Special Tax Rules Will Allow Paulson To Sell His Goldman Shares

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

04 July 2006

The United States Treasury has confirmed that the publication of new regulatory guidance concerning the taxation of executive deferred compensation plans has been accelerated to allow the incoming Treasury Secretary, Henry Paulson, to sell his Goldman Sachs stock without suffering an additional tax penalty.

The new guidance clarifies that business executives taking up positions within the government will not be required to pay a 20% tax penalty on the proceeds of deferred compensation plans which need to be cashed in early, as long as they meet certain government conflict of interest rules.

This tax penalty was introduced under the American Jobs Creation Act of 2004 as part of a general crackdown on deferred compensation schemes which are used by companies to help their executives avoid taxation.

Paulson, the former Chairman and CEO of Goldman Sachs, whose nomination for Treasury Secretary was approved by the Senate last week, holds 3.23 million shares in the company, where he worked for 32 years. This holding is worth some $480 million.

While the new guidance, which has been advanced specifically to deal with Paulson's case, will mean that he will escape the 20% penalty, Paulson must still pay regular income tax on the accelerated deferred compensation - as will any other executive in the same position.

Howeve, capital gains taxes can be deferred on these types of divestitures if proceeds of the sale are reinvested in government securities or other government-approved investment instruments.

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