Senate Deals Tax Blow to Deferred Compensation Schemes

by Leroy Baker, Tax-News.com, New York

14 May 2003

A last minute amendment to the $441 billion tax bill currently passing through Congress will tax certain deferred compensation schemes and prevent deferral of profits from some stock options.

It is estimated that this measure will raise $4.4 billion in revenue over the coming decade, although it is also intended to prevent future executive compensation abuses such as those witnessed at the now defunct Enron Corp. In the case of the collapsed energy trader, a Joint Committee on Taxation report discovered that scores of the firm's highest paid employees took millions- tax free- in deferred compensation from a $200 million deferred payment fund just before the company filed for bankruptcy protection in 2001.

Pamela Olson, assistant secretary for tax policy, announced, on publication of the report, that: "The company permitted its executives to defer staggering amounts of income but took measures to insulate them from the risk of nonpayment that the law requires as a trade-off for tax deferral."

Consequently, this is a practice that the Senate Finance Committee wishes to prevent in the future: "The committee believes that many nonqualified deferred compensation arrangements have developed that allow improper deferral of income. As in the case of Enron, executives often use arrangements which allow deferral of income, but also provide security of future payment to the executive," the committe explained in a summary of the new proposal.

The measure will seek to tax certain non-qualified deferred compensation schemes with assets held offshore. It will also apply to trusts, and will prevent creditors from being denied access to such funds in the event of bankruptcies. The proposal also deals with the tax treatment of corporate insiders' gross income.

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