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.

Unfortunately, the Stabilization Act contains some “revenue raisers.” Most notably, the legislation provides that any compensation which is deferred under a “non-qualified” deferred compensation plan of a “non-qualified” entity shall be included in gross income when there is no “substantial risk of forfeiture” of the rights to the payment. A substantial risk of forfeiture exists when one of two criteria are met. Either, the person’s rights to such compensation are conditioned on the future performance of substantial services, or the compensation is determined solely by reference to the amount of gain recognized on the disposition of an investment asset.

For this purpose, a non-qualified entity is defined as, (1) any foreign corporation — unless substantially all its income is “effectively connected” with the conduct of a business in the United States or is subject to a “comprehensive foreign income tax ; or (2) any partnership — unless substantially all of its income is allocable to persons other than foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax. These rules are scheduled to apply to deferred compensation with respect to services rendered after December 31, 2008. Moreover, the Act contains other rules which would require the inclusion in gross income, beginning in 2018, of prior deferrals.

Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for


(1)The tax code provides that in the case of a financial institution referred to in Section 582(c)(2), the sale or exchange of a bond, debenture, note, or certificate or “other evidence of indebtedness” shall not be considered the sale or exchange of a capital asset. Thus, in effect, the bailout legislation extends the ameliorative provisions of Section 582(c)(1) to Fannie Mae and Freddie Mac’s preferred stock.
(2) Also includes any corporation which would be a bank except for the fact that it is a foreign corporation with respect to gains and losses which are effectively connected with the conduct of a banking business within the United States.


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