Thursday, September 15, 2005
The New York Times reports that Lawrence J. Ellison, CEO of Oracle, has agreed to pay $100 million (over 5 years) to a charity of his choosing to settle insider trading charges involving his sale of $900 million of Oracle stock before the share price sank 50% when it announced it would fail to meet earnings expectations. The Oracle board must approve the payments, which will be made in Oracle's name. The New York Times notes that "it is unclear whether the payments would be tax-deductible by Mr. Ellison."
Mr. Ellison faces at least two significant hurdles to deducting the payments:
- To be deducted as charitable contributions, gifts must proceed out of a detached and disinterested generosity, and the donor cannot receive back a substantial benefit from the contribution. Ottawa Silica Co. v. United States, 699 F.2d 1124 (Fed. Cir. 1983); Singer Co. v. United States, 449 F.2d 413 (Ct. Cl. 1971).
- To be deducted as ordinary and necessary business expenses, the payments must not run afoul of §§ 162(f) and 165. Structuring the payment to a charity may remove the application of 162(f), which requires payment to the government, but the payment also must avoid the § 165 public policy rule. Brian Lynn, I'll Pay, But Let's Not Call It a Fine: Code Sec. 162(f) Issues in Structuring Settlement Payments - Five Lessons from LTR 200502041, 83 Taxes (July 2005).
(Thanks to Greg Germain (Syracuse), Elliott Manning (Miami), Gregg Polsky (Minnesota), Adam Rosenzweig (Northwestern), & Theodore Seto (Loyola-L.A.) for their thoughts in thinking through this issue.)