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Abstract

Part I of this article discusses and analyzes clawbacks in general, including clawbacks that are part of common-law remedial schemes, federally legislated clawbacks, and those triggered by contractual clawback provisions. Part II of this article analyzes the tax consequences to the executives that result from the repayment or forfeiture of compensation. This part provides an analysis of the annual accounting concept and the claim-of-right doctrine which will generally result in the payment and return of compensation to be accounted for in separate tax years and, concomitantly, will generally result in incongruent tax consequences. The exceptions to the annual accounting concept are discussed with particular emphasis on Section 1341, an ameliorative provision. The tax consequences arising from the clawback of compensation are heavily dependent upon the tax treatment of the compensation that is clawed back. Accordingly, a detailed discussion of the tax treatment of cash and equity-based incentive compensation schemes is provided. In many cases, the tax treatment of clawbacks is relatively straightforward – albeit somewhat punitive. However, in certain instances, the tax consequences to executives subject to clawback provisions are uncertain.

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