Tax Law and Business Organization Strategy

Using the Tax Code to Breach a Contract

According to Charlie Rangel, the Chairman of the House Ways and Means Committee, The tax code is not “a political weapon.” That was just a few days ago. Now the House has passed a bill that would confiscate payments made under contracts between AIG and its employees. How quickly the worm turns.

I am not going to argue whether the amounts of the payments are justified. (Reasonable compensation is something that the tax courts struggle with on a daily basis. They realize that predicting the market for services is a subjective exercise and not a science.)  But I am going to argue that what Congress now proposes in the form of a tax (and in this instance I use the term loosely), amounts to breach of contract and theft of services.

Not many details have been disclosed about the terms of the “bonus” program. However, it does appear that the formula for determining bonuses had a floor on it. That is, regardless of how well AIG did, no more than a certain amount of losses could be imposed against the bonus pool. Therefore, the recipients were guaranteed to receive a certain minimum amount.

This guarantee was then used as consideration to keep people from quitting until they had earned this additional compensation. That is the basis of the contract on which the employees continued to work for AIG. The AIG employees relied on the promise of this money in deciding whether to stay at AIG or quit.

Now that the employees have provided the contracted for services, Congress doesn’t want to pay them. Whether Congress entered into a good deal or a bad deal, they entered into a deal, and they should not be allowed to renege on it now that Congress and the US taxpayers have received the benefit of their bargain.

I believe that what is going on here is Congress trying to cover up the fact they they made a bad deal to begin with. The persons who should be paying for negotiating a bad deal are the people who negotiated the bad deal. If I had negotiated a deal like this, I’d probably be sued for malpractice. But Congress gets off scott-free, particularly if they are able to undo their bad deal after the fact.

If this scenario happens, who in their right mind would ever enter into a contract with the government to provide them services? If the government becomes disenchanted with the deal it cut, it can simply renegotiate the deal, after the fact. This is what third world, corrupt politicians do. It’s not what the United States of America is supposed to do.

Trackbacks (0) Links to blogs that reference this article Trackback URL
Comments (2) Read through and enter the discussion with the form at the end
Mark Abraham - March 20, 2009 12:38 PM

Great commentary Jack! I agree wholeheartedly.

Jack Howell - March 25, 2009 1:59 PM

Here is a letter from an AIG executive which confirms much of what I had speculated the facts were -- at least for some of the affected executives:

Sprouse Shrader Smith PC
701 S. Taylor, Suite 500, Amarillo TX 79101

Phone: 806.468.3300