Adding Insult to Injury: The Federal Income Tax Consequences of the Clawback of Executive Compensation

Part I of this article discusses and analyzes clawbacks in general, including clawbacks that are part of common-law remedial schemes, federally legislated clawbacks, and those triggered by contractual clawback provisions. Part II of this article analyzes the tax consequences to the executives that result from the repayment or forfeiture of compensation. This part provides an analysis of the annual accounting concept and the claim-of-right doctrine which will generally result in the payment and return of compensation to be accounted for in separate tax years and, concomitantly, will generally result in incongruent tax consequences. The exceptions to the annual accounting concept are discussed with particular emphasis on Section 1341, an ameliorative provision. The tax consequences arising from the clawback of compensation are heavily dependent upon the tax treatment of the compensation that is clawed back. Accordingly, a detailed discussion of the tax treatment of cash and equity-based incentive compensation schemes is provided. In many cases, the tax treatment of clawbacks is relatively straightforward – albeit somewhat punitive. However, in certain instances, the tax consequences to executives subject to clawback provisions are uncertain

Income Tax Practice and Certified Public Accountants: The Case for a Status Based Exemption From State Unauthorized Practice of Law Rules

The purpose of this article is to examine the application of unauthorized practice of law restrictions to certified public accountants engaged in income tax practice. Prior to my admission to the bar, I had been a practicing certified public accountant and, like many of my colleagues, did not believe that the scope of my profession\u27s services in tax matters was subject to serious dispute. However, exposure to attorneys, particularly those not in tax practice, has led me to conclude that the bar has not come to any universally agreed upon conclusions about the role that certified public accountants may properly play in tax matters. Recent events have supported my conclusion

Pub. L. No. 86-272 and the Anti-Commandeering Doctrine: Is This Anachronism Constitutionally Vulnerable After \u3cem\u3eMurphy v. NCAA\u3c/em\u3e?

State taxing authority suffers from little of the structural impediments that the Constitution imposes on the federal government’s taxing power but the states’ power to tax is subject to the restrictions imposed on the exercise of any state action by the Constitution. The most significant obstacles to the states’ assertion of their taxing authority have been the Due Process Clause and the Commerce Clause. The Due Process Clause concerns itself with fairness while the Commerce Clause concerns itself with a functioning national economy. Although the two restrictions have different objectives, for quite some time both restrictions shared one attribute—a taxpayer physical presence test. Business practices evolved in response to technological developments and the ability of enterprises to avail themselves of a forum state’s markets with little or no traditional physical presence in the state resulted in the elimination of the physical presence test for Due Process purposes almost thirty years ago. The subsequent exponential growth of electronic commerce finally led to the demise of the physical presence test for Commerce Clause purposes as a result of the Court’s recent decision in South Dakota v. Wayfair. However, a six decades old statute remains an impediment to the states’ ability to exercise income tax jurisdiction over the income earned by remote sellers of tangible personal property. In a case unrelated to state taxing authority during the same term, the Court in Murphy v. National Collegiate Athletic Association struck down a federal law that prohibited states from authorizing sports gambling. According to the Court, the federal law impermissibly commandeered state legislatures. A critical holding in that case was that a federal law that prohibits state action is subject to the anti-commandeering doctrine similar to federal laws that mandate state action. The federal statute that limits the states’ ability to tax is very similar to the gambling statute that the Court struck down—it prohibits states from enacting otherwise permissible legislation without establishing a corresponding federal regulatory regime. In short, the statute commandeers the states similarly to the gambling statute. As a result, the statute is an impermissible encroachment of state sovereignty. Part I of this Article discusses the Due Process and Commerce Clause limitations on states’ taxing powers and the eventual demise of the physical presence test as a result of Court’s holdings in Quill Corp. v. North Dakota and, more recently, South Dakota v. Wayfair. This part also discusses Pub. L. No. 86-272, the longstanding prohibition imposed on states with regard to the taxation of income derived by remote sellers of tangible personal property. Part II discusses the anti-commandeering doctrine. This doctrine has surfaced as a significant bulwark for federalism over the past three decades and led to the demise of the federal sports gambling legislation as a result of the Court’s recent decision in Murphy. This part concludes with an analysis of the case and its potential application to the tax statute