Daily Tax Update - March 18, 2009

BAUCUS AND GRASSLEY UNVEIL PROPOSAL TO TAX BONUSES:  Yesterday, Senate Finance Committee Chairman Max Baucus and ranking Member Charles Grassley unveiled a proposal designed to “discourage excessive compensation by companies that have taken taxpayer funds.” In addition, the proposal will recoup payments made to executives at American International Group (AIG) last weekend as well as payments made to other executives at institutions that received Troubled Assets Relief Program (TARP) funds. The proposal would impose a 70% excise tax on certain “excessive executive compensation.” The excise tax would retroactively apply to all bonuses received as of January 1, 2009, and extend to all future years.

  • The key components of the proposal include:
    • Excise tax on excessive compensation
    • Companies must pay a 35% excise tax on:
      • All retention bonuses
      • All other bonuses over $50,000
    • Individuals must pay a 35% excise tax on:
      • All retention bonuses
      • All other bonuses over $50,000
      • For foreign employees – if the excise tax cannot be collected from the individual through normal withholding, then the company is responsible for paying the employee’s 35% excise tax amount
    • Regulatory safeguards that help to prevent companies from characterizing bonus payments as salaries to avoid the tax
    • Provisions that apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac
    • Applies to all retention bonuses or other bonuses earned or paid beginning on 1/1/09 and continuing through the period during which the company retains TARP funds
    • One million dollar cap on deferred compensation
    • There would be a $1 million limit on nonqualified deferred compensation, meaning that a taxpayer cannot defer more than $1 million in a 12 month period 
    • Provisions apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac
    • Applies to all compensation deferred after date of enactment and continuing through the period during which the company retains TARP funds
  • Today, House Ways and Means Committee Chairman Charles Rangel said that the House could act on its own proposal as early as tomorrow. Rangel said the House proposal is still being drafted and it would impose a tax that is “higher” than the 70% tax in the Finance proposal. Rangel also said the House plan would cover more companies than AIG but didn’t provide specifics. Rangel added, “We are on a very, very fast track...A lot has to do with what the other committees do but we're not going to leave here without doing something. I think it would be awkward to allow this to simmer over the weekend.”
  • Additional information on the Finance proposal can be accessed here.

MISCELLANEOUS GUIDANCE ISSUED TODAY:
Revenue Ruling 2009-10 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by § 1274. 
 
The rates are published monthly for purposes of sections 42, 382, 412, 1288, 1274, 7520, 7872, and various other sections of the Internal Revenue Code.

TAX BILLS INTRODUCED MARCH 17TH:
H.R.1542: To amend the Internal Revenue Code of 1986 to impose a 100 percent tax on bonuses paid by businesses that receive TARP assistance and are majority owned by the Federal Government.
Sponsor: Rep Maloney, Carolyn B. [NY-14] (introduced 3/17/2009)      Cosponsors (5)

H.R.1543: To amend the Internal Revenue Code of 1986 to impose a tax on bonuses received from companies receiving TARP funds.
Sponsor: Rep Dingell, John D. [MI-15] (introduced 3/17/2009)      Cosponsors (None)

H.R.1545: To amend the Internal Revenue Code of 1986 to make the credit for research activities permanent and to provide an increase in such credit for taxpayers whose gross receipts are predominantly from domestic production activities.
Sponsor: Rep Boccieri, John A. [OH-16] (introduced 3/17/2009)      Cosponsors (1)

H.R.1547: To amend the Internal Revenue Code of 1986 to provide for collegiate housing and infrastructure grants.
Sponsor: Rep Berkley, Shelley [NV-1] (introduced 3/17/2009)      Cosponsors (33)

H.R.1552: To amend the Internal Revenue Code of 1986 to increase the amount allowed as a deduction for start-up expenditures.
Sponsor: Rep Kratovil, Frank, Jr. [MD-1] (introduced 3/17/2009)      Cosponsors (1)

H.R.1558: To amend title I of the Employee Retirement Income Security Act of 1974, title XXVII of the Public Health Service Act, and the Internal Revenue Code of 1986 to prohibit preexisting condition exclusions in group health plans and health insurance coverage in the group and individual markets.
Sponsor: Rep Courtney, Joe [CT-2] (introduced 3/17/2009)      Cosponsors (12)

H.R.1561: To amend the Internal Revenue Code of 1986 to provide a standard deduction for the business use of a home.
Sponsor: Rep Fortenberry, Jeff [NE-1] (introduced 3/17/2009)      Cosponsors (None)

H.R.1572: To amend the Internal Revenue Code of 1986 to impose a 90 percent tax on bonuses paid by business that receive TARP assistance.
Sponsor: Rep Thompson, Mike [CA-1] (introduced 3/17/2009)      Cosponsors (None)

S.623: A bill to amend title I of the Employee Retirement Income Security Act of 1974, title XXVII of the Public Service Act, and the Internal Revenue Code of 1986 to prohibit preexisting condition exclusions in group health plans and in health insurance coverage in the group and individual markets.
Sponsor: Sen Rockefeller, John D., IV [WV] (introduced 3/17/2009)      Cosponsors (2)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.