IRS SAVES PAULSON FROM TAX HIT: The Internal Revenue Service will issue guidance clarifying the 20 percent penalty for executives who divest 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 that 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 specifically to comply with government rules on conflicts 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.

The 2004 tax legislation that applied the 20 percent penalty was designed as punishment for executives who cashed out of such compensation plans early. In early July, the compensation committee for investment banking firm Goldman Sachs awarded Paulson, its former chairman and chief executive, an $18.7 million bonus for his last six months of work. Paulson's net worth is estimated at more than $700 million.

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