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Recent reports indicate that News Corp., based on the wishes of CEO Rupert Murdoch, contributed $1 million to the Republican Governors Association, and through it, to Ohio gubernatorial candidate John Kasich. This contribution could create legal problems for Murdoch and News Corp. and highlights the need for new regulations of corporate contributions to political campaigns.
News Corp.s contribution sheds light on the significant potential for abuse as powerful CEOs use corporate treasuries as their own private pocket books to make large political contributions to their friends. Such use of corporate funds potentially creates corporate waste and thus violates the CEOs duty to shareholders and may also violate an executives fiduciary duty. Under existing law, corporations may make political contributions, but corporations still have a duty to shareholders to make sure that the contributions are in the best interest of the corporation and its shareholders.
News Corp.s contribution raises concern because Murdoch reportedly admitted that it did not have a business purpose but was instead to support a friend. When Murdoch was asked about the contribution and how it affected Fox News (which is owned by News Corp.) and its credibility, Politico reports that Murdoch explained: It doesnt reflect on Fox News. It had nothing to do with Fox News. The RGA [gift] was actually [a result] of my friendship with John Kasich.
A corporation can have a business purpose for making a political contribution, and such a contribution would not necessarily violate the executives fiduciary duty to the shareholders, but the CEO cannot make a contribution from the corporation that is based solely on the CEOs friendship with the candidate. CEOs simply cannot use the corporate treasury as a personal piggy bank. Why didnt Murdoch simply write a check out of his own personal bank account? Why did he have to spend shareholders money? The probable answer is that, thanks to the tax code, it is less expensive to donate the money from the corporate treasury.
If the corporation makes the contribution to a non-candidate political organization, such as the RGA, the contribution is made from corporate profits. The tax code prohibits the corporation from deducting the expense as an ordinary necessary business expense, so the tax cost of the contribution is the effective tax rate for the corporation. The top tax rate is 35 percent, but the effective tax rate for most corporations is closer to 20 percent.
If Murdoch makes the contribution out of his own funds, the corporation must first pay a 20 percent tax on its profits (same as above). But now, the corporation distributes the profit to shareholders. Shareholders pay 15 percent tax on the dividends. In addition, depending on the executives tax situation, he may have to pay state tax and local tax on the dividend. In other words, the executive saves tax by using the corporate treasury instead of his own checking account.
Two problems exist with this scenario.