2008 Bailout Legislation: Key Tax Provisions

On October 3, 2008, Congress passed, and the President signed

into law, the Emergency Economic Stabilization Act of 2008 (EESA),

along with a number of other Acts intended to provide economic

relief. These new Acts are often referred to collectively as

"the bailout," and are intended to provide individual and

business tax relief through the extension of many credits and

deductions and the creation of the Troubled Assets Relief Program

(TARP). Some of the major tax provisions of the Acts are

outlined below.

Ordinary Loss Or Gain On Sale Of Fannie Mae And

Freddie Mac Preferred Stock

EESA allows certain banks and financial institutions that sold

or exchanged preferred stock of Fannie Mae (Federal National

Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage

Corporation) to treat gains or losses as ordinary income or

loss. In order to qualify for this treatment, a bank must

have held the preferred stock on September 6, 2008 or have sold the

stock between January 1, 2008 and September 7, 2008.

Partnerships that made a distribution of Fannie Mae or Freddie Mac

preferred stock and partnerships that have an applicable financial

institution as a partner or a subsidiary of an applicable financial

institution that sold such stock may also be eligible for ordinary

income or loss treatment.

Limits On Executive Compensation For Financial Institutions

That Participate In TARP

TARP authorizes the Treasury Department to purchase, through

auction or directly, assets of financial institutions. An

institution that sells an aggregate of $300 million of assets to

the Treasury may become subject to new limits on executive

compensation.

Deduction of Executive Compensation:

Institutions that participate in TARP, including non-public

companies and non-corporate entities, may deduct only $500,000/year

of individual compensation for their CEOs, CFOs, and the three

other highest compensated employees. This new rule alters a

prior rule limiting such a deduction for public companies to

$1,000,000. TARP further alters the allowable deduction by

including within the $500,000 limitation commissions and

performance based compensation.

Excess Parachute Payments and Involuntary Termination

from Employment: Restrictions under Section 280G on the

deductibility of "excess parachute payments" and excise

taxes on those payments, are now applicable to payments made in

connection with an involuntary termination from employment,

bankruptcy or liquidation. Previously, the prohibition on

deducting excess parachute payments was applicable to payments made

in connection with a change in ownership or effective control of a

corporation. An excess parachute payment occurs when the

aggregate amount of payments made, or intended to be made, to an

employee equals or exceeds three times the employee's base

amount (the average of the employee's gross income over the

five preceding years). Upon such a payment the employer is

prevented from deducting the difference of the excess payment and

the base amount. Under the Acts, payments made upon

involuntary termination, bankruptcy or liquidation include certain

payments that are normally excluded in...