Senate Passes Financial Bailout Legislation

On October 1, 2008, the Senate passed the Emergency Economic Stabilization Bill of 2008 (HR 1424) by a vote of 74 to 25. The House version of this bill failed in the House on September 29 by a vote of 205 to 228. The original version voted on in the House included three tax provisions. These would permit banks and other financial institutions that were invested in preferred stock of Fannie Mae and Freddie Mac to treat losses as ordinary losses rather than capital losses, put a $500,000 limit on deductions for executive compensation for entities having securities purchased under the legislation, and extend the mortgage debt forgiveness exclusion for an additional three years.

The Senate’s version of the legislation adds the provisions of the Tax Extenders and Alternative Minimum Tax Relief Bill of 2008 (HR 6049), previously passed by the Senate on September 23, 2008. This portion of the legislation includes a one-year extension of the AMT exemption amount with an inflation adjustment and an extension of the provision allowing nonrefundable personal tax credits against the AMT. Also included in the AMT portion is a provision providing some protection to taxpayers with incentive stock options and who are also subject to the AMT. The legislation also extends a number of individual and business expired tax provisions, provides Katrina-like disaster relief for Midwest areas affected by tornadoes and floods, and lowers the standard for return preparer penalties. Also included is a package of tax cuts related to renewable energy.

The legislation includes several revenue raising proposals but is not fully offset. There are approximately $150 billion in tax breaks and $42 billion in revenue raisers in the portion of the legislation added by the Senate, raising the total cost of the financial bailout package to roughly $800 billion. Revenue raisers include a freeze on the Code Sec. 199 domestic production activities deduction for oil and gas producers at six percent, a requirement that securities brokers report the cost basis of stock transactions, and a requirement that deferred compensation paid by tax-indifferent parties be treated as current income.

The House is scheduled to vote on the legislation October 3, 2008. It is unclear at this time whether the legislation will pass the House on the second try with the changes inserted by the Senate. The Administration strongly supports the legislation and is encouraging quick action by the House. The House has previously passed most of the provisions added by the Senate in several stand-alone bills, but costs of those bills generally were fully offset, except for the legislation providing AMT relief.