Andrew Cuomo Issues an Ultimatum

Update: All Attorneys General aren’t publicity seeking thugs. Chuck Grassley (Ranking Republican on the Senate Finance Committee) used the AIG mess as an opportunity to lecture state AGs on their responsibilities to “consider the appropriateness of inquiring whether financial institutions located within your State have violated (or would violate) State law by making certain executive compensation payments to executives and top management.” This is the concluding paragraph of a letter sent to Sen. Grassley by Wisconsin AG J.B. Van Hollen (via WSJ):

“However, I will not be initiating investigations through press releases, nor will I treat all corporate executive expenditures as presumptively wrongful. Wisconsin law certainly does not. Financial institutions (and other businesses) on the verge of insolvency are ill-advised to make unnecessary expenditures, whether to executives or otherwise. At the same time, contractual obligations are generally to be fulfilled, work should earn compensation, and there is no law in Wisconsin making a contract illegal simply because someone is well compensated. Absent specific information indicating a transaction is fraudulent as opposed to foolish, I will not use my office to threaten litigation in an attempt to micromanage Wisconsin’s businesses. Corporate governance is generally a matter for shareholders, not public officeholders.”

Sounds like the Wisconsin AG would like Sen. Grassley to mind his own business.

NY Attorney General has issued an ultimatum to AIG Financial Products employees:

The e-mail went out at 6:46 p.m. on Friday.

It had been a brutal week inside AIG Financial Products. News that the firm had doled out more than $165 million in retention payments over the past week had angered the country and sent lawmakers into fits of rage. American International Group‘s president, Edward M. Liddy, had asked that the unit’s employees consider returning some, if not all, of the money. New York Attorney General Andrew M. Cuomo had subpoenaed AIG for a list of Financial Products employees and how much money each had received.

Now, the firm’s chief operating officer, Gerry Pasciucco, had set a 5 p.m. Monday deadline for staffers to indicate whether they planned to return their retention payments, and if so, what percentage. His e-mail included what appeared to be a tacit ultimatum from Cuomo.

“We have received assurances from Attorney General Cuomo that no names will be released by his office before he completes a security review which is expected to take at least a week,” Pasciucco wrote.”To the extent that we meet certain participation targets, it is not expected that the names would be released at all.”

No matter how you feel about the AIG bonuses, AG Cuomo’s behavior can only be described as thuggish. If you don’t return the bonus, he will release your name to the public which in this environment is like handing the lynch mob a rope and helpfully providing directions to your house. There is a lot to dislike about what the financial sector did over the last few years, but the response of politicians is at least as disgusting and getting more so by the day.

And it turns out that returning the bonus may not relieve you of the taxes due on said bonus:

Returning one’s bonus is not the end of it, however. Recipients still will be subject to significant taxes. We address that issue today.

All compensation, including the retention bonuses, received by employees for services is included in the recipient’s gross income, and in determining his adjusted gross income (AGI). If a bonus recipient gives it back, does the bonus vanish from the employee’s income?

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. Under the Internal Revenue Code, the best a taxpayer could do is argue that he was forced by circumstances beyond his control to forgo compensation to which he was entitled. This might be easier to argue if the taxpayer returned a bonus in conformance with H.R. 1586 section 1(a)((2)(C), which reads:

WAIVER OR RETURN OF PAYMENTS- [The term “disqualified bonus payment”] shall not include any amount if the employee irrevocably waives the employee’s entitlement to such payment, or the employee returns such payment to the employer, before the close of the taxable year in which such payment is due. The preceding sentence shall not apply if the employee receives any benefit from the employer in connection with the waiver or return of such payment.

However, even this language is probably insufficient, for it does not exclude a returned bonus from gross income, but only from the definition of a “disqualified bonus payment” that is taken into account in determining the taxpayer’s income tax liability. (This issue also affects an employer’s reporting requirements on its employment tax returns and the employees’ Forms W-2.)

I would hope that any legislation would address this issue, but if I were an AIG employee, I certainly wouldn’t count on it. Furthermore, if our tax code is so complicated that returning the bonus doesn’t remove your tax liability, I think its time to review the damn thing and insert some common sense.

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