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The Emergency Economic Stabilization Act of 2008--Tax Provisions

Client Advisory

October 6, 2008

On Friday, October 3, the House passed and the President signed the "Emergency Economic Stabilization Act of 2008," the so-called financial bailout legislation. The law gives the United States Treasury authority to establish a Troubled Assets Relief Program (“TARP”) to purchase up to $700 billion in distressed assets from financial institutions with significant U.S. operations. The legislation includes several tax provisions that are related directly to the credit crisis and the TARP. However, in order to ensure passage in the Senate, a host of tax extenders, alternative minimum tax relief, natural disaster tax relief and energy tax incentives was also included. Some of the more noteworthy tax provisions are the following:

Executive Compensation. Participants in TARP auctions that sell at least $300 million in assets (whether in the auction program or through direct sales) will be subject to two new tax rules regarding executive compensation. Note that these rules supplement the ability given to the Treasury under the legislation to limit executive compensation where it engages in direct purchases from financial institutions. 

1. There would be an overall limitation of $500,000 on the deductibility of compensation paid to “covered executives” for services performed during an applicable year.   “Covered executives” are the chief executive officer, the chief financial officer and the three other highest compensated employees of the participating financial institutions.   The cap is intended to cover both current compensation and compensation that is earned in the relevant year but deferred for tax purposes to a future year. There is no exception for performance-based compensation as there is under current Section 162(m).

2. The law extends the existing golden parachute tax rules to apply to payments to “covered executives” of participating companies, if the payments are made by reason of the involuntary termination of the executive by the company or in connection with the bankruptcy or liquidation of the company.   Under the golden parachute rules, if such payments equal or exceed three times the executive’s average annual base compensation, then any excess of such payments over average annual compensation is considered an “excess parachute payment.” Excess parachute payments are (a) not deductible by the employer and (b) subject to a 20% excise tax in the hands of the executive. 

Losses on Fannie Mae and Freddie Mac Preferred Stock. The Act also provides that banks and certain other financial institutions realize ordinary income or loss, rather than capital gain or loss, on the sale of preferred stock in Fannie Mae or in Freddie Mac held on September 6, 2008 (or sold earlier in 2008). Banks had been encouraged to purchase these securities, and they lobbied hard for this change, because many banks have little or no capital gains to be offset by capital losses.

Homeowner Debt Forgiveness.  Finally, the Mortgage Forgiveness Debt Relief for homeowners is extended through 2012. Under this legislation, qualifying mortgage debt (up to $2 million) on a principal residence that is cancelled or reduced is not considered taxable income for the debtor/homeowner.

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As noted above, in order to ensure rapid passage of the legislation in the Senate, numerous tax benefits were added, including both extensions of many expiring tax benefits, such as a one-year extension (to 2008) of the AMT “patch,” and a miscellany of tax incentives for energy producers, conservers, etc.

The legislation also includes some tax changes intended to raise revenue. One is a provision disallowing tax deferral for compensation earned from “tax-indifferent” parties (such as offshore hedge funds), effective for compensation earned after December 31, 2008.   Another will require brokers to report the tax basis (and holding period) of customers’ securities, beginning in 2011.


Questions regarding this client advisory may be directed to Howard Barnet (at 212-238-8608 or barnet@clm.com) or Dan Pittman (at 212-238-8854 or pittman@clm.com).
IRS Circular 230 Information: To ensure compliance with requirements imposed by the Department of the Treasury, we inform you that any tax advice contained in this client advisory was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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