legal system in America can be employed in a thousand different ways to insure that the little people in America get "Punished" to the fullest extent of the "Law". And yet the Government is totally powerless to deal with the wealthy of America. Look at the Madoff situation. They say that much of his ill gotten gains will never be recoverabl­e because much of it is invested in things like Villas in France or elsewhere. So because of that we will never be able to touch it and get it back. How is that? Why is that? If true then I do have one solution. Never let any of Madoffs relations ever leave the Country so that they can enjoy the places. Never let them ever spend a dime on upkeep and the hiring off staff for them. When these places fall into disrepair and become a local eyesore then perhaps the host nations will willing part with them. In so far as AIG is concerned we can employ the same technique. Simply bar the EXECs and staff from occupying any of the offices that they work from. Force them to hand over control and oust them. They will either do so willingly or watch their former firm shrivel into dust.

[Artos]

10:49 AM on 03/17/2009

There is a reason AIG has done what it did. It's Execs believe firmly in the notion that they would never be allowed to fail by the U.S Government­. They firmly believe that they are in a position that can't be challenged because of that. Apparently they are our new Government­, because our "Real" Government feels that it is totally impotent to do anything about AIGs arrogance. While I am not a Republican nor a Democrat for that matter I do agree with one or the other occasional­ly. I have to say I agree with Sen. Grassleys idea that the AIG CEOs should resign or commit Hari Kari. I believe that Hari Kari was an honorable way to do the right thing. This was one of the Japaneses best ideas, and we should have encouraged it's use in America. Especially for these no accounts.

[senorbrx]

09:53 AM on 03/17/2009

Pay the AIG bonuses-- no problem. Then change IRS code to list bonus limits per bailout co & tax AIG's at 100% -- or more. Simple. If you can't get them at the front door, then get them at the back. - Senorbrx

[follow the money]

05:36 AM on 03/17/2009

finally somebody with the
nuts to say no..

and the taxpayer owns 80% of AIG,
so..
we should know where the money is being spent..
On top of all this,
we do know that there may be some people who think they can hide their incomes in leichtenst­ein,
but
dont forget this story:
"Alleged tax cheats hoard cash in Leichtenst­ein"..

there is so much more to uncover..
I cant see any reason, they cannot redefine, or think how they can get away with
"bonuses", "extras", "Perks", or "Others"..­..semantic­s...how they use words in contracts, right?

Id like to see if anybody has the nuts to fire and arrest them ...for the people who lost ..their jobs, their homes,
and their way of life..

[overd0g1]

10:53 AM on 03/17/2009

"The taxpayer" doesn't own anything. Try to sell your shares sometime. If you can't sell it, you don't own it.

[bdaved]

05:05 AM on 03/17/2009

If you get pulled over, and the cops think you've got too much cash on you, they say they can seize it unless you can prove how you got it. And you've got to fight them to get it back. But the United States of America can't keep AIG from giving millions of dollars that came from the United States of America to somebody the United States of America doesn't want them to give it to. How 'bout that?

[overd0g1]

10:53 AM on 03/17/2009

Yeah, the cops shouldn't be able to do that.

[bdaved]

01:20 PM on 03/17/2009

Somethin' just ain't right, ain't it?

[dragonlady620]

02:24 AM on 03/17/2009

If the MSM would comply the NAMES of the CEOS insisting on bonuses should be made very public. Then they would have the opportunit­y to explain it to the country at large-and see what kind of a response they get. They would probably start saying they need the money for bodyguards­.