Taxing Unreasonable Compensation: §162(a)(1) and Managerial Power
10 Pages Posted: 23 Oct 2009 Last revised: 3 Dec 2011
Date Written: October 22, 2009
Section 162(a)(1) of the Internal Revenue Code, as construed by the IRS, effectively allows publicly traded businesses to deduct an unlimited amount of executive compensation for corporate tax purposes. In contrast, the IRS has consistently used § 162(a)(1) to limit corporate deductions for executive compensation paid by closely held corporations. This Comment proposes that, in light of recent scholarship, the IRS has misapplied § 162(a)(1), since publicly traded corporations may lack the appropriate oversight and incentive infrastructure to set executive compensation reasonably. Therefore, this Comment proposes that the IRS should use § 162(a)(1) to render such compensation nondeductible, just as the Service examines the deductibility of compensation paid by privately held corporations.
Keywords: Executive Compensation, Managerial Power
JEL Classification: G38
Suggested Citation: Suggested Citation