Grassley Calls For End to Executive Tax Shields

April 9, 2003 (PLANSPONSOR.com) - Senator Charles Grassley (R-Iowa) is recommending Congress tighten current tax laws that allow corporate executives to obfuscate their income from taxes without consequence.

>The Chairman of the Senate Finance Committee cited a report issued by the Joint Tax Committee (JCT) on Enron as the impetus for action. In that report, it was discovered the top 200 executives of the company avoided taxes by deferring $150 million in pay in the five years preceding its bankruptcy, $53 million of which came in the weeks immediately prior the company’s bankruptcy, according to a Bloomberg report.

Presented by acting chief of staff Mary Schmitt, the JCT report recommend, among other things, that executives not be allowed to defer stock option gains and restricted stock programs, a source of much of the Enron executives’ deferred pay.

“I don’t care about executive compensation, so long as it’s honest,” Grassley said at a hearing on the report by the JCT. “What bothers me are the abuses of the system.”

>Executives who delay collecting their pay for tax reasons should accept the consequences if their company fails, Grassley said.   “If an executive wants to make what is essentially an unsecured loan to his or her company by not taking all their compensation in cash, and the money is completely at risk, my advice is go ahead,” he said.

>Grassley said his panel would consider bills allowing the US Treasury Department to better oversee salary plans and require that executive bonuses and compensation be included in the assets of bankrupt companies.

>Currently, tax regulations allow individuals an opportunity to offset a large tax bill associated with profits from the exercise of options by establishing a separate investment that enables the executive to exercise his or her stock options without paying the taxes that would normally be due that year .     The tax shelter, know as the “tax deferral method,” came into the limelight recently after the dismissal of Sprint Corp’s chief executive and operating officers.   The two utilized the technique after it was promoted to the company by their auditor Ernst & Young (See Sprint Board Forces Execs Out Under Tax Scrutiny ). 

Not All For

>However, Pamela Olson, assistant secretary of tax policy for the Treasury Department, said Congress should not rush into regulating executive salaries: “Corporate accountability should be dealt with directly, and not through amendments to the tax code.”

Instead, Olson is supporting an amendment to a 1978 law that would give the Treasury Department the authority to give more guidance on deferred executive compensation. Currently, the department is forbidden by law to offer such direction.

Also, the American Benefits Council submitted a report to the Senate Finance Committee explaining the importance of nonqualified deferred compensation plans to the workforce and need for Congress to exercise caution before punishing the many for the actions of a few (See  Benefits Council Issues Report Teaching Senate About NQDCs ).

The report, Nonqualified Deferred Compensation: An Important Source of Retirement Income, was issued to dissuade legislators from limiting the ability of employers to establish deferred compensation arrangements consistent with current tax regulations.     “Ongoing Congressional debate, including today’s hearing about appropriate changes in the tax treatment of nonqualified deferred compensation plans, has initiated important questions about the design and operation of such plans – and also formed numerous misconceptions,” Council Vice President and Senior Counsel Lynn Dudley said in a statement.

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