Before the Corporate Tax reform debate jumps the shark

THE BDN republished a Washington Post article regarding tax inversions.  Tax reversions, as well as the corporate tax code in general, are moving closer to the center of public debate, with the issue of corporate tax reform now overlapping with the issue of corporate person-hood.  While some may question the ‘economic patriotism’ of companies renouncing their ‘citizenship’ in order to avoid U.S. corporate taxes, there was one issue raised in the WaPo piece that needs to be addressed before the debate over U.S. corporate tax reform jumps the shark.  From the WaPo piece (my emphasis):

Our U.S. code imposes on CEOs a fiduciary obligation to do the best by their shareholders, which very much includes minimizing taxes,” Ivo Welch, an economics and finance professor at UCLA’s Anderson Graduate School of Management, wrote me in an email. “Arguably, a CEO who does not take advantage of a Double-Dutch when (s)he can and instead pays taxes can in principle be taken to court for neglect.”

In short, that’s wrong.  While there are no hard and fast rules in the law, and everything is up for debate, to varying degrees, CEOs are not in fact under a fiduciary duty to avoid taxes.  From the legal blog Professorbainbridge.com:

As a US lawyer, of course, the more interesting question for me is whether the business judgment rule would protect a board decision to minimize corporate taxes and/or a board decision not to do so. As I read the US cases, the answer is that the BJR would in fact protect either decision from judicial review:

Francis Pileggi posts on an interesting recent Delaware case, Seinfeld v. Slager, which raises two issues:

(1) Whether board approval of a supplemental retirement bonus was a breach of fiduciary duty to the extent that it constituted waste and did not qualify for a tax deduction; and (2) Whether a stock option plan for the directors was self-interested and not entitled to the benefit of the business judgment rule.

Francis explains that the court answered those questions as follows:

(1) The Court found a failure to plead demand futility and dismissed the waste claim, and the Court found that Delaware law did not impose a fiduciary duty, per se, to minimize corporate taxes, thus rejecting a related tax argument about the deductibility of the compensation paid to a retiree; (2) The Court found also, however, that the stock option plan for directors did not have sufficient limitations despite shareholder authorization, and therefore, could be considered self-interested and not entitled to the benefit of the business judgment rule.

The court held that the business judgment rule protected the directors’ decision from judicial review. The parallel to the Seinfeld case is readily apparent, of course.

None of this means that the U.S. corporate tax code does not need reform, just that we need to maintain some perspective when having a discussion on the reform.

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John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.