Executive Pay Clawbacks and Their Taxation

51 Pages Posted: 26 Jan 2021 Last revised: 9 Jun 2021

Date Written: 2021

Abstract

Executive pay clawback provisions require executives to repay previously received compensation under certain circumstances, such as a downward adjustment to the financial results upon which their incentive pay was predicated. The use of these provisions is on the rise, and the SEC is expected to soon finalize rules implementing a mandatory, no-fault clawback requirement enacted as part of the Dodd-Frank legislation. The tax issue raised by clawbacks is this: should executives be allowed to recover taxes previously paid on compensation that is returned to the company as a result of a clawback provision? This Article argues that a full tax offset regime is most in keeping with the evolving rationales for clawbacks, with consistent treatment of executives subject to clawbacks, with encouraging even-handed implementation of clawbacks, and with minimizing clawback induced distortions and other unintended consequences associated with a tax regime that would not provide full offsets. But the tax treatment of clawback payments has been uncertain, and the enactment of the Tax Cuts and Jobs Act adds to that uncertainty. Meanwhile, adoption of legislation to ensure that executives are fully compensated for taxes previously paid on recouped compensation is probably a political non-starter. Given that, this Article argues that the IRS and courts should interpret the relevant tax laws liberally to maximize recovery of taxes paid on clawed back compensation.

Keywords: clawback, executive compensation, claim of right

JEL Classification: G34, H24, H25, J33, K34, M52

Suggested Citation

Walker, David I., Executive Pay Clawbacks and Their Taxation (2021). Boston Univ. School of Law, Law and Economics Research Paper No. 21-01 , Florida Tax Review Vol. 24 (2021), Boston Univ. School of Law, Public Law Research Paper , Available at SSRN: https://ssrn.com/abstract=3773046

David I. Walker (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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