TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, April 13, 2018

Netflix Accused Of Violating Tax Law In Bonuses To Top Executives

NetflixHollywood Reporter, Netflix Accused of Violating U.S. Tax Law in Bonuses to Top Executives:

When Congress passed sweeping tax changes at the end of last year, Netflix became one of the first companies to restructure its compensation to top executives. The amended tax law no longer allowed companies to deduct performance-based bonuses to those managers making more than $1 million. So in light of the change, Netflix scrapped cash bonuses in favor of a higher salary. A new lawsuit first filed under seal late last week questions what Netflix was doing before the change.

In a shareholder derivative complaint, the City of Birmingham Relief and Retirement System asserts that performance-based bonuses paid to executives like Ted Sarandos were essentially a sham. These bonuses, it's alleged, were solely designed so that Netflix could receive tax deductions, and the achievement of performance goals was a fait accompli.

"To qualify as 'performance-based,' the compensation must, among other requirements, be contingent on the attainment of one or more pre-established, objective performance goals," states the complaint. "Critically, in order for a performance goal to qualify under Section 162(m) [of the Internal Revenue Code], its achievement must be 'substantially uncertain' at the time it is set. In other words, a company may only pay exorbitant, $1+ million per year compensation to an employee and deduct those payments for tax purposes if the payments are tied to that employee achieving real accomplishments that serve the Company and its shareholders."

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