Senate Democrats Question Legality of Secretary Tillerson Ethics Plan, Call for Administration to Close Abusive Tax Loopholes

Senators highlight that Secretary Tillerson could avoid an immediate tax bill totaling up to $72 million

WASHINGTON – Senate Finance Committee Ranking Member Ron Wyden, D-Ore., along with members of the committee Senator Tom Carper, D-Del., and Senator Sherrod Brown, D-Ohio, today raised serious concerns about Secretary of State Rex Tillerson’s deal that will allow him to defer paying tens of millions of dollars in federal taxes over the next decade. In a letter to Treasury Secretary Steven Mnuchin and IRS Commissioner John Koskinen, the Senators urged Treasury and the IRS to closely examine Secretary Tillerson’s compensation arrangement to ensure it is compliant with current tax law. They also called on the administration to close tax loopholes that allow individuals to defer paying taxes to potentially pay a lower rate in the future. According to the Tax Policy Center, the wealthiest Americans would see their tax rate drop by seven percent if the President’s tax plan is enacted into law.

“It appears that the tax position taken by ExxonMobil and Mr. Tillerson is aggressive at best and may evade current law,” the Senators wrote. “We ask that you closely scrutinize this arrangement to ensure compliance with current law. Furthermore, some aspects of the rules governing executive compensation arrangements are too loose and encourage aggressive tax planning. Therefore, we also ask that you review and tighten these rules in order to eliminate future abuse.”

The full text of the letter can be found here and below:

Dear Secretary Mnuchin and Commissioner Koskinen:

We write to you regarding concerns about recent reports of a compensation arrangement that would allow Rex W. Tillerson, the Secretary of State, to defer paying millions of dollars in federal taxes. It appears that the tax position taken by ExxonMobil and Mr. Tillerson is aggressive at best and may evade current law. We ask that you closely scrutinize this arrangement to ensure compliance with current law. Furthermore, some aspects of the rules governing executive compensation arrangements are too loose and encourage aggressive tax planning. Therefore, we also ask that you review and tighten these rules in order to eliminate future abuse.

According to press reports, ExxonMobil plans to cancel a restricted grant of ExxonMobil stock to Mr. Tillerson. Such shares are presently valued at over $170 million. Mr. Tillerson has not yet vested in these shares. As a substitute for such stock, the company then plans to put a similar amount of cash into a trust with Mr. Tillerson as the beneficiary. The trust will make payments to Mr. Tillerson gradually over the next ten years. The arrangement includes a noncompete clause.

Although we commend Mr. Tillerson for his attempt to comply with government ethics rules, there are a number of problems with this arrangement.

First, to avoid current federal tax liability, the trust includes a noncompete clause. Should Mr. Tillerson leave government employment and become employed or otherwise engaged in the oil and/or gas industry, any assets remaining in the trust will be forfeited. However, it does not appear that this clause constitutes a substantial risk of forfeiture.

According to Treasury regulations, “an enforceable requirement that the property be returned to the employer if the employee accepts a job with a competing firm will not ordinarily be considered to result in a substantial risk of forfeiture unless the particular facts and circumstances indicate to the contrary.” Mr. Tillerson is 64 years old and will be the Secretary of State for the foreseeable future. Furthermore, pursuant to Article I(H) of the trust agreement, in determining whether Mr. Tillerson violated the trust’s noncompete clause, the trustee is, entitled “to rely conclusively, without investigation” on a certification by Mr. Tillerson. In other words, it is unclear whether and when Mr. Tillerson will exit government service and he is permitted under the terms of the trust to self-certify whether he has engaged in the activity that would trigger a forfeiture. Therefore, it appears that the noncompete clause does not truly create a substantial risk of forfeiture and Mr. Tillerson should pay taxes currently on the full amount in the trust.

It also should be noted that, although this arrangement might technically fall outside the rules for nonqualified deferred compensation under Code Section 409A, cancelling one form of deferred compensation and essentially replacing it with another that is subject to more lenient conditions does not fit with the spirit of these rules. If Mr. Tillerson’s restricted stock arrangement had been governed by Code Section 409A, such a substitution could result in immediate taxation and a 20 percent penalty. As such, the Treasury Department and the Internal Revenue Service (IRS) should consider a similar application in instances such as this.

In closing, according to press reports, Mr. Tillerson is potentially avoiding “an immediate federal income tax bill of as much as $72 million” through this deferred compensation arrangement. It appears that the taxpayers are taking an aggressive tax position and therefore, we ask the Treasury Department and Internal Revenue Service to closely scrutinize this transaction and ensure compliance with current law. Furthermore, as clearly demonstrated by this arrangement, some aspects of the rules governing executive compensation are too loose and encourage aggressive tax planning. Therefore, we also ask that you review and tighten these rules in order to eliminate future abuse.

Thank you for your attention to this matter. We look forward to working with you to ensure fairness in our tax system and shut down executive compensation loopholes.

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