Tax News

CCH (cch.taxgroup.com) reports:

  Outrage over excessive bonus payments to American International Group (AIG) employees has fueled talk of using the federal tax code to recover the funds. The office of Senate Finance Committee (SFC) Chairman Max Baucus, D-Mont., reports that it has started working on a proposal to address the issue of excessive executive compensation paid by recipients of Troubled Assets Relief Program (TARP) funds, including a possible excise tax on institutions paying retention and other bonuses. House lawmakers also expressed outrage over the AIG bonuses on March 17, vowing to pass legislation that would impose new federal income taxes on company executives who received the extra pay.

SFC Hearing

  A March 17 SFC hearing on the tax implications of the Bernie Madoff Ponzi scheme gave lawmakers the opportunity to vent their frustration at the recent turn of events at AIG and to question why the Treasury Department failed to halt the payouts.

  Baucus told IRS Commissioner Douglas H. Shulman that he was "outraged" by AIG's actions. He noted that, at one point, the Treasury was in a position to stop the bonuses under the terms of TARP, which Baucus helped draft. "We need to stop this nonsense," he said. Baucus pressed Shulman and other tax experts on ways to prevent or limit AIG's apparent abuse of taxpayer money and asked how large an excise tax could be imposed on AIG for paying the retention bonuses while still being lawful.

  SFC member Charles E. Schumer, D-N.Y., said that Congress could impose a tax possibly as high as 91 percent, that would in effect, recover nearly all the bonus money. Schumer said that he, like most Americans, did not like to see taxes raised. "But in this instance, I think all of us can make an exception," he said.

  Before taking legal action, Senate Majority Leader Harry Reid, D-Nev. said lawmakers would send a letter to AIG asking them to renegotiate the business contracts that include the bonuses. If that request is rejected, Baucus would offer legislation subjecting the bonuses to severe tax penalties. Reid said he also plans to send a letter to the Treasury Department, urging it to quickly finish guidelines regarding executive pay and luxuries as required by the recently enacted American Recovery and Reinvestment Act of 2009 (P.L. 111-5). In addition, Reid said that Congress will work with President Obama and the Banking Committee to complete a Wall Street Accountability bill as soon as possible.

House Reaction

  During several press conferences on March 17, lawmakers said that AIG officials have scorned the intent of American taxpayers who have provided more than $170 billion in bailout funds to the troubled company. Rep. Carolyn B. Maloney, D-N.Y., and Rep. Steve Israel, D-N.Y., unveiled separate legislation to tax 100 percent of all bonuses over $100,000 paid to individuals who work for companies that received TARP bailout funding.

  Israel's Bailout Bonus Tax Bracket Bill of 2009 would create a separate bonus bailout tax rate for companies receiving TARP funds in the 2008 tax year. "We can't retroactively impose new tax brackets for the last tax year," he said. "So what we have at our disposal is taxing those bonuses that were issued and provided this year."

  Maloney's bill, the AIG Taxpayer Protection Bill (HR 1542), would apply to any company in which the federal government owns a majority stake. The legislation would direct the IRS and the Treasury to develop guidelines that tax at 100 percent any bonus compensation that is not directly related to a commission. "This will allow AIG to continue to meet their contractual obligation to pay these bonuses, but will ensure that the recipients are not allowed to keep this money," she said.

  In addition, on March 17, New York State Attorney General Andrew M. Cuomo sent a letter to House Financial Services Committee Chairman Barney Frank, D-Mass., notifying the lawmaker that AIG distributed more than $160 million in retention payments to members of its Financial Products Subsidiary, the unit of AIG that was principally responsible for the firm's meltdown. AIG claims that retention of individuals at Financial Products was vital to unwinding the subsidiary's business. "However, to date, AIG has been unwilling to disclose the names of those who received these retention payments making it impossible to test their claim," the Cuomo letter states. A copy of the letter can be found at http://www.oag.state.ny.us/media_center/2009/mar/House%20Committee%20Letter%203.17.09.pdf.

  According to the letter, the top AIG recipient received more than $6.4 million; the top seven bonus recipients received more than $4 million each; and the top 10 bonus recipients received a combined $42 million. In addition, 73 individuals received bonuses of $1 million or more; and 11 of the individuals who received retention bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million, the letter states.

  House Majority Leader Steny H. Hoyer, D-Md., suggested that the AIG executives should feel guilty enough over the bonuses to voluntarily give the money back. Congress and the Obama administration should not be required to go through a lot of legislative machinations, he said. "They rely on customers to do business with them, at least on their insurance side, so I would think, from a public relations standpoint, they would try to get their company out of looking like a totally insensitive, greedy operation that's getting a lot of help from the taxpayers," he said.

  Speaking to reporters outside of his capitol hill office, House Ways and Means Chairman Charles B. Rangel, D-N.Y., said he was willing to talk to any lawmaker who wanted to discuss taxing AIG bonuses. "There is no question that AIG should not have used taxpayer funds to pay bonuses to executives; the question we have to deal with now, is, how do we repair this damage?" he said. However, he declined to give his own opinion of the merits of such legislation. "I have met with Members and House Leadership to discuss legislative options, and will continue these discussions tomorrow to develop a legislative response to this problem," he said.

  Hoyer speculated that lawmakers would face difficulties implementing a tax on bonuses because of the equal protection clause of the constitution, which would prevent different levels of taxation for the same types of bonuses. Lawmakers might have a difficult time crafting a tax unless, possibly, the tax was specifically targeted to anyone who received TARP money, Hoyer speculated. "That might be one way to discreetly deal with it, but I haven't thought it through, as you can clearly tell, with great depth," Hoyer said.

White House Response

  The White House legal team will look at everything possible to recoup the AIG bonuses, including any changes in the tax code, according to White House Press Secretary Robert Gibbs. President Obama on March 16 directed Treasury Secretary Timothy Geithner to pursue "every single legal avenue" available to block an estimated $165 million in executive bonuses at AIG. Obama said it was unwarranted for derivative traders at AIG to be awarded bonuses when the corporation's financial meltdown was due "recklessness and greed."

  By Jeff Carlson, Stephen K. Cooper and Paula Cruickshank, CCH News Staff

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