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48 Tax Law. 255 (1994-1995)
The Deductibility of Executive Compensation: Automotive Investment, Pulsar Components, and New Section 162(m)

handle is hein.journals/txlr48 and id is 265 raw text is: NOTE THE DEDUCTIBILITY OF EXECUTIVE COMPENSATION: AUTOMOTIVE INVESTMENT, PULSAR COMPONENTS, AND NEW SECTION 162(m) I. INTRODUCTION In 1980, the average annual compensation of the highest-paid executives at the largest American corporations was $624,996-forty-two times the pay of the ordinary factory worker.' This disparity was partially reduced, however, by the seventy percent maximum marginal tax rate in effect at that time. By 1990, the average compensation paid to the nation's top executives had risen to $1,214,090--eighty-five times the pay of the average rank-and-file employee- while the top tax rate had fallen to thirty-three percent.' In 1993, the last year for which figures are available, the compensation paid to the nation's top executives averaged $3,841,273-approximately 149 times that of the typical factory em- ployee.3 Although the Omnibus Budget Reconciliation Act of 19934 increased the top marginal tax rate to 39.6 percent,5 the compensation gap between execu- tives and rank-and-file employees has continued to widen. This gap has become the focus of considerable public attention in recent years. The growing anger is fueled by a perception that increases in pay during the last decade are not justified by corresponding improvements in corporate performance and unaccompanied by commensurate increases in worker compen- sation.' While, for decades, the reasonableness limitation on deductibility un- der section 162 has acted to limit the distribution of disguised dividends to shareholder-employees of closely held corporations, there has never been any limitation on the deductibility of exorbitant executive compensation in publicly traded corporations. However, public pressure has spurred numerous congres- sional proposals and most recently has led Congress to enact new section 162(m),7 which generally precludes publicly held corporations from deducting compensa- tion in excess of $1 million paid to certain executive officers.' This Note discusses the deductibility of executive compensation in the wake 'John A. Byrne, The Flap Over Executive Pay, BUSINESS WEEK, May 6, 1991, at 90, 95. 'Id. IJohn A. Byrne, That Eye-Popping Executive Pay, BUSINESS WEEK, Apr. 25, 1994, at 52, 56. 4Pub. L. No. 103-66, 107 Stat. 312 (1993). 51d. at §§ 13,201-202, 107 Stat. 457-61. Section 13,201 raises the top marginal tax rate to 36%, and section 13,202 imposes a surtax on taxpayers with incomes in excess of $250,000. See also I.R.C. § 1. 6John A. Byrne, What, Me Overpaid? CEOs Fight Back, BUSINESS WEEK, May 4, 1992, at 142. 7 Section 162(m) provides that for taxable years beginning after December 31, 1993, a publicly held corporation may not take a business deduction for employee compensation paid to its CEO and the other four highest-compensated officers in excess of $1 million per person per taxable year. Section 162(m) also provides exceptions for remuneration payable upon the attainment of a company's pre-established, objective, nondiscretionary performance goal and for existing binding contracts. I.R.C. § 162(m). 'Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, § 13,211, 107 Stat. 312, 469 (1993). Tax Lawyer, Vol. 48, No. I

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