Monday, March 16, 2009


You can't always have things the way you want them to be. Even if you go to Yale Law School. Click the link, read it, then come back here.

Back? Okay.

Here's the key bit in Mr. Zelinsky's piece:
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.
Here, Mr. Zelinsky skips a few important steps in legal analysis. For one thing, it is not at all clear that the AIG bonuses are analogous to the bonus at issue in Gordy Tire. There was no contract in the latter; there are contracts in the former. If those contracts set up a structure for bonuses, and the workers performed according to the terms of those contracts, then AIG is in fact bound to pay those salaries. It is highly unlikely that AIG can get around this by claiming the bonus structure they set up constitutes "unreasonable compensation."

Further, Gordy Tire found the salary to be reasonable, and did so merely based on the testimony of witnesses friendly to the executive in question. The burden for showing reasonableness is not set all that high by Gordy Tire, and Zelinksy is misleading people by implying that this would be an easy way out for AIG/Summers. It's possible that cases that follow Gordy Tire do set a clearer standard, and make a better case for withholding the bonuses—I don't know and at the moment I don't have time to find out. But Zelinsky's reliance on that case alone implies that it's unlikely. And his reliance, I believe, is misplaced.

Look, I don't know if these guys (not executives, by the way, but derivatives traders) really deserve their bonuses or not. But if they have a contract that says they do, then they should get paid them. And if they don't, AIG is going to wind up spending far more in legal defense fees than they would have if they'd just paid them. And let's also not forget that these aren't massive bonuses going to a few top executives. These are more likely the minimum bonuses allowed by the contract going to a whole lot of guys at the bottom of the totem pole. Frankly, I'd rather they have the money in their pockets to spend than the government.

Trying to block this is absurd.

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