Regulation and Legislation Update
Dana Fitzsimons, Jr.

BAILOUT

On October 3, 2008, the President signed into law the Emergency Economic Stabilization Act  of 2008 (H.R. 1424).  The Act provides the Treasury Secretary with powers intended to restore liquidity and stability to the U.S. financial system. 

The Act authorizes the Treasury Secretary to establish a Troubled Asset Relief Program to purchase troubled assets from financial institutions, along with an Office of Financial Stability within the Treasury Department to implement the program in consultation with the Federal Reserve, the FDIC, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, and the Secretary of Housing and Urban Development.  The Act requires the Treasury Secretary to consider the interests of taxpayers, minimizing the impact on the national debt, providing stability to the financial markets, preserving homeownership, the needs of all financial institutions regardless of size or other characteristics, the needs of local communities, and the long-term viability of institutions. 

The Treasury Secretary is allowed to use up to $250 billion immediately, another $100 billion upon a Presidential certification of need, and the final $350 billion upon a written request from the President to Congress (provided Congress does not disapprove by joint resolution within 15 days).  Authority granted under the Act expires on December 31, 2009, unless the Treasury Secretary extends the authority for an additional year upon certification of need to Congress.

The FDIC and the National Credit Union Share Insurance Fund deposit insurance limits are raised from $100,000 per account to $250,000 until December 31, 2009.

The Act provides for the creation of a Financial Stability Oversight Board to advise on the exercise of authority under the Act and to provide oversight.  The Act also imposes various reporting requirements on the Treasury Secretary.  Other provisions include (1) allowing the Treasury Secretary to waive provisions of the Federal Acquisition Regulation, (2) allowing the FDIC to be asset manager for residential mortgage loans and mortgage-backed securities, (3) requiring rules for dealing with conflicts of interest, (4) requiring a plan to mitigate foreclosures and to promote modification of loans, and (5) requiring the Treasury Department to promulgate executive compensation rules governing financial institutions that sell troubled assets.

Protective provisions of the Act include public disclosure, oversight by the Comptroller General, judicial review, a Special Inspector General, a Congressional Oversight Panel, FDIC Enforcement Enhancement, required federal financial regulatory agency cooperation with the FBI, and in five years, a Presidential proposal to recoup from the financial industry any projected losses.

Passage of the Act was assisted by a package of tax extender provisions and other “sweeteners”.  These provisions include changes in the tax treatment of losses on certain preferred stock; limits on executive compensation and golden parachutes; extension of tax forgiveness on the cancellation of mortgage debt; insurance coverage for mental health treatments; hurricane related tax benefits; incentives connected to renewable energy; a “patch” for dealing with the Alternative Minimum Tax – including raising the AMT exemption level; and increased taxes on hedge fund managers.  The Act also extends the individual deduction for state and local general sales taxes and qualified tuition expenses; modification of the child tax credit; includes provisions for donating IRA assets to charity; and provides for several business tax cuts.

MORE BAILOUT

On October 14, 2008, the Internal Revenue Service issued Notice 2008-94 providing guidance in the form of questions and answers on executive compensation in connection with the Act.  The Act added new sections 162(m)(5) and 280G(e) to the Internal Revenue Code.  Sec. 162(m) generally limits the deductibility of compensation paid to certain corporate executives and Sec. 280G provides that a corporate executive’s excess parachute payments are not deductible and imposes (under Sec. 4999) an excise tax on the executive for those amounts.  Those sections also limit the deductibility of compensation paid to certain executives by employers who sell “troubled assets” in the Troubled Assets Relief Program.

JUST A BIT MORE BAILOUT

On October 15, 2008, the Internal Revenue Service issued interim final rules on the executive compensation provisions applicable to participants in the Troubled Assets Relief Program and Capital Purchase Program under the Act.  The Act requires financial institutions from which the Treasury Department is purchasing troubled assets through direct purchases to meet appropriate standards for executive compensation and corporate governance.

STILL MORE BAILOUT

On October 14, 2008, the Internal Revenue Service issued Notice 2008-101, providing  clarification on the treatment under Internal Revenue Code Sec. 597 of amounts furnished to a financial institution pursuant to the Troubled Asset Relief Program of the Emergency Economic Stabilization Act of 2008.  The Notice provides that, until guidance is issued by the Treasury Department otherwise, no amount furnished by the Treasury Department to a financial institution pursuant to TARP will be treated as the provision of Federal financial assistance under Internal Revenue Code Sec. 597. 

AND THE HITS KEEP ON SPINNIN’

On October 14, 2008, the Internal Revenue Service issued Notice 2008-100, providing interim guidance regarding the application of Internal Revenue Code Sec. 382 to loss corporations whose instruments are acquired by the Treasury Department under the Capital Purchase Program under the Emergency Economic Stabilization Act of 2008.  Internal Revenue Code Sec. 382(a) provides that the taxable income of a loss corporation for a year following an ownership change that may be offset by pre-change losses cannot exceed the Sec. 382 limitation for the year.  An ownership change occurs with respect to a corporation if it is a loss corporation on a testing date and, immediately after the close of the testing date, the percentage of stock of the corporation owned by one or more 5-percent shareholders has increased by more than 50 percentage points over the lowest percentage of stock of such corporation owned by such shareholders at any time during the testing period.  Under the program, the Treasury Department will acquire preferred stock and warrants from qualifying financial institutions, and the Notice addresses the application of the Sec. 382 rules in this context.

AND NOW FOR SOMETHING COMPLETELY DIFFERENT – INFLATION!

On October 16, 2008, the Internal Revenue Service issued Notice 2008-117, which provides that for 2009, numerous personal exemptions and standard deductions will rise and tax brackets will widen because of inflation adjustments.  Certain tax provisions are required to be adjusted annually to keep pace with inflation.  Changes include the personal and dependency exemption; standard deduction; increase in tax-bracket thresholds; earned income tax credit; joint return filing credit; and annual gift exclusion.

That same day, the Internal Revenue also issued Notice 2008-117, which provides cost of living adjustments applicable to dollar limitations for pension plans and other items for tax year 2009.  Many (but not all) of the pension plan limitations will change for 2009 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment.

NO LOVE FROM THE SUPREMES

On October 6, 2008, the Supreme Court of the United States denied certiorari to numerous tax cases, including the 11th Circuit decision in Jelke allowing a reduction in the value of a closely held company for built in capital gains tax liability.  Other cases declined by the Court included cases dealing with the economic substance doctrine, fraud, administrative requirements prior to seeking a tax refund, tribal issues, German taxes, estate tax value of annuities, and various procedural rules, penalties, and enforcement issues.

Dana Fitzsimons, Jr., is an attorney with McGuireWoods LLP in Richmond, Virginia. He focuses his practice on fiduciary litigation, estate and trust administration, and estate planning.