(CN) - Shareholders sued ConocoPhillips for allegedly duping them into approving a plan to pay its top executives more than a billion dollars in bonuses and stock incentives, despite the fact that it could cost the energy company millions of dollars in unnecessary tax liabilities.
     In March, the oil and energy company announced its 2011 Omnibus Stock and Performance Incentive Plan, claiming performance-based payouts to its chief executive officer, James Mulva, and its four highest-paid employees would be completely tax-deductible for the next five years, investor Patricia Swords claims in her complaint filed in Delaware.
     A public company can earn tax deductions on compensation paid to executives up to $1 million under Internal Revenue Code 162(m), the shareholder says. However, corporations can dodge the $1 million-cap if the executives receive the pay after meeting objective, performance-related goals, according the lawsuit.
     "Congress enacted IRC section 162(m) not as a revenue device, but as part of its effort to regulate corporate affairs in favor of stockholders and other investors," the complaint states. "In particular, it is designed to be a counterweight to the policies of many states to regulate corporations that operate in favor of officers, directors, and other insiders."
     The investor says a compensation committee must objectively determine the goals and the stockholders have to approve the payouts.
     However, the committee was allegedly anything but objective when it decided how much money the executives, including Mulva, Willie Chiang, Greg Garland, Alan Hirschberg and Ryan Lance, received in yearly cash incentives and performance-share awards under the oil company's current incentive plan, according to the lawsuit.
     "Rather than determining cash and stock amounts by pre-established, objective standards, the Compensation Committee determines those amounts at the end of a performance period by making a subjective evaluation," Swords states.
     For example, in February, the committee approved yearly cash incentives of 140 percent of the "targeted amounts" for the executives, and up to 25 percent increases for each based on their role in ConocoPhillips' financial success.
     Swords also claims the committee set "vague," easy-to-meet performance goals.
     "The Compensation Committee also sets targets for tax-deductible incentive compensation that would most probably be achieved," the investor claims. Swords says the tax code and ConocoPhillips own incentive plan "require that achievement of the performance goal be substantially uncertain when set."
     Under the new incentive plan, top executives stand to make $419 million a year, which includes 9 million in stock-related incentives and $10 million in cash, while directors will rake in close to $41 million, Swords claims.
     The investor claims the yearly payouts are unreasonable and "have no rational limit."
     Although 58 percent of those stockholders who voted approved the compensation plan in May, Swords says the vote doesn't count because ConocoPhillips' proxy statement was misleading.
     "Over a billion dollars of performance-based awards could be awarded over the lifetime of the 2011 Incentive Plan, but because the 2011 Incentive Plan is invalid and defective, such awards could also subject the Company to hundreds of millions of dollars in tax liability," the investor states.
     Swords claims the plan is a drain on corporate assets and the board is obligated to maximize tax deductions.
     "As Learned Hand, Felix Frankfurter, and others have famously stated, there is no patriotic duty to arrange your business so as to increase your taxes, because taxes are enforced extractions, not voluntary contributions," the complaint states.
     Swords wants the incentive plan invalidated along with an unspecified monetary award for the energy company.
     She also lists board members Kenneth Duberstein, Ruth Harkin, Harold McGraw III, Robert Niblock, Harald Norvik, William Reilly, Victoria Tshinkel, Kathryn Turner, William Wade Jr., Richard Armitage, Richard Auchinleck and James Copeland Jr. as defendants.
     The shareholder is represented by Joseph Farnan Jr., Joseph Farnan III and Brian Farnan of Farnan LLP.