In the Bailout, Which Taxpayers Win?

The law that allows the Treasury Department to buy up toxic mortgage assets from banks and other institutions provides some tax relief — and some tax hits.

A covered employee is defined as any employee who, at any time during the taxable year that the buy-out programs is in effect, is the chief executive officer, chief financial officer, or one of the three highest compensated officers — other than the CEO or CFO.

Finally, executive remuneration includes all payout for services performed including remuneration that would otherwise be exempted because it is “performance based” within the meaning of Section 162(m)(4)(C). Further, the deferred deductible remuneration referred to in the Stabilization Act relates to pay received for services performed in an application taxable year, but for the fact that the deduction for such remuneration is allowable in a subsequent taxable year.

Debt Forgiveness

Generally debt that is forgiven or cancelled by a lender must be included as income on tax returns, and is taxable. But there are certain exclusions written into Section 108(a)(1)(E) of the tax code related to a homeowners principal residence and referred to as qualified principal residence indebtedness (QRPI). Basically, the new legislation extends the beneficial provisions of Section 108(a)(1) for an additional three years through the close of 2012.

The section provides that gross income does not include amounts that would otherwise be included on account of the discharge of (QRPI). Under the tax code, this type of indebtedness includes acquisition indebtedness incurred with respect to one’s principal residence. Acquisition indebtedness, in turn, includes indebtedness incurred in acquiring, constructing, or substantially improving a qualified residence, but only if the debt is secured by such residence.

For a discharge of QRPI to be eligible for the section’s exclusion benefits, the forgiveness of the debt must be “on account of” a decline in the fair market value of the relevant principal residence or a deterioration of the “financial condition” of the debtor. Further, the amount excluded from gross income under Section 108 shall be applied to reduce the basis, in the debtor’s hands, of the principal residence which serves as security for the QRPI.

Covered securities

The Stabilization Act also requires brokers to furnish information to their customers with respect to “covered securities.” Specifically, the information must include the adjusted basis of securities and whether any gain or loss realized by the customer in connection with the disposition of the securities is long-term or short-term in nature.

Further, the law states that the adjusted basis should be determined in accordance with “first in, first out” principles unless the customer notifies the broker by means of an “adequate identification of the stock sold or transferred. For purposes of the bailout, a covered security is any “specified” security acquired on or after the applicable date. In the case of stock the applicable date is January 1, 2011; for debt instruments the applicable date is January 1, 2013.

In addition, the law extends alternative minimum tax relief — in the form of increased exemptions — for an additional year and extends, among other credits, the research and development credit through the end of 2009.

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