PAYING THE PIPER
Contact The Author
While politicians loudly and proudly beat the drums for laws to block tax loopholes for Wall Street billionaires such as Stephen Schwarzman and Henry Kravis, the taxman has already stealthily and steadily pounced on rich CEOs.
In new regulatory moves little noticed by the public, the Internal Revenue Service is targeting two of the favorite tax loopholes used in the outsized paychecks of top CEOs – golden parachutes and deferred compensation.
The IRS wants to collect hundreds of millions in income taxes that the corporate elite has dodged legally for more than a decade in their paycheck bonanzas.
“There’s a growing concern that the wealthy aren’t being taxed realistically,” said Alan Sklover, a compensation lawyer who represents CEOs and Wall Streeters.
“It’s now become political pushback over the controversy about excessive pay. Democrats want to show they can do well for the middle class for the next presidential election.”
The IRS in recent weeks has already put into effect a regulation that will put a crimp on the long-honored executive perk of pushing big income into the future so they don’t have to pay taxes until years later, usually at much lower rate, aided by various tax shelters.
For example, if a CEO whose ordinary annual compensation was $10 million managed to score a total $300 million windfall through bonuses or securities perks in a particular year, he could push those earnings into future years to avoid a whopping immediate income tax bite – in excess of $100 million. The deferred earnings could also sit in an investment pool run by his company, earning even more tax-sheltered income.
But a new rule, dubbed 409(a) from a section of the tax code, prevents big earners from deferring any income that is two times higher than their usual compensation package.
Under the new rule, that same executive wouldn’t be able to defer his $300 million windfall, and would be limited to sheltering and deferring just $20 million, or twice his usual $10 million annual pay. His tax bill due: $100 million plus.
Another IRS crackdown is hitting golden parachutes. New regulations would require a departing executive in many cases to pay income taxes on severance packages in the same year that he collected them, preventing a practice of spreading payouts over four-year periods to reduce taxes.
Meanwhile, the Senate Finance Committee has also launched a move to collect three years of back taxes – more than $4 billion from scores of rich investors – over certain oil and gas and other partnerships involving the sale and lease-back of foreign assets.
The leasing deals were favorites of the rich in the past decade. These offshore deals, called “sale-in, lease-out” deals, allowed a bank or others to become the owners, for example, of a foreign municipal bus system or water works, which they lease back to the municipalities. Tax laws permitted liberal depreciation and write-offs to pile up tax deductions.