User:Smiller45/Louis B. Mayer Clause

The Louis B. Mayer clause was a section added to the United States Revenue Act of 1951 that reclassified certain incomes.

While head of MGM studio, Louis B. Mayer's contract gave him 10 percent of the net proceeds from every picture made at MGM. At his retirement in 1951, he had the option to either continue receiving those profits, or sever his relationship with the studio and take a one-time payment. He chose to take the one-time payment, approximately $2.75M. This would have been classified as ordinary income and taxed at a rate of 90 percent.

To avoid this tax rate, Mayer contacted Ellsworth Alvord, an innovative and successful tax lobbyist. With his contacts on the Senate Finance Committee, Alvord succeeded in getting the following section added to the Revenue Act of 1951:

Sec. 329. Receipts of Certain Termination Payments by Employee. (a) Taxability to employee as capital gains -- Section 1717 of the Internal Revenue Code is hereby amended by adding at the end thereof the following subsection: (b) Taxability to employee of termination payments. -- Amounts received from the assignment or release by an employee, after more than twenty years' employment, of all his rights to receive, after termination of his employment and for a period of not less than 5 years (or for a period ending with his death), a percentage of future profits or receipts of his employer shall be considered an amount received from the sale or exchange of a capital asset held for more than six months, if such rights were included in the terms of the employment of such employee for not less than twelve years, and if the total of the amounts received for such assignment or release are received in one taxable year and after the termination of such employment.

Tailored expressly and exclusively to protect Louis B. Mayer's retirement income, the act reclassified Mayer's payment from ordinary income to capital gains, which were taxed at about 20 percent. The amended tax code saved Mayer just under $2M (which adjusted for inflation is about $17M in 2007 dollars).