Tax Lawyer's Blog

The Washington Post reports that Congressional Democrats have a plan if AIG executives do not voluntarily return (would you?) their bonuses:

[Congress] will seek to recoup $165 million in bonuses paid to executives of the troubled insurance giant American International Group through a narrowly focused tax, unless the money is returned voluntarily, party leaders announced this morning.

Senate Majority Leader Harry M. Reid (Nev.) said Finance Committee Chairman  Max Baucus (Mont.) would unveil a proposal by tomorrow that would tax up to 98 percent of the bonus money. “That will certainly send a message to the people at AIG and all others who try to benefit from the hardships the American people face,” Reid said.

But is it legal?

The tax would clearly apply retroactively since the bonuses would have already been contracted for and paid to the AIG execs by the time the legislation is passed.

Article 1 Section 9, Clause 3 of the Constitution states:

 No Bill of Attainder or ex post facto Law shall be passed

Article I, Section 10, Clause 1 of the Constitution provides that,

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

An ex post facto law is a law passed after the occurrence of an event or action which retrospectively changes the legal consequences of the event or action.

The “words and the intent” of the Ex Post Facto Clause are meant to encompass “[e]very law that changes the punishment, and inflicts a greater punishment, than the law annexed to the crime, when committed.” Calder v. Bull, 3 U.S. 386 (1798).

There is some question as to whether the Ex Post Facto Clause forbids the passage of laws that do not involve criminal conduct.

Here are a few observations I have about this whole bailout/bonus fiasco:

AIG Executives Bargained For the Bonuses in Contract Negotiations

Apparently these bonuses were bargained for by the employees who are set to receive them.

In legal parlance, this is called “consideration.” And contracts are not valid without it.

So, then, AIG execs, by definition, gave up something in exchange for AIG’s promise to pay them a bonus later on down the road.

They may have agreed to work longer hours or may have simply agreed to forego a job opportunity at another company.

Whatever it was, they relied on the promise of the bonuses to their detriment and, therefore, are entitled to them.

Bills of Attainder are Unconstitutional

A Bill of Attainder is a legislative act that singles out an individual or group  of individuals for punishment without a trial.

Clearly Congress, should it pass a special law increasing the tax on only the AIG bonuses, would be singling out the recipients of those bonuses for punishment without trial.

I think statements made on the House and Senate floors will come back to haunt Congress.

Charles Grassley has suggested the AIG execs resign or commit suicide and Senators Harry Reid and Chuck Schumer have actually threatened the employees:

“Recipients of these bonuses will not be able to keep all of their money,” declared Senate Majority Leader Harry Reid in an unusually strong threat delivered on the Senate floor.

“If you don’t return it on your own, we will do it for you,” echoed Chuck Schumer of New York.

Sounds like “after-the-fact” punishment to me.

And some powerful Congressmen agree with me.

Listen to what Laurie Kellman of the Associated Press says,

Not all Democratic leaders were racing in that direction. Penalizing people with the tax code could be inappropriate, declared Rep. Charlie Rangel, D-N.Y., chairman of the tax writing Ways and Means Committee. He said, “It’s difficult for me to think of the code as a political weapon.”

Here are a few experts on the subject of bills of attainder:

“The Bill of Attainder Clause was intended not as a narrow, technical (and therefore soon to be outmoded) prohibition, but rather as an implementation of the separation of powers, a general safeguard against legislative exercise of the judicial function or more simply – trial by legislature.”  U.S. v. Brown, 381 U.S. 437, 440 (1965).

“A bill of attainder was a legislative act that singled out one or more persons and imposed punishment on them, without benefit of trial.  Such actions were regarded as odious by the framers of the Constitution because it was the traditional role of a court, judging an individual case, to impose punishment.”  William H. Rehnquist, The Supreme Court, page 166.

“Bills of attainder, ex post facto laws, and laws impairing the obligations of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. … The sober people of America are weary of the fluctuating policy which has directed the public councils.  They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less-informed part of the community.”  James Madison, Federalist Number 44, 1788.

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