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There is no question that corporate executives are well paid. But does high executive compensation mean excessive or unreasonable compensation? And if so, what is the solution to curbing the problem of excessive executive pay? More specifically, should the Internal Revenue Code be used as a means for regulating the actions of public companies?

This Article briefly explores these issues. In Part I, this Article provides a narrative of the excessive compensation debate. Without drawing a conclusion as to whether executive compensation is reasonably set or excessive in nature, Part I summarizes the history of public outrage surrounding executive pay. Part I also provides a short discussion of the arguments on each side of the debate. Part II of this Article analyzes Section 162(a)(1) of the Code, which provides for the deduction for a reasonable allowance for compensation. This Part explores the history behind Section 162(a)(1) and how the provision has been interpreted to apply only to compensation paid by private, closely held companies. Part II concludes by determining that the deduction for reasonable compensation allowed under Section 162(a)(1) is different than a deduction only for reasonable compensation and that there is no basis for judging the reasonableness of compensation in the public company context. Part III discusses prior tax legislation enacted in an attempt to control executive pay by setting forth objective standards of reasonableness in the public company context. In addition, Part III summarizes the literature that shows that each attempt to limit executive compensation not only failed to achieve its goal, but also may have led to executives of public corporations receiving larger pay packages. Part IV critiques a recent law review piece which argues that, not only should the Code be used as an instrument to regulate executive compensation, but that the Service should use the vague language of Section 162(a)(1) to achieve this goal. The Article concludes by urging Congress to refrain from using the tax laws to further regulate behavior in this area.

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Buffalo Law Review

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