Thursday, March 26, 2009
Wall Street Journal: Give Back That Bonus! Oh, and By the Way, You Still Owe Taxes on It:
That means you won't be taxed at 90% on the money you held only briefly. But you will be taxed. As Belzer explains:
No. Because the recipient was entitled to receive the amount of the bonus, and actually received it, it cannot be excluded from gross income or AGI. ...
Add it all up, and the cost of returning your bonus is somewhere north of 130%. Suddenly that 90% rate doesn't sound so bad.
John Prebble (Victoria University of Wellington, New Zealand):
Tax people in other countries who are not familiar with the arcana of the U.S. Tax Code are intrigued. In most jurisdictions, a revenue receipt is derived when it accrues or, for employee remuneration and for some other receipts, when it is received in cash or banked. Derivation very rarely occurs at some undefined time after property has passed, especially if that property is money. Later actions may result in offsetting losses or deductions, but no subsequent transaction can cause a revenue receipt to cease to be a revenue receipt. The status of the receipt is fixed on derivation, not, for instance, at the end of the tax year or when one lodges a return. Is the position the same in the USA?
If so, Mr Poling's bonus would seem to have been taxable immediately he received it, though I expect that the U.S. system allows him a few months to pay, depending on when the tax year ends. Also, he may have losses or deductions to take into account.
As I understand it, if Mr Poling were a resident of New York City the aggregate tax rate would be 101.948% and the tax bill for the bonus would be $6,524,672.00. Let's hope that Mr. Poling's home town and home state, Fairfield, Conn, are less grasping.
Does the U.S. Internal Revenue Code allow people to undo transactions that they think better of? How long do taxpayers have for thinking? According to Compaq Computer v Commissioner, 277 F. 3d 778 (5th Cir. 2001) they have less than one hour. If I have understood it correctly (Prebble, Prebble & Postlewaite, 62 Bull. Int'l Tax'n 151, 165 (2008)) Compaq involved a pair of economically self-cancelling transactions separated in time by about an hour. The court held that for legal and tax purposes the transactions were independent. What duration separated Mr Poling's transactions?
On the basis of Compaq, Mr. Poling's transfer of $6.4 million to AIG appears to have been a new transaction. There was no legal obligation on Mr Poling to make the transfer: it was a gift from an employee to an employer. Does the U.S. tax code authorize deductions for gifts by employees to employers? If not, what saves Mr. Poling from tax on the $6.4 million?
Down here in the Southern Hemisphere we are wondering if Mr Poling's saviour is the generous U.S. exemption for gifts to charities. Clearly, well-disposed people, notably the handing-money-out branch of the United States Government, see AIG as a charity. But is the IRS, the taking-money-in branch of the United States Government, bound by other people's characterizations?
All this assumes that Mr Poling has in fact paid $6.4 million to AIG. If Ashby Jones was correct when he wrote, and if Mr Poling has so far only offered to pay the money to AIG, should Mr. Poling, as an experienced tax counsel, advise himself to hurry?