Democrats to tap tax code to curb AIG

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With popular outrage erupting over Wall Street’s misdeeds, the Obama administration and Congress on Tuesday looked to the tax code to claw back bonuses given to traders at bailed-out insurance giant American International Group Inc. while softening the losses for victims of Ponzi scheme mastermind Bernard Madoff.

House Speaker Nancy Pelosi, California Democrat, and Senate Majority Leader Harry Reid, Nevada Democrat, said Congress was ready to pass within days new tax bills with confiscatory rates to reclaim virtually all of the $165 million in bonuses recently paid to executives at AIG, the beneficiary of about $170 billion in taxpayer bailout funds and a company at the center of the country’s credit crisis.

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Sen. Amy Klobuchar of Minnesota was one of 10 Democrats who signed a letter in support of an excise tax as high as 91 percent on the AIG bonuses if the firm does not “clean it up themselves.”

“We’ve got to do whatever it takes to make sure people that basically ripped off the American people weren’t able to profit from it,” Mrs. Klobuchar said. “At this point, we have to move forward or else risk losing the trust of the American people.”

Separately, victims of Madoff’s $64 billion investment fraud caught a break from an unlikely source: the Internal Revenue Service.

IRS Commissioner Douglas Shulman told the Senate Finance Committee that the tax agency had issued two rulings designed to soften the losses for the thousands of individual and institutional investors taken in by financial scams such as the one operated by Madoff.

The new guidelines, which were posted Tuesday on www.irs.gov, clarify rules to let victims of Ponzi schemes claim “investment theft losses” on their tax returns, allowing for greater deductions than can be claimed under other types of capital losses. The agency also has created a legal safe harbor where investors can claim the deduction right away, even if they eventually recover some of their funds when the Ponzi scheme is unwound.

But it was the AIG revelations that dominated the discussion in Congress. Republicans attacked the White House for allowing the bonuses in the first place, and a key Democratic lawmaker cautioned against the rush to use the tax code as a weapon of revenge. Despite the warning, lawmakers stampeded to introduce bills competing to take the toughest line on the bonuses, many of which will go to traders in the unit who pushed the company to the verge of collapse.

The anger on Capitol Hill almost certainly will make for an uncomfortable morning Wednesday for new AIG chief executive Edward Liddy, who met privately with lawmakers Tuesday ahead of an appearance before a House subcommittee.

But House Ways and Means Committee Chairman Charles B. Rangel, New York Democrat, sounded a note of caution about the rush to pass tax bills solely to punish one company.

“The tax code is not sacred, but it should have enough credibility so people can depend on it to raise revenue and not to penalize - that’s up to the courts,” Mr. Rangel said.

“It’s difficult for me to think of the tax code as a political weapon,” he said.

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