The Internal Revenue Service will issue guidance clarifying the 20 percent penalty for executives divesting a deferred compensation arrangement.

The new regulations will translate into significant savings for incoming Treasury Secretary Henry Paulson. Paulson will sell off the more than $470 million he owns in Goldman Sachs stock to comply with conflict-of-interest provisions for his new position. The guidance says that any executive divesting a deferred compensation arrangement to specifically comply with government rules on conflict of interest doesn't have to pay the penalty.

Paulson will still have to pay regular income taxes on the deferred compensation.

A spokesperson for the Treasury said that the IRS had been working on the guidance for some time, but accelerated its work in time for Paulson to be covered. The writing of the new rule hadn't been a priority because so few people are affected under the provision. President Bush nominated Paulson in May to replace Treasury Secretary John Snow, who officially stepped down from the position on Friday after more than three years on the job.

Paulson received Senate approval last week and Treasury Deputy Secretary Robert Kimmitt will serve as acting secretary until he is sworn in.

The 2004 tax legislation, that applied the 20 percent penalty, was designed as punishment for executives who cashed out of the compensation plans early. Such plans are designed to up the pay for executives by awarding cash or stock and stretching the payments out over time to lessen tax consequences.

On Monday, the compensation committee for investment banking firm Goldman Sachs awarded Paulson, its former chairman and chief executive, an $18.7 million bonus his leadership over the past six months of work. Paulson's net worth is estimated at more than $700 million.

Previously on WebCPA:

Hearings Open for Treasury Nominee (June 28, 2006)

Snow Steps Aside, Goldman Sachs CEO Moves In (May 31, 2006)

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